How to Make Your Procurement Organization like Amazon — Use the Flywheel!

Many smart readers will be familiar with the Amazon flywheel. It is a graphical representation of Amazon’s business model that you can read about on this blogpost here.

The model from that post is shown below:

Source: http://www.samseely.com/blog/2016/5/2/the-amazon-flywheel-part-1

The graphic generally shows the self-reinforcing cycles of how Amazon’s focus on customer experience and product selection help drive demand — which in turn attract sellers while also then letting Amazon gain economies of scale (and also “economies of scope” when it jumps into adjacent markets) to then self-fund (i.e., re-invest all the profits) the offering of lower pricing AND the development of even better customer experiences … which then repeats the cycle continuously.

This graphical model is an oversimplification because there other things at play here:

* disintermediation in the supply chain to capture value
* building/buying capabilities to jump into adjacent markets
* driving not just experience and eyeballs, but also monopolistic power in categories
* acquisitions to accelerate category dominance
* subscription-based bundling and related incentives (“free” shipping with Amazon Prime)
* playing 3D chess by playing different roles — e-tailer, wholesaler, marketplace, platform — and then using that power with upstream suppliers
* speed to value and focused/driven/intense organizational culture on mission and results

I’m sure you could add more to the list above. That said, procurement and supply chain professionals understand many of these drivers when they look at supplier power and category strategy — especially when one of those suppliers may be Amazon (e.g., AWS)!

Many procurement organizations often have a difficult time expressing their organizational value-add to other stakeholders, or they end up focusing too narrowly just on cost savings. They need to be able to communicate higher impact value creation and also create some “branding” surrounding their spend/supply management services. So, they should consider adopting the Amazon flywheel to their organizations, and there are actually three ways in which they can do this:

* Apply the Amazon flywheel to the broader organization and then dovetail in how procurement helps to support the business flywheel. Most organizations want to be like Amazon in some respects, so this can help reinforce that.
* Apply the flywheel to the procurement organization as a spend/supply management “business” in its own right and then tweak the Amazon flywheel model to create a self-funding procurement flywheel.
* Apply the flywheel to sourcing, category management and supplier management as you engage suppliers.

In other words, change “growth” to “profitable growth” and then change “sellers” to “suppliers” and you get the general idea.

In the rest of this Spend Matters PRO research brief, we’ll share our adaptation of the Amazon flywheel to a “procurement flywheel” that procurement organizations (and to the digital solution/service providers who help support them) can adopt for themselves and their stakeholders.

For any qualified practitioners interested in this PRO content, please feel free to reach out to us and we can make it available to you if you’re looking for support in your digital transformation.