This article originally appeared in Singapore Business Times (subscription required).

SCRATCH an industry leader, and you'll find an iron-clad procurement operation. What companies such as Apple and Walmart have learnt on the way to the top of their industries is that procurement leaders are cost leaders with a clear edge over rivals. Cost leaders can out-invest in innovation, capture share through price flexibility and quickly capitalise on new opportunities - all the while retaining margins. But in recent Bain & Company interviews with 60 business heads and chief procurement officers (CPOs) throughout Asia-Pacific, we found no company executives who would describe their capabilities as world class. Compare that with an earlier survey of North American executives: The 15 percent of respondents who felt their companies had world-class procurement also were those with the industry-leading costs.

Procurement represents the lion's share—as much as 80 percent—of overall costs in some industries, such as cars, textiles and electronics. Yet the vast majority of executives readily admit that their companies rely on procurement capabilities that are no better than those of their competitors, or are worse.

In this two-part series, we will look at why it's so critical that companies sourcing in Asia-Pacific develop winning procurement capabilities, where executives feel they're falling short and how companies can improve for dramatic results. The best companies can achieve a 2 percent gain in margins by bolstering their procurement operations.

Nowhere is the pressure to improve procurement as intense as in Asia-Pacific, both for domestic companies and multinationals that rely on the region as an important source of goods and services. The pursuit of world-class procurement is as critical in developing countries as it is in the region's developed countries.

Companies operating in China, India and other emerging economies face the pressing need to impose efficiency on their fast-growing operations. Undeniably, swift growth, combined with shorter product cycles, has left companies with the challenge of dealing with massive operating complexity. The effect of each new product is felt throughout the supply chain: everywhere from sourcing to logistics to warehouse management. Planning gets more complex each time a new product or SKU (stock-keeping unit) is introduced.

In addition to complexity, there is the matter of cost inflation. In these countries, revenues are growing rapidly, but input costs are growing even faster - and eating into margins. Another issue, revealed by our study, is even more vexing for some Asia-Pacific executives than rising input prices: volatility. In our interviews of 60 executives in the region, 91 per cent agreed that volatility continues to dominate their agenda.

For their part, companies in developed markets such as Australia and Japan must accommodate rising and volatile input costs as they deal with slow-growing economies. As top-line growth falls off, they need to find ways to shore up profits.

To address all of these ills, companies throughout the region have dutifully set aggressive targets for reducing input costs - but always in a short period of time. Trouble is, despite their best intentions, too many executives tell us they are simply ill-prepared to meet their goals. For example, more than half of Asia-Pacific CEOs feel their supply base is underdeveloped, and only 40 per cent are satisfied with their procurement talent.

But even companies that are woefully behind can quickly build capabilities to manage procurement, with processes and systems that match the maturity of global leaders'. There's a clear view of what great looks like. Instead of simply being content to eliminate any waste, tighten all processes and provide every improvement in spending control and visibility, companies can go much further, adopting the practices of what we refer to as "fourth-generation" procurement - using the procurement function as a way to add value to the business year after year, shoring up the bottom line by keeping costs from mounting.

We've found that companies following this approach can make procurement savings stick. After initial cost savings in the 8 per cent to 12 per cent range, the best players typically deliver 3 per cent to 4 per cent cost reductions per year.

Whether a company in Asia-Pacific is struggling with the fallout of growing too rapidly or the challenges of a cooling economy, it needs a world-class procurement organisation to control costs better than rival firms.

What's wrong with procurement in Asia-Pacific?

In our interviews with business heads and CPOs, we heard the same repeated theme: While many report their capabilities are fair or even good, none feel they are great. They are saddled with procurement operations that lag global best practices. Our study found that procurement teams in Asia-Pacific often lack organisational support and prominence, tend to focus on short-term activities, rely on inadequate demand management processes and struggle with underdeveloped supply bases and insufficient core procurement processes, such as category management. They lack systematic supplier management processes, reliable data systems and strong procurement talent. For example, while some companies make a serious point of investing in procurement talent, they fail to take the critical move of defining a clear career path for procurement professionals.

Still, our interviews helped us identify those procurement organisations that stand out. A 5 per cent cost-performance gap and contribution to revenues is what sets apart good from great procurement organisations in leading companies across the region when compared with their industry peers.

Executives were candid in their self-assessments. Fully 66 per cent told us that procurement simply doesn't get the prominence it needs across systems, processes and people to deliver results. For example, companies are stymied by limited programmes for grooming and managing procurement talent. Among the reasons procurement is often viewed as an undervalued back-office support function: Many companies don't understand how important it can be for improving the bottom line since they lack impressive cost savings from earlier procurement initiatives.

How are companies falling short? While more than 50 per cent of executives interviewed understand all elements of total cost of ownership, only 15 per cent employ it effectively across all decisions. And 82 per cent admit they use inventory to counter shocks in demand forecasts, instead of relying on robust demand management planning processes and systems.

The executives in our study also told us their supply bases are underdeveloped. More than half of the CEOs we interviewed are concerned about the availability of good suppliers, and 67 per cent are concerned about unfair supplier selection practices. The issue of unfair supplier selection is a tricky one. In our experience, companies often try to address it by adding administrative processes to monitor supplier selection. But that typically leads to more bureaucracy and inefficiency, making it harder to make the leap from good to great. Adding to the difficulties is the fact that less than half of our study participants have visibility into supplier costs.

Another area for improvement: effectively capturing data and market intelligence. The quality of data in the region's emerging markets, in particular, is insufficient. In our experience, companies make quick fixes with new systems, but often fail to go the full distance with improvements that allow them to analyse spending data consistently and reliably. And when companies set out to boost the quality of their data, they often make a fundamental oversight: Decisions on how to improve data often aren't led by the business.

Knowing where they stand is the first step in the journey towards fourth-generation procurement, using procurement to add value year after year and shoring up the bottom line by keeping costs from mounting.

The writers are respectively a Bain & Company partner based in Kuala Lumpur and a Bain & Company principal based in Beijing. Both are members of the firm's Performance Improvement practice.

See the second article in this series: Adding value through better procurement