The Procurement Value Proposition at a glance by Gerard Chick

Editor’s Note: As a follow-up to my interview with Dr. Robert Handfield earlier this week regarding his new book The Procurement Value Proposition, his co-author Gerard Chick has written the following post that picks up and expands on some of the discussion points from our conversation.

The big business idea of the last 30 years has passed its sell-by date. The idea being that you drive cost out of the organisation to make it more profitable, to maximise shareholder value. Why has it passed its sell-by date? Because by driving cost out most businesses have been driving huge risk in. Why do organisations public and private, continue to get this so wrong, pursuing the will-o’-the-wisp of cost reduction with measures that end up increasing them? This preoccupation seems to have tainted the cream on the top of most business models.

With the shift in the economic centre of gravity to the east, has the competitive edge of western economies been irrevocably dulled? Have decades of outsourcing and downsizing drained our ability to innovate, grow and prosper; and if so then what can we do about it?

The last 30 or so years has shaped business models and the business landscape – globalisation coupled with rapid developments in the new information technologies are changing the way we live and work.

I believe that the evolution of supply side management has placed procurement at the strategic heart of many organisations and that some or all of what follows will become common place over the next decade or so as the sustainability of the organisation as an entity becomes paramount.

The supply function evolves:

• The procurement function shrinks – as the strategic impact of procurement really comes to the fore, organisations will still care about managing their spending; they just won’t have a large, discrete, function doing it. Procurement has two types of people working in it – doers (the buyers) and enablers (the value adders). Enablers will be deemed more useful to the organisation and stay embedded in strategic business units.

• Profits replace cost savings – yesterday’s cost savings focus, the eponymous “goalkeeper” mind-set, will give way to a strategically aligned emphasis on profitability. So will supply management still concentrate on cost savings or will contribution to revenue growth take over? How will you address the doer –v- enabler question?

• Budget battles fade away – as the discrete procurement function moves into a new modus the battles to ensure that cost savings are reflected in their budgets will fade with their passing. The perennial emphasis on cost savings only will have less weight than security of supply – timeliness and quality.

• Bye-bye to the “buyer”– those who excel at cutting deals in the back office will find themselves working for third-party services organisations — or maybe not at all! The enablers, value-adders will rule!

• Embedded procurement – will the future bring a loose network or a tight function? One of supplier-facing professionals embedded into strategic business units, communities, and processes wherever needed, constantly moving and reinventing their roles as needs shift –how will the highly successful procurement leaders make this happen?

A new supply management mind-set emerges:

• Outsourcing takes off- many current procurement and supply side activities, the ones that do not get pushed elsewhere in the organisation, will be outsourced as organisations rationalise and “slim down”.

• Service providers call the shots – the quantity and quality of third-party procurement services will increase dramatically simply because their performance, in many spend categories, will surpass what can be achieved in house.

• The strategic horizon widens- the past 30 years has seen procurement transform from tactical to strategic. But the notion of ‘strategic’ remains hemmed inside the function, almost a prisoner of its own history. With a cultured understanding of the (strategic) value-adding capability of procurement and a new generation of professionals – the bimodal procurement pro – the realisation of what strategic can mean gets much broader.

• Procurement gets commercial – as well as managing the physical supply chains, procurement will also become more intimate with the workings of the financial supply chain, ultimately stimulating good demand and increasing business value derived from spend (and supply markets) rather than simply reducing spend magnitude.

Business intelligence is your key to the future:

• Open pricing –pricing for goods and services will become virtually transparent due to the internet, e-sourcing, global trading networks, online communities, and procurement’s intrepid scrutiny into still-cloaked categories. Will negotiation become a lost art?

• Risk recognition catches up –in this decade the moves to drive costs out and the consequential supply-related risk that activity has brought with it comes into sharper focus. We are beginning to see consensus develop around risk and complexity and how to model risk, as well as more standardised, readily available third-party information and networked communities where people pool data for operational risk assessment.

• The emergence of Intelligent Data – procurement has spent the last three decades looking backward— at money spent or supplier performance in the past. The future procurement professionals will be working with information, data and models that look forward.

• Knowledge at your finger -tips – full visibility regarding spend, risk, and performance, will be available when you need it. Ready access to accurate, timely, structured internal and external business intelligence will create unprecedented capability regarding information manipulation in support of decision making.

Collaboration is omnipotent:

• Innovation from the supply base – Since the ‘90s the move from closed to open innovation models has facilitated innovation-oriented cost saving strategies. We now see a major emphasis on driving and taking innovation from the supply base with the supply management role to set it up and move on.

• The dawn of the extended enterprise –manufacturing has led the “make –v- buy” paradigm for many years – creating as shallow depth of manufacture. Whilst the manufacturers intend to stay there, service organisations will join the outsourcing bun fight too. The expanding trend to extended enterprises promises interesting times for supply professionals in the very near future.

• Solutions not products please– suppliers and service providers are taking on bigger chunks of things they already do for their customers by developing end-to-end solutions if they do not already exist. Where solutions do already exist, then customer enterprises must become much more receptive to sourcing them, with suppliers moving out of their comfort zones to drive customer performance.

• How soon is now? – Life is all about timing; the unreachable becomes reachable, the unavailable become available, the unattainable, attainable. Customer-supplier collaboration will shift and whilst today, suppliers may be asked to contribute ideas to existing designs or to help fix existing processes soon they will be frequently in from the “get-go”.

• Mi casa es su casa – as supply management professionals look to extract more value from their supplier relationships it stands to reason that in time leveraging supplier resources and integrating supplier functions 1-to-1 will become the norm.

• Networks for innovation– a transition from the dyadic ‘buyer and supplier’ relationship to ‘integrated supplier networks’ will enable greater coordination of innovation roadmaps across connected businesses and industries. The dawn of sapient leadership?

• Suppliers gain power – the growth of outsourcing, tighter integration, and heavier reliance upon supplier’s means that they are gaining more leverage in buyer-supplier relationships. Instead of them selling to you, it may be you selling to them – procurement has a new challenge… to remain attractive to key suppliers.

• Organisations share risks and rewards – as supply management professionals get better at segmenting, defining, and measuring value, they will begin to incorporate both gain- and risk-sharing into commercial relationships with suppliers.

• Motivational contracting – the dawn of the “intelligent client”. As well as sharing risks and rewards in contracts, supply management professionals will accept greater risk in commercial relationships with critical suppliers by leaving out all the de-motivational stuff that inhibits supplier innovation.

Connect, network, trade:

• Everything starts with an E! – Procure-to-pay, sourcing, contract management and other automated solutions will be integrated up and down supply chains, fully adopted, providing full transparency and real-time insight.

• Work on your smartphone – A new internet-savvy and technically-confident generation is entering the workplace using smart phones, tablets, embedded chips, and other devices to create a mobile work environment for procurement professionals and suppliers alike. We are seeing it now; it will only get bigger and faster.

• Connect and collaborate – For years we’ve been talking about dynamic supply chains and how networks are the way to go forward but actually manifesting that in our day-to-day, work-life has been difficult. Now, we have an opportunity where in 10 minutes we can find second and third-tier connections in global networks, with people who know people you know. Buyers and sellers will increasingly rely upon digital trading networks and communities that allow them to quickly and easily discover each other, connect, and collaborate.

• It’s all about complexity – the fast-growing, and culturally different organisations developing in the emerging economies, makes the process of selecting suppliers more risky, couple this with the inherent complexity in a globalised market place, and it becomes clear that doing business is increasingly difficult.

• Fragility and supply risk – converging global trends in often turbulent economies means that a new systemic approach to risk must be taken. The conventional approach to risk related to exposure to uncertainty and therefore uncertainty was the source of risk. However the uncertainty of the (global) economic environment cannot be controlled; these days, excessive complexity is the source of risk. We can anticipate big increases in companies’ awareness around supply risk and also an expansion in their perceptions of where risk lies.

Supply professional skill sets must change:

• Procurement professionals need to get savvy – professional; influential; persuasive; visionary; strategic; global; collaborative; commercially savvy; these are the attributes of the future supply professional.

• A new definition of ‘expert’ the new supply professionals must become “students of their industry”. They will know everything, from the science, economics, law and politics of their supply markets on a global scale.

• The battle for Talent–where will we find future talent, how do we develop the talent pipeline? Is it too sparsely populated to meet the demand for the professionals described above how will we meet the challenges as they develop this decade? The upshot will doubtless be intense competition to attract the best and brightest and it will most likely be on their terms.

Supply side management is increasingly gaining control over its main purpose — the procurement of goods and services for the organisation – supply assurance.  Today and as we move into an uncertain future, procurement professionals clearly face a variety challenges. All organisations are rapidly investing in new technologies to meet these challenges in the contemporary, global marketplace; however the skills required to take full advantage of these tools and circumstances are often lacking.

As scrutiny of organisations’ environmental and ethical practices increases, there is also a requirement for procurement to understand the implications of its corporate responsibility and sustainability for purchasing and the supply chain. Efforts to make a bigger contribution to strategy continue, but sometimes at the cost of misunderstandings between the profession and the rest of the business. And yet procurement has much expertise to offer, which can provide substantial financial benefits. Convincing colleagues across the business of this, and aligning not just goals but thinking about where the profession can — and cannot — add value, is potentially the biggest challenge in the years ahead. Ultimately the only way to predict the future is by helping to shape it.

Gerard Chick is Chief Knowledge Officer for the Optimum Procurement Group in the United Kingdom.

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