Procurement – The Function that Buys the Pencils or a Dramatic Contribution
5th October 2015 | Jonathan O'Brien
In this article Jonathan O’Brien discusses why strategic procurement is a key enabler to business success and why procurement needs to employ a whole new approach to realise true potential.
That was the question a CEO of a large multinational corporation asked me. I had ended up sitting next to him at a dinner event, looking forward to talking about how I was working to develop capability within his procurement team. “Ah Procurement….the function that buys the pencils” he said. “No” I said, “the function that could make a dramatic contribution to your bottom line, but one that needs your full support to do so”. The problem here is not just a CEO that is out of touch with his organisation but rather a common and inhibiting mind-set that consigns procurement or purchasing to being a tactical function.
Progressive organisations have long since separated out the transactional component of their purchasing and now recognise strategic procurement as a key enabler to business success. 20 years ago the position of Chief Procurement Officer (CPO) was unheard of. Now any business that wants to survive and beat the competition couldn’t be without one. So what’s the big deal? Why is procurement so important all of a sudden? The answer is simple and two fold, first; the world is fast changing, supply bases and market places are global with informed customers who want it better, faster, cheaper, unless it can be unique and exclusive and, second; the supply base typically harbours the greatest untapped potential that can transform the organisation, but only if there is a way to figure out how to access this. It will not happen by doing more of the same, negotiating harder or restructuring the procurement team, instead it requires a new approach and one that changes the game.
Changing the game begins by driving in a series of strategic sourcing approaches across the entire organization. That’s right…the entire organization! Why should the process of managing a firm’s spend and interfacing with the supply base be confined to the procurement team when R&D, marketing, operations and other functions all want and need relationships and interactions with certain suppliers? A dynamic that suppliers work hard to use to their advantage! Instead by working cross functionally it is possible to bring alignment and drive in new procurement strategies around what a firm buys and who they buy it from, and here we need two types of strategic intervention:
First; Category Management is a proven approach that enables organizations to consider the entirety of its third party spend and divide this up into ‘categories’ that reflect how market places are naturally organized and enabling each to be worked on separately. Using ‘deep dive’ market, supplier and organizational knowledge, cross functional teams can then identify the most beneficial way to source the goods or services within each category, maximizing its leverage and position in the marketplace. Effective category strategies can dramatically reduce cost and price, reduce risk, and secure new value and innovation.
Second; Game changing also requires an organization to think about who it sources from. Amongst the thousands or tens of thousands of suppliers are some that need more attention than a traditional ‘arm’s length’ contractual relationship. Some need to be managed or measured to reduce risk, make operations work effectively or drive specific improvements, whilst for others it is necessary to look beyond the immediate relationship and understand the entire supply chain in order to have confidence around what is happening - or not happening - many steps removed.
However, there are likely to be just a handful of suppliers where the right relationship can transform a business; where connecting their innovation or know-how could transform and grow a brand. Some of the biggest and brightest new ideas that help transform our lives don’t come from within the companies we buy from, but rather their suppliers; carefully identified, nurtured, incentivized and worked with to create something great, perhaps the most notable example of recent times being Apple.
Finally, changing the game requires talented procurement people who can think and act strategically with the right skill set for today’s business challenges. Today, a senior procurement practitioner not only needs to understand the commercial aspects of the role, instead he or she must be good at stakeholder management, driving change, leading cross-functional teams, and project management. However, perhaps the key skill that can make the most impact and a dramatic difference is the ability to negotiate well and translate the strategic insights, thinking and intent into tangible results. All of this in the face of the cleverest of suppliers, who receive, on average, ten times the training and personal development than those in purchasing. One question I frequently ask CPOs is “does your team leave money on the table when you negotiate with a supplier?”. The answer is usually “I don’t think so”. My next question is “how would you know?” This is always the killer question and one that provokes the most reflection and challenges the very heart of how organizations manage talent. Learning to be excellent at negotiation is not a once only activity like ‘earning your wings’ it’s an ongoing development process. Just like a soccer player keeps training to maintain peak performance, organizations need programs to build and keep developing the negotiation capabilities of its team.
You can read more in Jonathan O’Brien’s book, Category Management in Purchasing. The new edition is out now. The book provides a step-by-step guide to the tools, techniques and applications of category management. It allows readers to quickly analyse complex sourcing situations, and develop innovative proposals for sourcing. It includes case studies of IKEA, The Body Shop, NHS, Heinz, Cardiff Council, and GlaxoSmithKline.