VALUE CREATION
Roel Bellens and Karel Volckaert
Despite all the talk about “win-win partnerships”, the reality often proves quite different, with the stronger party opting for short-term efficiency gains rather than long-term shareholder value. CPOs concentrate on immediate savings because that is the nature of the framework they are allowed to work in.
But more suppliers are now complaining that they are being squeezed to the point where they do not have enough cash to finance future developments. In the case of General Motors and Delphi, this has forced the latter into bankruptcy protection.
A value chain is sustainable, argue the authors, when all the parties have sufficient free cash flows to satisfy their stakeholders and allow them to invest in physical and intellectual capital for the next business cycle. Conversely, a chain is unsustainable when one party owns a dominating share of its cash flows.
An analysis of the GMDelphi relationship since 1999 suggests that GM has taken more than $5 billion of cash flow away from its suppliers – equivalent to an average of 1 per cent of their annual sales.
If CPOs want to have a serious impact on the long-term health of their companies, they will have to find an alternative to the short-term annual savings lever.
PROCUREMENT OUTSOURCING
Geraint John
After a cool start, the market for indirect procurement outsourcing, or BPO, is hotting up. The past six months has seen big firms such as Unilever and Colgate- Palmolive join the likes of Lucent, BAE Systems and Deutsche Bank in outsourcing some of their spend categories, purchase-to-pay processes or a mixture of both.
Despite these contract wins and analyst predictions of provider earnings growth of up to 30 per cent over the next few years, though, procurement outsourcing is still in its early adopter phase; the all-important “tipping point” has just not happened yet. Concerns about service providers’ ability to deliver savings and service improvements are among a number of factors that make many CPOs sceptical about the validity of the BPO model.
However, there is general consensus about the need for CPOs to be proactive and well informed in this area, whether they intend to initiate discussions internally or not. Advice from providers and early adopters includes: be clear about your objectives; ensure that you have internal support for change; understand the different business and pricing models; choose a provider that fits your culture; and work hard at nurturing the relationship.
INNOVATION
John Bessant
Rather than the stereotypical “Eureka” moment in the bath, innovation in the 21st century is a complex, risky business marked by global operations and internet speed. In this environment, the key requirement for innovation is building and managing networks, relationships and knowledge flows both inside and outside the organisation, says the author, a professor of innovation management at Imperial College London.
Companies such as Procter & Gamble have changed the rules of the game from “research and develop” to “connect and develop”, with the aim of sourcing half of its innovations externally – so called “open innovation”. This puts procurement centre stage, because of its role in improving process innovation (cost, quality and delivery) as well as its interaction with suppliers.
Procurement professionals have the chance to play a key role in helping their firms to master not only traditional “steady state” innovation but also more radical, industry-changing forms of “discontinuous” innovation – of the kind experienced in the airline and music industries in recent years. However, to do this they need to understand the importance of knowledge networks and develop new skills to manage and evaluate new kinds of relationships.
INTERVIEW
Clive Heal, Genentech
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Genentech, a pioneering, San Francisco-based biotechnology firm that makes anti-cancer drugs such as Avastin and Herceptin, has doubled its workforce and revenues in the past three years. It has also grown a procurement function headed by Briton Clive Heal in a culture that puts a premium on “a flexible, entrepreneurial spirit” and “a minimum of guidelines and procedures”.
In such an environment, Heal says, introducing and standardising procurement processes has been a challenge – as has finding new people who can win stakeholder buy-in, manage cross-functionally, operate at a strategic level and keep up with the company’s rapid growth. Hiring PhD-qualified scientists who can talk the right language is part of the solution.
Cost control is important to Genentech, he adds, but security of supply, managing growth and helping to bring innovation from the supply base are higher priorities.
He believes that in future procurement professionals will have opportunities in areas such as revenue generation, risk and asset management, and in reaping the benefits of advanced software tools. But CPOs will need to think carefully about what their priorities are and which pathway they want to take.
COLLABORATION
Corey Billington, Joe Sandor and Tom Vollmann
For genuine collaborative supply chain partnerships to flourish, a new language is required to support them. This is because language frames thought and behaviour. Many terms commonly used in purchasing are not only inappropriate but also potentially insulting in highly collaborative relationships. Examples include “supplier evaluation”, “supplier measurement”, and even the term “supplier” itself.
Instead, the relationship should be defined by words such as “share”, “nurture”, “entrust” and “honour”.
As well as a different language, supply chain partnerships require a different set of strategies, policies, tactics and structures. Firms that have successfully adopted such an approach to their most valued partners include Toyota, HP (with Canon), and Harley-Davidson, the iconic motorcycle manufacturer.
“Achieving great results happens when language changes are consistent with a level of deep trust, mutual respect and genuine interest for the partner,” write the authors, three American business school professors. Partnerships require “care and feeding”, and it is critical that staff in both companies do not lose sight of the relationship’s importance or drift off in search of other ideas.
SAVINGS TRACKING
Pat Houston, Martha Turner and Christoph Bliss
As any CPO knows only too well, there can be a large gap between what is identified as procurement savings and how much actually drops to the bottom line. Experience suggests that more than half can easily leak away as a result of four main factors: overly aggressive or optimistic targets; expectations that are watered down when incorporated into departmental budgets; people buying off-contract products from approved vendors; and inflationary pressures.
The good news is that savings leakage can be fixed – or at least minimised. Six elements need to be in place for this to happen: half on the “harder” tactical side (the most critical factors) and half on the “softer” organisational side. The tactical challenges are, first, to define the savings initiative specifically in terms of accountability, decision-making responsibility, timing and targets; second, to use “strong-form budgeting” to ensure visibility; and third, to insist on well-defined measurement and tracking.
On the organisational side, any savings initiative requires senior management commitment; cross-functional engagement; and a brokering process and “decision rights” to resolve potential stumbling blocks and arrive at the right outcomes for the business.
ERP v BEST-OF-BREED
Malcolm Wheatley
Unlike many companies, the US carrier Delta Air Lines enjoys a single installation of its SAP enterprise resource planning system and operates it right across the business. Yet for spend data analysis it runs so-called “best-of-breed” software from Verticalnet.
The ERP versus best-of-breed solution debate is very much alive and well. Although the former has clear advantages from an IT perspective, in terms of better integration and single-vendor accountability, best-of-breed typically offers deeper functionality, particularly in procurement and supply chain management terms.
ERP leaders SAP and Oracle have been busy fighting back with improved functionality in recent years, yet best-of-breed vendors claim they still offer faster implementation, lower prices and compatibility with a wider variety of data sources.
Like Delta, HJ Heinz’s European operations have opted for non-SAP software (in this case, Ariba) to gain visibility of direct and indirect procurement data; while Bayer Corporation in the US is using tools from SmartOps to better manage its inventory. “Waiting three or four years for the required functionality to evolve [within an ERP infrastructure] isn’t an option,” notes Bayer’s former CPO, Robert Rudski.
