For many in procurement, the recession offered the prospect of a return to what they do best: cutting costs and delivering savings.
More than three years on from the depths of the downturn, such an approach is less sustainable. For many, although by no means all, quick wins have been achieved and the wider business is once again beginning to look at growing top line revenue. For procurement to continue to deliver value going forward, it’s vital CPOs can install a culture of longer-term planning and convince the wider business of its ability to play such a role.
But this isn’t the only challenge as the heads of many functions are still battling the perception that cost-cutting is procurement’s only function.
Alex Klein, chief operating officer at procurement consultancy Efficio, says the most effective way of getting involved in long-term projects and strategic initiatives is by excelling at the day job. “Procurement has to prove it can have an impact in the downturn on costs,” he says. “The reality is that a lot of procurement functions aren’t playing that role effectively. If you’re not walking yet, don’t complain no one is letting you run.”
Research by Accenture, released earlier this year, also makes the link between delivering savings and taking a longer-term, strategic approach simultaneously. The study focused on six core areas of procurement and identified those who performed better than the weighted average as ‘masters’. These companies had an average of 12 per cent more direct spend under management and 15 per cent indirect, but were also significantly more likely to have a formal integrated strategic plan, to be better perceived by leadership and to deliver innovative value in addition to cost savings.
“If procurement does well, it is invited on to other things,” says Jeremy Robinson, head of procurement in UK and Ireland at Accenture. “With the masters, procurement did come to the fore and had the opportunity to rebrand itself as a function that could sit at the top table. There has been closer integration between procurement and the business strategy and that hasn’t all been about cost. It’s also been around innovation, risk management, being able to respond to changes in the market and revenue generation.”
This is something that echoes with Rachel Lee, procurement director at facilities firm Norland Managed Services. “We have been growing pretty fast, even during the downturn, so we have been chasing cost savings, but perhaps not to the extent that some industries have,” she says.
“The cost savings agenda is on the back seat. We have preferred supplier arrangements in place and we’ve now turned our attention to the company’s strategic target, which is to grow, so that’s what the procurement team largely focuses on.” This includes working closely with customers and developing solutions to problems that can then turned into revenue-generating ideas, she says.
A further way for procurement to demonstrate its worth could be to take the initiative in areas that play a prominent part in wider business strategies. This has been successful for Idsert Walta, strategic relationships manager at Nordea Cards, based in Sweden, around the issue of sustainability. “It is on the corporate radar from another perspective and the CPO community can add something by explaining how someone looks from a procurement perspective,” he says. “We’ve built a way to explain what choices people have to make and what the effect is of making those.”
Emerging market sourcing is another area where procurement can demonstrate both its longer-term vision and strategic ability to the wider business, even if it
is initially from a cost perspective. “A lot of companies have seen the rapid rise of low-cost country sourcing and then a retrenchment over the past 10 or 15 years as people have realised that it’s not that easy,” says Eamonn Phillipson, procurement director at Paris-based 4G chipmaker Sequans Communications.
“We take a very proactive view of emerging markets and low-cost country sourcing, to understand whether a firm is creating the kind of people who may be consumers or suppliers into your business.”
Much of the business case for adopting a longer-term view is likely to come from the benefits that can be derived from working more closely with suppliers. Walta, for instance, has been pushing the merits of awarding longer-term contracts with suppliers in the face of pressure from the wider business to restrict any deals to a maximum of a year. “We want to offer suppliers something so they can make a different investment towards us,” he says.
“The business, by definition, says we don’t want to sign up for a longer period of time than one year because it’s too risky, but they’re saying they want to do some cost cutting. Stepping out would be even more costly so why not sign up for three or five years, to send a message to the supplier that we are serious? That’s been picked up and has led to savings. You have to create the right business case, so you have to know your business. It’s a long haul, but it’s about creating attention.”
Larry Beard is chief procurement officer at Tate & Lyle. He argues CPOs now have no choice but to take a longer-term and more strategic view in their relationships with suppliers, as all the obvious areas for cost reduction have been exhausted. “We’re at the point where people have done a great job at driving down costs and a pretty good job with working capital. This where we can be innovative,” he says.
“You can either be innovative in terms of how you approach your sourcing and therefore your relationships or in identifying the opportunities in relation to the suppliers that will give you as a business a differentiator,” Beard continues. “That area of innovation is down to individuals and that’s an area of great opportunity.”
Collaboration with suppliers in product specifications, process efficiencies or even new business ventures is another feature of the leading procurement organisations, according to Accenture’s research, with some 64 per cent enacting this as part of their supplier relationships compared to just 13 per cent of other organisations.
“The downturn allowed buyers to focus on taking cost out of the supply base, but in terms of a sustainable business model that only has a certain longevity so they’re now looking to the suppliers who will bring that value to the table, whether that’s improved cost in the long term or involving them in some of the innovative revenue-generating opportunities,” says Robinson. “For the majority of businesses, growth will be a key objective and suppliers can bring a lot of new ideas to the table.”
Procurement’s role, though, need not be restricted to suppliers. At Sequans, Phillipson regularly meets the company’s own customers to better understand own needs and how the wider business will need to adapt in the future. “It removes the salesperson’s filter from the CPO’s understanding of what the end-customer is looking for in a few years’ time,” he says.
Involvement in such strategic discussions has not gone unnoticed outside of procurement he says. “Many boards are becoming aware that CPOs have a very good helicopter view of the industries in which we work, so when we look at a supplier we’re not just seeing the products they supply, but we’re evaluating them from a financial stability standpoint and from what they may be doing with competitors. Boards see in a CPO a well- rounded businessperson, not just a senior buyer.”
There is, though, more procurement could do to make the case for greater involvement in longer-term initiatives. “Purchasing still has to describe what it can do for the board,” says Beard. “It has to be clear on what part it can play. It can help with working capital or process efficiency, or help to drive the strategic direction through mergers and acquisitions. But we need to educate, help and influence the role that purchasing can play.”
The function also needs to do a better job of aligning itself to the corporate agenda, including making a clearer link between the savings it delivers and the bottom line, before it will be fully trusted by senior management. “There needs to be very clear integration between procurement and finance in terms of accountability and ownership of that spend,” says Robinson. “You need a very rigorous tracking and reporting mechanism so you’re rigorously assessing how you’re performing against the budget that has been set to that category and making sure that is being acted on by a cross-functional team that’s operating across that whole spend area.”
There are concerns over how well equipped procurement is to take on a more strategic approach. “The role at the strategic end is to play facilitator between the supplier and the business,” says Klein. “You need to be good at engaging suppliers and the business and brokering the two coming together. The skill is about being very good at working cross-functionally. We do a lot of training of procurement people and often what holds them back are the stakeholder engagement skills. Procurement tends to do things its way.”
This is a something Lee has also encountered as she has looked to develop a team capable of generating revenue in addition to cutting costs. “One of our main problems is finding people with a procurement background who actually have an eye for the sale and the bottom line,” admits Lee. “We have this endless debate about how we can show we’re a more strategic function, but it starts with us as individuals.”
Part of the solution could be to incentivise buyers on more than just hitting cost reduction targets. According to Accenture’s research, 67 per cent of leading procurement organisations manage success through balanced scorecards that feature key performance indicators such as internal stakeholder satisfaction and innovation, as well as cost reduction, but this falls to just 17 per cent among other companies.
“There’s a gap there, even for masters, around acquiring and retaining the best talent in the organisation to deliver against the brand that we’ve created during the downturn,” says Robinson. “Talent is probably the thing that has slipped behind everything else.”
Ultimately, procurement teams will come to play the role in the business of which they are capable, suggests Klein, and that starts with demonstrating they can do the day job. “We shouldn’t think that cost reduction is a lowly and basic thing that we can do with our eyes shut.”
“It can be complex and to do it well is a very strong competence. If you look at the procurement functions of Toyota or Ford, 70 per cent of what they do is still about cost, but they’re very sophisticated about it and because of that they get the respect of the business. That’s how they grow into the more strategic roles.”
Case study SKF
For Lovisa Söderholm, chief purchasing officer for direct material at global bearings manufacturer SKF, taking a longer-term approach has meant using fewer suppliers and working across the business to manage demand.
The company’s senior management has been supportive, she says, but not everyone has welcomed this approach.
“The challenge is to convince the middle management or the factory managers who are responsible for the bottom line of their business unit or particular factory that this will lead to long-term profitability,” she says.
“You can always find a cheaper price, but in the long term it gets very expensive because you have so many suppliers to keep control of in terms of cost, equality, delivery issues and sustainability, so you have to look beyond costs.”
The strategy has also involved the creation of a cross-functional category management team consisting of people from purchasing, quality, product development, manufacturing and logistics, which aims to manage demand across the enterprise.
This kind of longer-term approach also helps suppliers plan, adds Söderholm,
particularly at a time when the market is experiencing extreme price swings.
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Nick Martindale is a freelance business journalist 