LEADERSHIP
René Carayol
Procurement has become a much more professional discipline in recent years. The introduction of strong processes is sensible and necessary, but there is still a place for well-informed judgment. And for judgment, read leadership.
While managers tend to focus on getting “stuff” done, leaders focus on how people feel. Such leadership qualities are vital if procurement is to seize the business, and personal, opportunities presented by alliances and collaboration. The best leaders are also the best collaborators, says author René Carayol, a business thinker and former board director at PepsiCo.
In a complex, competitive and fast-moving business environment, strategic relationships between firms – even between apparent rivals such as booksellers Borders and Amazon – are an alternative to both organic growth, and mergers and acquisitions. But partnering is no panacea: a recent survey indicated that more than half of business alliances either fail or do not live up to expectations. Poor working relationships are the primary cause of failure.
Becoming the “keeper” of key strategic alliances gives CPOs a shot at making it into the boardroom. But management and process alone will not be enough.
INNOVATION
Richard Lamming and Wendy Phillips
“Discontinuous innovation” has been shown to wreck established industries and bring successful companies to their knees. In earlier times, it destroyed the ice-making industry; more recently, it has shaken up the airline and photographic businesses.
This disruptive, powerful form of innovation may be hard to detect at first, and be confined to smaller, less established suppliers. For purchasers, the implication is that if they want to avoid missing out on potentially valuable innovations, they need to “flirt” with such firms, even it proves to be just a brief fling, while maintaining relationships with longer-term partners. The authors call this a “strategic dalliance”.
The dalliance may threaten the alliance, and it is this balance that the buyer must address strategically. Zingo, a mobile phone-based service for hailing a taxi in London, is cited as a real-life example.
In some circumstances, the buyer, incumbent supplier and radical newcomer may work together, with discontinuous innovation stemming from all three – a situation termed “strategic consilience”.
A new approach to sourcing, supported by a new type of relationship strategy, may be the only way to avoid being left with a non-competitive supply base.
MERGERS & ACQUISITIONS
Theo Theocharides
Continuing to add value in ever more innovative ways is a key requirement for procurement. One of the untouched areas of business where it is rarely involved, let alone early enough, is mergers and acquisitions.
In most organisations, its contribution is confined to the very late due diligence or post-acquisition integration stages, despite its supposed expertise in negotiation. To be shunned in M&As defines procurement as a non-strategic function.
Two main reasons explain its absence: first, a lack of stakeholder engagement at the highest level; second, a lack of broad business understanding and experience. But with up to 70 per cent of mergers failing to deliver on their promises, and firms concentrating on very focused additions to their portfolios, there has never been a better time for procurement to play a pivotal role in the M&A process.
Identifying synergy savings, finding hidden sources of value, and using innovative sourcing methods and strategic outsourcing are just some of the ways CPOs can ensure their involvement in the assessment, deployment and integration phases.
M&A activity is high risk and not for the faint-hearted. But it is also the Holy Grail of procurement’s position and profile in an organisation.
LOW-COST COUNTRY SOURCING
Denis Kenny, Marc Debets and Matthias Daemmig
Global sourcing has been around for many years, so why are companies still reluctant to embrace the opportunity to both reduce cost and deliver strategic advantage? In the authors’ view, the issue is not so much about finding capable suppliers in emerging markets, as it is gaining stakeholder support for more radical sourcing strategies.
Key stakeholders such as the chief operating officer, head of new product development, and the finance, logistics and marketing directors will have a number of concerns. These include social and political instability, currency fluctuations, security of supply, and protection of intellectual property and brand image.
The most effective way of ensuring that low-cost sourcing takes hold is for the CXO community to have targets “baked” into their performance contracts. But given that procurement cannot directly influence this, it needs to concentrate on winning buy-in for a global sourcing strategy. This should seek to answer questions such as:
INTERVIEW
IBM’s John Paterson
In 2002, IBM brought all of its supply chain functions – procurement, manufacturing, logistics and fulfilment – together to create a new organisation, the Integrated Supply Chain (ISC).
In this interview, John Paterson, the company’s US-based CPO, discusses what the new structure means for the global procurement function and how his own role is changing as a result.
In the past, IBM opted mostly for “make” rather than “buy” decisions, he notes. Now, though, like many other companies it relies on a large network of suppliers to deliver its products and services to customers. The purpose of the ISC is to improve efficiency and speed up response times. One of the ways procurement is contributing to this is by applying hardware principles to the services business, which now accounts for around half of IBM’s revenues.
Paterson reckons his role has moved from a 100 per cent focus on how IBM spends its $45 billion procurement budget to 60:40, where 40 per cent is the time he spends talking to customers and helping to sell IBM’s business process outsourcing service.
“Increasingly, we are going to spend a lot of time on this revenue growth and transformation activity in the marketplace,” he says.
ORGANISATIONAL BEHAVIOUR
Arjan van Weele and Frank Rozemeijer
Many corporate purchasing initiatives are derailed at the business unit level, so CPOs and others need to appreciate the emotional and political factors at work, rather than relying only on rationality and logic to win the argument.
To test this theory, the authors conducted a case study experiment at a Dutch management conference using a fictional company, Dairy Firm Ltd. Participants were divided into two groups – malicious business unit (BU) executives and co-operative purchasing executives – and asked to suggest ways of either frustrating or supporting plans to create purchasing synergy.
Those in the BU role, all senior purchasing executives in real life, had no trouble in thinking up blocking tactics. These included letting product trials fail, leaking information to existing suppliers, changing specifications and constantly being unavailable to make decisions or attend meetings.
To counter these tactics, the CPO must be clear about the benefits synergy will deliver; ensure that line managers take responsibility for the project and are accountable to senior management; insist that cross-functional teams are staffed with high-quality people; and continually check that the expectations of key stakeholders, including the CFO/CEO, match their own.
GOVERNANCE
Geraint John
Since 2001, British Airways, like most global airlines, has been in serious cost-cutting mode. It has axed 13,000 jobs and taken out £450 million in annual operating costs. Silla Maizey, BA’s procurement director, admits that a “tough love” approach – rather than winning hearts and minds – has been to the fore, although that is changing now that the airline is profitable again.
At other more diverse and decentralised companies, such as the US conglomerate Tyco, the “big stick” approach is less of an option. But Kai Nowosel, a former global purchasing head at Aventis, believes that even in centralised firms, it is a mistake to dictate. “Users feel threatened by that and try to find ways around you,” he says.
Given the differences in size, structure, culture and fortunes among organisations, what are some of the common success factors in terms of purchasing governance? Here are 10 suggested by those interviewed for this article:
1. Involve senior executives.
2. Demonstrate value.
3. Listen and seek buy-in.
4. Give category responsibility to business heads.
5. Adopt a customer-service philosophy.
6. Be tough in some categories.
7. Know when to walk away.
8. Share targets and plaudits.
9. Make it easy to comply.
10. Tackle persistent offenders.
SRM SOFTWARE
Malcolm Wheatley
The emergence of customer relationship management, or CRM, in the late 1990s was based on the idea that customers typically “touch” a business at several points, and that having a clearer picture of these makes it possible to target them more effectively.
Supplier relationship management was seen as the corollary of CRM on the supply side. But it has had mixed results and proved a difficult concept to nail down, with software vendors using it to include just about anything to do with sourcing.
The problem it needs to solve is islands of supplier-related information, creating instead a single, holistic view of a trading relationship.
Such a perspective is more vital than ever with corporate governance and Sarbanes-Oxley high on the agenda, notes Alex Kleiner of Frictionless Commerce.
NTL, a British cable TV and telecoms firm, is using its SRM suite to manage those requirements and to improve the quality of its supplier relationships. A key measure it now tracks is the access it gets to supplier innovations.
So far, however, many companies appear to have started their SRM journeys only to stall part way. For SRM to become a core capability, more of those journeys must reach their destinations.
