Commercialism vs. Value Creation: striking the right balance and why value creation matters

Striking the right balance

Procurement is often seen as a numbers game. Driving down costs, negotiating hard, and securing the best possible outcome. This approach, rooted in commercialism, can often prioritise short-term financial gains. But in today’s complex supply chain environment, and where the PE environment is holding onto assets for longer, focusing solely on price and in year outcomes may not always be the optimal approach.

Enter value creation, a strategy that looks beyond cost to build resilience, innovation, and long-term success.

The challenge? Striking the right balance between these two forces.

What does commercialism in Procurement mean?

Commercialism emphasises strong cost control and competitive bidding. It’s about squeezing margins, leveraging volume, and achieving rapid cost savings.

Pros of commercialism

• Rapid financial benefits.
• Stronger quarterly performance.
• Ability to measure and report success.

Cons of commercialism

• Supplier instability due to unsustainable pricing and commitment.
• Reduced quality and innovation.
• Higher risk of supply chain disruption.

While commercialism delivers short-term benefits, it can overlook the bigger picture such as supplier relationships, risk management and strategic growth.

Understanding Value Creation in Procurement

Value creation shifts the focus from price to total cost of ownership (TCO) and long-term benefits. It involves building partnerships that foster innovation, sustainability, and resilience.

Key Elements of Value Creation

• Strategic supplier collaboration.
• Investment in innovation and technology.
• Emphasis on sustainability and ethical sourcing.

Benefits

• Stronger supply chain resilience.
• Enhanced brand reputation and key supply chain support.
• Reduced risk exposure and compliance issues.
• Positive collaboration and engagement with business owners

Value creation isn’t just a buzz word - it is a competitive advantage in a world where disruptions are the norm.

The ability to utilise data, analytics and AI-powered insights to drive sharper decisions, identify new levers and accelerate execution is fundamentally enabling new ways to consider how value is built and delivered today.

The tension between Commercialism and Value Creation

Why do organisations lean toward commercialism? The answer lies in pressure - from CFOs, shareholders, and performance metrics tied to quarterly or annual results.

Risks of ignoring Value Creation:

• Fragile supply chains vulnerable to shocks.
• Missed opportunities for co-innovation with suppliers.
• Long-term costs outweighing short-term savings.
• Misalignment, perception challenges and poor engagement with business owners.

This tension creates a strategic dilemma - how does the business, and Procurement, deliver bottom-line savings without sacrificing resilience and growth?

The solution isn’t choosing one over the other. It is in integration. Here is how Procurement leaders can achieve a greater balance:

1. Segment Suppliers

• Categorise suppliers by strategic importance.
• Tailor negotiation and relationship strategies accordingly

2. Expand KPIs beyond cost

• Include metrics for sustainability, risk management and innovation.
• Reward for long-term value, not just short-term savings.

3. Adopt a dual approach

• Apply commercial tactics for transactional suppliers.
• Use value-driven strategies for strategic partners.

4. Leverage Tools and Frameworks

• Implement Category Management for structured decision-making.
• Utilise Supplier Relationship Management (SRM) to foster collaboration.

Real world examples

• Cost only focus gone wrong: A global retailer prioritised low-cost short term contracted suppliers, only to face significant disruptions during a geopolitical crisis. The short-term savings quickly evaporated as emergency sourcing costs skyrocketed, with a supply chain not willing or able to absorb costs or work collaboratively to identify win-win solutions.
• Value driven success: A technology company invested in a strategic supply chain, supplier innovation, co-developing new components that reduced on-going production costs and improved product performance, creating a win-win scenario greater than the immediate financial year.

Final Thoughts

Commercialism and Value Creation are not opposing forces. They are complementary strategies. Procurement leaders who find the right balance between the upmost need for cost efficiency with long-term value will build supply chains that are not only lean but also resilient and innovative.

Rethink your procurement metrics. Are you measuring what truly matters? Procurement and Supply Chain KPIs and SLAs

The future belongs to organisations, and Commercial and Procurement teams, that can see beyond price and invest in value creation.

Reach out to 7 Steps Solutions to discuss subjects such as; cost savings, value creation, supplier relationship management and category management.

On our homepage you will find a Commercial Assessment you can take in 5 minutes that provides you with a personalised one-page report on your organisation’s Commercial and Procurement maturity.

If you are interested how your business can create P&L impactful savings, read our short blog Commercial thinking Procurement – is your function creating enough P&L value?