PRIVATE EQUITY: SUPPLIER BUYOUTS
Dealing with private equity
Nick Martindale
A few years ago, the prospect of a supplier being taken over by a private equity firm would hardly have registered on a CPO’s radar. This is no longer the case, as a poll by CPO Agenda reveals. It found that 83 per cent had experienced this in the past five years, with views split as to whether it was a positive or a negative trend.
The biggest worry, according to Rick Hughes, CPO of Procter & Gamble, is whether the new owners will continue with existing product lines. Others have experienced a far greater emphasis on profit and cash flow, as well as a lack of a long-term focus.
The key to managing such situations, says Hughes, is to sit down with suppliers and investors to talk about their intentions. Other strategies CPOs have employed with varying degrees of success include looking for alternative suppliers and agreeing a long-term contract before the takeover is finalised.
But there are many positives as well. Hans Elmsheuser, head of global procurement at Syngenta, argues that private equity firms tend to run companies in a more professional way than those that are answerable to shareholders; while others point out that if the supplier is put on a more stable financial footing it can only be good news for buyers.
PRIVATE EQUITY: THE CPO'S ROLE
Conjuring up value
Richard Nixon and Vincent Neate
As well as private equity takeovers of their suppliers, a growing number of CPOs are seeing their own companies taken over, which throws up challenges and opportunities.
The key for the CPO is to understand the motivations of the new owners and define a strategic role that procurement can play, argue the authors from KPMG. They must build a relationship with the private equity portfolio manager within the first 100 days, when a detailed operational change plan will be drawn up.
This plan is likely to be focused on cost savings, but organisational redesign and process improvements can also feature. Tactics include altering creditor and debitor terms, awarding bigger contracts to fewer suppliers and taking advantage of low-cost sources and e-auctions.
Further opportunities are afforded by the recent development of “portfolio-level” procurement, where private equity firms look for buying synergies across their companies. In one example, this approach generated $15 million of savings in one year by bringing $100 million under master contracts.
Successful CPOs, suggest the authors, can expect to further their careers by moving into other businesses within the portfolio or working for the private equity firm itself.
INTERVIEW
Saving Chrysler (again)
John Campi, CPO
Following last year’s demerger from Daimler and the purchase of a majority stake by private equity firm Cerberus Capital Management, Chrysler’s new procurement chief, John Campi, has a tough job.
In a candid interview with CPO Agenda – his first since joining the auto maker in January – Campi says Chrysler needs to regain the trust of its suppliers. “If you destroy the trust in the supply base, which I believe has been done, then you have a contentious relationship,” he argues.
Chrysler intends to work closely with suppliers to shed costs from the supply chain (his target is 25 per cent over three years) by stabilising its production schedule, driving out complexity and seeking to avoid constant design changes once a vehicle is launched.
Campi pledges to improve supplier relations along similar lines to former president Tom Stallkamp’s famous “Score” programme in the 1990s and to share savings on a 50:50 basis with suppliers.
Chrysler’s private equity ownership will, he admits, put a strong focus on earnings and cash flow, but Campi is adamant that the company will conduct its dealings towards suppliers with integrity.
His long-term aim is quite simple: “I’m looking forward to having supplier relations that are on the lines of Toyota.
SUPPLIER DEVELOPMENT
Investing closer to home
Nicolas Reinecke, Nicolas Constantinesco and Henrik Gunnerling
Low-cost country sourcing has been favoured by CPOs in recent years as a way of reducing costs. But many companies have had less than satisfactory experiences and typically savings are only three-fifths of what had initially been anticipated, argue the authors, three McKinsey consultants.
All too often, companies overlook a major alternative cost-out strategy – namely, using supplier development to improve the efficiency of local firms. This can generate labour productivity improvements of 30 per cent or more, along with other benefits such as reduced lead times and a faster response to quality issues and volatile demand.
Supplier development is not an easy option, however. A number of conditions need to be met, including a high level of trust and a compelling value proposition for both parties.
Programmes must be adapted to fit the capabilities of each supplier and there should be a fair value-sharing model. The buyer also needs to provide real expertise in improvement techniques and integrate these activities with their wider organisation.
A final key requirement is to get the pace of introduction right. If done too quickly there is a risk of early stumbles, while too slow a pace means the initiative can be lost.
EXECUTIVE DEBATE
Outsourcing: what scope for deeper relationships?
8 panellists, Amsterdam
The latest CPO Agenda Executive Debate, held in Amsterdam, posed the question of what scope there is for deeper relationships between customers and their outsourcing providers.
Most participants had seen extensive outsourcing, ranging from IT to logistics. But the extent of – and the reasons for – procurement’s involvement differed markedly.
Logistics remains a problem, with slow transportation and a preponderance of inefficient small providers. However, major investments are being made in new transport links, including a pan-Asian train link to Europe.
Participants agreed that most outsourcing deals worked well, but at a “co-operative” rather than a “collaborative” level. There was general agreement that greater collaboration was desirable in some instances, and that both sides needed to work harder to build these relationships.
The benefits of greater collaboration were seen to be incremental profit improvements, greater agility an flexibility, innovation and competitive advantage and support for business expansion abroad, as well as helping in “softer” areas such as talent retention and career development for buyers.
The key enablers for creating deeper relationships were seen as both sides having a real understanding of the other’s business objectives, with clear performance metrics and governance structures. But non-procurement colleagues also had to be convinced and the risks managed carefully.
PROCUREMENT'S STATUS
Taking the gloves off
Neil Deverill
Despite having the title, many CPOs are in dead-end jobs and have no future with their current employer, according to Neil Deverill, who until recently was the CPO of mining giant Anglo American.
He argues that because CPOs have traditionally focused on cost savings, senior executives often do not consider procurement as having a more strategic value-creating role.
To transform this situation – and to speed up the pace of change – executives need to be educated about the additional competitive advantage that can be derived from getting procurement right, and persuaded to recruit higher-calibre people for CPO jobs.
Deverill argues that many of these individuals will not be career procurement professionals – and that more of them are needed. As “journeymen” on their way up the corporate ladder, they may only stay in the CPO role for two or three years. Nevertheless, they have a vital role to play in raising the status of the function and attracting other talented people into it.
Although this shift appears to be a threat to procurement institutes such as CIPS and ISM, they have an opportunity to provide focused support for these non-career CPOs, along with stepping up their efforts to market the profession.
CAPABILITY DEVELOPMENT
Mastering the perfect storm
Pierre Mitchell and Christopher Sawchuk
Over the past few years, procurement organisations have been hit by a “perfect storm” of five major trends:
· rising prices;
· scarcity of top-notch talent;
· poor internal process performance;
· regulatory challenges;
pressure to do more but without additional resources.
Ambitious procurement groups are not only surviving this storm, but actively seeking to extend their role into the more advanced stages of total cost of ownership, demand management and value management, according to the authors, directors at the Hackett Group in the US.
These latter two stages shift the focus of procurement back to internal clients and represent the real “tipping point” for a world-class organisation. But the elements that can provide procurement with a platform to add value – such as risk management, innovation and CSR – ring hollow unless it has the capabilities to deliver on the “promise of a new brand”.
A culture of execution is required in operating model, resource management and core processes. But those procurement organisations that are able to build a service delivery model to fulfil this promise will be able to weather the current storm and deliver much greater levels of value.
BENCHMARKING
World class or best in class?
Andrew Cox
Most senior procurement professionals want to know how their function’s performance compares with that of others. But when seeking to improve their systems and processes, they often find it hard to determine whether they should be aiming for “world-class” or “best-in-class” status, argues consultant and academic Andrew Cox.
Over the past two years, he and his colleagues have benchmarked over 200 organisations from the private and public sectors. Retail, automotive and consumer goods achieved the highest scores, but the results varied dramatically and suggest it may not be possible – or even desirable – for all organisations in all sectors to fully implement the same approaches to process and system improvement.
The variety of tools and techniques used to benchmark performance make it difficult to understand what a world-class (or “ideal”) approach looks like for any step of the strategic sourcing process. In many respects, the most relevant benchmark is performance against a comparable organisation in the same sector – in other words, “best in class”.
Understanding what is feasible in your sector, given the specific role of procurement, is essential.
