Have cost-driven purchasing strategies passed their sell by date? Nick Allen looks at the qualities required for a more sophisticated approach to buying.
During the long, lean years of economic strife corporate procurement departments were set the onerous task of acquiring goods and services at a much reduced cost. The die was cast for achieving “added value deals” on re-negotiated contracts and performance was measured on a department’s ability to bring about cost savings combined with substantial service enhancements. Managers looked for the keenest price from suppliers and drove a hard bargain – sometimes to the point of a Pyrrhic victory, with a supplier eventually being driven into receivership.
However, economic circumstances are beginning to change and attention appears to be shifting away from rigorous cost cutting, to investment and business expansion. So what does this mean for Procurement? Are a different set of skills required to achieve new strategic objectives? What’s in the procurement tool box?
A report just published by IBM Global Business Services, working with Oxford Economics, entitled “Chief Procurement Officer Study – improving competitive advantage through procurement excellence”, sets out a view that high performing procurement organisations have three points of differentiation over their peers – “Effective delivery of traditional procurement capabilities; influence within the enterprise over purchasing and strategic decisions; and identification of innovative ideas from a diverse range of inputs”.
The report suggests that what has often been maligned as a “back office” support function can be a driving force for gaining competitive advantage. Using feedback from 1,128 chief procurement officers from global organisations with annual revenue of $1bn and above, the survey finds that “companies with high performing procurement organisations have profit margins 15 per cent higher than the average company and 22 per cent higher than those of companies with lower performing counterparts”.
Half of procurement organisations surveyed were seen as “effective or capable”. But along with delivering spend savings – using core competencies such as category sourcing, supplier management and transaction processing – any company wishing to achieve excellence would need a CPO at the helm that was able to influence strategy. However, apparently only 33 per cent of those polled enjoy significant influence over important strategic issues, such as delivering customer service, driving efficiency, introducing products and services more quickly and creating brands.
Fewer organisations still (27 per cent) were considered innovative. Those that were used techniques such as crowd sourcing, collaborative product development, internal collaboration and customer interactions.
Just 15 per cent of all companies surveyed demonstrated all three attributes of being capable, influential and innovative.
So with few companies able to show that procurement has influence over business strategy and uses innovative techniques such as collaboration, what needs to happen to bring about change?
Dr John Glen, senior lecturer in economics at Cranfield University and economist with the Chartered Institute of Purchasing and Supply, believes there is a deficiency in the skills required by purchasing professionals across G20 countries.
Commenting on a recent study for CIPS into evaluating the level to which procurement is “professionalised” within large global organisations across G20 countries and 30 other OECD countries, he says: “CIPS believe that people should be fit to practice and have sufficient skills to go beyond this immediate notion that procurement is about pursuing the lowest cost.”
He says it is about “taking a much more strategic view of what procurement can deliver inside an organisation in terms of building sustainable supply chains, supply chains that protect your reputation, that minimise waste, that address the issue of safety and so on”.
Reflecting the views of CIPS, Glen sees procurement as being a strategic activity. “The CPO function has to attain a position where it influences strategy rather than is reactive [to it], but to do that, it makes it incumbent upon the purchasing profession to have the requisite skills.”
However, according to Glen, “The research is tending to point to the fact there is a deficiency of them [skills] – manifesting itself in the West Coast Mainline fiasco, G4S and all the problems the government has had in making sure that people deliver on what is necessary.”
He sets out a list of objectives. “There is a body of evidence out there that says, if you want to build sustainable, value-enhancing supply chains, this is what you need to do… it’s about relationships, minimising risk, transparency, being proactive rather than reactive, drawing down on relationships when things go wrong – rather than having a transactional type of relationship with your supply chain,” he says.
“That then overcomes a lot of issues around visibility… there is no way in the world you can put a system in place that gives you visibility down to tier 6, or the cost of doing it would be prohibitive.”
Glen believes that relationships hold the key to ensuring that corporate values are transmitted down the supply chain to lower tiers. “[There should be] sufficient relationships existing to make sure the values you have, the practices that you want to go on – the compliance you want in your supply chain – are based upon relationships that exist, rather than people trying to write contracts to enforce them,” he says.
“You can have people trying to enforce regulation and saying you have got to have transparency all the way down, but the reality is it’s incredibly difficult to do that. Even if you attempt to put systems in place, enforcing those systems is difficult,” he says. “So what you have to do is build a culture, to build relationships, to build trust – that over time makes it explicitly clear that that’s the way you want to do business.”
According to Adrian Chamberlain, CEO at Achilles, an organisation that operates globally needs globally available information. “The “Holy Grail” for international businesses seeking to mitigate supply chain risk is to create a single, centralised global source of accurate and validated supplier information, one that stretches down through all tiers of the supply chain, and is visible to procurement teams across all geographies,” he says.
“Many global companies want the same consistent processes and standards for all operating units and wish to use a consistent approach to managing supplier information to create transparency and facilitate benchmarking of supplier performance,” he says. “Comparisons of a supplier’s performance across several regions may well be useful for creating continuity within complex global operations and may reduce the potential for individual buyers to introduce inconsistencies at a local level through cosy relationships with suppliers.”
Chamberlain says the globalisation of supplier information is starting to gather momentum with a number of international companies outsourcing the management of their global supplier databases to Achilles. “It’s a market that’s time has come. Lots of companies are looking to outsource – they’re saying they don’t want to do the basic work themselves.”
But while globalisation continues to gather pace, evidence is mounting of a trend among western companies to bring manufacturing back closer to home. The dynamic interplay between costs of labour and transport, vs responsiveness, risk and complexity have made near-shoring the preferred option for a growing proportion of manufacturers.
A survey by Versapak, a supplier of tamper evident solutions draws upon the views of 1,124 managers from UK companies with interests in manufactured goods. It suggests that two thirds (67 per cent) of those polled would consider bringing manufacturing back from China to the UK or Europe “if market forces were right”. Thirty eight per cent admitted to already being in discussions on returning production to Europe.
The top five reasons given for this change in sourcing strategy were: Difficult communication (53 per cent), rising prices (48 per cent), long lead times (40 per cent), poor quality of production (35 per cent), and large minimum order quantities (32 per cent). Gerard Chick, chief knowledge officer at Optimum Procurement, believes that with the focus on cost-cutting over the last three decades – leading to the wide-spread adoption of just-in-time practices, lean thinking, outsourcing and off-shoring – we are now starting to experience the unforeseen consequences of our actions. He says: “Over those three decades of pushing cost out, people have managed risk in.”
He cites examples of supply chains that have been disrupted by natural disasters, that have experienced CSR issues or that have suffered from supplier quality failures, and explains the impact that the changes taking place within the Chinese economy will have on our supply chains. “Because wages have gone up in China, incrementally the cost of having things manufactured has gone up,” he says.
“China is having problems with internal consumption because they want to bring demand to their own markets and not to just rely on exports – so these things that they [Western buyers] didn’t think would happen has changed the focus of supply chains.”
“The dream is you take it to the other side of the world and it’s cheaper – and people used to say off-shoring gives you cheaper prices but longer lead-times. Well the cheaper prices have gone,” he says.
Chick views the issue of supply chain complexity as a challenge that needs to be embraced to create competitive advantage, and he believes purchasing managers need to be far more sophisticated in their approach to supplier management.
“People should be innovative about how cost reduction is achieved and contemporary cost reduction will be about taking a view on “total cost of ownership” so they may bring quality into it [the equation] more rather than go by cheapest price. Or people will look at lifecycle costs – if we build an airport or hospital, how will we run it, how will we manage our contracts and how will we work with complexity? People are now looking at cost reduction in a much more sophisticated way,” he says.
“For procurement, the day of the buyer has gone. The people that remain as supply side managers will need different skills. There will not be enterprise-wide buying departments anymore, you’ll have people who interface with marketers, sales people, finance people and so on – all the functions in the organisation – and they will work together to make the organisation successful,” says Chick.