ORGANISATIONAL DESIGN
Jon Hughes
All CPOs are involved in creating operating models to support business performance, yet workable guidelines in this area have been in short supply. Hughes explores the challenges facing complex, multi-site, multi-country businesses and presents case studies of GlaxoSmithKline and WPP as examples of two contrasting models.
There is a marked trend towards centre-led operations in procurement, but often these fail because of turf battles and disputes about authority. A more sophisticated approach than “centre-led networking” is therefore now required.
Hughes outlines 10 possible operating models, ranging from totally decentralised procurement at one end of the scale to a totally centralised, top-down model at the other. He suggests five tests to determine whether a model is fit-for-purpose in the context of an organisational culture.
He goes on to outline eight features of successful operating model design:produce a “parenting: proposition; be crystal clear on roles and purpose; secure authority to act; incentivise the business to improve procurement; create a business-aligned “value map”; create strong internal stakeholder pull; focus on leadership and pivotal roles; and recognise the criticality of people development.
PERFORMANCE MEASUREMENT
Andrew Likierman
Moving the purchasing function from an operational to a strategic resource is never easy, but the task is even more difficult without the right performance measures. In this article, Likierman, a professor at London Business School, looks at how performance measurement can support the CPO’s authority.
He considers three different roles – procurement expert, head of function and member of the senior management team – and maps them against three scenarios: compared to plan/objective, compared to what others are doing, and compared to what might be possible. Of these, the latter is the most important and the most outward-facing, but it is also the toughest to measure.
Questions designed to test this include:
- What might have happened if procurement had not intervened?
- How well trained are procurement staff compared to the best in the field?
- How far has the CPO made other management team members aware of what procurement can offer?
- Is the CPO linking his or her function to the corporate responsibility agenda?
- Sticking to more traditional measures that are simple and known may be tempting, but they limit the role. It’s up to the CPO to force the pace.
STRATEGY
Hugh Baker and Fabrice Saporito
Procurement reinvention has stalled in many businesses, argue Booz Allen consultants Baker and Saporito. Faced with short-term cost pressures and stakeholder indifference, many CPOs have focused their efforts inwardly on improving functional depth through initiatives such as
e-procurement, e-sourcing and spend analysis.
While this is understandable and necessary, there is a danger that in the process they pay insufficient attention to functional breadth – engaging the organisation and its suppliers – and fall down a “rabbit hole” that limits their influence on operational decisions and involvement in strategic ones, and may lead eventually to the outsourcing of procurement altogether.
Instead, CPOs need to take a broader view by working hard internally to engage key stakeholders: with finance to overcome the still all-too-common “show me the money” problem and drive savings to the bottom line, and with other functions to manage essential business trade-offs and design new processes for handling them.
Externally, they need to work closely with suppliers to secure preferential access to innovation and capacity, and confront risks by seeking to build greater resilience into their supply chains.
SUPPLY RISK MANAGEMENT
Yossi Sheffi
Disruptions to supply chains come in many different forms: natural (eg, earthquakes, hurricanes) and man-made (eg, strikes, terrorist attacks). Globalisation is stretching supply chains at a time when market volatility is on the increase, exposing companies to greater uncertainty.
Global enterprises cannot rely on government action to protect them – indeed, it may even exacerbate the problem. Instead, they can mitigate these risks by becoming more “resilient”. This is a measure of their ability to return to normal, and the speed at which they can accomplish it.
Resilience can be achieved either through building up inventories or building in flexibility. Of the two, the latter is the better option, but it requires careful planning – for example, reducing the number of components and standardising design (as Dell and HP have done) – and strong supplier relationships (Toyota being a good case).
But the most important distinguishing factor of companies that bounce back quickly from a disruption is corporate culture. A flexibility culture is one where communication is pervasive and constant, and where even low-level employees have the power to take vital decisions. Creating such a culture is difficult, but not impossible.
CPO INTERVIEW
Kees Linse of Shell
In February 2003, Kees Linse became the first CPO of oil giant Shell. Since then the company has experienced the lows of its reserves scandal early last year and, more recently, the highs of record profitability.
In this interview, Linse explains that making mega-profits is a mixed blessing for procurement, because demand for contractors to build new capacity and prices for key raw materials such as steel have both rocketed. Security of supply has become the number one priority, to keep valuable production sites on stream.
Aside from current industry requirements, Linse has focused his efforts on four broad elements: people, process, systems and category management. The latter is still being embedded as a single business-wide approach and now covers three-quarters of Shell’s multi-billion dollar annual external spend.
As a relative newcomer to procurement, Linse has been impressed by the “very focused, very sturdy” attitude of people in the profession, although he believes they could be more “assertive” when confronted by difficult stakeholders. And they need to be careful not to overstate their contribution to value creation; concentrating their efforts on the value that suppliers can bring to the business.
LOW-COST COUNTRY SOURCING
Benjamin Schmittzehe, Rolf Schimrock and Kai Kuan
Through 20 years of doing business in China, the authors – consultants based in London, São Paulo and Shanghai – have watched plenty of sourcing managers lose their shirts when trying to deal with Chinese suppliers. They believe that many today are guilty of taking a short-term, narrowly cost-focused approach and are neglecting to invest the time needed to build longer-term partnerships.
Faced with difficult challenges, some purchasers take the “easy option” of choosing those suppliers that speak the best English, even though they may not be sufficiently hungry for the business; while others seek to outsource the problem. Neither is likely to produce the optimal economic outcome. Instead, you need to understand clearly the Chinese environment and adopt the same rigorous, structured process to sourcing that you would elsewhere.
The authors’ advice includes thinking carefully about how your requirements may change over time; playing the game when it comes to developing social relationships and respecting Chinese attitudes to “face” and hierarchy; ensuring that you fully understand the strategy, economic drivers and ownership structure of any potential partner; and sticking to business fundamentals.
SERVICES E-PROCUREMENT
Malcolm Wheatley
E-procuring services, rather than commodity items, has long been something of a challenge, not only for users but also for vendors. “Services are based around contractual relationships, which are not readily capable of being catalogued,” sums up one software company boss.
However, systems are becoming more sophisticated and better able to handle the requirements of services buying. Companies such as AstraZeneca have been trialling e-procurement in areas such as consultancy services.
Richer descriptions of services is one key aspect that has to be resolved. Billing and payment is another. “Procure-to-pay automation is probably the biggest single challenge to service procurement,” argues analyst Pierre Mitchell.
Temporary labour is perhaps the most advanced category, and vendors such as Elance and IQNavigator have been providing niche solutions for several years. Sony Electronics in the US has been using the latter to handle its agency staff needs since mid-2002.
Both vendors are now trying to branch out into other service areas, on the basis that these are, by definition, forms of temporary labour. Some aspects are more complex than others, but as long as they can be defined and categorised, the services can be e-procured.
