Creating a Competitive Advantage in Business Through Procurement
To achieve competitive advantage.
That was the mission statement for the procurement function at Mars, the privately-owned American group famed for its confectionery, pet foods and pet care. Unlike many corporate mission statements, this was not something that was formulated, signed off and stuck in a drawer (metaphorical or literal).
Everyone who worked in procurement at Mars knew that, if they ever met a member of the Mars family, they would be asked: “What have you done to procure any products or services better than Cadbury and Rowntree?”
The key word there is ‘better’.
Traditionally, in the eyes of many CEOs and – as a consequence, in the eyes of whoever leads the procurement function – better has been defined as cheaper. In some ways, that priority has paid dividends.
Since the 2008 economic crisis procurement departments across the world have saved thousands of companies and protected millions of jobs by cutting billions of dollars in costs.
One unintended consequence of these Herculean labors is that it has reinforced a narrow, restrictive definition of the procurement function.
In the eyes of other stakeholders, it is the department that says ‘No’. Yet in reality, procurement could be, should be – and increasingly is – a powerful source of competitive advantage.
Martin Denham, operations director at procurement advisors Xoomworks, said: “Procurement is too often seen – within companies and sometimes within its own function – as a department that defines process, negotiates contracts, drafts regulations and polices them. In the eyes of other stakeholders, it is the department that says ‘No’. Yet in reality, procurement could be, should be – and increasingly is – a powerful source of competitive advantage.”
In a global economy that is changing at warp speed, procurement has a historic opportunity to prove that it can create value for the business, not just protect it.
The tools are here – digital technologies, source-to-pay software, robotic process automation, the Internet of Things, machine learning and AI – are becoming increasingly commonplace although, different companies are at very different stages on the digital transformation journey.
“If procurement is to do more with less – which, like every other central function, it is increasingly expected to do, it needs to embrace this technology to automate less strategic activities, improve its capabilities and become more agile,” says George Rösch, Vice-President of Product Management at JAGGAER.
The rise of new technologies – and the decline of old business models – gives procurement the opportunity to reinvent itself. The critical question is: will we take the opportunity?
The Big Picture
This won’t just happen and it won’t be easy.
It’s up to procurement leaders to have the nerve, foresight and imagination to fundamentally reappraise what they do, why they do it and how it serves the business.
Many supply chains have not been created with long-term design in mind.
They are the result of a complex amalgam of legacy mindsets, historic relationships, short-term priorities, cultural biases, fluctuations in market demand, changing corporate objectives and, to be fair, a continuous effort to ensure that the company spends its money as efficiently as possible.
Few procurement leaders have been able to step back, take a different perspective and look at the big picture.
From time to time, many of them will have been nagged by the thought that there must be a more efficient way of doing x or y but often the daily pressures are so relentless they never act on these thoughts. That needs to change.
“With the technologies that have already been developed – let alone the technologies that are just developing – procurement leaders can look at their function, ask fundamental questions and, depending on the answers, take appropriate action,” says Denham.
“Managing cost is one of the biggest challenges facing a company and if you manage them more efficiently, those savings go straight to the bottom line. But procurement can have a big influence by considering the operating cost of managing costs. If procurement can minimize those, it can focus on the issues that are most likely to help the organization achieve its strategic goals. Leaders can look at the function as a whole and explore how best to simplify it so that they can spend most of their time doing the things that are most valuable to the business.”
“Nothing extraordinary will happen if we don’t take risks every once and awhile and break away from the ordinary. These should obviously be calculated risks, but in order to bring in new talent we need to be bold. Best practices will only get you so far.”
Many procurement leaders look at their existing systems and processes and ask “Why?”, when they might do better to dream of completely new systems and processes and ask, “Why not?”
In practice, few procurement functions have the freedom to start completely anew. Yet, if leaders can look beyond what their function is currently achieving, they can envisage what procurement needs to achieve to serve the business in the next three to five years.
Having articulated that vision, they can use that to inform their procurement strategy and, just as importantly, to engage, educate and persuade other internal stakeholders. This will also help address one of the challenges around digital transformation.
In JAGGAER’s experience, even though many businesses are making progress with digital technology, these are often limited in scope. “Many other organizations are still unsure where to start or where to go next,” says Rösch.
The goal here is not a digital Utopia but to have a clear sense of how technology can improve performance and focus on that.
Challenge the Business
As far as the board is concerned, I’m only as good as the last bad thing I did.
Procurement leaders would do well to be driven by what management theorist Rosabeth Moss Kanter calls a “certain healthy paranoia.”
As she told Strategy + Business magazine: “Companies that are great at change seem to say ‘Okay, we’re doing well today, but we might not be doing so well tomorrow, so we’d better be better at what we’re doing today and we’d better try to destroy our own established model before someone else does it for us.’
That creates a restless dissatisfaction. No matter how well you’re doing, you believe you can do better. That creates an obsession with unmet opportunities, with new needs and new desires.
It’s very entrepreneurial and it empowers people to be as creative as possible and to spend time challenging the established models.”
Challenging the rest of the business is something, Denham says, that procurement leaders could do more of. Yet, in some organizations that is easier said than done.
For a start, it’s hard to challenge if you’re not even in the same room as the CEO and CFO.
All too often, procurement and supply chain leaders are only given face time when something is wrong.
As one CPO of a large multinational complained once: “As far as the board is concerned, I’m only as good as the last bad thing I did.”
To help combat this, procurement leaders could do more to put numbers – especially bottom-line savings – in the broader business context.
For procurement, the art of persuasion starts with language – wherever possible, replacing internal jargon with terms that other stakeholders use and understand. Accompanying words and numbers with graphics, using dashboards and augmented analytics, can also make the narrative more powerful.
Not All Risk Is Bad
There is also the matter of risk.
Corporate appetite for risk varies from sector to sector and even between similar-sized companies in the same sector. The one constant is that, within each organization, procurement is likely to be more risk-averse than most functions.
Given what’s at stake – even a minor blip in production can wipe millions of dollars off a large company’s bottom line – this is perfectly natural. Yet, procurement leaders need to recognize that a reluctance to take even sensible risks can lead to complacency, stagnation and, ultimately, competitive disadvantage.
The upside of risk is opportunity and, procurement leaders with vision, influence, determination and a clear sense of priorities can reap significant rewards for their company.
“A global manufacturing company outsourced their sourcing for certain categories to us,” says Denham. “We doubled the number of sourcing events throughout the year – auctions, RFPs, etc. – and, as a result, the client told us they had saved tens of millions of dollars.”
That was clearly a risk worth taking because of the ROI, but also because such initiatives help to change the perception of procurement, elevating it to a more strategic role.
In a similar vein, procurement at one large, high-tech American company got buy-in from the CEO and CFO after it saved $450m by shortening its supply chain cycle from 60 days to 50 days.
This reinforces the idea that sometimes best practice shouldn’t be the goal. Everyone follows “best practice” and expect extraordinary results, but best practice isn’t extraordinary.
Sometimes you need to be bold, be creative and take risks, otherwise you’ll never separate from the pack.
How Can you Make Procurement a Competitive Advantage in Your Business?
There are many ways procurement can become a source of competitive advantage.
To cite one topical example, the need to switch manufacturing swiftly and efficiently to avoid tariffs or get closer to a key market has shot up the corporate agenda.
Innovative procurement leaders who embrace change, keep up to date of technology (but do not become infatuated by it), hire the right people and are not afraid to challenge conventional wisdom – their own or that shared by other stakeholders – will discover many more ways to sustain that competitive advantage in the years to come.
It’s up to leaders to ensure that every day they are pushing their organization to become more competitive than the day before, and that starts with asking the right questions.
You can read our ten critical questions to ensure procurement becomes a source of competitive advantage for your organization here:
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