Geraint John (GJ): To what extent does your organisation operate internationally, rather than just in Italy or southern Europe? And how is your procurement function structured to support that?
Stefano Baghetti (SB): Alenia Aeronautica is an international company because our main customers are Boeing and Airbus. The procurement activities are mostly concentrated on foreign suppliers, and more than 50 per cent of our buying – several hundred million euros – is in foreign countries. One of the main conditions is that when we sell in a country we have offset obligations, so we need to buy products, services or materials there. So we are increasing the volume of procurement in countries like Greece or Turkey where we are selling aircraft.
Giorgio Diazzi (GD): In terms of globalisation we have several approaches at Siemens, where my responsibility is indirect materials and services. For some segments it is pretty global – for example, what we call “corporate mobility services”: business travel, fleet management and event management. This is under a global umbrella and there is an organisation that covers all the countries Siemens operates in. In the indirect area, globalisation for Siemens is more about harmonisation than centralisation; it is a set of rules and recommendations. When a new global agreement is signed with a supplier, each country is invited to use it, but they are not forced to participate; it’s more about promoting the advantages of globalisation on a proof of concept base. A second approach is a pan-European commodity approach, and a third is a “southwest approach”, which comprises eight countries in south-west Europe. It’s a commodity approach with purchasing councils that each country is invited to participate in. Through the councils we evaluate Siemens’ opportunities for doing procurement together and pooling volumes. That’s the low-hanging fruit we are exploiting right now. The procurement organisation is still pretty local; there are links to the global organisation, but there isn’t any strict relationship between them. This is mainly managed through a project team approach.
Luca Mastrogregori (LM): Italy’s public administration has quite a different approach to the international issue, one based completely based on the evolution of legislation. Globalisation is a trend even for public administration because, as a member of the European Union, Italy has to change and adopt legislation that enables international suppliers to compete for public tenders. In 2004, the EU published a directive to open borders to the 27 members to international purchases, because public spending represents 16 per cent of the revenue of the EU countries. As a national procurement agency, Consip is trying to lead this process, but it is a challenge for political and economic reasons, as well as cultural ones in terms of overcoming the national culture of our buyers. The benefits of acting globally are not so well perceived in public administration.
Paolo Cova (PC): At LeasePlan our procurement activity at an international level has been driven by two main forces. The first is that international customers have become even more important in our customer portfolio, and they are looking for international conditions and leverage of their scale. And second, because the suppliers of our cars and tyres and other services related to the automotive world are international companies. So far the co-ordination internationally on the supply side on behalf of our customers has been the function of my corporate unit. However, now we have realised that this is no longer enough and we want to step forward and really leverage our scale. We have 1.3 million vehicles in our fleet and we believe that leveraging our scale and improving the professionalism of procurement at both an international and a local level is one of the keys to profit and competitive advantage in the future.
Paolo Zammattio (PZ): Techint is a big group of companies. We are in the business of designing and supplying technological equipment and entire plants, mainly for the steel and the metallurgical industry. In the recent past our business needed globalisation in order to survive, to be able to save on costs and to keep on getting contracts all over the world. We are competing on five continents and 95 per cent of our business is international. Our business has been changing very fast: revenues have increased from about €200 million two years ago to €700-800 million this year, and in another couple of years we foresee having a business value of about €1 billion. At the same time the number of companies has been increasing through mergers and acquisitions. In the past we mainly operated from Italy and had just a few subsidiaries or sister companies in Brazil and Germany, with a small presence in China. From a regionally orientated organisation we are now changing to a product-orientated organisation. Spend analysis made it evident that there are strong similarities in the spending of different companies around the world within the same family of products. We now have five business areas, and each one includes different business units but with similar products and similar spend. That means that in the near future there is going to be a strongly integrated structure for procurement in each business area and very few synergies between them. This decentralisation by product may seem strange, but it is the only way to control our business in an efficient way. We are going to have about 20 legal entities and in each there will be a local purchasing office. It would be very difficult to manage that in a fully centralised way.
Danilo Augugliaro (DA): UniCredit is a relatively young international company. In the last 10 years it has changed from a group of Italian banks to a group that is present in 20 countries – primarily Germany, Austria, Poland and all the countries of Eastern Europe – with 24 different banks in the top three in each market. We have almost 8,000 branches and 145,000 people, who are my internal customers. The procurement organisation became international two years ago and has a matrix structure. Today we are managing 75 per cent of the spend on a global basis – all the IT procurement, all the general services. The only part that remains at a local level is building and construction and strictly local business. For these we are not approaching the market in a global way, but we are adopting a best-practice approach in terms of continuous internal benchmarking of process and market approach. In this environment the procurement function is trying to create this global process, thinking globally, acting locally. That means converging the global decision while respecting local needs. In some cases there is a full-cost business case that must be analysed and evaluated. We are trying to be the engine of the decision process but involving all the functions concerned so as to avoid the “war positioning” that can occur in this kind of global organisation. This is now fully in place and has been achieving results since the middle of last year.
Luca Guzzabocca (LG): GSK has a really international footprint, both as a company and as a procurement organisation. We have a global procurement and contract manufacturing organisation of 750 people led by a senior executive; below that we have five executives in charge of their respective sourcing groups: IT, R&D, contract manufacturing, manufacturing, and commercial and general. There is also an international executive in charge of the rest of the world. The five are in charge of 80 per cent of the global spend in North America and Europe, the sixth person is in charge of South America, Africa, Oceania, Asia – about 150 countries in all. I belong to the commercial and general organisation, which handles non-inventory materials and services, and we have responsibilities at a global level for two sourcing groups: corporate services (business travel, car fleet, credit cards, etc) and HR services (temporary labour, consultancy, etc). We also have two regional responsibilities, one in the US and one in Europe, looking after all the non-inventory and services. We have a common way of working across the global procurement community: a very structured process called sourcing group management, with a web-based system and an e-learning programme to support that. Basically, we are sourcing strategy driven. Some categories, such as business travel and car fleet, are eligible for a global sourcing approach, while some are strictly regional, because of European or US peculiarities, and others have to be managed locally. We have conducted a very good exercise to evaluate at which level categories should be managed.
Paolo Mondo (PM): Accenture does have a global footprint, of course, and provides, for instance, outsourced procurement services to clients from three centres: Bratislava in Slovakia, Dalian in China and Bangalore in India. What others around the table have said is interesting, because we are in the middle of a debate on how to organize the procurement function when there is a general trend towards globalisation. It is without doubt a big driver in business today. The debate is basically between centralisation and decentralisation, but the selection of which route to take, from what I’m hearing here, is through clustering of the commodities.
Lorenzo Laurelli (LL): What I’ve heard reflects the scenarios of our customers. Multinational companies need to get suppliers abroad to supply their core business, but also to harmonise their purchasing to gain efficiency. These are two sides of the same coin. The question is: what are the tools and the enabling factors that sustain these different needs and different impact in terms of organisational processes and sourcing culture? Then it’s a matter of finding which is the best set-up and enabling factors, in terms of technology, to get efficiency, savings and to increase revenues.
GJ: What are some of the key issues and challenges you have been facing in making procurement more international, and how are you addressing them?
SB: In aerospace one of the key factors is quality, because you cannot put a component that is low quality on an aircraft. On one side it’s a big chance to grow our suppliers in low-cost countries, but on the other you must be capable of keeping control of their capacities, their quality and their reliability in terms of getting the product to the assembly line when you need it. Monitoring a supplier in a low-cost country, to check how they are performing, is not easy. We want to buy complete sections of an aircraft, and for that you need to have a complete team of people resident in these countries, from tooling, materials, logistics and quality. When you are making your business plan, you therefore need to consider not only the final cost of the products that they sell to you, but also your own costs in terms of monitoring their activities. We have just 1-2 per cent of our spend in low-cost countries at the moment, but this volume is increasing. We could grow much more, but we believe it is important to develop reliable suppliers and to find people inside your company who can develop this co-operation. You also need to co-ordinate these activities with your existing supply base. We buy products that require qualification and certification. We can’t afford for these suppliers to die because we have gone to lower-cost countries, because that capability has been developed over many years. You need to find a compromise.
PZ: Our business has specific peculiarities that require different considerations and a different approach. We supply plants to make steel, for example, which are very different from each other. The degree of repetition and standardisation of equipment or goods is very low. That means that it is difficult for us to have standard supplies for specific items. Time is also a constraint, because our equipment has to be designed case by case and made in a different way from previous ones. It would be easy to make an investigation and realise that some items could be sourced in a better way and at a lower cost from China or India or South America, but in most cases at the time of purchasing we do not have yet the complete and final specification, so to decide what to buy and where to buy. Our activities, from design to procurement and logistics, must be very integrated. We do not have the time to do what we would like to do, even when we know what, theoretically, could be the best option. This means that the best way to proceed, perhaps, is that we decide in advance, even before getting a contract, on the basis of a previous analysis of the global market, which portion of our project has to be developed vertically through a business unit of ours in China, India, Italy or in Brazil, each portion including engineering and supply of equipment. It’s a completely different focus, but we think we can take advantage of our presence around the world to operate and be effective in this way. This does not exclude inter-company purchases from low-cost countries, when timing and other circumstances allow it.
PC: We have to cope with local market specification. Of course we have international partners and suppliers, but the fulfilment of the service we provide is delivered by local networks. The dealers, the tyre fitters, the roadside assistance companies are all local organisations, and there is a lot of different practice in the way local markets are organised. In many cases our customers don’t contact LeasePlan directly, they contact our partners in these local networks, and they are the ones that have to ensure customer satisfaction. This is a big constraint in leveraging our scale. We can better leverage our scale if our fulfilment partners are able to leverage it as well. This means, for example, that we have to find international companies able to deliver fitting services and establish partnerships with them. This is very complex task that requires close co-ordination between different companies. So to move forward we decided we are going to launch a “procurement for service” programme that is looking at different areas, one of which is commodity strategy. We split our spend into commodities, whether it be tyres, vehicles, fuel or indirect spend. On this base we organise international procurement task forces comprised of people from different countries. They develop the commodity procurement strategy, not only in terms of the sourcing activity, but also redefining the supply chain structure together with other functions within the company and with the suppliers. This is time consuming because we are dealing with virtual teams – people who are doing this work in addition to their normal operational jobs. But this is the only way we can achieve co-ordination. Another problem we are facing is planning our volumes within and across countries. As matter of fact this is a prerequisite if we want to leverage our scale. To achieve this result procurement needs the support of business development. In other words, procurement needs to pay attention to the voice of the customer. We realised that many requirements from a procurement point of view are the same for a customer in the UK, Spain or the US. This, of course, makes it easier to plan proper sourcing activities.
LG: We have some common challenges, such as how can we extend the current procurement volume from low-cost countries? Do those LCC suppliers comply with environmental or health and safety rules? But the key critical success factor is to get people skilled and prepared to approach a different environment and to work in teams. That’s the reason why GSK decided to set up a couple of dedicated sub-teams within our global procurement and contract manufacturing organisation, one looking at low-cost country opportunities, the other at offshoring activities. This is the only way to really improve these operations. We have been using low-cost country sourcing for production materials in China, Korea and India, and we have been using offshoring in India, for example, for some back-office activities, as well as for IT support, market research and analysis, and some R&D. So it’s not only production and materials, but also non-inventory materials and services.
GD: We have challenges like the ones already discussed, of course, but we also have an internal challenge in terms of the creation of a global organisation. We have identified two areas: one is governance, the other operational. We are now starting to define a global organisation for the operational part. The integration issue is really a challenge, because as soon as we have a global contract we are experiencing the same problem in that you have to deploy the contract at the local level and get the right service. You have to face this day by day. The real challenge today is to understand what should be done globally and what should be done locally, and how we can get suppliers to provide the right level of service at the global level.
LM: Most of these challenges are common to the procurement process in public administration, because even if we are less international, the centralisation versus localisation of the purchase and the procurement activity is the same. Since 2001, there has been a strong rationalisation process that is based on procurement agencies. As well as the national agency, Consip, there are also regional agencies that are growing in several areas of Italy. This presents us with the challenge of how to balance standardisation of needs, aggregation of demand and localisation of the spending. There is an additional challenge that is related to the value of the public spending as a tool of economic policy. If we open up to international competition, it has a strong impact on the 95 per cent of our economy that is made up of small and medium-sized businesses. Public administration is an important source of revenue for them. There is a political will at the European Union level to act globally, to develop the European internal market, but in Italy, as in other countries like France, Spain and Greece, the problem is how to balance the openness of the marketplace with the economic cost of unemployment. Most countries are not ready to open themselves up to international competition. It’s a very slow process.
DA: There is a cultural barrier too. It’s easier to work and have a stable relationship with a current supplier than it is to build one with a Chinese supplier that doesn’t speak your language. If I’m working with a well-known supplier, I can change and fine-tune my idea every time and without creating so many problems. If I am doing it with a supplier that is 10 hours away by aeroplane and doesn’t understand what I’m asking for, this is a barrier that today is not really broken down inside companies.
SB: And this is not only a procurement problem. The company must be capable of dealing with international suppliers, not only from a technical point of view, but also in terms of attitudes. For instance, my company is not used to not paying suppliers on a timely basis. This may not be a problem when we deal with Italian companies, but if you deal with US companies they want to be paid quickly.
PM: Another reason we stress that a global approach should involve the whole company is because you have to take a total cost approach. You cannot launch a low-cost sourcing project unless you are able to look at the whole supply chain. Fulfillment is a part of the process that you cannot overlook; logistics plays a major role.
LG: That’s right. You need a clear sourcing process that involves all the stakeholders from different functions. It’s about facts and data. And not just looking at the short-term benefits, but also the medium and long-term impact. We also have a continuous improvement process, because you do not stop your strategy once you have implemented it, but also the following year.
LL: From the Emptoris experience, working with the subsidiaries of multinational companies, I think Italians are really prepared to embrace this kind of technical solution. Going global means spending a lot of time in preparation before you go to establish new relationships with suppliers. This change is not well recognised by organisations, which tend to focus on the market and then gather information, rather than the other way around.
GJ: To what extent are your companies using international outsourcing and offshoring in the way that Luca mentioned at GSK a moment ago?
DA: Outsourcing is not a familiar word in my company. We are doing activities like IT software development in Germany, but this is not a strong approach we are following. We are thinking of creating a competence centre that can centralise internal activities, such as credit card personalisation and transaction monitoring. We may move to outsourcing in the future, but today it’s all about the concentration of activity inside the one or two main centres within UniCredit. The mindset of our organisation is to look at concentration of volume, not only in procurement but also in the back office. We have a lot of back-office activity in Prague and Budapest, but it is under our ownership.
PC: Call centres could be interesting. However, there are some concerns about customer satisfaction. For example, if you look at the US they are moving call centres back from India. I read recently that a call centre operator in the US costs $30 an hour and one in India $10 an hour, but one working from home in the US costs $20 and the customer satisfaction they generate is much better. If you are dealing with car accidents, people tend to be quite emotional! We are looking to digitise our services as much as possible and we see a lot of potential, not really in terms of outsourcing but mostly in improving efficiency by leveraging the network’s potential.
PZ: In our business it would be very difficult to do outsourcing and offshoring is an option we are trying in China and in India to a limited extent, because of the peculiarities of our business that I mentioned earlier. There is a strict relationship between engineering, project management, manufacturing and logistics.
LM: In public administration the outsourcing model is quite well adopted, but always at the national level. I’m not aware of any cases of offshoring public services. As a procurement agency we are outsourcing part of our services, in terms of management of the IT infrastructure or call centre, but are rethinking this, especially for the call centre part, because we are realising that the customer relationship is so important for our business. It will be difficult to outsource services on an international basis, at least in a wide sense.
GJ: What type of skills do your procurement people need to have to operate successfully in this new world? To what extent do you have these now?
GD: Today we need people with real international experience, flexibility and competence in process procurement and project leadership. Managing a mix of cultures is still a barrier; we are working with colleagues in any European country and there is a difference of approach to business. We need talented people in the local organisations who can manage this mix successfully.
LG: It’s really important to prepare people in the right way. We have a specific module in our sourcing group process related to low-cost countries, offshoring, nearshoring, and so on. We use a mixture of our e-learning programme and local training.
PC: One of the critical skills for our commodity leaders, in a decentralised environment, is leadership in the sense that he or she will not get formal authority to take decisions but has to lead, motivate and explain and bring the different countries to the same understanding. This is a new way of doing management.
PZ: One way to reach our targets is to get younger people into our procurement organisations, but another way could be moving people from one local purchasing office to another. Our experience is that it is good to do this. It’s much easier and more effective to move someone to China or South America or the US than it is to do training.
PM: Generally speaking, people are key. In my experience there is a migration of managers from more advanced industries to other industries that are on the same path but a number of years behind. The skill I’d like to stress is the ability to work with different functions, because today procurement is not just sourcing, it’s a number of things that involve different stakeholders. So people have to be able to relate to different departments and the external world. Buyers must have a much broader set of skills and competencies, from technical aspects to financial aspects. I agree that job rotation is essential, not only between central and local organizations but also between different functions. Today we have buyers who used to be engineers, as well as from financial departments. This allows cross-pollination of the skills that buyers are expected to have.
SB: I agree 100 per cent with job rotation. It is very important for the procurement organisation and for buyers to know the right ways to approach the market in different countries. If you go to Europe or the US you are in an open market, so you can find the suppliers you want. If you go to countries like China, though, it’s important that you go through certain government organisations. It’s not an open market and it’s important to know how to approach companies. In our experience, going directly to some companies didn’t get us good results.
PZ: I have some concerns about job rotation. I agree that it’s important to understand the roles and the point of view of other internal offices, as well as external counterparts. But we must also preserve the professionalism and expertise of our buyers. We must take care not to make job rotation too easy.
PM: I fully share your point that because purchasing is a profession, we need to have a professional in that position. Purchasing decisions are team decisions, so you bring in engineers, logistics people and so on. But because purchasing is pivotal, a buyer should be able to speak to them all, and therefore the more information, the more competencies he has, the better he could act as an interface to all these functions. I’m not saying it’s easy.
GJ: People are one enabler, technology is another. To what extent are you using it to support your international procurement activity?
LG: Technology is consistently supporting our procurement organisation in an active way. We have a web-based platform with many e-tools for knowledge-sharing, spend analysis and e-sourcing, as well as a contract depository. It’s a global platform that helps to speed up decisions about global sourcing, regional sourcing and multi-country sourcing, and so on. You can look at whether other colleagues around the world have done the same kind of job, keep in contact with those colleagues and exchange knowledge around the sourcing strategy. “Do not reinvent the wheel” is our motto.
DA: Inside the UniCredit group we have an e-platform, an e-marketplace, so auctions and catalogues are well adopted: we are doing 65 per cent of our procurement through e-auctions. These have an advantage in terms of opening the market to foreign suppliers, because this kind of process provides a level of transparency and trust. Often a new supplier thinks he could be used just to reduce the price of the current supplier. If you are fair and transparent enough to respect the results of an online auction, it could give foreign supplier the chance to win new business. What we really don’t have today but we are working on is the creation of the global infrastructure – the spend analysis, the contract management. In one year we should have a global system that will cover all 20 countries. Spend analysis for me is a nightmare, and the time spent doing this is something we can avoid by having the right tools. I think 24 banks have 24 different systems today, so we are merging them.
SB: We don’t put out our RFQs worldwide. We use suppliers that are on our supplier list, and in order to be on that list you need to check a lot of documents. If you open it up worldwide, then suppliers you don’t know can quote just to be in the market.
DA: Participants in the auction must be well-known, qualified suppliers, I agree. But you can add some known but not yet used suppliers and qualify them, let them know that they can win the business.
LL: From the Emptoris perspective, technology is an enabling factor. It has to be clear what the strategy is within the purchasing organisation. You can have problems knowing what your spend is, you can have problems going global with a sourcing process, and you can have problems in managing your contract after you’ve done a good deal with a foreign supplier. It’s important that your organisation understands clearly the goals that you want to achieve. Used effectively, technology can push changes in an organisation, streamline the process, bring savings and keep real value within the company.
