Procurement Value – Myth Or Reality?

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A CEO who had an Epiphany

Recently I presented to a large Mining Company on a proposed Procurement Transformation opportunity. What surprised me was the unexpected, enlightened and refreshing view from the CEO that Procurement value in his Company needed go way beyond cost reductions to the point that his Procurement team became a viable strategic asset that he could actively use when selling large scale mining services to other Companies. To say that I was flabbergasted was an understatement – finally someone who understood the strategic opportunities Procurement can provide.

While there are many challenges that Procurement leaders face such as the need to create a new Procurement paradigm, the delivery of “value” is one of the most important goals that we must focus on today. To this extent it is critical that we understand what value Procurement can actually deliver. At the strategic level Procurement value can be defined by:

  1. becoming a Customer facing capability;
  2. connecting commercial and technical capabilities of the Company;
  3. activating key supplier relationships;
  4. Reducing supply vulnerability; accessing new products, R&D and innovation;
  5. lowering costs;
  6. delivering high quality goods and services; and
  7. creating transparency across the Companies spend activities.

Customers like Professional Procurement Organisations

External customers in contact with Procurement people – what on earth are we thinking about?  After all sales executives like to see Procurement relegated to our diminutive little box in the back of the stores shed. The reality is quite different. Today our customers are seeking more transparency across the Company’s Procurement activities and assurances that the quality of the goods or services is assured while social procurement objectives have also been met.

Procurement’s focus on delivering high quality lower cost solutions is a natural sales asset – by understanding our customer’s needs, Procurement can deliberately focus on ensuring that the customer gets what it wants, either at exactly the right time ,or one minute before the Customers know that they need it.

To demonstrate, imagine taking a CPO to a sales negotiation – who is best placed and experienced at the negotiation and in conducting and succeeding in win-win negotiations – the Procurement expert or a Sales person? In a previous role at Fonterra, I was always taken by the sales team to our negotiations with McDonalds who were ferocious in trying to get the best deal and price. The result was a more relaxed negotiation as McDonalds realised that Fonterra understood its processes and lower prices and improved conditions for both Companies resulted.

In the goal of becoming a customer centric Procurement organisation, building a strategic Procurement team with the necessary customer facing skills is a great start to delivering added value.

Connecting Commercial and Technical Capabilities – working together

We talk about this all the time, you know the words, “leave the Terms and conditions to us because we are procurement experts, and you just write the scope of work”. But the discussion needs to go beyond that concept.

As Procurement people we need to do more. We need to understand the actual needs or requirements, commercial risks, performance requirements, supplier capabilities and the depth of supplier value that it can bring to your internal customer. It is essential to become deeply involved in both the requirement as well as the process to ensure that there is a clear fit commercially between what is being offered by the Supplier and what is delivered to your internal customer. Procurement must become the fulcrum that engenders trust and respect by both internal customer as well as the supplier.

It’s now time to move from transactional play things and become adult Procurement experts. We need to become trusted advisors and a team that the Business can rely on to deliver sound commercial and technical solutions. A part of this approach is of course activating those key supplier relationships.

Activating Key Supplier Relationships

I have discussed the value of SRM previously in the article “Suppler Relationship Management – Are we in the Dark Ages?”. Nothing has changed. Companies still do not understand that by becoming a Customer of Choice, their top suppliers will willingly give them preferential benefits, benefits that will either fall to the bottom line or deliver process or productivity improvement. Companies need to take a positive view of their top suppliers and actively and routinely engage with them. Top suppliers must become a key part of your Company.

The value of SRM is simple:

1.      Lower prices from top suppliers by Companies making more commitment to each other;

2.      Process improvement in all areas;

3.      Productivity improvements through continuous improvement programmes;

4.      Access to new products and preferential treatment by the top supplier;

5.      Reduction in supply chain risk with agreed lead times and availability;

6.      Integration opportunities with IT;

7.      Improved planning; and

8.      Greater transparency of costs.

By activating key supplier relationships through a collaborative SRM process, Companies can identify and target the dollar savings as well as other competitive value adding opportunities – all it takes is a willingness to step outside the box.

Reducing Supply Vulnerability

Lofty words, but what do they actually mean? Supply chain vulnerability means points of weakness brought about by poor planning and a failure to collaborate or selecting the wrong suppliers. Deloittes report that at least half of all companies are now experiencing increases in supply disruption on a regular basis, adversely affecting their business.

Procurement has a critical role in seeking out suppliers that have both capacity and capability to support their business, while ensuring that the ensuing commercial relationships provide for the delivery of goods and services on time and without disruption.

Clearly delays in receiving goods and services, and subsequent production, has a significant effect on both profit as well as competitive advantage. Failures to deliver the best price and goods on time means customers will not buy the products, profitability will fall as will shareholder value. While Procurement is often call into resolve disrupted supply events, it is more important that the Procurement team focus on prevention – identifying and managing supply risk using best in class sourcing strategies.

I would challenge any Company with only a transactional purchasing approach to claim it is adequately managing its suppliers and that it has a one hundred per cent success rate with on time deliveries of the right goods and services. In direct contrast, Companies with strategic Procurement teams know that real value is creating efficient supply chains and in making sure that their Companies have the right suppliers, providing the right quality, at the right price, and supplying at the right time – this is the road to success!

Lowering Costs – The Dollar talks Big

The optimisation of external spend by Procurement will always be a key strategy – yet my favourite horde, the Business Luddites, continue to claim that Procurement savings are smoking mirrors. Perhaps some Procurement people do actually over-claim savings – in a recent experience I witnessed one of my own team consistently over-claim to achieve egocentric fame and reputation. Of course this is not the norm.

The reality is that Procurement savings do support the achievement of Competitive advantage. The mathematic are simple. In the current economic market, almost all customers set the price for goods and services which means most markets are price sensitive. If Company A manages to make 7% profit, and Company B makes 10% profit because it is buying better, then Company B will be able to either lower the price to gain market share, return more to Shareholders or invest the difference in profit for growth opportunities to increase the size of the business. By buying better, Procurement has delivered a bonus for Company B. that is value, that is Meerkat Simples!

The challenge that we face as Procurement people is to identify what those savings actually are and what effect they have on the Company. Savings occur in multiple areas and need to be treated differently including:

1.      Year on year savings on items – The new price is lower than the old price and continues to be so year on year. These savings almost always fall to the bottom line unless given away by hare-brained sales people;

2.      One off savings – normally on capital or in -projects. Lower price for goods or services that occur only once and should be recognised as one-off;

3.      Cost avoidance – through negotiation the supplier agrees not to increase prices in relation to market movements. Thereby continuing the Company B lower cost and greater profit scenario.

4.      Process savings – relate to a reduction in process activities such as purchase to pay activities and costs per purchase order. Savings in this area occur only if headcount is reduced as a result. However if headcount is not reduced potentially there should be a corresponding increase in productivity in other areas. An example is where Engineers stick their fingers into buying activities – if their interventions are removed because of process changes, the engineers will actually be doing what they are paid for – being engineers and not purchasing people.

5.      Production efficiency – relate to improvements brought about by Procurement sourcing better quality goods resulting in reduced consumption through modifications or changes in processes identified by procurement. These savings often occur in the supply chain or in different quality of products taking into account total cost of ownership (TCO) analysis.

There is no questioning the real value that Procurement can deliver through cost savings. The real challenge is for Procurement to be open, honest and realistic in measuring and reporting savings. Furthermore it is essential to realise that most of these savings cannot be achieved without key stakeholder involvement which means that the savings are a joint effort between the Business and Procurement.

It’s not just about Price – the Quality Dichotomy

This is a crusty old acorn that keeps being thrown in the face of Procurement day in, day out by Luddites and cantankerous old rocks. Typically internal stakeholders will always preference and demand the Original (OEM) product because it is “trustworthy” or “made in a Good quality Country”. Engineers will always revert to preference and claim the OEM products last longer. What a load of codswallop!

There is a real balance that Procurement needs to achieve. Low cost is not the best cost. Clearly sourcing low quality goods is not acceptable. However Procurement can add value by ensuring that there is a clear and articulated scope of works or technical requirement that specifies the quality levels. Sourcing can then identify the best location, best quality and shortest lead time.

The issues that Procurement must balance are price, quality, product performance, and availability.  A deep analysis of total cost of ownership can demonstrate the value of shifting to alternate products as well as provide a higher degree of comfort to end users. To this extent getting involved in the definition of requirements process early is essential.

In respect of OEM versus generic product, the arguments are the same as local versus international sourcing. Often generic or Best Cost Country Sourcing (BCCS) products can be higher quality and improved performance. A recent personal experience demonstrated that pump parts imported from China were higher quality, outperformed the OEM by 25%, and were 50% lower in cost. By running detailed trials in collaboration with the engineers, my team was able to demonstrate real measurable value and manage the change process. The rewards were obvious.

Laying bare the True Costs for All to See

The final brick in the tower is the one that most people in the Company have a clear and nervous aversion to – transparency across the spend. With Procurement systems in place that accurately record each purchasing activity, it is possible to analyse the data and create a highly accurate picture of the effectiveness of the Company’s buying behaviours – to individual’s purchasing level. With such clarity, individuals can be called to account. However by the same measure stick, Procurement can also be called to account for the effectiveness of its own sourcing activities.

With access to Procurement reports the CEO and the CFO can act on the reports and potentially

1.      at one end of the spectrum make improvements to Company strategy if necessary to ensure continued competitive advantage, and

2.      at the other end of the spectrum continue existing successful practices by all involved including stakeholders as well as Procurement.

The real value that Procurement enables in the provision of this data and reports is not in the data itself, but in the ability for the CEO and CFO to act on the reports and make changes if necessary.

The Power of procurement – Delivering real Value

There we have it. Far from being a simple transactional team relegated to the bleachers, Procurement can deliver value by exploring opportunities, managing commercial risk, and delivering bottom line savings. It is a customer facing team that has access to innovation, new products, and a wide range of commercial skills that can be used to create invulnerable supply chains and supplier relationships that are astonishing in the extent to which these relationships also deliver value.

I am greatly encouraged by the CEO I spoke about at the beginning of this note. In a rapidly changing business environment Procurement needs to become agile and adopt highly strategic views of it’s role and place in the Company. There are some great signs that Procurement is making this adjustment and hopefully these change activities will continue in the future. After all, value is what we are all seeking.

  • Trevor Cameron is CPO at Thyssen Krupp. 

 

  • Have you heard about PASA CPO Summit in March? ‘Future Proofing You’ will be held on 13 & 14th March 2018 in Sydney. 

 

 

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