RISE OF THE CPO
Geraint John
Purchasing has been a bit of a latecomer to the “chief officer” or “CXO” bandwagon, with the chief procurement officer (CPO) title really only taking hold since the late 1990s. In contrast, titles such as CEO, CFO and COO – collectively known as “C-suite” executives – have been common currency for longer.
In the US, where these titles have sprung from, big companies that have CPOs include DuPont, Motorola, ChevronTexaco and JP Morgan Chase. In Europe, CPO has also taken root in companies such as Philips, Novartis and ABN Amro.
One reason that CPO is catching on is the increasing globalisation of business. Another is that unlike titles such as director and vice-president, CPO clearly differentiates the postholder as the overall functional leader. Adoption of the CPO title often coincides with a bigger remit for procurement. But there don’t appear to be any significant differences in their job description.
Because it positions the function at, or near, board level, CPO is “very aspirational for the next generation of procurement leaders,” says Theo Theocharides at IBM. It may also encourage ambitious graduates to choose procurement, rather than fall into it by accident later on.
OUTSOURCING MISTAKES
Andrew Cox
Most of the outsourcing decisions reviewed by the author and his colleagues over the past 10 years have been failures rather than successes. By understanding what goes wrong strategically and tactically when outsourcing, managers will be in a better decision to understand how to be successful.
There are three main failures organisations make. First, outsourcing strategically critical assets, such as IBM did with its PC operating system and microprocessor to Microsoft and Intel respectively in the 1980s. Second, retaining tactically non-critical assets in-house when they could safely and cost-effectively be outsourced to suppliers.
Third, outsourcing fails when managers do not sufficiently understand post-contractual “moral hazard” and lock-in. The buyer overlooks how power circumstances can change over time, and the ways that high switching costs can tie them into long-term supply relationships.
To avoid these three mistakes, organisations need to develop a robust make/buy methodology; train managers better; involve more functions in outsourcing decisions; understand how power relationships can change over time; and ensure that they have a clear exit strategy in place.
THE SOURCING CHALLENGE
Jon Hughes
How do you embed strategic sourcing so that it becomes a core business competence? Through interviews with CPOs and others, the author identifies six performance levers that need to be applied across category management, process and functional outsourcing, major supplier relationship management, and business transformation and value chain initiatives.
The first lever is alignment of procurement strategy with business drivers, which includes brand-building and customer satisfaction. The second is about executive sponsorship and engaging stakeholders across the business. Lever number three is organisational design: redefining roles so that the function is structured appropriately.
Governance and disciplined programme management – implementing fit-for-purpose processes that drive compliance – is the fourth lever; while lever five is about leadership, behavioural change, and developing procurement professionals with high-level commercial and influencing skills.
The sixth, and final, lever is about allocating resources to activities that matter and implementing processes and technology that cut cycle times and capture value more quickly than in the past.
STRATEGY
Hugh Baker and Simon Harper
In hard times, procurement shines as an integral part of the cost-cutting challenge. Most of the procurement legends have occurred in industries where reducing absolute cost was a strategic priority.
But the up-cycle, where the business is focused on growth, is very different. Other functions are less willing to invest time and attention to what they are buying and how they can do it better. Procurement is limited to cutting price without changing any of the fundamentals.
There are three plays a CPO can deploy to ensure that procurement stays on the top management agenda during the up-cycle. The “supplier-driven customer value play” is about securing preferential access to supplier capacity or being first in the queue for innovations. The second strategy, the “growth through acquisition play”, focuses on achieving procurement savings during and after a merger. Lastly, the “value of growth play” takes advantage of scale economies among growing suppliers, providing additional funds for investment.
Thriving in the up-cycle requires finding the right hook into the top management agenda; sharing value with suppliers; repositioning procurement to appeal to internal clients; and preparing for the next down-cycle.
OPTIMISED E-SOURCING
Malcolm Wheatley
Optimised e-sourcing is being used by companies such as Procter & Gamble, Motorola and HJ Heinz to wring greater value out of e-auction or RFQ-based tendering.
The main problem with standard e-auctions is that they invite bids on pre-determined “lots” of items. This is the buyer’s view of what he or she wants in terms of specification, etc. All the supplier can do is indicate the best price they can offer against each item. This doesn’t necessarily deliver the lowest overall cost and is therefore “sub-optimal”.
Optimised e-sourcing, by contrast, allows suppliers to bid “expressively” – indicate how they could be more competitive if the parameters were varied. Comparing different offerings of this kind is highly complex, and software that uses advanced mathematics is required to pick the optimum combination of supply options.
According to Forrester Research, there are currently two technology companies that offer sophisticated bid optimisation techniques: CombineNet and Emptoris.
The extra savings reported by companies using optimised e-sourcing are typically 5-25 per cent. It works particularly well, say experts, in large spend categories, those with extended items lists, and where usage is widely distributed.
SUPPLIER RELATIONSHIPS
Neil Deverill
CEOs do not instinctively know of the competitive benefits that arise from collaborating with suppliers. This leads to a vicious circle where procurement finds it hard to justify investment in the function and hence underachieves.
In an attempt to break this circle of ignorance, the author proposes a simple “roadmap” that illustrates the relationship between management support, the degree of procurement competence, and sustainable business benefits.
It has four stages of evolution in terms of supplier relationships. Stage one is about basic price reduction. Stage two, supplier cost management, sees “should-cost” discussions taking place with suppliers. Stage three, “collaborative total cost of ownership”, requires disclosure of future plans, objectives and targets and a high level of trust between buyer and supplier, and is rare even today.
The fourth, and final, stage, “competitive value and supply chains”, signals true integration between companies. At the moment, it is restricted to parts of the automotive and aerospace industries, but it will become an option for others in the future. In this scenario, procurement becomes a key driver of competitive advantage and a catalyst for new alliances.
BENCHMARKING
Jules Goffre, Wim Plaizier and Jesper Schade
What separates the leaders from the followers in procurement today? That was the question posed by AT Kearney’s latest Assessment of Excellence in Procurement study. Covering more than 270 large companies across 25 industries, it found that 66 per cent now look to procurement to create value, compared with 28 per cent in 1999.
The study shows four key value approaches emerging in leading companies. The first is innovation and growth. More than half of automotive firms involve suppliers in the earliest stages of product development, versus 20 per cent of others. Second, through optimising the value chain. Here, nearly three-quarters of leaders and only a third of followers use joint cross-functional teams.
The third approach is advanced cost management. Collaborative cost reduction with suppliers is pursued by 78 per cent of leaders, but just 31 per cent of other companies. The final area is risk management and supply continuity. But whereas nearly all companies see business continuity as a strategic issue, only 40 per cent have a procurement strategy for it.
In terms of savings, the study finds that firms that invest the most in procurement capability enjoy significantly greater results across all categories.
GLOBAL TEAM-BUILDING
Craig Lardner
Back in 1996, industrial gases producer the BOC Group operated on a country-by-country basis in its 50 markets. For supply management, this meant that not only did it not get full leverage over its £2.5 billion annual spend, but staff did not know their peers and were not able to take advantage of solutions they had developed.
Today, the 200-strong supply management function operates locally but executes a global strategy through a group of 20 lead supply managers from the major business units worldwide.
Its CPO highlights eight key lessons about building a successful global team. First, communication is the global “glue”. Second, insist on common processes and tools everywhere. Third, implement universal competency profiles so that people can move between countries more easily.
Fourth, make sure you talk a common supply management language. Fifth, accept that operating rules – for example, on ethical purchasing – may need to vary according to local culture and custom. Sixth, ensure that your corporate function is diverse in terms of race, sex and country of origin. Seventh, use local staff, not just those with global jobs, for global projects. Eighth, make sure suppliers understand and respect your global structure.
