A burning platform for change in any organisation can be really great news for a head of procurement. Increased competition, economic landslides or replacement technology slashes our margins and, hey presto, suddenly the spotlight is on external expenditure. Any actions that can be taken with, or sometimes against, suppliers that yield cash are heralded as lifesavers. The CEO gets to hear of heroes in procurement and our moment of fame occurs.
While some of us have experienced and used these events as vehicles for change, they cannot be relied upon to come along at just the right moment. Thus, we continue to be challenged to motivate improvement and change for procurement and supply chain functions where there may be no perceived need to do so. Often the improvements required include order-of-magnitude changes to our own and other functions’ activities that simply cannot be understood by management. And the levels of performance world-class organisations achieve are typically beyond the belief of many business managers who have not yet “seen the light”.
In my experience, CEOs do not instinctively know of the benefits that arise from working with suppliers. Why should they? Their focus is generally on driving the business to optimise what it does best in order to make profits and to maintain its competitive edge. Likewise, heads of business functions such as operations, engineering, marketing (who should know better) and finance are normally internally focused and blissfully unaware of the additional competitive advantage they are not getting.
Where this is the case, and if management is to consider growth through using external ideas, know-how and capacity, someone else needs to bring the opportunities to the table. In my world, this is the task of excellent procurement people. One of the problems with this assertion is that if management don’t know of the opportunities, their procurement function is probably not yet excellent. This is a common situation and I propose that a simple “roadmap” can be used to break the circle of ignorance.
In the late 1980s I was given the job of running procurement in a multinational company, at corporate level. At that time there were still many companies around that were head-down and focusing on their known world – not working with others, not sharing ideas and not developing common targets for joint benefit, as some of us do today. As was the norm, we had programmes that measured supplier performance against our delivery and quality requirements, we negotiated prices that met our budget needs and our business was generally running with the pack. We believed that all our targets were sharp (higher than last year), but we were not doing breakthrough strategies.
The company’s management believed, correctly, that we were powerful enough to dictate to suppliers, who in turn confirmed that they could meet our demands. Typical of this situation were suppliers that improved delivery and quality performance each time we raised the bar, but never exceeded our targets. The identification of this phenomenon led to the realisation that we might be limiting our own performance by the mediocrity of our own targets. That was when I finally addressed the question, “What should we want from our suppliers?”
My new corporate position, unencumbered by the daily round of production, gave me room to think. The answer became clear: internal productivity and our business performance were limited by the knowledge and imagination of our own people. Out there were businesses that could probably perform beyond all expectations if we challenged them to be excellent. They were also supposedly expert at making the things we used; why not ask them to help us use them better? Why not test our combined knowledge about applications, costs and specifications? Why not see how innovative we could be by bouncing ideas off each other?
In that company and at that time these were truly challenging questions. A symptom of our non-success with suppliers was comatose procurement. The cause was management ignorance, both of what could be achieved through collaboration with selected suppliers and of how the business needed to improve internal performance and co-operation before it could consider going down that path. That is when the “roadmap” came to mind. It was appropriate then and appears to remain so now.
Without a crisis to deal with, there needs to be some pre-existing knowledge to convince management to change the status quo. The skill levels and activities in procurement and supply chain in my company were relatively undeveloped and reflected internal demands. We were caught in a vicious circle (see figure 1).
The first principle of the model is that the three axes are related; you can’t get two of them without the third. Benefits won’t accrue without simultaneous improvement in both competence and processes, which in turn cannot be properly invested in without management support. The second principle is that you cannot jump levels. The final principle is the logic of the proposition: when you provide management support and invest in competence and capability, additional benefits will accrue. For the purpose of the chart, the benefits indicated should be seen in relation to each other as typical results for each stage and not necessarily as absolutes.
STAGE 1: Price reduction
A business that has not invested in procurement and supply chain excellence normally functions at stage one. Here, price negotiations are what the business does. Why? Because it can. Often management will be comfortable at this level and will be unaware that there is more to come. The good news about stage one, however, is that normally businesses are relatively poor at negotiating anything at this level and so even here major savings can be made with training and practice. One business I know of tripled its previous negotiated savings performance despite management being convinced that they were already ace negotiators.
At stage one, negotiations will probably be adversarial, as will internal relations. Inviting a peer function, such as engineering, to help with a difficult negotiation can start the process of internal co-operation that is vital for further organic growth. And when engineering is prepared to work a little with procurement, it can be a relatively small step to start looking at standardisation opportunities that can fuel further (joint) negotiations with suppliers.
Local plant managers in a process company were aware of, but continued to use, many different variants of motor for a particular application across the plants. When approached by procurement to help negotiate motor prices they became aware of the potential, and for future contracts they decided that they could reduce the number of variants by two-thirds. After this kind of exchange, engineering and other peer functions may even be prepared to share some of your training if you sell it well. They can learn that there are other modes of relationship between customer and supplier and that, with a changed focus, apart from specific competitive mode negotiation, many approaches can lead towards a win-win – or at least not a lose-lose – position. This is the start of the path that management need to understand.
STAGE 2: Supplier cost management
A well-kept secret in business is that many companies do not know how much the item or service they are buying really should cost. This is in part because purchasing cost estimators have largely disappeared, but it is also because “should-cost” analysis and cost modelling is not taught comprehensively in many degree or MBA courses today. Cost management is the next step of development for the business and stage two of the roadmap. By moving to a cost discussion with suppliers, the interface changes. Salespeople are taught never to discuss costs with customers, and when the customer simply will not talk price, a hiatus develops.
I recall sitting with people from a supplier who wanted a price increase. Our team had pre-worked the issue and concluded that there was probably potential to reduce the supplier’s cost of production. Our plan was to talk to the supplier about anything but price and we told them this. They were taken aback and at first continued to address their agenda. After some hours, and several long pauses in the conversation, they eventually agreed to bring in their colleagues from marketing and product engineering to see what we really wanted.
To discuss and pursue cost issues with suppliers you have to be trained not only in developing models, but also in working together with other functions in your business such as engineering, operations and finance. Cost is not something a lone procurement person should attempt with a supplier. Until a supplier trusts you, there will be a cost accountant wheeled in as quick as blinking to defend the story and you need to be well prepared.
Moving to stage two therefore requires combined internal training with engineering and/or operations, and a functioning team strategy must be developed. These are early steps in cross-functionality and some change management will be required. Why, after all, should a fully functioning engineer work with someone from “purchasing”, a function hitherto seen as an adjunct at best?
Provided the team can be assembled, this provides a new face to the supplier and signals a change in approach. (This is where the early teaming at stage one starts to pay off.) The supplier will see the new approach as a challenge, which must be taken seriously, and often this can be a make or break point in the relationship. If they decide to try it, truth and integrity must be the way forward. It is important to say this, as it is not always the natural choice. There will be several attempts at cost discovery and reduction before you get it right, but as a tool or mechanism for developing relationships it works very well.
Of course, it takes time because you are changing your ways of reacting and you are asking others (suppliers) to do the same based only on the belief that you mean what you say. And when you both begin to reveal that the costs included or associated with your proposed purchase are, in fact, somewhat spurious, fictitious or random, (this must be handled with the utmost care), the benefits will be worth the effort and are likely to be far greater than you would have negotiated at stage one.
A recent exercise in should-cost modelling at my current company indicated that a supplier appeared to be making over 100 per cent margin on a fairly major consumable item. The discussions began and the supplier refused to discuss costs. In parallel to trying a repeated but conciliatory approach with the supplier, developing markets were investigated and alternative supplies started to flow on a trial basis. Eventually, the original supplier agreed to open up a little and it was discovered that it was not making such huge profits after all. In fact, its cost base was excessive.
Through discussion and a promise of returning business, both customer and supplier are working together on reducing the cost base to enable appropriate supplier margins and greatly reduced customer prices. In this case some persuasion was needed to convince the supplier to discuss costs; this is the reality and it worked. Sometimes suppliers will not agree to discuss their costs and that is their right. In those cases we have to make a value judgment about the continuation of business with that company.
Now that you have arrived at stage two, you will have undergone training and development of a kind that probably has not been tried before in your company. You will also have received support from management (that third axis), who have understood the implications of the model. Generally, stage two is the level of development where you are able to explore the things that you buy today, looking for productivity in production and utilisation, or perhaps joint material negotiations to reduce costs. You can do this because, through developing trust not only between you and your suppliers, but also with your peers internally, you have moved the relationships to a higher level of internal co-operation and external collaboration.
Stay with this level for a while for two reasons. First, there are many areas of spend that can be opened up for major savings. All that you buy today is fair game, so do not lose this opportunity. There will be areas of spend that are difficult, such as monopoly supply or regulated prices, but even there you can discuss productivity if you can be an interesting or attractive enough customer to the supplier. The other reason is that this is an area where your suppliers will need to develop too. Those that have jumped in will be undergoing a consolidation process, evaluating how they feel about you and what to do next. Of the others who are still resisting, some can normally be persuaded over time. You may wish to train your people and supplier people together in this cost learning, which will build further bonds for the future.
A few years ago I was involved in discussions between a supplier of compressors and a customer who used them in the equipment they sold. We decided to run a workshop on the problem of cost and asked each side to estimate the actual costs of the other (the supplier to make and the customer to install and assemble). Then they added their views of the constraints and opportunities on each other’s side. They were almost exactly correct and their combined learning was immense. It was an easy step after the session for both parties to agree joint cost-reduction plans and targets.
While the benefit axis cash till will be ringing bells, management support must be sought and satisfied if they are to continue their support for improvement. After all, it was they who needed the roadmap in the first place. A senior manager with whom I worked recently expressed major doubts about the should-cost mechanism. “Why should the supplier co-operate? All he is doing is lowering his price to you which, in the end, he will have to give everyone else too.” The answer came to him even as he asked the question – the supplier doesn’t have to tell all his other customers that he is more productive now, does he?
Assuming that your development has gone well and that relationships are now positive, both internally and externally, you are ready to move to stage three: proactive collaboration.
STAGE 3: Collaborative total cost of ownership
Stage three is for the long term. Don’t go there with suppliers with whom you do not intend to stay. This is a level that few businesses have attained, even today. It requires disclosure of future plans and costs, objectives and targets that may not have seen the light of day outside the inner sanctum of your company, perhaps ever before. But when you have progressed as far as this, your management will have started to develop relationships with their opposite numbers in the vital few key suppliers and there will be the beginnings of belief in true partnership.
Transition from stage one through stage two will have taught your management and peers in the company some truths. They will have learned about investment and cohesion in cross-functionality and in supplier relationships and the resultant benefits. They should have practised good behaviour and joint planning of new projects or products. Some will even have considered joint marketing with a supplier. The key thing about stage three is that it is a natural continuation after finessing stage two. Often suppliers are happier about joint future planning than stage two cost analysis, as their future business planning can take account of the changes before, not after, the fact.
At this level your teams have been working well internally for some time and suppliers are expecting a single-face approach from you as the customer. Benefits are no longer about price reductions but relate more to time to market (or money), early project completion or entirely new product/market ventures that were not possible using only your own knowledge.
The reason that this stage cannot be entered until stage two is working well is simply that your management must be ready to accept different solutions to projects and business plans than those that have been seen as “right” before. Additionally, they need to accept apparently radical ideas from other people who don’t work for them.
A classic example of this is where a supplier of equipment retrains not only the customer’s operators but also their design engineers who have been “doing it this way for years”. A factory making gas cookers came near to a walk out by designers fearing for their jobs because a component supplier (by invitation) was proposing a radical approach. Ultimately it reduced the cost of a sub-assembly by almost 40 per cent, but internal relationships had to take the strain in the process. (As an aside, successful collaboration with third parties requires a crystal-clear understanding of roles.)
In another example, the total life cost of a major piece of processing equipment will be reduced by up to 20 per cent because the customer and supplier collaborated to plan its optimal use before the project was commissioned. And of the total life cost, the upfront price was only one-third.
At this level of maturity, engineers, accountants and marketing people can be found in the procurement function, working together and growing there as part of their career path. Some of these will be the same people who historically would have wondered what they had done wrong to be sentenced to spend time in purchasing at all. Alternatively, the procurement function may have evolved into extensions of engineering, truly working together as never before.
STAGE 4: Competitive value and supply chains
The final step to stage four is seldom taken, owing to the relatively recent maturity of procurement and supply chain management. Today it can be seen in some parts of the automotive and aerospace industries, and occasionally in other sectors such as pharmaceuticals. But beyond these it is still very much personality led.
Stage four is true integration, both vertically between you and your suppliers and horizontally between your suppliers in support of you. It forms part of the roadmap because I believe this will become an option for many more businesses in the future. Here, the collaboration between customer and tier one and two suppliers has worked well to the extent that other options can be considered. The supplier is comfortable enough to work with other businesses that are also suppliers to its common customer. This collaboration would not normally occur because the original supplier would have no knowledge of those other suppliers and the relationship would exist only via the common customer.
Stage four requires a strategic interventionist view from the customer and a level of acceptance that this is important for all parties for the long term. The collaboration takes the form of future capacity planning – say, on the level of building production plants alongside each other as in some automotive chains, or of joint technology research (eg, lasers) and glass to support consumer electronics original equipment manufacturers. It can also be seen in military contracts for governments, although these relationships are not always successful.
The simplest example I have encountered was that of a plastic injection-moulding company being introduced to a steel component maker and an electric motor manufacturer for the long-term supply of parts to a domestic appliance maker. Component quality and performance improved, as did yields and service levels to the customer.
The doubters will point to the Japanese models and suggest that this only happens with coercion. I happen to believe that groups of like-thinking CEOs can work together voluntarily. Similar marketing strategies and strategic goals do happen and we will see further development of these supply networks, especially in conditions of strong competition where supply chains and networks become the ultimate competitive unit.
And when procurement functions are developed to stage three thinking and competence, they can be the catalysts for future alliances.
It is our job, after all.
Neil A. Deverill is executive vice-president, group procurement and supply chain, at Anglo American, based in Johannesburg, South Africa (ndeverill@angloamerican.co.za)
