Spend Matters welcomes another guest post from Amol Jawale of GEP.
In most large organizations, there has been a traditional allocation of financial responsibilities among functions. Marketing and R&D are expected to drive top line growth, whereas procurement and operations impact costs and hence the bottom line. However, there are several examples of industries where procurement has played a much bigger role in driving innovation and the top line. Ambitious CPOs have expanded the scope of their impact. The success of companies such as Wal-Mart, Amazon, Ford, Dell, Apple and Boeing has been largely due to such visionary thinking.
Here are three common themes across companies that have successfully leveraged procurement to impact their top line:
Development of business models around procurement: A big part of Apple’s corporate success is its reliable and competitive supplier network. Wal-Mart and Amazon changed the face of retail by perfecting the art of managing a complex network of supplier relationships. All these companies developed successful business models around procurement and supply chain, by first recognizing the ability of procurement to shape their strategies and empowering CPOs to drive the strategy execution. CEOs need to engage with the leaders of their procurement and supply chain functions in order to approach business strategy creatively. The belief that such solutions are limited to certain industries and companies is flawed.
Data-driven decision making: Discussions around revenue and innovation tend to drift in the direction of “broad strategy” and “intangible game changing ideas.” This is the exact opposite of procurement’s analytical and numbers-driven approach. While room has to be made for intangible strategies, procurement and finance leaders can help instill a disciplined approach in bigger corporate decision making. For instance, most M&A discussions in the C-suite involve potential (mostly unrealistic) synergies. If procurement can be engaged early on in the process, such hypotheses can be validated and the probability of success can be more clearly understood. A CEO recently mentioned that a big contributor to his success was the deals that he did not pursue, more so than the ones that he did!
Innovative products - As Ford was designing its new Fusion model, there was a tangible increase in the level of collaboration with suppliers. BASF worked with Ford to design a new resin, which halved the cost of window trims and drastically reduced internal transportation costs. Compare this to other carmakers that were focused on negotiating unit trim prices with suppliers and Ford’s competitive edge becomes clear. Such levels of collaboration require a high level of trust and commitment to the supply base, which can only be fostered by long-term thinking. Short-term cost pressures inevitably end up focusing on unit costs, which soon reflect diminishing returns. Industry leaders, on the other hand, have figured out the balance between immediate efficiencies and longer-term revenue growth.
For more interesting thinking on procurement, visit the GEP Knowledge Portal.