January 22, 2008

Saving Procurement from Itself

Procurement leaders must strengthen their reach within ‎their organizations and ‎take a more prominent role on ‎the strategy table.‎

Dubai, UAE, January 22, 2008 – Chief Procurement officers (CPO’s) play a ‎fundamental role in driving an organizations’ revenue while driving down ‎costs, but must step up to the challenge of spreading their reach across their ‎organizations, according to a new report conducted by Booz & Company.‎

By looking at a number of companies across different industries, the ‎report analyzed the strategic role that procurement units can actually ‎play in an organization, but cites they must reach across the supply ‎chain, pursue cost reduction and emphasize collaboration, innovation, ‎flexibility and resilience. The report demonstrates the successes of a ‎number of procurement teams, allowing them to excel in bottom line ‎growth and in terms of innovation in their various fields. ‎

‎“Many chief procurement officers (CPOs) no longer seek to influence ‎the supply chain or strive to tackle the underlying driver of cost and ‎value. They are increasingly focused inward, implementing ‎sophisticated ways of improving procurement itself but neglecting ‎coordination with the wider organization,” said Karim Ragab, a ‎principal with Booz & Company, a global management consulting firm ‎with offices throughout the MENA region.‎

‎“Focusing on cost reduction leaves untouched the significant potential ‎for creating value, generated when procurement engages the rest of the ‎business and its suppliers,” Ragab added.‎

“For procurement to be considered more than a functional tool for ‎other departments, CPOs need to build influence and credibility with ‎their internal management colleagues. By engaging with peers — that ‎is, by taking a cross-functional approach — procurement can influence ‎the decisions that impact value all along the chain,” added Fabrice ‎Saporito, a principal with Booz & Company - Dubai.‎

A summary of the report’s findings, with methods to broaden the ‎procurement agenda, follow below.‎

A strong relationship with finance

Procurement should demonstrate to Chief financial officers (CFOs), the ‎report found, how procurement contributes to value generation by:‎ 

  • Introducing a procurement performance system that reflects the ‎CFO’s definition of profitability and requires finance to look at ‎inputs rather than outputs. ‎ 
  • The CPO and CFO meeting regularly to review how procurement’s ‎efforts are affecting budgets and assess procurement’s value. ‎

‎“Lego Group, the world’s fifth-largest toymaker, introduced this ‎collaboration and established a purchasing performance management ‎forum that includes regular meetings between the CPO and CFO,” said ‎Saporito. “Such meetings enabled the team to break down consumption by ‎plant and identify the sources of gaps in performance. Together, they were ‎able to ensure that in the next month, orders were made at the right ‎quantities and savings leakages minimized,” he added.‎

A recent study by CPO Agenda however, says CPOs have their work cut ‎out for them: An online survey of more than 200 CFOs, vice presidents, and ‎directors of finance in North America revealed that only one in five ‎believed procurement’s ability to provide ‘timely and accurate spend data’ ‎was excellent, whereas one-third believed this ability to be poor.‎

Cross-functional teamwork

CPOs must measure the efficiency of the organization as a whole and ‎enforce cross-functional decisions. They must ensure the interests of the ‎whole enterprise are considered when deciding to invest in inventory, and ‎manage the inevitable trade-offs that arise from tensions among the ‎company’s key functions. ‎

Spanish clothing company Inditex‘s Zara - the report found, competes with ‎other mass clothing brands, and encourages customers to buy often, rather ‎than a lot at once. Procurement contributes to the brand’s success by ‎ensuring supply network flexibility, which requires speedy decisions and ‎strong cross-functional teamwork among procurement, design, ‎manufacturing, logistics, and sales teams. ‎

‎“Having a procurement department with the ability to synthesize cross-‎functional requirements in an aligned operating model is key to Zara’s ‎success,” said Saporito. “Ensuring procurement is highly integrated with ‎all the other functions, has created a strategic advantage for Zara. The ‎traditional model of retail procurement is a back-end service function that ‎merely sources fixed designs at the lowest cost, usually irrespective of the ‎delivery lead time,” he added.‎

A sturdy supplier–customer relationship

Suppliers and retailers can create a mutually beneficial partnership by ‎sharing data and forecasting methodology. ‎

‎“A major northern European food retailer realized retailers and suppliers ‎incur costs and lose revenue opportunities in an effort to optimize margins, ‎so decided to identify improvement opportunities with its supplier. The ‎company understood consumer behavior but lacked its supplier’s in-depth, ‎product-specific knowledge and a full understanding of costs,” said Ragab ‎citing one case study.‎

‎“Together, they took steps to find areas of improvement - detailing costs ‎and revenues, highlighting strategic options for improvement, analyzing ‎opportunities to improve profitability and enhance revenue, and ‎establishing implementation plans and benefits sharing. The result was ‎economic insights to help build a picture of the joint value chain; they ‎moved from looking at price, to total internal costs, to value chain costs. ‎Both retailer and supplier identified areas of revenue enhancement, ‎enabling both to eliminate costs,” he added.‎

Tap into innovation

The supplier network can generate many sources of competitive ‎advantages by translating the company’s vision through innovation, ‎production, and business development. Procurement can play a critical role ‎in evolving the supply base to deliver that vision. ‎

‎“Jeff Hawkins, inventor of the Palm personal digital assistant (PDA), saw ‎this potential,” said Ragab. “Rather than using his in-house innovation ‎team to compete head-to head on functionality, he asked procurement to ‎engage the supplier base on innovation - adapting their role to become a ‎channel for great ideas from suppliers. One of these, IDEO, helped Palm ‎understand that simplicity and aesthetic appeal would win over ‎improvement in functionality alone. The supplier and the Palm team ‎worked for almost three years to develop the next-generation PDA, and ‎consumers were so enthusiastic they paid a much higher price for the sleek, ‎lightweight Palm V than for rival gadgets.”‎

Make the network resilient

By engaging suppliers, procurement can increase network resilience by ‎ensuring greater flexibility where lower-cost supplier networks and longer ‎supply chains are often less resilient. Resilience must be inherent in the ‎design and procurement can work with other functions to balance the ‎needs of low cost and resilience in the supply network. ‎

‎“A major fire at a supplier’s factory in February 1997 halted the supply of a ‎critical Toyota valve. Toyota plants, which build more than 14,000 cars a ‎day, had only four hours’ supply of this valve as a result of its just-in-time ‎operation,” said Saporito.‎

‎“Not being able to replace the part would have resulted in huge losses and ‎damage to the brand but Toyota’s procurement department had designed ‎its supplier base as a network; if one node went down, other pathways ‎were in place to secure the necessary components. Toyota had its ‎production lines up and running in four days when experts had predicted ‎it would take weeks. Procurement worked successfully with other ‎functions to keep costs low without sacrificing resilience,” he added.‎

Procurement’s common inclination to focus on reducing the price it pays ‎for goods and the cost of its own operations has certainly benefited ‎organizations, but the returns on these efforts are diminishing, the report ‎concludes. “When procurement has moved beyond its traditional role, ‎companies have prospered. Keeping the attention of colleagues is the ‎CPO’s responsibility and procurement leaders must constantly strive for ‎the kind of breakthrough thinking that benefits their colleagues’ functional ‎and strategic agendas,” Baker added.‎
For the full report or a more detailed version for industry experts, please ‎visit: www.booz.com.‎

Resources for compiling the report‎

  • Hugh Baker and Fabrice Saporito, “Avoiding the Procurement Rabbit Hole,” CPO Agenda, June 2007: The study on which this article was‎ based goes into more detail for industry experts. www.boozallen.com/‎ media/file/Avoiding_the_Procurement_Rabbit_Hole.pdf
  • Doug Hardman, Simon Harper, and Ashok Notaney, “Keeping Inventory‎ ‎— and Profits — Off the Discount Rack,” Booz Allen Hamilton white‎ paper, February 2007: An in-depth look at Zara’s highly successful ‎collaboration-‎ based operating model. www.boozallen.com/media/file/‎ Off_the_Discount_Rack.pdf
  • Bill Jackson and Michael Pfitzmann, “Win-Win Sourcing,” s+b, Summer‎ ‎2007: Toyota’s knowledge-based sourcing consistently outperforms more traditional procurement models. www.strategy-business.com/article/07207‎
  • Geraint John, “CFOs Less Than Happy with Procurement’s Performance,”‎
  • CPO Agenda, May 25, 2007: Procurement and finance should be working‎ together, but in many cases aren’t. www.cpoagenda.com/latest-news/‎cfos-less-than-happy/‎
  • Keith Oliver, Edouard Samakh, and Peter Heckmann, “Rebuilding Lego,‎ Brick by Brick,” s+b, Autumn 2007: How a supply chain transformation‎ helped put the toymaker back together again. www.strategy‎business.com/‎article/07306t