Material price volatility, pressure on profits, increasing risk profiles in global markets, and a pressing need to innovate and become more sustainable: These are causing executive management to take another look at the contributions procurement departments are making—and not just to cost savings. Generating cash by reducing costs may always be job No. 1, but the other contributions procurement can make are substantial, from product and service innovations to enhanced productivity to shortened delivery times. CEOs are now asking different questions about their procurement function, with an eye to minimizing supply chain risk and leapfrogging competition.
Procurement has made big strides in moving from a purely cost-oriented, transactional function to a strategic, value-adding activity. Over the last two decades, with support from the C-suite, procurement has shaken off its clerical backroom persona of processing forms and perpetually grinding down suppliers on the price of pencils. Supply chain or chief procurement officers (CPO) are becoming key participants in the C-suite, with the ear of the board and the CEO.
Why this step up? One reason is that straight cost savings plays have lost steam. As companies have gotten smarter about strategic sourcing, management has begun to run out of categories to turn to for big breakthrough savings. A report by Ardent Partners in 2011 found that, on average, the leading procurement organizations handled more than 80 percent of total enterprise spend.1 Besides, too-frequent tendering can jeopardize important supplier relationships over diminishing returns. Witness the shriveled office supplies business, rationalized as a result of constant procurement pressure.
But a more compelling reason is increased competition. Best-in-class companies have realized that product development is not just internal, that innovation or the potential for it often comes from the supply base. As PricewaterhouseCoopers’ supply chain leader Michael Giguere points out, “Supply chain is not only a strategic advantage, but if you’re not looking at how it supports the business, I can pretty much guarantee you soon won’t be in a position to have any advantage over your competition at all.”2 Enter procurement, which is responsible for managing those supplier relationships to get at the innovation.
Procurement’s role has changed at companies both large and small. “I work at small companies that have supply chain leaders that have taken procurement to a very high level,” adds Giguere. A new set of challenges is calling for a new level of leadership-driven initiatives. So if procurement leaders aren’t delivering new types of strategic value, it’s time for the CEO and the executive team to rethink what it would take to get them there—and start asking some new questions.
Based on my experience, here are eight of the leading opportunities for ramping up procurement in your organization:
Is talent flowing in and out of procurement as part of a curriculum for developing future leaders? These days, it’s common for top management to have appointed a CPO as part of an investment in upgrading the function. The CPO often has an advanced degree from a top school and is frequently made a direct report of top management, with the charge of sourcing specific areas of external spend and the budget to build a stronger team of buyers that can engage with the business. It’s time to build procurement’s bench strength. Recently, when retailer Tesco wanted to better leverage the buying power of its operations across Europe, it advertised for people with world-class backgrounds in IT, marketing, and energy and with European experience and the ability to speak a second language.3 Hiring strong people with above-average qualifications, including experience in the line area or business units they will be supporting (advertising, R&D, law, product development), creates credibility within the organization and a model for excellence.
The case for making procurement not only part of the recruiting brand of your organization, but also part of the track to executive leadership is clear; the function represents a rare part of the organization that is like a lab for future leaders.
The case for making procurement not only part of the recruiting brand of your organization, but also part of the track to executive leadership is clear; the function represents a rare part of the organization that is like a lab for future leaders. For example, think of:
Take, for example, Stijn van Els of Shell, who came from a capital development role when he was promoted to CPO several years ago. On the strength of his achievements in expanding procurement’s contribution to the company’s performance, he was recently promoted to CEO of a major new Shell joint venture. According to van Els, “Procurement leaders who take their function forward have good business sense, and they’re used to working with the external interface. Importantly, they see what the company needs, and they get their own organization to execute. That is worth a lot to the business.”4
Is procurement part of the top team of the major business units? In order to uncover new ways of adding value, high-performing procurement organizations work in close collaboration with the business units and with the overall company—becoming involved in business unit planning and playing an active role on the management teams.
“Some businesses have an obvious and well-defined executive seat for the chief procurement officer—automotive and other manufacturing businesses are good examples,” says Leslie Campbell, CPO of Reed Elsevier. “Other businesses, however, do not have such a clear procurement remit, and, in these cases, procurement may appear to be less critical to the business.”5
Integrating procurement and product development has been shown to increase the speed of development, as well as reduce costs. When involved in the front end of the product design process, procurement may be able to suggest parts or ingredients that are as good as or better than engineering would otherwise have specified, for example, less costly and/or closer at hand. But once the design and the parts are set, it will likely be too late. Involving procurement early in the process can provide multiple benefits, from standardization to innovation to a new perspective on suppliers’ technical capabilities, financial strength, or lesser-known capabilities.
Is procurement getting suppliers involved in areas where you see potential but don’t have all the answers? PwC’s 14th Annual Global CEO Survey found that 39 percent of CEOs expect the majority of innovations to be co-developed.6 (See Figure 1.)
Q: To what extent do you agree or disagree that you expect the majority of your innovation to be co-developed with partners outside your organization?
No one organization has all the answers, so it just makes sense to team up with supply chain partners in the search for innovation. As soon as you make the leap from using the term supplier to using the word partner, good things start to happen.
Old practice would dictate procurement’s acting as gatekeeper to its company’s supplier dollars—maximizing its buying leverage and flexing its muscles to drive prices down. A focus on supplier involvement in innovation requires a fundamental shift in procurement behavior. As an example of this shift, Procter & Gamble has a supplier portal through which it shares with its supply base the areas where the company does not have the answers yet and is looking for help. This transition to openness and transparency of weakness repositions the power dynamic as one in which supplier and customer work closely together as equals.
“Our consumers are continually looking for new and innovative products, and we recognize that many of our suppliers have industry-leading innovation capabilities—we listen to them and work with them to bring the best innovation to consumers in order to remain a world leader in our field,” says Unilever’s CPO Marc Engel.7
Has procurement developed a sharp line of sight into supply chain risks and vulnerabilities? With suppliers deeply embedded in a business’s core operational processes, whether by supplying manufacturing factories or serving administrative operations of financial institutions, they gain access to very sensitive consumer data that put the company at risk.
Fluctuations in raw material prices and potential breakdowns in supply chains add risk profiling to the decision matrix for procurement. Following the 2011 earthquake in Japan, Toyota’s Executive Vice President of Purchasing Shinichi Sasaki said: “We’re making checks to see what needs to be done to enable a recovery within two weeks when the next one hits.” Sasaki revealed that the automotive company was taking a multi-faceted approach to combat supply chain risk.8
Leading procurement departments are constantly monitoring the financial health of suppliers, so they aren’t left in the lurch if something happens. They also pay attention to how suppliers manage their supply chains. As the CPO of a global chemical company points out, “In a supply chain context, it can be the suppliers of our suppliers that are a bottleneck or driver of scarcity or volatility in the market. As Procurement, we have to know that, help manage that, to ensure security of supply to the factory, to the customer.”9
A robust supply chain risk management process will include a supplier-monitoring framework that includes financial and operational data, industry information, and on-site reviews. It will also include the ability to analyze risk data against established limits and industry warning signs and identify suppliers that fall outside risk limits.
Global technology company Dana is an example of a business where procurement carefully monitors its supply base. According to Gary Baugh, senior director of purchasing for Dana’s Power Technologies Group, “Our success as a company is dependent upon having a strong and viable supply base. The more we can plan, the better cost control we can have and the better we can mitigate impact to our plants and, most importantly, mitigate impact to our customers. Part of this has seen Dana conduct a financial risk analysis of new suppliers, as well as ensure its buyers have worked out risk mitigation plans for those suppliers who are seen as a medium to high risk.”10
Does your global footprint of sourcing and operating focus on more than just low-cost locations? In the past, China, Southeast Asia, Latin America, and Africa have been seen as locations offering low cost and future market potential. However, that attribute is less and less viewed as an exclusive benefit. Today, it’s about more than just costs.
In the past, these regions may have had only a local buying outpost; now companies such as Dell and IBM have located their top procurement leaders in Asia because of the region’s importance to procurement performance. Angela Zhang, senior director of global sourcing at Sony Mobile, also has embedded the company’s Asia procurement team into the global leadership structure of procurement and adjusted procurement practices globally to reflect innovations from the region.11
When did procurement last review its governance? In addition to Asia taking a more prominent place in the global supply chain and procurement organization, new drivers and governance models are coming to the forefront. As Singapore-based PricewaterhouseCoopers partner Andrew Butcher notes, “We are certainly seeing more global companies locate substantial parts of their supply chain in Asia as part of major value chain transformations.”12 While volume aggregation remains a consideration, new drivers for global procurement include the need to have enterprise-to-enterprise connections with major suppliers—as well as the need for improved market intelligence and risk management capabilities to cope with material price fluctuations and supply uncertainty. New models are used to achieve new scope and improved governance to cope with these challenges. Hedging and taking positions in the materials market on behalf of the company are commonly considered as new scope; new models include regional procurement hubs that function globally, or buy-sell models.
For example, Rio Tinto’s Daniel Koempel describes how procurement is changing in that company: “We have changed our procurement model. We operate a buy-sell model for some of our categories in which we are buying and taking position in the market ourselves and then reselling these products to our businesses globally. The businesses also pay us for our services. That means, in a nutshell, if we do not do a good job, we do not get paid, and we can go home.”13
What is procurement doing to help the company, as well as the supply base, hit sustainability goals? A 2010 research project carried out by PwC and EcoVadis, in collaboration with INSEAD demonstrated that sustainable procurement could yield positive economic benefits in terms of reducing costs, lowering risks, and growing revenue. The study notes that sustainable procurement was considered important or critical by 90 percent of European CPOs.14 (See Figure 2.)
Is sustainable procurement an important/critical priority?
“A lot of our CO2 footprint is driven by externally purchased supplies, so no wonder that between R&D, procurement, and suppliers, we can make a difference and need to be a nucleus for change. Procurement has to be a critical linking pin and co-owner of sustainability efforts. There is arguably little you can do without approaching it in a supply chain context,” says the global specialty chemicals company CPO we interviewed.
Is procurement spearheading a drive to get top management to meet with senior management of important suppliers? Just as customers effectively own part of your business’s future, so do suppliers. Worldclass supplier relationship management includes direct links between customer and supplier—including top-to-top links. In the ideal world of supplier relationship management, top management and board members would assign themselves to critical suppliers and engage in ongoing dialogue, acting as “sponsors” of key supplier relationships. Procurement can help with this by establishing a joint mission and relationship road map and by knowing which suppliers are the most critical to actively manage. Topics of conversation might include future strategy, market and technology needs, and joint opportunities, as well as joint investment decisions and reviews.
As Eva Wimmers puts it: “The differentiating power of procurement is no longer in hammering down prices only. What’s needed is a different attitude to external partnering—understanding the market environment, your vendors, their strategies, and what makes them tick. Vendors need a greater understanding of our objectives and to be closer to our functional discussions, too. We can’t work in a new world based on old-world assumptions.”15
As you rethink your procurement function, there are two obvious starting points for the CEO and the executive team. The first is to reconsider the procurement dashboard. Historically, procurement dashboards have focused on savings and operational measures of purchase order compliance and procurement contract usage. But, as procurement becomes more and more strategic, this tool will need to capture and measure market intelligence metrics against strategic priorities such as supplier relationship management efforts and supplier diversity. This is already happening at a number of innovative companies that, rather than using procurement dashboards just to track savings, are looking at value measurements as a better way to support a review of impact on competitiveness and strategic progress. (See Figure 3.)
The second is to place a different discussion about procurement on this week’s agenda by asking the question, What else can procurement do to help us accelerate progress against our strategy and drive new differentiating advantages in the market? Implementing even these two suggestions can make a serious difference in your company’s approach to procurement—a difference that very well could define your organization’s future competitiveness.
1 CPO Rising 2011: Innovative Ideas for the Decade Ahead.
2 Michael Giguere was interviewed for this article in August 2012.
3 Supply Management, “Tesco expands procurement team to boost buying power,” 7/9/2012.
4 Procurement Leaders, www.procurementleaders.com, July/August 2012.
5 PwC interview, August 2012.
6 PwC, 14th Annual Global CEO Survey, 2011.
7 “Spend Matters,” www.spendmatters.com, 3/14/2011.
8 Procurement Leaders, www.procurementleaders.com, “Toyota aims for ‘quake-proof’ global supply chain,” 9/7/2012.
9 PwC interview, September 2012.
10 Procurement Leaders, www.procurementleaders.com, July/August 2012.
11 PwC interview, September 2012.
12 Andrew Butcher was interviewed for this article in September 2012.
13 Daniel Koempel is global sourcing leader, carbon products for Rio Tinto, based in Singapore. He was interviewed for this article in September 2012.
14 HEC “European Sustainable Procurement Benchmark - 2009” cited in 2010 Value of Sustainable Procurement Practices, a report by PwC and EcoVadis, in collaboration with INSEAD.
15 Eva Wimmers, SVP of procurement at Deutsche Telekom, was interviewed for this article in August 2012.