Coming Up With the Big Idea in Procurement: Lessons from Rio Tinto CFO Chris Lynch

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As we continue to share some of the highlights from his speech (See Part 1 here), we will talk about the first step Chris observes in making a big idea successful: coming up with a concept itself!

When generating the right “big idea,” Chris notes it is important to challenge paradigms through true “intrapreneurship,” (i.e., entrepreneurship inside an existing environment). There should be no shortage of ideas that can come out of procurement, he observes, based on where the function sits.

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After all, the “procurement profession touches the line in between cash and finance” and is an ideal place to “understand what makes the business tick and see opportunities for improvement.” Chris gave the example of a monopoly supply situation inside Rio Tinto in which a supplier would not come to the negotiating table because it knew the mining giant “could not get a bid on a competing product.”

What was the big idea in this case? The procurement organization ended up “developing a virtual competitor for the product” and developed all the required cost models to prove substantial savings were possible. Specifically, procurement came up with a plan to “source the raw material and virtual fabrication” and establish “an entire supply chain” including warehousing. The procurement team then shared this with the monopoly supplier.

The result? The supplier came to the negotiating table after all prior attempts failed. Chris observes that this entire idea originated and was incubated in procurement. Such an example shows that procurement can be creative and “does not need to get locked into risk averse paradigms.”

He suggests looking at the function as venture capitalists look at new ideas and that procurement should “never underestimate the value it can contribute.” A key place to turn for ideas is suppliers themselves.

Chris notes that “the best ideas can come from suppliers, and [companies] should reward the opportunity” and key supply partners. Chris cited the example of Komatsu as a “primary partner in commercial vehicles” to Rio Tinto that has come up with ideas around “productivity and maintenance schedules” among other areas to ultimately drive a lower cost per payload (unit of output) and lower total cost.

But most important, regardless of who introduces the idea, it is important to “protect your flank,” as the big idea will take time to deliver, which is where his next suggestion, getting support, comes into play.

First Voice

  1. Ian Heptinstall:

    Hi Jason. Great examples from RT. Can you clarify the “virtual” part of Chris Lynch’s talk?

    Did he mean they created a pure cost model of the monopoly’s supply chain and use this in negotiation?

    Or had they contacted several potential suppliers who they could combine into a supply chain to replace the incumbent? If it was the latter was this purely an exercise aimed at reducing the monopoly’s price with no real intention of actually setting up the alternative, or was it a real and genuine competition?

    I ask because I do see false competition used with the sole intent of keeping a preferred supplier’s prices “keen”, and I dont see this as good practice.

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