This is the second in a series of three articles in Sammy Rashed’s Beyond Procurement series, an in-depth look at strategies to take the procurement function to the next level in terms of performance and influence. The first in the series was published in Issue 37 of Procurement Leaders. In this installment we begin our deep dive into the 10 game-changing options that can grow the function. We start by looking at how procurement can contribute to topline growth.
Here are the approaches I thought were the most meaningful for driving topline growth, starting from the easiest to implement to those that can deliver the greatest impact:
- Training on skills – While acting as a sparring partner for the sales force on negotiation simulations, other opportunities surfaced where procurement could also apply its mastery of contracts and expand in further areas such as business development and licensing.
- Building processes – In the mid-nineties before SRM became mainstream, I ‘intruded’ on some strategic account management training that was targeted at sales executives. I was the only procurement person in the room. In addition to learning a lot from each other’s perspectives, we actually found many opportunities for exchanging and collaborating on how to manage key accounts.
- Creating new product/service offering – A great example of this goes back a few years when General Electric (GE) wanted to sell a scanning device to a hospital, which was deemed too expensive based on the expected usage. Instead of lowering its price, GE helped the hospital improve its internal operations to get more scans out of the device.
From procurement’s perspective, this is a red-hot area of focus, particularly given the increasing levels of outsourcing and growing complexity of supply networks. Suppliers now take over more innovation responsibilities and engage in closer collaboration with their customers. This leads to innovation alliances and ‘open innovation’ networks that can nicely bring the procurement function’s natural interface to the supply base and – if done right – can result in clear competitive advantage to the organisation.
- Identify the ‘spark’ – Often innovation seems to be accidental rather than intentional, at times resulting from desperate attempts to try something different when all else has failed. Budget pressures, financial difficulty – even uncertainty on the company’s future – are powerful drivers that urgently force us to think differently. But there are also ways to ensure that your supply base remains intrinsically innovative without facing doomsday scenarios. For example, making innovation a measure when selecting suppliers, offering incentives and recognising innovation (such as offering public supplier innovation as BMW does annually), and other ‘non-touchy/feely’ supplier management approaches.
- Apply robust process in very few places – A replicable process to develop the innovative idea can be built by better understanding the following key elements to help identify the kind of innovations required from the supply base, and to distinguish between process innovations (enhancing baseline performance) versus product innovations (enhancing topline growth).
- Create an innovation governance – In-house innovations often encounter resistance within the organisation, and it’s even worse for external ideas brought in via procurement. A rigorous process to probe external innovations and develop them further in collaboration with the supplier is critical so that once innovation is identified, it does not get slowed down or sidelined altogether during the internal review and approval process. Ownership is ideally assigned to the functions and leaders that will actually use the innovation output.
- Broaden procurement’s mandate and capabilities – Procurement has a huge opportunity to leverage its supplier management performance capability to help grow its contribution beyond simple cost performance. Pressures to reduce costs are growing, but less than the need to drive top-line sales given the economic turmoil we continue to be in. As a source for innovation, procurement can be just as important as R&D – and may even get results faster.
Total cost base management
By combining functions such as procurement, offshoring and outsourcing (O&O), and lean/Six Sigma (LSS), with a robust global project management approach, an end-to-end cost management team is created. This helps organisations to diagnose, evaluate and implement measures that focus on the sources of costs to create more durable solutions and thus deliver savings that are significantly above average levels.
The basic principle on which it builds is that any activity that leads to a cost – whether internal or external – is a product of a system of business needs. When those needs are approached by traditional structures these costs are treated sub-optimally because they are evaluated discretely.
By recognising this segregation, creating a powerful systemic costs analysis, and applying related comprehensive solutions, cost management moves out from independently managed budget cuts to root-cause based solutions that are consistent with business objectives.
1) More spend managed = more savings potential – Productivity performance is measured as a percentage of savings off In- Scope Spend. By growing the coverage beyond only third-party spend and aiming to deliver the same percentage savings across the wider cost base using expanded tools, more funds can be freed up from ongoing operations and reinvested in marketing, development, or brought to the bottom-line.
2) Category Management alone is not sufficient – For procurement to expand its responsibilities beyond the defined remit of external third-party spend, it needs to adopt and combine new processes. The importance of covering the entire company spend is particularly reflected in industries with low procurement ratio (pharmaceuticals, for example), where only 40-50% of cost is external. There is a clear opportunity to address the remaining costs, which are mostly internal – LSS and O&O can best complement the proven category management process.
3) Seamless alignment between the three processes – Although each has its separate proven methodology and corresponding tools, category management, O&O, and LSS can be boiled down and mapped through a simple process. This also allows us to sequence the activities correctly by 1: optimising the process; 2: identifying the right delivery method (in-house or outsource) and 3: seeking the lowest cost for acquired products and services.
There are five possibilities where procurement can expand the breadth and depth of its contribution in this area. They are listed below in order of increasing complexity and benefits:
- Strengthen verification process.
- Move from assessing to actively mitigating risk.
- Develop preventive strategies by sharing risks and benefits with vendors.
- Go deeper in the supply chain by applying the previous points to second-tier vendors.
- Help mitigate customer risks.
Interestingly, moving to a full supply risk management and business continuity plan can help to protect the business and result in real benefits for the organisation, but offers no accurately measurable returns from a traditional financial KPI standpoint. Although conventional thinking tells us: “you can’t manage what you can’t measure”, I am fond of the contrarian concept from Seth Godin that “the easier it is to quantify, the less it’s worth”.
Improving existing metrics will result in incremental gains – real breakthroughs, however, are more likely to come if we are not constrained by defined measurements. Although it falls out of conventional cost savings definitions, comprehensive risk management may offer a more robust type of cost avoidance, a classification increasingly considered as ‘hypothetical, what-if scenarios’, and often overlooked by management.
Global business services
The global business services (GBS) model consists of pooling non-customer facing functions (such as HR, finance, IT, facilities, and legal services) into a central, separate unit, typically reporting directly into board member.
There are similarities between GBS and procurement, such as global cross-functional scope, their aim to provide a standard interface with internal customers, the fact that they ‘cut across the board’ horizontally instead of being aligned vertically with the business, as well as the size and scale they need to recruit top-quality talent.
The function is under constant pressure to do more with less, yet still aspires to move upstream and get closer to its customers. One possible way to balance both objectives is creating Centres of Excellence operating within the GBS area, by identifying repetitive procurement activities, aggregating them through a central/standard process which provides the right size and scale to generate greater efficiencies and performance. At the same time it can allow procurement to move its game upwards with stakeholders and engage them with more strategic activities.
The most obvious place to begin is when an organisation doesn’t have an O&O team. Procurement can then step up to the role of setting the strategy for make versus buy, and identifying how external relations will be integrated for delivering services.
Another possibility is for procurement to look within itself as a function and assess what pieces of its own process are critical and most valued by the business, and which ones can be consolidated or even outsourced.
On a larger scale there is an opportunity to be involved in the overall transformation project when a GBS strategy is already being pursued by the company. The CPO can play a wider role here beyond his formal responsibilities, helping expand not only his own business leadership but also procurement’s.
This article is extrapolated from Sammy Rashed’s 15-part Beyond Procurement blog series, which appeared on the Procurement Leaders blog. Note: the post is the author’s opinion and does not necessarily represent the views of Novartis.