Geraint John (GJ): To what extent are you under pressure to reduce costs at the moment?
Steve Mallaband (SM): For us the pressure to reduce costs hasn’t gone away. But over the last 18 months significant changes in our supply markets have meant a significant change of procurement approach. Last year’s barley harvest, for example, was a disaster in Western Europe and Australia. It ended up with a lot of other people fighting for a very small crop. Our procurement focus therefore had to change quite rapidly from savings to security of supply. So we’ve gone from a market of abundance where we were looking for competition and cost savings to a market of scarcity where it’s all about risk management and planning forward. That means we have to be better at forecasting our demand and protecting ourselves against swings in the market, through things like financial hedging. What happens in practice when markets undergo a shift like that is that in the short term you will not reduce costs. The issue is less about saving on what you paid last year and more about buying better than the competition, getting supply at a reasonable price. Once you’ve found out how you can secure your supply, then you can work to reduce your costs.
Jacqueline Hoogerbrugge (JH): Our situation at Numico is very similar to the one Steve’s just described. We are facing substantial cost increases, so we have to find ways to compensate that without jeopardising security of supply. The most significant shortage for us is in the dairy market, but also other markets such as fruit and vegetables, cereals and oils, which are under pressure owing to a combination of climate change, biofuels and growing economies.
Bart Kroon (BK): Yes, cost savings are important, but security of supply is equally important in markets that Nutreco is dealing with, such as fish oil and fish meal. There’s also going to be a scarcity in raw materials like wheat, barley and corn, because of biofuel developments. A new balance needs to found, using value of raw materials to the best effect. People are now burning rapeseed oil – which a valuable raw material that can be used for baby food – in cars! Those developments do change the environment. The only way to secure supply in markets that are subject to scarcity is to do supplier development for the long term, and for us the way to do that is to organise across our business to combine volumes. So, for example, we are working to formalise the information exchange process and turn informal networks into category groups that deploy category strategies.
Paul Bestford (PB): There continues to be pressure to find savings, but for us at the moment a lot of it is about funding growth, not necessarily in terms of net cost reduction but in terms of taking money out of areas of the business that aren’t particularly productive and investing them in areas that are. For example, we recently took a million dollars out of our car fleet costs which we can invest in the development of our business.
Benno Lutje Wagelaar (BW): The energy business, which we are in, is one where savings are not that important yet, because it’s a relatively stable and protected market. But now you see big mergers coming, not only in the Netherlands but also internationally. The energy world is coming under more pressure to manage costs, so it’s going to be important for a company like Essent too. That’s why we’ve invested a lot in procurement people and tools, to be in front of those trends and to be ready when the pressure increases.
GJ: How far have you implemented strategic sourcing and category management in an effort to deliver savings?
Dominique Gardy (DG): Category management is, I believe, key in delivering the value from contracting and procurement. This was introduced in Shell a couple of years ago and has brought credibility in terms of addressing the risk that our various businesses face in procuring rigs, equipment, engineering, and so on. These categories have been developed to support value delivery and I see there are many opportunities in setting up some real global categories, to bring economies of scale and leverage the potential we have as a company. Take valves, for example. Why should that not be looked at on a global basis for Shell as a whole?
John Tros (JT): Although category management is key in delivering value, we see four developments within the market that are changing our category management requirements and strategies. One is that some of the indirect categories are becoming a commodity because demand across businesses isn’t that different any more. If you take this point of view, a possible outsourcing of some of these categories might be the next step. The second development we see is that in the Netherlands traditionally when customers made a claim insurance companies just gave them the money. The trend now is towards providing them with a service, which is currently still viewed as claims and not as direct costs that can partially be influenced via the value chain. As a result, procurement has to develop a new category. The third development is that the government is liberalising the market for healthcare services. The impact of this liberalisation has resulted in a totally different category approach. The final development is the globalisation of suppliers within certain categories. In these a category manager more and more has to focus on how Delta Lloyd becomes the customer of choice.
Danny Pieters (DP): The way we have organised category management has been to start with the supply markets. Some of these markets – truck transportation, for instance – are regional. Based on this, we decided at which level the category would be handled, whether local, regional or global. There is a difference of approach between direct and indirect materials, because there needs to be an acceptance from your internal customers as to whether you take particular materials at a category level.
Dimitri Huyghe (DH): If you look at strategic sourcing for direct materials, that’s where you need a central procurement function to review all sourcing activities, to make sure you get the best out of all of those categories, to know where the pockets of potential savings are. In indirect materials it’s also strongly correlated with data transparency; often you see that the data is not there.
DG: I agree that you need to align with suppliers at global, regional and local levels. And at the same time you need to have an holistic view, at least for some categories, on the cross-company opportunity, otherwise you can miss opportunities. That’s my view.
PB: I agree. We used to have a central strategic sourcing organisation, which we have retained in some sense, but at the same time we have pushed sourcing down to the local organisations. We wanted to focus the regional effort on managing categories that were very strategic to the business, things that are about driving innovation, launching and growing new products or helping us to manage risk. For those things we have a small central category management hub, which is global and regional. At a local level we have strategic sourcing close to the business, but we didn’t want to lose the value of our scale, so we have a small team at the centre that works with each of the national businesses to help them collaborate with each other, to share knowledge, processes and data without being controlling. A good example of that in practice is the office supplies category. There is a regional market for that but we don’t see it as strategic, so we don’t necessarily want to buy it at a regional level. Our central team facilitated a parallel process where we ran an auction that included all the countries, but we kept them as separate pieces of business. That helped us to negotiate better deals in each country, but without the slowness and complexity that comes with buying on a bigger scale. So far this approach is certainly helping us to increase the rate of savings we can achieve, because we are able to stay agile at a national level.
SM: InBev’s history has been one of growth by acquisition, so procurement has developed from a local base. It’s only in the last 2-3 years that we have tried to pull that together and put a layer of global category management on top. In the past 18 months our central procurement team has gone from five or six people to around 35, out of about 400 people in procurement globally. Our experience of setting up that structure is that direct spend areas have been easier to do on a global category basis, whereas on the indirect side it’s been a lot tougher. Some categories, like point-of-sale materials and IT spend, we are genuinely doing globally, but for transport and logistics, our second biggest area of indirect spend, we are nowhere near that. Traditionally, the industry has been built around local breweries serving a local area, and transport still reflects that structure – sometimes you have to wait until the market evolves before you can buy well and sometimes you have to push to help the market evolve. In terms of strategic sourcing, what we’ve tried to do over the past year is introduce one single process globally, so that we can all talk to each other in the same language and make sure that our buyers are trained rigorously, especially when they are dealing with high-value spend.
JH: Numico initially made significant savings by globalising procurement and centralising it in Switzerland. Later it was felt that procurement was becoming a bit isolated, an ivory tower, too detached from what the real business needs were. So three years ago the decision was taken to move it back to Numico’s headquarters at Schiphol. We still have a centralised procurement department, but it’s now much more integrated in the business, working closely with marketing, R&D and manufacturing. One of things we are currently evaluating is whether we can keep the function central, but spread the people to various locations throughout the business. We try to procure at the lowest hierarchical level and only pull it up a level higher if it really adds value – either by combining volumes to get economies of scale or because it allows us to have a certain expertise centrally that you couldn’t afford locally.
JT: In negotiating with all the big consultancy firms globally, I’ve learnt that you can do a local deal and then combine it into a global deal, rather than try to negotiate a global deal. Most of these companies say they operate globally, but their pricing, because of local P&L responsibilities, is not global. If you go for a local pricing deal, you probably get better cost reduction.
Philippe Courregelongue (PC): The identification of these kind of synergies still need to be part of a process, a spend analysis process basically that is thorough and systematic, otherwise you are missing opportunities. We see organisations leveraging technology to provide aggregated, normalised, cleansed and categorised spend data in a consolidated solution across their global operations in order to fuel their sourcing strategies. Historically, this data resided in regional and disparate ERP systems, resulting in an inability for central procurement teams to identify and prioritise the sourcing strategies required to deliver value back to local stakeholders. This does not require simple transactional reporting, but a robust data extraction, cleansing and analysis process that allows procurement, whether central or regional, to understand spend and pricing patterns across the whole business.
GJ: What other cost-saving strategies – such as low-cost country sourcing, for example – have you used over the past couple of years?
DG: In terms of sourcing from low-cost countries, we are at the beginning of that. Management is very willing to go there because we can source it cheaper, but it’s balancing savings, quality and sustainability of supply. We now have two offices in China to try to establish a network and understand how contracting processes operate locally.
JH: We’ve made important savings through sourcing from Eastern Europe and China. One of the critical success factors was our supplier development department, which is part of our quality and food safety function rather than procurement, as standards and specifications in the baby and clinical food industry are very strict. Supplier development went into these countries and helped suppliers to develop up to our standards, using local people who understood the local culture and customs and who could bridge the gap between our Western European mindset and these low-cost markets.
JT: In my previous company, where I was the global category manager for HR services and the regional category manager for professional services, we brought in suppliers from other countries. This was because the company’s spend was either so big that the selection of a local supplier would mean that you would introduce a monopolist, or that the Dutch market was too standardised. For example, we introduced a new money transport supplier from Germany that brought a totally different approach – one that had a high impact on cost reduction. In another case we introduced a call centre services provider from Canada into the market.
DH: You need the mindset to be willing to look at that. Two companies moving cash around can seem like a fixed situation, but the fact that you thought about it and looked at companies in another country, that is the mindset that makes the difference.
GJ: What about your use of technology such as e-auctions and e-procurement?
Susan Jansens (SJ): We use auctions and the experience has been really good up to now, mostly in direct materials, although there are some areas of indirect where we are looking to use them now as well. There’s been a slight shift: it was all auctions a while ago, but now we’re using the platform to put out requests for information as well.
SM: We’ve had considerable success in procuring marketing point-of-sale material through e-auctions, because it’s an area that’s highly competitive; there are a lot of suppliers out there, a lot of new suppliers trying to enter the market and you can attract a lot of bidders to your auction and get some good prices. But the big thing you get out of it is better adherence to process, clearer specifications, better structure, and that gives you better results.
Françoise Demanet (FD): That’s true for us. We don’t use e-procurement and we are just testing the e-auction tool for use in June this year. But using the RFP and RFQ processes has forced our internal customers to define their specifications and help us to plan our purchasing activity in the market.
JT: It’s not only about getting cost down, it’s also about making the process more transparent for your clients. Often they don’t see the benefit of what you are doing and what the reaction is of suppliers when the market is becoming transparent.
PC: What we see is two moving scales: there’s the maturity of the organisation doing auctions and the degree of comfort they have with the tool they use; and there’s the complexity of a tender for particular markets. It’s really matching these two that is the challenge. In many cases, auctions still remain extremely valuable to drive savings, for a number of reasons: be it transparency, be it because there’s competition in the market. So there are still opportunities to grow the use of auctions, but what we see as well is that there are a number of people now who are trying to get means of negotiation that are less adversarial. We call it “creative negotiation”, where the type of input is not strictly related to the price or the total cost of ownership, and the suppliers can do their own bundling or use their own scale of rebates, and so on. The level of complexity is not just sitting on the buyer’s side, but also on the supplier’s side. It needs some leverage to bring savings. This is pretty successful – for example, Heinz has been using this technology extensively for several years now to drive savings in this way. It uses this approach for approximately 40 per cent of its sourcing events within categories where traditional e-auction approaches proved incapable of delivering cost reductions and were harming supplier relationships. In addition to e-negotiation solutions, we see organisations embracing more holistic, broader supply management solutions so that the value created during negotiation can be captured via more effective contract management, supplier performance and compliance management solutions.
PB: In the context of e-auctions and e-sourcing, we see transparency as a definite gain, but this is also the case in other areas too. We have a spend analytics system that enables us to get global visibility of our spend. It’s still not 100 per cent accurate, but it is hugely helpful both for collaborating and for “deep sourcing” – getting into those areas of the business that other sourcers can’t reach. We’re also in the process of implementing a global platform for contract management. Our next step is to create that same level of transparency around the knowledge we possess – how can we access the knowledge and experience of several hundred procurement professionals across the globe in a really user-friendly, meaningful way? If we can find something that will help us do that quickly and efficiently then it would be a huge win. One of the first challenges we are facing here is creating a common sourcing language or framework that enables us to describe and share our knowledge in a consistent way.
DH: What really helps is if your strategic sourcing process and methodology is pretty much standardised. It’s not only about spend data, but ensuring that the analysis is transparent and that the strategy for a certain category is clear. If everybody in the organisation speaks the same language about it, then you can really accelerate learning from each other and sharing knowledge.
GJ: How successful have these various approaches been in reducing costs, and how much mileage is there still in them?
DP: In terms of e-procurement and e-sourcing, I would say it’s early days. We’ve been using e-procurement for 4-5 years, but on a very limited scale and in a limited geographic area. People see the advantage process-wise, they see some light at the end of the tunnel, but they haven’t seen whether the sky is cloudy or full of sunshine. Savings are there, but there is still a long way to go to get them.
DG: I would comment on two fronts. The first is what I call the basics; the other is adding value. On the basics, you need to have a management information system that tells you what you spend in what categories and with which supplier. We have done that, which is great. We are also close to a global contract management system. So we have come a long way on the basics, although there are still quite a number of opportunities to improve efficiency and effectiveness around standardisation and process simplification and automation across the group, particularly in the requisition-to-pay process. In terms of adding value we have put some strong stakes in the ground for category management and supplier relationship management. But I think here we have a long way to go in terms of being more proactive and looking forward. Looking backwards is nice to know, but it’s not going to help your business in terms of delivering shareholder value. Optimising sourcing based on planned demand, developing some intimate relationships with suppliers to really understand cost build-up and long-term sustainability of supply are key in our industry.
JH: Our progress is variable, depending on which area and category you are looking at. We’ve been very successful in getting to strategic buying, centralising the procurement function and then bringing it closer to the business. We have a company-wide programme for cost savings. It’s multi-disciplinary, working together with product development and manufacturing, creating significant savings. If I look at low-cost country sourcing it has been very successful for particular categories where we have implemented it, but there is still a lot of scope in rolling it out to other categories. We haven’t even started e-procurement or e-auctions yet and I still see substantial opportunities for us there. So there are pockets of excellence, but overall I still feel there is plenty of scope; I don’t feel like we’ve run dry.
PC: Looking at our customers, I would rank these opportunities as, number one, increasing the level of adoption of strategic sourcing and e-sourcing to achieve its full potential in terms of addressable spend. Number two is compliance, where the opportunities to capture savings are based on aligning execution with the strategic sourcing initiatives. Number three is really supplier performance management and, in general, expanding collaboration with suppliers.
GJ: What do you see as the “next wave” of cost-saving opportunities for your companies?
PB: One of the things that we’ve embarked upon is process outsourcing – we’ve outsourced a large chunk of our transactional procurement processes and some elements of finance, HR and IT. Part of that is about offshoring to low-cost countries, but it’s also about driving consistency of those processes on a global scale. On a smaller scale we’re also looking at translation services, and other areas of opportunity to offshore, though not necessarily to outsource.
SJ: For us at the moment it’s about trying to get people interested in potential savings. They have got other priorities a lot of the time when it comes to indirect materials, and they are not fully aware of the true benefits of doing something slightly differently – for example, offshoring or partial offshoring. It’s quite a big battle to convince people that it might be interesting to look in different areas that haven’t been explored until now.
DH: There’s an unwillingness to change. When you drill down into the organisation to the people who are actually deciding what to buy or where to buy it, defining the specifications, the awareness about getting value and savings for your company is not there. So the procurement department has a key role to play, as you say, to show what can be done.
JH: An area where I believe there is an important opportunity for cost savings is collaboration with suppliers and with other functions within our company. This is not about being adversarial or jeopardising your security of supply, just taking out costs that are simply unnecessary – duplication and non-value adding cost together with suppliers and optimising costs cross-functionally with other departments within our company.
JT: Reverse integration is another one. I’m currently in the process of setting a sourcing strategy for repairing cars, which could also mean that we buy suppliers. I’ve even proposed buying a hospital to look into how we can manage costs. In the past companies have tended to push things out, because they haven’t seen them as core to their businesses, but now they are rethinking that. In the future there will be a reverse trend that is about securing supply. There is a restaurant chain in the Netherlands that owns everything, from their own slaughterhouse to their own wine maker. It’s doing great, but I don’t think that is the way to go. Agility is important. In my area I’m even thinking of buying more from my suppliers if they are able to provide me with more customer satisfaction. At least then if we’re not getting a cost reduction we get a profit improvement because our customers are happier with our products.
DG: I think there is another area where there might be far more value added, which is to look forward to what we expect to buy in the years to come. What are the risks out there, for example, in terms of price and supply availability? By bringing market intelligence and really engaging with the various businesses to offer clear strategies to mitigate risk we could add real value.
FD: If we are involved early in the sourcing process, we can use techniques like value engineering and demand management. This helps not only to execute a correct procurement process but also enables us to increase the savings.
PB: Having got strategic sourcing and category management embedded across our organisation globally, the next step is to take that skillset and knowledge base outside of the sourcing function and start to really help our key user groups understand that this isn’t an art that only sourcing people can do. I think having a user group that can do some of this themselves is a healthy thing. So that’s one area. The second is about entrepreneurialism – how do we allow our sourcing people to work within a consistent process and framework, but at the same time encourage them to be out there finding new types of opportunity and doing things in a different way? There’s a little bit of conflict in that we need to get to grips with.
PC: We’re working with many organisations that are looking at how technology can help them deliver “the next wave of value”, whether that’s through leveraging more innovative negotiation and analysis technologies to create value (as with Heinz), managing their contracts more effectively to capture the value, or reducing operational and regulatory risk within the more complex relationships inherent in today’s global supply network. What we’re seeing our customers focus on next is the weaving together of solutions for every element of supply management to try to address the broader issue of compliance across all supplier relationships, covering both direct and indirect categories. It’s through the effective management of buyer and supplier compliance in its various forms, across all categories and all markets (established and emerging), that the “next wave” of savings can be delivered.
DH: We’ve talked about global sourcing, outsourcing, insourcing, supplier development and business intelligence – getting more insights in the market and having that as a differentiator. One area we haven’t touched on is procurement function efficiency. There is a scarcity of talented sourcing people in the market, we all know that, the question is how to make best use of this talent once they have joined your organisation. It is a worthwhile exercise to see which activities of a strategic sourcing process can be done by supporting people or alternatively by third party. At the same time, review which less critical categories can be done by third party. Anyway, the good thing is that there are a lot of alternative savings opportunities that in fact only become visible after a first wave of strategic sourcing projects. These alternatives – such as global sourcing, better upstream supply chain control, broader supply markets, and so on – will take more time and effort and more collaboration between stakeholders than traditional strategic sourcing. That is why I call this “deep sourcing”. Deep sourcing often leads to substantial new savings or value for your company.
GJ: On balance, do you see the majority of future savings coming via traditional, competitive methods or through collaborative ones?
JH: I see the majority of savings being the collaborative sort, because of the need for security of supply. It’s about working with strategic suppliers, looking at things cross-functionally, trying to create a win-win situation by taking out costs on both sides. How can you make your suppliers’ lives easier and thus cheaper in a way that is ultimately also going to have security of supply benefits?
BK: I fully agree with that. In markets where scarcity is increasing, you need to be an effective partner and that’s what we are trying to do. In other markets it’s still the old game and that will continue.
SM:Yes, it depends on the category. Tough negotiation is still an extremely useful weapon and it’s well worth reminding yourself occasionally to go back to it.
JT: I think it depends on the overall strategy and the related category strategy that you as a company have developed and implemented. In some cases people are too quick to focus on collaboration and partnerships, which often mean that you are locked in to a particular supplier. You should always assess if there are opportunities to get out of this kind of situation because the market and strategies can change.
DH: You have to do your homework before you start collaboration, because I’ve seen a few cases where the supplier was taking really huge margins. If you don’t know that and you step into this monopolistic situation and don’t look at anybody else, then you are leaving a lot of money on the table.
SM: With some suppliers you are never going to collaborate. I would challenge anyone to collaborate with Microsoft, for example. It’s not an approach that works. I agree with Dimitri that you need to choose very carefully who you collaborate with and don’t waste your time with the Microsofts of this world. If you think supplier profit margins are too high, then get some competition going first. Our view is that you should get a sound commercial deal in place and then look at collaboration, rather than starting the collaboration and then working out what the commercial deal should be.
PC: The name of the game will be agility – balancing adversarial negotiation techniques and more collaborative ones. This depends on a multiplicity of factors, including market conditions and the maturity of suppliers and of the procurement organisation. Agility requires flexibility in terms of skills, processes and technology to support the right strategy at the right time, and to anticipate and deliver change.
