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.
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