Contribution by Jonathan O’Brien – Award Winning Procurement Author
That was the question asked of me by a CEO of a large multinational corporation. I was sitting next to him at a dinner event, looking forward to talking about how I was working to develop capability within his procurement team.
“Ah Procurement… the function that buys the pencils” he said. I replied, “No, the function that that could make a dramatic contribution to your bottom line but one that needs your full support to do so.” The problem here is not just a CEO who is out of touch with his organization but rather a common and inhibiting mindset that consigns procurement or purchasing to being a tactical function.
Progressive organizations have long since separated out the transactional component of their purchasing and now recognize strategic procurement as a key enabler to business success. Twenty years ago the position of Chief Procurement Officer (CPO) was unheard of. Now any business that wants to survive and beat the competition couldn’t be without one. So what’s the big deal? Why is procurement so important all of a sudden?
The answer is simple and two fold. First, the world is fast changing. Supply bases and market places are global and informed customers want their products and services better, faster, and cheaper (unless it can be unique and exclusive). Second, the supply base typically harbors the greatest untapped potential that can transform the organization but only if there is a way to work out how to access this. It will not happen by doing more of the same, negotiating harder or restructuring the procurement team; instead it requires a new approach and one that changes the game.
Changing the game begins by driving in a series of strategic sourcing approaches across the entire organization. That’s right… the entire organization! Why should the process of managing a firm’s spend and interfacing with the supply base be confined to the procurement team? R&D, marketing, operations and other functions all want and need relationships and interactions with certain suppliers. This is a dynamic that suppliers work hard to use to their advantage. Instead, by asking the business to work cross functionally, it is possible to bring alignment and drive in new procurement strategies around what a firm buys and who they buy it from. To do this we need three types of strategic intervention: Category Management, sourcing strategy analysis and exceptional personnel hiring and development.
Category Management is a proven approach that enables organizations to consider the entirety of its third party spend and divide this up into ‘categories’ that reflect how market places are naturally organized, allowing each to be worked on separately. Using ‘deep dive’ market, supplier and organizational knowledge, cross functional teams can then identify the most beneficial way to source the goods or services within each category, maximizing leverage and position in the market place. Effective category strategies can dramatically reduce cost and price, reduce risk and secure new value and innovation.
Game changing also requires an organization to think about who it sources from. Amongst the thousands or tens of thousands of suppliers are some that need more attention than a traditional ‘arms length’ contractual relationship. Some need to be managed or measured to reduce risk, make operations work effectively or drive specific improvements. For others it is necessary to look beyond the immediate relationship and understand the entire supply chain in order to have confidence around what is happening many steps removed.
You’ll find, however, that there are likely to be a handful of suppliers where the right relationship can transform a business—where connecting their innovation or know-how could transform and grow a brand. Some of the biggest and brightest new ideas that help transform our lives don’t come from within the companies we buy from specifically, but rather through their suppliers—suppliers who have been carefully identified, nurtured, incentivized and collaborated with to create something great. This cooperation is something that companies such as Apple are well known for.
Finally, effective change requires talented procurement people who can think and act strategically with the right skill set for today’s business challenges. Currently, a senior procurement practitioner not only needs to understand the commercial aspects of the role awareness, he or she must also be good at stakeholder management, driving change, leading cross-functional teams and project management.
Perhaps the key skill that can make the most impact, however, is the ability to negotiate well and translate all the strategic insights, thinking and intent into tangible results. This is done in the face of the cleverest of suppliers, who receive, on average, ten times the training and personal development that their counterparts in purchasing do. One question I frequently ask CPOs is whether their team leaves money on the table when you negotiate with a supplier.
This answer is usually “I don’t think so.” My next question is, “How would you know?” This is always the killer question and one that provokes the most reflection, challenging the very heart of how organizations manage talent. Learning to be excellent at negotiation is not a once only activity; rather, it is an ongoing development process. Just like a professional athlete keeps training to maintain peak performance, an organization needs programs to build and continue development of the team’s negotiation capabilities.
So, when building a procurement organization where the CEO knows we do more than buy pencils, we’ve got a path we can follow. Get great at category management, get focused on suppliers, and make sure your people are ready to deliver. But remember to buy the pencils as well.