Strategy & Operations » Procurement » Procurement’s new value proposition

Procurement's new value proposition

If procurement is to become more aligned to strategic goals, technical competencies must be complemented by soft skills, such as communication

“THE SECRET of change is to focus all of your energy, not on fighting the old but on building the new.” Clearly, when Socrates uttered those words, he was not talking about the procurement function, but it is a mantra today’s chief procurement officer would do well to take up.

It is no longer enough to build a procurement function that is efficient, demand-driven or even transparent. Procurement must now offer an organisation something that adds greater value. Indeed, a panel of chief procurement officers from some of the UK’s largest companies agreed that they see their future role as one that removes the shackles of mere cost savings.

Like chief financial officers, who have already moved from being simple number crunchers to holding one of the most important functions as company executives and strategic business partners, procurement officers and supply chain managers increasingly see their function as being more entrepreneurial, commercially focussed and – most important of all – one that adds tangible value to the bottom line.

“Increasingly, I am being measured on my ability to produce bottom-line results, such as EBIT and cost-to-serve,” said Andrew Croston, CPO of Fujitsu, at an invitation-only roundtable held by procurement outsourcers and consultants Optimum Procurement.
Though finance will remain the ultimate arbiter of costs within the business, accountability is starting to shift towards procurement teams and their CPOs.

“Somebody will always be accountable for controlling costs, but I think we will see a shift to supply management being more accountable for costs as they relate to sales or revenue, being held accountable for delivering value, and not just lower costs to the business,” said Rachel Lee, procurement director at Norwood Managed Services. There is no doubt that this is music to many finance directors’ ears.

Technically speaking
So often the refrain has been that procurement understands the cost of everything and the value of nothing. But for procurement to become more aligned to strategic goals and for CPOs to become more analytical and strategic in their thinking, technical abilities will need to be complemented by soft skills, such as communication.

“Technical ability can be learned and taught a lot better and a lot easier than soft skills,” explains Nick Brazier, chief procurement officer at BNP Paribas. “The ability to influence people, the ability to actually go into a room and sell as well as buy is increasingly important.”

Indeed, many within the profession believe that procurement has a brand and PR challenge. Although they are not top priorities when compared to creating sustainable and diverse supply chains, managing supply chain risk and tackling changes cost management strategy – a traditional area of procurement strength – lack visibility, and this remains one of their biggest challenges.

“When we talk about supply chain visibility, it does not simply mean visibility into your own supply chain and my procurement. I mean visibility among my peers, which enables collaborative decision making,” said Brazier.

In order to be taken seriously, procurement officers need to get better at deciphering their organisation’s objectives and communicate it to their team and the CFO. Too often, judging by CFO attitudes towards the procurement function and its past failings, supply managers’ visibility and, therefore, their influence in the business has been stymied because of embedded views about the function.

According to Learie Attzs, former supply chain capabilities director at Unilever, supply managers need to get the attention of the right people.

“These people will come to appreciate the role of procurement, making them the go-to people in the business, as their outward- and inward-facing knowledge and experience is unique,” Attzs said.

Fair value
Nevertheless, cost reduction remained delegates’ number-one responsibility to the business. However, new commercial demands have rocked this traditionally strong area. In today’s global market, the focus has shifted away from spend management in favour of revenue growth and profit.

“These days, the chief procurement officers I work with are talking about the top and bottom lines and that is very different from what we have seen in the past,” said Andy Howarth, supply chain director at Balfour Beatty.

In this environment, “price should be the last thing we worry about,” said Attzs. “We want overall value. So we are going to see the emphasis in contracts go from price to fairness and value.”

As recent events at Debenhams have shown, squeezing your suppliers too hard on price can be more of a hindrance than  a help. The high-street department store was accused of issuing a ‘Santa tax’ on its key suppliers. A letter sent from CFO Simon Herrick, who resigned days after a profit warning [see page 8], had called on the own-brand suppliers to make a contribution – calculated at a 2.5% discount on Debenhams’ open orders – towards Debenhams’ refurbishments, according to reports.

It is also worth noting that it is one year since the horse meat scandal: a series of revelations that food companies, supermarkets and even schools were providing food that turned out to be not quite what it said on the label. That incident – or series of incidents – raised numerous questions about whether suppliers and buyers were working closely enough together to ensure that the final product was exactly what it claimed to be on the packaging.

Progressives have now stopped talking about the “old” relationship with suppliers where the main activity was an aggressive conversation about price and how it could be cut. The buzzword now is ‘collaboration’.

Add to that another buzzword: ‘diversity’. Supplier diversity has long been neglected as an important source of innovation, and a specific aspect of procurement’s role. However, delegates at the roundtable suggested expanding the supplier base could benefit the business in a number of different ways.

“Supplier diversity is not about quotas – it is about widening the applicant pool to secure the best suppliers,” said Beth Ginsburg, programme manager at Supplier Diversity Europe.

For example, engaging with suppliers that are more efficient, flexible and innovative can add value to the supply chain as well as providing access to new markets. Delegates felt that they had to think about quality, cost and equality in order to ensure the company’s reputation and reduce risk.

“The goal should be that supplier diversity becomes part of the company’s DNA as the standard way it does business,” said Croston at Fujitsu.

However, the focus on suppliers can go too far if it is at the expense of customers. For instance, delegates felt that direct engagement with large business-to-business customers was a key part of procurement’s role and found that even in supply-chain planning, which is essentially a demand-driven process, not everybody included customer input.

“In essence, the value shifts innovation from a feature-cost orientation to a customer-value orientation,” explained Peter Gombera, head of procurement at Land Securities.

Series of unfortunate events
Globalisation and greater supply chain interdependence have also elevated risk management as a key concern for chief procurement officers.

Events such as the Japanese earthquake and tsunami in 2011 have only served to emphasise the importance of a strong supply chain and to illustrate the risks associated with having a lengthy global supply chain. Transport costs are increasing, and many of the perceived benefits from outsourcing to low-cost suppliers in emerging markets have failed to materialise.

Alongside a general awakening regarding supply-related risk comes the need for an improved way of measuring it. That requires more standardised, readily available third-party information shared amongst networked communities where people can pool data for operational assessment.

All of the delegates said they have programmes in place to monitor compliance, but it was agreed that there was a clear need to take risk management a step further – incorporating it into their plans and using IT to monitor and act on disruptive events.
“Supply management will have responsibility for third-party risk management, centralised governance, and control over third-party risk, providing business segments with the tools to assess and monitor risks together with oversight and reporting on the entire portfolio of suppliers to identify undue concentrations of risk within a segment, process or supply industry, “ explained Gombera.

Lee Rimmer, supply chain director at CSC, put it more succinctly: “It is still supply-chain risk, even more than increasing customer demands and higher cost, that is my stay-awake issue.” ?

This article was based on an invitation-only roundtable, which was held by Optimum Procurement and attended by Financial Director

Was this article helpful?

Leave a Reply

Subscribe to get your daily business insights