Geraint John (GJ): To what extent have you and your procurement team been involved in activities focused on business growth and innovation? What is the expectation in your companies about your role here?
Giuseppe Conti (GC): In our case, we are basically the eyes and ears to the market – the people with lots of external contacts who, as a result, can bring new ideas in areas such as packaging and technology. We identify and build relationships with suppliers of products or services that can give us a competitive advantage, while protecting the company’s interests as the deals move forward. We are also improving time to market through outsourcing deals: looking at other companies that can produce things faster so that we can be more flexible in delivering our needs. We work in cross-functional teams aimed at new product launches and bring competitive and market trends intelligence to the business. Recently, we have also contributed to acquisitions. We were involved, as part of a cross-functional team, in the business case and the due diligence for an acquisition that we completed in July. Another thing we’ve done is to challenge the company to introduce open innovation networks for our research.
Thomas Schnadt (TS): What we at Credit Suisse have done, especially in Asia and India, as a result of contacts with suppliers – for example, in the offshoring business – is to link their CEOs, CFOs and other senior management people to our investment banking and private banking departments. So we open the doors to wealthy individuals but also to promising companies, many of which are privately owned. We were early adopters in buying from these markets and now the banking is following the supply chain. We do the same in our home Swiss market, where we have roughly 10,000 suppliers. It’s not a formal process, since this would hinder tough negotiations. But if there’s a good opportunity to introduce our banking services that can benefit our counterparts, we do it.
Gregor van Ackeren (GA): We are private equity owned and therefore very focused. Cost savings is business as usual; the question is really “are you value adding?” Cost saving is one value-adding activity but it’s only one. Procurement is suddenly an integral part of business management. Everything you have an influence on starts to be your responsibility. There is no clear end to that; you are asked to take the initiative, unless you can find someone else who can do it better. That was a very new experience for me, coming as I did 18 months ago from a well structured, much larger company where procurement was clearly savings-orientated and you weren’t expected to touch anything else. It’s a complete mindset change. As CPO you have to show your effect on the P&L, otherwise you don’t get invited back.
Rainer Rauenbusch (RR): Purchasing at Lufthansa is becoming more and more a kind of value-orientated entrepreneurship. It’s not a fixed role, we are not linked to the financial department, we are linked to the network, IT and strategy departments. Savings are very important, because in general we have more a cost problem than a revenue problem in our industry. Beside sourcing and purchasing we also support sales interests and are rewarded for cost savings and the increase in corporate value. Since a lot of business partners are using our aviation products as well, we have selected partnerships with some of these companies. For example, I am the manager of a strategic partnership with Deutsche Telekom and there are elements of sales and marketing there. That’s a very different role than we had as “classic purchasing”.
Kai Nowosel (KN): I’m interested to hear that some of you are rewarded for growth and innovation activities, as many of the procurement functions I know are still measured only on savings. Just yesterday I had a meeting with the head of a big industrial equipment firm who told me “I run a business division, I know I’m here for innovation, but the only thing I get measured on is savings. In our recent board meeting I was criticised because I only delivered 1.3 per cent savings instead of 1.7 per cent. But nobody saw how much I was involved in product development, in the product lifecycle sourcing that redesigned the product.” How do you make a difference that is not just about P&L savings, but also profit growth? How did you get measured on innovation?
Manfred Gamauf (MG): You have to define what innovation is, because there are different levels. The first one is the ingredients in the product; the second one would be process improvement. If you take one side of our business – paper – in many ways it’s not complicated, but in others it is. It’s very sensitive on the machines, it’s very sensitive to the ingredients. The most important thing is how you get the fillers and the fibres working together; how can you get more fillers than fibres because they are less expensive, and how do they glue together in the chemical and mechanical process? So one innovation would be to find a supplier with a glue, a starch or something else that allows you to do exactly this.
I would be rewarded for innovation when a supplier comes to me and says: “We have a new kind of filler, we should do testing together and see if it really works.” The specific role of procurement is not just to identify the supplier, because we are the eyes and ears of the market, and talk to them, but then also to draw up a contract that allows us to get the exclusivity of this kind of product, if it’s successful, for a limited period of time. That’s one example. The other is process technology. We have a lot of paper machines and the suppliers of these machines are developing new presses to improve our process. The impact is first on the savings, because with fillers it should be less expensive. But that flows through into us being able to sell more and so it goes to the top line as well.
Ulrich Piepel (UP): I don’t think purchasing people in many companies are involved in innovation, it depends on the business. Out of 100 companies, there are probably 15 or 20 where the purchasing organisation is involved in innovation. The rest are fighting for it. RWE is not a highly innovative company that brings out new products every day, but one area where we tried to innovate was to transform our lead buying organisation into a sourcing organisation that included technicians. We no longer had product groups where only buyers came together, we invited the technicians too. We said “Let’s try to standardise, let’s try to bring in innovations from suppliers, or let’s talk about our own ideas for innovation”. But there’s a long way to go. In the IT industry, where I worked before, it’s totally different. There the buyer has to be in China and look for the most innovative supplier and bring them in. If they don’t do it, or they are three months too late, they might be fired! But if you look across industries that’s not the standard role model.
Bettina Wietzel-Skakowski (BWS): It’s very difficult to measure innovation; savings is easier. But I think it’s important to measure how quick you are to come in – for example, when you make acquisitions that procurement is involved early in this process. Procurement does not handle due diligence in our company, but we are at least informed because we buy all the insurance and the management consultancy that supports the acquisition process. Innovation is also about bringing knowledge of markets – especially suppliers and technology – into the company, as others have said. But I think you need a strong home base and have good acceptance, confidence and respect that allows you to go beyond the traditional procurement role and into new markets. Otherwise you are not convincing.
UP: I always tell my people that they are wealth managers. There’s the budget holder who gives you a few million and you have to make sure that these people are confident that you are doing the right things with their money. If they don’t have confidence, they will do maverick buying or negotiate deals on their own. If you are a good wealth manager then you might also be innovative. It’s the same as if I give my own money to a wealth manager and he recommends an investment that to me seems innovative. If I trust him, I will give him more money. So it’s a question of trust and experience.
TS: I don’t think it’s reward that triggers this. Ten or 15 years ago the supply management function was on the production floor and there was no chance to bring innovation. But now it’s at executive level, and in a lot of companies it’s reporting to the executive board, so you are part of the senior management team. You can’t just hide in a supply management box and say “cost savings is all that I do”. You have to be networked with your colleagues from all the other parts of the organisation and then you can say that innovation is part of daily life. Traditionally, innovation has been a core strength of Credit Suisse and is therefore a key area of focus for our top management and the bank as a whole.
Johannes Schuchlenz (JS): I have approximately 20 years’ experience in the German automotive industry with BMW, Audi and Porsche, and now three years within the construction industry. I think purchasing in the automotive industry is fundamentally different to our discussion, which is really at a low level. Low level means cost savings. The automotive industry has been reducing costs by 2.5 per cent for the last 20 years. It’s a given. But in the VW organisation, for example, purchasing also has to change the thinking of management, both in direct and indirect materials.
Hans-Joachim Lumbe (HJL): The KPIs we are measured on are savings, savings and savings. In the telecommunications industry it’s very simple: you have a price reduction in the double digits – 15 or 20 per cent per year. If you are not successful at doing something similar on the procurement side, you can close down. You cannot counterbalance the price erosion by increasing the productivity alone. But on the innovation side we are very active as well. We have more than 200 procurement engineers getting involved in the product development phase as early as possible, making sure that we get the right suppliers and the right products designed in. The other area where we add value is in project management. Telecommunications often involves large projects, networking countries and so on, and there is tremendous competition to win these tenders. We are involved in the acquisition phase, so we make sure that our sales force is aware of the best prices and conditions, to support them and to help them win the projects. We put a lot of effort in there.
GA: Without innovation in the function you will have no innovation in the product. The question is: how is procurement recognised for being a driver of innovation in the company? If we are reduced to cost savings, of course nobody will recognise that as innovation. If you want to be an innovation driver, having the right KPIs is essential. Why should a procurement manager drive innovation if they are not measured on it? Innovation is not usually measured on a yearly basis like savings; if you develop a supplier, the benefits of innovation will come in the long term.
You need to look at the KPIs of your colleagues at the top management level and in R&D and see how you can take some of those and implement them into your own KPIs and get those agreed. For example, in R&D you could say “I will open the doors to 10 innovative new products within the next 12 months”. At the end of the year you look at whether you’ve achieved that. Were you able to launch that product? Did your support in this area make a difference? It will not be linked directly to savings, but it will be linked to cost of goods sold because you were faster. That is innovation from my point of view. It ends in the product, but it starts in the function.
Ian Miles (IM): A number of companies I’ve worked with are clearly identifiable as having an innovation culture. I’m convinced it’s far more straightforward for procurement to be innovative when they are working in a business that has one. When a company is looking for growth, typically it is introducing new products, entering new markets. Procurement departments are well placed to deliver here, often through very good knowledge of the supply chain and its capabilities, because you can’t enter a new geography or bring out a new product without a supply chain that delivers on that.
Nima Motazed (NM): For me, innovation is very interesting, but what we are talking about is mostly science fiction at the moment. In my company, capturing savings and delivering the benefits of those savings is the only thing that counts. By reducing the costs we are contributing heavily to the profitability of the company. At the same time we have started to build up a competence centre for outsourcing activities, and we are also talking to a number of vendors that are coming to us with innovative ideas but not finding the doors open to the business units. We try to find ways to bring them together to exchange information – for example, in half-day workshops – and to facilitate that process, so the business units can see if these innovative ideas might be worth considering.
GJ: Can you give us a specific example of that?
NM: Last week we had a discussion with one of the major consultancy firms, talking about how we can reduce project costs. One of the ideas was to use offshoring resources for testing purposes. Our testing people in Austria are probably 10-12 times more expensive than the people in India. In testing, the documentation and the number of testing cycles can be improved, as can the quality. So we went to IT and said we weren’t trying to take away their business, but that we knew they were under cost pressure, let’s sit down and look at the areas where we could co-operate.
IM: With innovation it’s not every idea you have, it’s every idea you commercialise. In the pharmaceutical industry, where I used to work, they might start by developing 10,000 molecules a year, of which perhaps two will make it to the market years later. So it’s about the management of innovation, how we reject the bad ideas, how we make sure we can nurture the good ideas and bring them through to completion. That’s where, as procurement managers, we can really add value to our functions and our organisations.
GC: I share part of your perspective in the sense that what is key is really getting the innovation delivered. On the other side, I see that we probably have more of a role in generating the creative ideas and less control over managing the internal process to see whether those ideas can be implemented or not.
IM: From an organisational perspective, yes, but we also have our department and internal innovation within our own function. If you can demonstrate that you have good processes and tools to manage innovation, then you will be listened to on the wider perspective. It’s a collaborative, multi-functional, cross-disciplinary process to bring new ideas to fruition. If we get a voice at that table and we demonstrate that we are able to manage, then I think we do take some of that ground.
BWS: I am inspired by this discussion, but I think we should distinguish between two things: continuous improvement – doing things better, faster, with more savings and so on – and real innovation. My definition of innovation is much more than continuous improvement. For example, take outsourcing or a new IT system. For me that’s an improvement. But innovation means that we come together cross-functionally; I need good relations with my customers and with the market. I think all of us have done a lot of innovation in our companies. You need a culture of innovation, as Ian said, and here I think the automotive industry and others are very good at creating that, at encouraging cross-functional working with procurement. You get deeper in the value chain with suppliers and with production.
GJ: Do others around the table agree with that distinction?
NM: For me innovation is doing something really new and getting competitive advantage, it’s not about having a good relationship with my internal clients and my vendors, understanding them, bringing them together – that’s just part of our job. But there are strategic areas where you can take ideas from the market and present them to people in your company. Procurement has a role there.
TS: For sure you have big steps that are more visible, but the little tiny steps of innovation make a difference and take a company forward. It’s nice if you have a lot of people who do the big steps, but normally it’s the little tiny ones that change the picture over time.
IM: Innovation is about something that is new. It doesn’t have to be completely new, it’s just something that is new to your organisation.
GJ: To what extent do you need to work with suppliers in a different way to capture innovation and deliver value in the broadest sense?
GC: This is really about a change of culture in the way that you approach suppliers, and that’s not the kind of thing that happens overnight. It takes time to build long-term sustainable supplier relationships and to change the perception within an industry that a company is not only cost-driven but also wants to work with new ideas, wants to be a preferred customer to its suppliers. The sort of things that we are doing is including elements of innovation in the service-level agreement, ensuring that we have regular discussions about what kind of new ideas suppliers can bring to the table. The other thing that needs to change is the attitude of our people, in the sense that if we have people who are traditional hard negotiators, keeping the supplier at arm’s length, they are unlikely to get collaboration with innovative suppliers. A broad guideline we have put together at Firmenich is that our work priorities should be 50 per cent about cost, 30 per cent about service to stakeholders and 20 per cent about innovation. We are not yet there, but that’s the vision of where we want to go.
JS: It starts with how you handle suppliers’ problems. Are they allowed to bring problems to you and you will say “Yes, we will share 50 per cent of the costs”? Or will you say “It’s your problem, you pay”? If you take the latter approach I don’t think you will ever have an open relationship; a partnership with your suppliers will not exist in reality – it will be strictly a business relationship. But if they know that you will discuss these issues in an open and honest way, then it’s possible to bring in innovation, because the supplier will trust not only your people but also your organisation.
MG: One of the ways you can change the relationship with suppliers is not to ask them to deliver parts, but to outline a specific problem – making a machine faster, say – and ask them to propose solutions. In this way you don’t confine their innovative ideas. We have a couple of people in our company who are essentially a think-tank. I recently asked them to participate in a request for information where we have a couple of business problems that we haven’t solved efficiently and where there might be other solutions. By getting a lot of different responses they get a lot of ideas, then they can get more specific on these.
HJL: There is an important role for the procurement function in terms of being the relationship manager between the supplying company and your own company; getting co-operation and innovation in the four areas of logistics, R&D, quality and production. This is not just a discussion about savings, it’s a discussion about broad co-operation among many disciplines.
UP: The way we treat suppliers at RWE has totally changed, at least for strategic suppliers. A couple of years ago we tried to establish quarterly reviews and introduced a supplier balanced scorecard. But this was only to look at the supplier’s performance, so we have recently introduced an electronic questionnaire that the supplier fills out to tell us how we are doing as a company. It’s a one-page format that rates us in areas such as workflow, innovation, product specification and costs compared to other companies and other industries. We just started that, but the results are astonishing. You first of all have to establish a platform, because suppliers – and salespeople, in particular – are pretty reluctant to criticise you, in case you reduce their volume of business. Once you have established the confidence, however, it’s a really good way to bring in innovation. But I would strongly advise that you only do this with your strategic suppliers, because you have to show them that you are doing something with the information internally.
KN: As much as I agree with what you are saying, Ulrich, and I think the instrument you are describing is absolutely the right one, I wonder how far companies and procurement people have adopted new ways of classifying suppliers. How do you select suppliers to do those quarterly reviews with? Is it mostly driven by volume, by innovation or by the impact that the supplier may have on your future business model? How have you changed the thinking?
UP: To answer your question directly, I cannot assure you that we did change this. But to make sure we don’t just pick the strategic suppliers by volume, I didn’t tell my people how to identify a strategic supplier. They might be big, they might be innovative, or they might be from different countries.
IM: A supplier may be strategic to you, but the other side of that is how does that supplier view you? If they also view you as a strategic partner you will be able to have the kind of relationship that will benefit from open exchange and measurement. If you view a supplier as strategic but they view you as a nuisance, then this kind of approach is not going to be so fruitful.
GJ: What skills do your procurement professionals need in order to contribute effectively to growth and innovation?
GC: I think what’s important is getting people with broad business skills. We interview MBA students from leading business schools like IMD. Another factor is understanding how the innovation process works; if you are not aware of what is going to make an idea fly or not, then you are not going to be effective in picking the right ones from the ideas you are presented with. We value the ability to integrate with our own organisation, so what we are doing is getting people from key functions – for instance, we now have two R&D people working in our procurement function, and this enables us to have a stronger collaboration with R&D.
HJL: The interface role is very important. In our case we have some 800 people in procurement and 200 of those are procurement engineers. They are our interface to R&D; they are supporting R&D but they are not negotiating with suppliers. We have other people from the IT function supporting IT purchasing decisions, people from a project management background supporting the acquisition phase. The traditional procurement manager – doing everything by himself in the purchasing arena – hardly exists any more.
RR: At Lufthansa now, people mostly leave to go to other functions, rather to purchasing jobs in other organisations as they did a few years ago. That shows me that they have a good understanding of the business process.
TS: I agree that project management is what the new sourcing manager is about. They must also have strong soft skills like people and strategy orientation, as well as the technical skills. There is strong competition for talented people in the recruitment market. A lot of other companies are trying to find the same skill profiles for various business functions.
MG: I’m just building up my organisation and I haven’t actually found it too difficult to find good people, especially as analysts. There are a lot of good university graduates around, you just have to look for the right ones and be very rigorous in testing them. But I am also mostly not staffing my organisation with procurement people. I hired somebody from the sales side as a category manager, for example, a European sales director who was highly regarded throughout the industry and in our company. I found it very inspiring, because he had a different perspective and could bring a lot of knowledge about the sales side. The other area is highly regarded people from inside the company. If you want to establish your credibility internally, why don’t you hire the most credible people in the company if you can get them?
GJ: Any tips on how to achieve that?
MG: Money does play a role, I had to make my case as to what I could bring and what it would cost. People then realise that procurement is paying better than they would have expected, and you get more knocks on the door, especially when other areas are consolidating, reorganising and becoming more efficient and I’m just building up. People often call procurement a support function, but I really disagree with that. Buying and selling are core functions, everything else is not. If you pay the seller well, why wouldn’t you pay the buyer the same?
NM: We had a very intensive debate with our head of HR regarding the remuneration of our procurement people. In some areas we wanted to hire people that, from the HR point of view, were overpaid. I could convince him by showing him, after three months, that this guy delivers savings worth 10 years’ salary. We should try to measure the productivity of people based on the savings or other value that they are producing for the company. This is a difficult discussion; we can do this with only a few people.
GC: The attractiveness of the procurement function within the company depends also on what stage you are at in the transformation process. One of the advantages of the early phase of really changing the way you do procurement is that you are perceived in the organisation as change agents, as a dynamic group. If you are a “sexy” organisation, people will be keener to join your team. At Firmenich we have a rotation process for young graduates. Traditionally they have only looked at sales and marketing types of role, and recently we had two of them. They want to get an understanding of procurement as part of their career development, because it’s a place where things are changing, where they like what is going on.
GJ: So having the right calibre of people is crucial. What are some of the other challenges you see if you are to help drive growth and innovation?
MG: One thing is that you can only grow if you have the suppliers; in some markets we have scarce supply, with raw material prices going up. So the discussion has to be around how do I ensure that I can support the growth of the business units when the raw material isn’t there? You have to think about the skills you have, not only for buying but to sell a business concept to the supplier as to why they should work with us and supply us with raw materials. The skillset is also about convincing a supplier to do something like innovation and to be around when the industry has consolidated.
TS: I think the complexity of supply chains is increasing dramatically. If you offshore parts of your value chain to countries where salaries double every year, what do you do in three, four or five years when you have many jobs deployed to those countries? Financial centres like Dubai, Singapore and Hong Kong are becoming increasingly strong. So we have to develop both a supply base and supply specialists in those parts of the world. That’s a huge area of complexity for the future. Working with that will keep us very busy.
UP: For me, the biggest challenge for procurement is focus. We want to be involved in everything and we cannot deliver everything. If you look at the three megatrends in the market, they all have to do with procurement. First, globalisation. Second, the focus on core competencies. And third, reducing your value add or outsourcing. Procurement has to deliver in support of these trends; if we don’t then we will not be in the driving seat. Another challenge I see is that there is still a separation of the procurement and logistics or supply chain functions. If we want to globalise, if we want to change supply chains, suppliers, and so on, it’s a nightmare and a mess that we have two functions that don’t always support each other on this change. We have to put these together with a single reporting line, otherwise it will be a real challenge to manage all these new and complicated trends.
KN: I think what Ulrich said is exactly right. Focus means balance. We can’t say as procurement that we just want to be innovative and forget the rest; neither can we do the rest and forget innovation. We’ll have to be very careful in identifying the right roles for the right people in our organisations. There’s a danger that you take too much on your shoulders and the talent is not there to deliver.
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