Procurement Value Drivers

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Spend Matters welcomes this guest post from María Cecilia Siqueira, of GEP.

Formerly known as a tool for cost reduction, procurement is now changing the business game. The market’s fast pace and global competition has forced some critical transitions in companies’ structure, strategy and execution. As Klaus Schwab, chairman of World Economic Forum, puts it, “Nowadays, it is no longer the big fish that eats the small fish — it is the fast fish the eats the slow one.”

Growing Momentum in Procurement World

Per Harvard Business School, 90% of procurement leaders indicated their job responsibilities have increased considerably over the last few years. CPOs must now truly act as an ally throughout business units, ending the status quo of a mere transactional function and now adding value for the company. In other words, it is time to influence and develop a strategy hand-in-hand with the company’s other C-level positions, especially CFO and COO, rather than just focusing in execution and implementation.

As Oihab Allal-Chérif and Savaltor Maira indicate in their article “Collaboration as an Anti-Crisis Solution: The Role of the Procurement Function,” “The procurement function is in the forefront when it comes to finding ways to maintain corporate financial health,” and this must not be taken for granted.

Procurement executives can — and need — to boost strategic discussions with their powerful analytical skills, as well as their market and supplier-market expertise. Still, even with their known potential, today only a third of them bring supplier intelligence to business insights, unconsciously sabotaging their company’s ability to adapt quickly enough so they won’t be eaten.

Two-Way Street

Companies that already do so are usually still on a one-way road; they use a supplier’s intelligence to contribute to the business, but hesitate to interact further and participate effectively within their supplier’s environment, which can potentially weaken the relationship. In fact, per McKinsey & Company, to achieve an outstanding supplier relationship, it is crucial to invest in a “joint development of capabilities for both the customer and supplier for the purposes of reduced cost, process improvements and innovation in products or services.”

Of course, the relationship’s purpose will not be the same for every supplier on the vendor list. In fact, a Douglas M. Lambert and Matias G. Enz study has ranked unrealistic and non-articulated expectations the two top reasons why company-supplier collaborations fail. The procurement team should classify suppliers based on criteria aligned with the business philosophy and the role which supplier will play in the company’s collaboration plan. Usually, parameters such as performance, capability and value added are used as the key indicators to define supplier’s role: cost reduction, innovation or enhance processes. Once it is defined, is necessary to communicate, plan, develop and execute with transparency and commitment agreed from both parties throughout the project.

Nevertheless, to successfully advance the company-supplier collaboration, the company itself needs to foster a collaborative culture. Internally, executives should gather skills, attitudes and processes that already encourage a collaborative environment such as effective communication, openness for innovation and project management. These attributes will also build trust throughout the company’s networks and potential partners once it is known for its expertise in this area.

Some business have already taken this step forward. Apple’s CEO Tim Cook, previously responsible for the company’s end-to-end supply chain processes, demonstrated how procurement’s view combined with analytical criteria of complex scenarios can enhance business advantage. Today, Apple’s global supply chain network is intrinsically linked to its R&D and design processes, which are a crucial part of the company’s philosophy, culture and its undeniable success.

Role of Procurement Executive

The new procurement executive must be bold and seize opportunities in a global spectrum without losing sight of the company’s strategy and stakeholder expectations for ongoing operations. It is essential to upgrade performance measurements customized and aligned with key budget holders, leverage technology to ensure best practices, develop a proactive risk management plan, and achieve end-to-end compliance and savings visibility.

The procurement team – acting as the “collaborative buyer,” a term originally from Allal-Chérif and Maira – must proactively work through the value chain, gathering alliances and enabling innovative initiates in its category’s project. Their tactical ability to understand and anticipate market movements is a valuable tool as an ally for new development in strategic projects, rather than “responses to accounting concerns.” Consequently, mutual benefits and stronger competitive positions are achieved. For example, in 2010, the suppliers that gave Toyota and BMW the highest cost reductions also rated them as their best customers.

Looking Ahead

Now, it’s crucial (and expected) for procurement executives to raise the bar and bring their expertise to the table. Of course, cost reductions will always have an important role to CPOs, but keeping transactions going smoothly simply isn’t enough to achieve a company’s goals.

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