MEASURING SRM CEOS OFFER INSPIRATION
The supply review for business leaders
PROCUREMENT IN INDIA SUPPLY IN DISASTER ZONES
SUPPLY BUSINESS
SUPPLYBUSINESS JULY 2013
JULY 2013
VOLUME 1
NUMBER 3
PASSAGE TO INDIA
How companies are overcoming procurement challenges to gain a slice of the import and export trade
VOLUME 1 NUMBER 3
INSIDE Supply in disaster zones | CEOs oямАer inspiration | Measuring SRM P00 SB3 Cover 2.5mm v1.indd 1
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SUPPLY BUSINESS
WELCOME Good relations imes don’t seem to be getting any less tough for most of us and it is in these periods that it’s especially vital to have good relations with your suppliers. By working together you can often find that competitive edge or innovation that you couldn’t in isolation. This issue has two pieces that examine the matter. The first covers the latest results of an annual US study on relations with suppliers to North America’s six largest automotive companies (p23). The second looks at the importance of measuring relationships and how to go about it (p48). American Red Cross CEO, Gail McGovern, supports the arguments with her comments on p36. She says the improved supplier relationships fostered
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Rebecca Ellinor, editor
due to the organisation’s better set up are “paramount to the ultimate success of our disaster response operations”. Elsewhere, we look at more areas in which procurement can make its mark on an organisation. One is in research and development (p38) – essential to so many industries – and the challenging area of costs associated with employees increasingly using their own computers and mobile devices at work (p42). We also take a look at the challenges of procurement and supply in India (p26), as well as bringing you positive CEO news: Rooney Anand at Greene King on p12 points out that in a good business anyone from any function should be able to get to the top – and on p9 we report on two former CPOs who’ve done just that.
Pushing boundaries othing can be more humbling than hearing the challenges from an organisation such as the Red Cross. By definition, it has to constantly push and cross boundaries daily to ensure it meets its objectives and goals. It has the ability to break down cultural and geographical boundaries – it is there to serve and assist those most in need. It truly is an organisation and brand that is respected and recognised in all four corners of the globe. Pushing boundaries is never easy, but often a necessity and something imperative, I believe, for businesses to evolve, adapt and thrive. Procurement and supply as a profession has not always been the most successful at pushing boundaries – protecting maybe yes, but not
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David Noble, CIPS CEO
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pushing. Thankfully, though, we are seeing a step change and I am meeting more and more procurement and supply directors rising to the top of their game. They have achieved this because they have stood up to be counted and truly demonstrated their worth. They have shown the breadth of what this profession can do strategically and avoided the label of just being ‘cost savers’. In fact, image is an area where the profession needs to continue to push some boundaries and stop hiding behind an outdated concept of a one-stop-shop for cost savings – and little else. This is not a ‘dark art’ profession, but one that is core to business strategy, fully integrated, problem solving and opportunity making. Hopefully the pages that follow demonstrate that undeniably.
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EDITORIAL Tel: +44(0)20 7324 2746 Email: rebecca.ellinor@supplybusiness.com Editor Rebecca Ellinor Projects editor Rima Evans Chief sub-editor Samantha Robinson Sub-editor Kathryn Manning Digital content editor Paul Snell Editorial/web assistant Hannah Whittaker Senior designer David Twardawa Picture editor Akin Falope
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SUBSCRIPTIONS Supply Business is available by annual subscription. The standard rate is £110 for four issues. It is £80 for members of CIPS and discounts apply for other participating institutes. Call Hannah Whittaker on 0207 324 2746 or email hannah.whittaker@redactive.co.uk Supply Business is published four times a year by Redactive Publishing Ltd, a division of Redactive Media Group, in partnership with the Chartered Institute of Purchasing & Supply (CIPS). It is a sister title to Supply Management, the institute’s monthly magazine. For more information about CIPS, call +44 (0)1780 756777, email info@cips.org or visit its website at www.cips.org For more information about Supply Management, call +44 (0)20 7324 2746 or visit www.supplymanagement.com © 2013 Redactive Publishing Ltd. All rights reserved. This publication (and any part thereof) may not be reproduced, transmitted or stored in any print or electronic format (including but not limited to any online service, any database or any part of the Internet) or in any other format in any media whatsoever, without the prior written permission of the publisher. Redactive Publishing Ltd accepts no liability for the accuracy of the contents or any opinions expressed herein. Printed by Pensord Press.
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BRIEFING
business model and save £300 million in the 2014 financial year. The UK mobile phone company posted a fall in revenue of 4.2 per cent to £44.4 billion for the year ended March 2013. The group also hopes to offshore more business functions to shared service centres and “unify network and IT management across multiple markets” to cut operating expenses, a statement from the chief executive reported.
Photography: Reuters
Sainsbury’s sales boosted thanks to responsible sourcing A ‘Sourcing with Integrity’ programme at UK supermarket chain Sainsbury’s contributed to an increase in sales for the first quarter of 2013. A trading statement for the 12 weeks to 8 June reported like-for-like sales up 0.8 per cent, excluding fuel. The retailer’s report on its year-end results also showed the business had invested more than £40 million since 2006 in development groups for farmers and growers and highlighted the fact that no horse meat had been found in its products. The year to 16 March 2013 results showed an increase in profit before tax of 6.2 per cent to £756 million. Meanwhile, the horse meat scandal held UK sales back at rival Tesco. Its first quarter statement for sales ending 25 May showed like-for-like sales in the UK dropped by 0.9 per cent. Chief executive Philip Clarke said there had been a “small but discernible impact on frozen and chilled convenience food sales due to the customer response to equine DNA being detected in four products”. Those products have been reformulated, the report said, and new suppliers brought in. Like-for-like group sales for the first quarter were also down 2.2 per cent. 8
LEADERSHIP
APPLE PUTS SUPPLY CHAIN AT CORE Igniting passion is top of leaders list Talent, smarter growth and attaining the next level of performance are the three standout areas of focus for supply chain leaders this year. Researchers at Gartner found these are the common trends for those ahead of the pack, according to the company’s Supply Chain Top 25. Stan Aronow, research director at Gartner, said leading supply chain organisations are going beyond specific talent initiatives to look at the fundamentals of motivation in their supply chain teams. “For them, it’s about igniting passion and excitement for the work. These organisations use terms such as wanting to be a ‘destination company’ or ‘employer of choice’ in supply chain.” Against a backdrop of slow growth, many companies might have been expected to slip back to focusing on delivering cost reductions and efficiency gains, but supply chain leaders are embracing “a new imperative for growth”. The world’s five best supply
chains, as ranked by Gartner, were Apple, McDonald’s, Amazon, Unilever and Intel.
Strategic CPOS make profits Profits at companies with the best procurement teams are 22 per cent higher than poor performing rivals. A study by the IBM Institute for Business Value found profit margin at companies where CPOs “rose to the challenge of the downturn” to contribute to strategic objectives was 7.12 per cent. This compared with 5.83 per cent at the worst performers. The average profit margin across all businesses surveyed was 6.19 per cent. The 2013 Chief Procurement Officer Study, which canvassed 1,128 purchasing executives in 22 countries, described high performers as those who could combine traditional procurement capabilities with influence and innovation. While half of respondents reported their organisation had strong purchasing capability, only a third said they enjoy ‘significant’ or ‘very significant’ influence over strategic goals.
The study also found twice as many of the best performing firms thought their recruitment and retention was a key strength. A separate study conducted by McKinsey & Company found margins at firms with top performing procurement functions were double those at weaker rivals’.
Help CPOs to sleep easy Procurement professionals need to address the issues that keep chief executives awake at night to increase their corporate standing, according to Stefan Dent, director – advisory services at PwC. He identified five propositions purchasers could make to senior management to boost their position. These were: 1 Disruption Companies need agile and resilient supply chains to deal with problems, and take advantage of opportunities created by chaos. 2 Customer experience Do purchasers understand how procurement activity touches the customer?
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OPINION
Advice from directors, executive coach, negotiator and tools of other trades
FIVE MINUTES WITH
ROONEY ANAND reene King, a leading pub retailer and brewer in the UK, dates back more than 200 years. It now employs 22,000 people and has grown to become a FTSE-250 company that took £1.14 billion in revenue in 2012 (a 9 per cent increase compared with the year before). It owns or operates around 2,300 pubs, restaurants and hotels and produces iconic ale brands such as Old Speckled Hen. Rooney Anand joined in August 2001 as managing director of the company’s brewing division. He was appointed chief executive in May 2005. Since then, Greene King has continued to produce strong financial results. We had five minutes to ask him the following…
Photography: Greene King
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What’s your current boardroom priority? To ensure we can continue to deliver value for shareholders by meeting and beating customers’ expectations in a very tough economic environment. The downturn has lasted longer than most of us expected. Greene King has perform performed well and people have used pubs as an affordable treat in a t tough environment r rather than, perhaps, e expensive restaurants o holidays. That will or c continue, but we are e ever mindful that pe people are careful about spen spending so we have to make sure su we deliver value for money to them. And people are comparing what we provide not just with another local pub but, for example, Pizza Express or Frankie and Benny’s, or buying food and drink in and staying at home. So we have to think much more widely than before.
What is your organisation’s biggest challenge for 2013? We haven’t got the benefits or distraction that last summer’s events provided with the Queen’s Diamond Jubilee celebrations, Euro 2012 and the London Olympics. That’s going to potentially make this summer tougher from a trading standpoint, but in another sense, it’s going to be quite helpful because there is less distraction and the team can get on with running the business on a ‘normal’ basis. How is procurement and supply helping you address those priorities and challenges? The people in my purchasing and buying team play an absolutely critical role in helping us deliver our goals for two reasons. One is by buying new drinks or exciting food items for our menus. Purchasing has become strategic because it can drive innovation and points of difference into our offer. Second, as we get bigger and our scale improves, it can help us protect our margins by helping us lower price if we can, or mitigate inflation. How has procurement driven innovation? Our wine buyer has transformed the quality and cost structure on offer because he is purchasing it directly from producers all over the world. Before, we were buying a decent percentage directly but still buying a fair bit through intermediaries. Now we go as much as we can direct to source and have saved a lot of money, which has not only helped protect profitability at a time we have been lowering prices to customers, but we have also improved quality. Food quality has also got better and we have been able to dramatically improve levels of assurance
“In a good business, anyone from any function should be able to get to the top” throughout the whole food supply chain, which is important given the recent horse meat scandal. Freshness and the level of internationalisation in our menus has been driven by purchasing and so has bringing down the price to make it affordable. Purchasing has also protected margins despite the volatility of commodity prices.
ROONEY ANAND is chief executive of Greene King
What do you demand of your procurement team and what does procurement excellence look like for you? Procurement excellence enables the business to be competitive. There are things you can get from Greene King you can’t get from our competitors. If a function is helping you deliver quality and value to the consumer, to me that is very strategic. In Greene
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LEADERSHIP TIPS WITH
Matthew Sanders Matthew Sanders co-founded de Poel, a procurer of temporary agency labour, with Michael Campbell in 2001. The company is now a £500 million turnover business and has a client base that includes Sainsbury’s and Carlsberg. Its first international offices will open this year Are leaders born or made? As is typical with the nature/nurture debate, I would have to say it is a mix of both. Some people just haven’t got it in them. And those that could make great leaders must be presented with the right set of circumstances.
King, procurement is a very commercial, entrepreneurial function. Its role isn’t just to lower the cost of goods, but add value to the offer and lead the business in terms of bringing in new ideas and options to our managers. What is your advice for procurement executives that want to rise up to the c-suite? In a good business, anyone from any function should be able to get to the top. In a world that is increasingly about the customer – particularly in a country like the UK, which is a very open market and where the customer has a huge amount of power and influence over the successes of businesses and brands – the procurement and trading functions are mission-critical to any customerfacing business. My advice to those in procurement is not to see yourself as someone whose sole job is to bring down the cost of goods. That is obviously critical, but you need to also improve the offer and competitiveness of the company.
How would you describe your leadership style? I’m an honest leader who expects nothing from my staff I wouldn’t do myself. To build a successful business, you have to lead from the front to engender trust, commitment and drive. I would also describe my style as action-focused. I get very frustrated by procrastination and businesses or individuals that require committees to make decisions. I would rather act, be wrong and quickly adapt, than delay and have nothing ever happen. I expect this type of confidence and proactivity from my team. I am not a micro-manager and I hire people who are comfortable acting on their own volition. Which leaders do you admire and why? While I like and respect a lot of business leaders, I have never thought about which ones I admire or would consider emulating. No one is perfect. A leader that built a £500 million business could have, in some circumstances, actually built a £500 billion empire. You don’t always have insight into what has gone on behind the scenes and how effective they actually are. What key messages would you give aspiring leaders? A man who thinks he can do something well, will, and the man who thinks he won’t, won’t. If somebody has the will to succeed but lacks the skills, I would back him against someone who had all the skills, but wasn’t sure if they could succeed. Success is the result of hours and hard graft – and only a strong mental drive will get you through. Can you give an example of a challenging situation and how you handled it? Our business model is based on the strategic
procurement of labour for organisations that have a £3 million+ annual spend. When we launched we never expected to have such a strong market position 10 years later. At the end of 2012 we had to think what the next area of growth would be. We decided to expand overseas into markets with similar labour setups and are thrilled to be opening our first international office this year. What’s the biggest leadership lesson you have learned? People will be people. They will surprise you with their negatives and positives. People you have written off can still do something exceptional – and people you thought would never put a foot wrong can fall off the rails. Never take anything for granted. What is the best advice you have had? When I was 26 years old and considering leaving a comfortable job to start de Poel I was hesitant, and the advice was “just go for it – what’s the worst that can happen?” The worst scenario was that it just wouldn’t work and I would go bankrupt – and then I would start again. Suddenly it didn’t seem so scary. How does one know if they are a ‘good’ leader? By the results they achieve and the people that stay with you for the journey. Being a leader isn’t a popularity contest, but in order to get results you need to attract and retain the right people. I have people on my board that have been loyal to me and my company and I wouldn’t be where I am without them. What are the three words you think employees would use to describe you? I asked one of the board members to answer this: demanding, supportive and fun.
MATTHEW SANDERS is CEO and founder of de Poel JULY 2013 SUPPLYBUSINESS 13
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OPINION
EXECUTIVE COACH
DICK RUSSILL Need advice? Send your questions to coach@supplybusiness.com Collaboration and innovation with suppliers is gaining ground as a must-have capability. What are the prerequisites for success? Despite increasing reliance on social networking tools, there is still no substitute for face-to-face interaction as the best way of creating a key requirement: trust and rapport between buyer and seller. New ideas are more likely to be voiced and developed if each party is confident that the other will not behave opportunistically. Second comes procurement’s status in the buyer’s company and its ability to exert boardroom influence. This ensures that open relationships established with the supplier are respected corporately and also that internal barriers to new ideas are more robustly challenged. Next is the propensity (or not) of the buyer’s company to embrace change. This is a cultural thing and will especially be relished by organisations hungry for continual improvement. This leads to a further necessity: the deliberate application of creative techniques to stimulate the innovation process. Finally, there’s the need for ongoing buyer-seller relationship management that sustains the priority and ethos of trustful creativity irrespective of the individuals involved. My CEO is interested in cost savings but I want her to appreciate that procurement can contribute in other ways to business success. Can you help me paint this bigger picture? There is current interest in procurement’s contribution to revenue growth and last issue’s Executive Coach dealt with raising procurement’s business profile. This described the different things procurement can do. However, if your CEO is fixed on cost savings, then her mind needs opening to other possibilities. The trick is to report cost-savings while adding a ‘hook’ to arouse additional interest. One CPO used this device, measuring success by the number of questions and information requests coming from the newly-curious CEO. Another tactic is to mention a key procurement strategy being developed and what business challenge this relates to. This
“If your CEO is fixed on cost savings, then her mind needs opening to other possibilities” portrays procurement as a business enabler or a bringer of solutions, rather than being the means of minimising the pain of having to spend money in supply markets. Always talk about procurement in the language of the boardroom. Supply markets are sources of competitive advantage and the means of achieving strategic objectives. This is not just about reducing the cost base, but about attracting other forms of value. Examples include increasing top line sales by constructing order-winning bids with supplier collaboration, and new product development. Attracting supplier-led innovation is increasingly necessary for profitable survival, as is receiving preferential treatment during supply shortages and protecting margin when supply prices rise, but customers force discounts. In this context, strategic procurement is not just doing the buying in an intelligent and forward-looking way, but is more about being a powerful, competitor-beating organisational capability.
How should I respond to ‘take it or leave it’ price increase demands from key suppliers? The ideal answer is to have strategies in place that monitor the main drivers of supply cost; take timely actions to capitalise on favourable movements and mitigate adverse ones; and probe relentlessly to remove wasted costs that currently leak value out of external and internal supply chains. But CFOs also want action now. So if you have alternatives, refuse the price increase. If you don’t, then more subtlety is needed. The majority of these demands are justified by ‘price-based-on-costs’ mathematics. However, such reasoning often conceals suppliers’ true motives. Are you suffering so that the supplier can favour other customers? Are suppliers genuinely under pressure or are they just testing what they can get away with? Have more faith in your own information, logic and opinions, than in the ‘facts’ given you by suppliers. Information and planning gives power. Avoid immediately responding to the demand until you have a better understanding of their motives. Analyse the background to the increase before deciding your reactions. Probing might reveal where you can attack weaknesses in their argument, but also expose what their real problem is. Have them realise that price increases are unacceptable and there may be other solutions. Discuss these, but also decide what you want to get out of the discussion to improve the deal. If you cannot reach conclusions at this stage, schedule another meeting, but only if current prices remain in force for the time being and deliveries are honoured. If you eventually have to accept their demand, don’t just agree. Aim to reduce the increase and/or defer it and/or get some concessions, and obtain their guarantee that they’ll supply for the immediate future. This is not ‘job done’ but you now have breathing space. Use this back at the strategy drawing board. DR RICHARD RUSSILL is a business coach, presenter and author specialising in supply, cost and relationship management (www.russill.com)
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COVER STORY INDIA
Countries increasingly want a slice of Indian export and import trade, but ďŹ rst there are procurement and supply chain challenges to overcome, as Rima Evans reports Illustration by I A N D O D D S
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ord Bilimoria, chairman of Cobra Beer, recently highlighted the “global race for the key emerging markets”. India is at the very heart of this battle. A wave of countries – the UK, France, US, Canada, Germany, Japan and Korea among them – are pitching to get access to its markets. In fact, the comments made Lord Bilimoria in The Telegraph came on the back of a trade mission led by UK prime minister David Cameron earlier this year, in which the PM sought to put back on track his aim of doubling trade with India by 2015. Bilimoria said while there is enormous potential for the UK and India to form stronger economic ties, it is effectively in a queue. The sub-continent’s economic ascendancy began in the 1990s when there was a shift in economic policy towards one of liberalisation and reform. A more marketorientated approach saw barriers to free trade and foreign investment lifted. This resulted in the country emerging as one of the fastest-growing economies. World Bank figures show annual GDP growth topping 9 per cent in the mid-noughties and keeping pace even during the recession (it was 10.5 per cent in 2010). Although latest figures show a slowing over the past two years – mainly due to a slackening in the manufacturing and services sectors – annual growth has remained steady at 5-6 per cent. Another significant change has been the growth of a rapidly expanding educated middle class. This has not only provided a low-cost workforce for foreign firms outsourcing or expanding into India, it has also created a rise in disposable incomes, triggering a greater demand for consumer durables. This market is estimated to expand from $7.3 billion in 2011 to $12.5 billion in 2015, according to figures compiled by Corporate Catalyst India, a firm that develops business strategies. All this combines to result in a market that both international and domestic businesses are greedy for. “India is fast becoming one of the biggest buyers on the planet,” says Jonathan O’Brien, co-CEO of Positive Purchasing, an international training and consultancy provider. “In 2015 it will probably overtake Japan, which will put it behind the US and China as the third biggest purchaser in the world.” His company has worked with Indian businesses and trains senior executives. “It is a huge, thriving economy that everyone wants a slice of.” In turn, India is hungry for
expansion: “If you have something they want, they are going to make sure it happens because they have to compete, they have to survive.” It has taken concerted steps to attract and accelerate investment from foreign companies. Keen to shake off the perception that it’s a chaotic and inefficient country (particular with regards to its infrastructure), the Investment and Trade Promotion division of India’s Ministry of External Affairs highlights advantages such as huge buying power, a 530 million-strong workforce, low labour costs, new markets, reform of tax
“INDIA IS DETERMINED TO FIGHT OFF COMPETITION FROM AMBITIOUS EMERGING ECONOMIES WAITING IN THE WINGS, SUCH AS LIBYA OR MACAU” structures and a reduction in import tariffs. According to O’Brien, its drive to remain an economic powerhouse stems from the fact it is determined to fight off competition from ambitious emerging economies waiting in the wings, such as Libya or Macau. It is also hungry to establish itself as a global player in the world economy, not just a supporter of it.
Supply chain challenges While India’s economic vision and drive may be hard to compete with, when it comes to the day-to-day realities of doing business there are some key concerns. Questions have been raised about the robustness and strength of supply chains in India, for example. Can they stand up to the challenge of its growing economic ambitions? Additionally, how is procurement developing and evolving as India becomes more greatly influenced by overseas companies? Is procurement emerging as a business enabler and acting as a strategic business partner rather than merely a tactical agent? On the supply side there are considerable obstacles hampering efforts to increase trade and investment, both domestic and JULY 2013 SUPPLYBUSINESS 27
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INNOVATION RESEARCH AND DEVELOPMENT
OPTIMISING R&D SPEND
The disciplines that ensure good procurement can also be applied to research and development activities. Fred Azalbert, Laurent Kurylo, Keith Crichton and John Steedman look at the steps to success
Cross-functional engagement and follow-up actions focusing on establishing and embedding the right procurement capability into R&D can all lead to success
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How procurement can help The elements that comprise good procurement apply to R&D as much as any other spend category. It is the relative importance of certain disciplines, and the way they are applied, that make them distinct.
Photography: Boeing
Stakeholder engagement Multiple technical and commercial stakeholders are often involved in the outsourcing of R&D spend. Procurement therefore needs to be adept at building internal relationships and gaining confidence in the added value that can be brought from applying key procurement disciplines. Business drivers R&D, whether developed in-house or sourced outside the organisation, must be aligned to the business drivers and the associated
Strategy
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Implementation
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Business drivers Market intelligence Outsource decision Market approach plan
Intellectual property Sourcing Supplier management
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As a consequence, limited interaction between R&D and procurement results in lost opportunities to create value and the mismanagement of risk.
R&D PROCUREMENT CAPABILITIES
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n capital-intensive industries, such as aerospace, pharmaceuticals, utilities, mining and energy, leading companies have built their success and differentiation on the ability to manage large-scale programmes, access funding, engage with key stakeholders and innovate. Managing innovation, from the foresight of a business need to the identification of new technologies and their rapid implementation, is key to high performance across these industries. In terms of research and development (R&D), there is a wide make or buy spectrum that includes subcontracting to third parties, setting up joint ventures, acquiring companies with a specific technology or licensing-in existing technologies. Procurement has traditionally had limited involvement in the early stages of R&D for a number of reasons, including: A perception that procurement’s role is transactional, simply contracting with a supplier for a product or service that has already been agreed upon by others in the business A reality that it often lacks the technical know-how and R&D market insight to contribute effectively The relative difficulty in clearly articulating the scope of R&D requirements from a procurement perspective The multiple factors affecting the procurement of R&D, which sets it apart from the traditional sourcing of products and services, outlined below.
STAKEHOLDER ENGAGEMENT
Benefits
Economic value Time-to-market Risk mitigation
objectives defined in the company’s strategy. The chart on p41 gives an illustration of this analysis for an oil and gas company involved in exploration and production. The procurement strategy needs to take into account the magnitude of the R&D effort, which can range from being: (i) marginal with limited technology improvement of an existing product, (ii) adaptive with the modification or development of a product incorporating some new, but existing technologies, (iii) fundamental with the development of a new product incorporating many new but existing technologies and (iv) breakthrough with the development of a new product incorporating technologies that do not exist yet or, at best, are still highly experimental. This will determine, in turn, the procurement strategy to best support R&D. Market intelligence For most products and services, the supply market is relatively mature, stable and transparent. Also, while a wrong supplier decision may have an adverse impact on cost or quality, it is unlikely to result in fundamental loss of competitiveness or the inability to deliver the corporate strategy. For R&D, the consequences are potentially more damaging. The supply market is constantly changing and up-to-date market intelligence capability is critical. Those unique capabilities to provide a competitive edge may well exist in small specialist firms, spinouts from universities or emerging economies. It is also critical to be aware of
Im p
on lementati
competitors’ suppliers and why they have been selected. Few businesses maintain a database of potential R&D suppliers and proactively manage it. The starting point is to confirm the industries that have the relevant capability and experience and then identify the companies able and willing to collaborate on joint development. Some could already have exclusive strategic partnerships or be constrained by intellectual property agreements. With a specific project in mind, due diligence should be conducted to compare and decide between the different options. Outsourcing decision The innovation strategy usually includes three key decisions: which technology to develop; whether or not to seek technology leadership in those technologies (that is, leveraging the first-mover advantage versus learning from others); and whether to develop these technologies in-house or to license them in from outside. Outsourcing of services has typically been applied to non-core activity (for example accounting and IT) for which the supply market often has greater capability and economies of scale than the organisation itself. In contrast, R&D is a core activity and outsourcing is likely to be considered for one or more of the following reasons: increasing flexibility, reducing operating costs, redirecting valuable resources, leveraging external capabilities and expertise, sharing or lowering risks, or JULY 2013 SUPPLYBUSINESS 39
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MATURITY CURVE
Somewhere back in the late 1980s to early 1990s, a transformation began in procurement. What had once been an administrative function that placed purchase orders to confirm arrangements made by engineering or manufacturing was now emerging as a strategic entity that had earned its seat at the executive table. This transformation was facilitated by the emerging use of computers and driven by global competitive pressures. To maintain competitiveness, businesses had to continuously improve their capabilities to deliver measurable savings for direct and indirect purchases while controlling the ‘cost of procurement’ as well. This transition from administrative and transaction-focused to more strategic, process-driven teams was tracked using tools such as maturity curves. These provided both a checklist to assess current performance and a roadmap to achieve a best-practice benchmark. I have used them extensively during my career to capture performance gaps and develop strategies to deliver competitive advantage. However, now we find ourselves 25 years along and we are still smarting from the results of the 2008 crisis. The financial climate continues to test our resolve while expectations to keep reducing costs have not diminished. The resources to control or reduce costs have been severely stressed. In many procurement organisations, budgets have been cut and headcounts reduced. Can any organisation continue to progress along the maturity curve in the face of these challenges? Should CPOs settle for maintaining the status quo or just try to minimise the degree of sliding back down the curve until economic circumstances change? For many executives, choices are limited. The mantra we all hear is to “do more with less”. In the face of these challenges, what should a CPO be doing to respond to the CEO’s expectations? Here are five critical actions that could help make a difference:
Leverage the procurement 1currently systems and tools you possess Instead of investing in new applications, save on your IT budgets by optimising how your business uses its existing capabilities. Refine your KPIs and management reports.
or three critical actions that are linked to your corporate strategic objectives. Collaboratively develop action plans to address costs, improve time to market for new products or services, reduce working capital or boost customer satisfaction. Implement a sales and operations planning process to facilitate the regular, cross-functional dialogue needed to tackle tough issues.
3 Train your staff
Develop a matrix to assess the skills of each individual and, using your business strategy and annual objectives as a guide, identify those areas that need improvement. Wherever possible, use individuals with expertise in specific processes or capabilities to train the rest of the team.
Integrate your 80/20 suppliers into your 4 business processes
ACTIONS TO IMPROVE PROCUREMENT Andrew Swift and Richard Kane look at how to take control in trying economic times Leverage functionality that has been overlooked or under-utilised to improve planning and share forecasts. Use internal resources to provide training on best practice and improve the skills of your team.
cross-functional 2 Improve relationships
There has never been a better time to develop closer working relationships between procurement and its stakeholders in engineering, manufacturing, marketing and finance. Work together to identify two
There is tremendous potential in your core supplier base just waiting to be tapped. Ask your suppliers to place some of their engineers into your facilities to collaborate on design and cost-reduction projects. Request on-site logistics support to help streamline the procure-to-pay process and tackle tough working capital problems. Share achieved savings with your suppliers to incentivise them and be open and innovative in your approach.
your three5 Rethink to five-year strategy
Update your benchmark assessment of your organisation’s capabilities. Plot where you currently stand on the maturity curve. While driving short-term strategies to secure your position, lay out a progressive strategy that addresses performance gaps to make incremental improvements each year in productivity and performance by addressing the topics outlined above. Do this and when the economic recovery finally hits, you will be well-positioned to make significant performance leaps for your business.
ANDREW SWIFT (www.twitter.com/ andiswift) is IT and telecoms senior procurement manager at BSkyB. RICHARD KANE is a client service director, supply chain management, with RGP (www.RGP.com)
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IUNDERCOVER A N C I D CPO ER A head of procurement at a large global business gives his reflections on corporate life
On the agenda he ‘what next?’ discussion, for the procurement industry, is continuing to gather some momentum. The March issue of Supply Business’ sister magazine Supply Management quotes Ian Fenwick as helping his organisation, the Football Association, to put money back into the game and therefore have “a direct impact on the quality of football”. I guess the premise is that procurement’s next corporate evolutionary step is towards assisting, in some way, revenue generation, or the support of revenue generation – top/bottom line contribution (depending on your point of view). I can’t help but feel this mandate has always been with procurement. Our mandate falls into three areas: compliance, shareholder value and risk. Any idea, strategy, agenda or initiative currently done or envisaged by procurement should fit into one of these. Revenue generation fits under shareholder value and support in this area will already be on the agenda. Jean-Philippe Collin, CPO for Sanofi, who is interviewed in April’s issue of SM, says if procurement is positioned where it should be, you enjoy business. I thought about this for a while: What is the right position for procurement? And what is it to enjoy business? I concluded there is not a single position for procurement, but a plethora, depending on which part of its triumvirate of mandates are being exercised at any point. I have always seen procurement as occupying three levels of position in any organisation: purchasing, procurement and commercial innovation. Purchasing is what a good purchase-to-pay process should do – industrialisation of the idea that everybody because they spend money, can be involved in spending the company’s money, with the appropriate level of attention to compliance, shareholder value and risk, through systems, tools and policies. Next is procurement – the bespoke contracting, negotiating, category management, strategic sourcing, SRM, CSR and any amount of other TLAs. The third is driving commercial innovation deep into the business models of the respective business groups within the organisation, for example, cost per transaction for online sales, banking credit card interchange fees,
Illustration: Rob Ball
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fixed and marginal cost models for affiliate marketing, hedging strategies for volatile commodities (the list is a long one). And then backing out these ideas into impact on sales, dare I say it with the appropriate flag waving and trumpet blowing. With such a wide remit, there is always the danger that procurement is trying to be all things to all people – it’s no wonder then that we start to have some sort of victim mentality or persecution complex. I love the idea that procurement has a victim mentality – as quoted by Ashley Readshaw, CPO at AstraZeneca, in another recent edition of SM. I was fascinated. Do we really have this trait as a collective mentality? Recently, I went to separate legal, HR and marketing seminars (undercover detective work) to see these industries as they see themselves. It was intriguing to see there are similar undercurrents of insecurity in all these professions. I heard discussions on the need to improve business impact and alignment, how to make a difference to the bottom line, the need to act more strategically, and so on. If procurement does have a victim mentality, it’s not alone. So this need – described by others as an insecurity – to have a higher collective agenda, is not unique to procurement and may have been with us for some time. The answer may not to be to look for deeper engagement or the next big thing, but in selling the success procurement already has, or could have, through its available mandates. Surely procurement should start employing marketing managers to create PR, communications managers to get the message out, account managers – an internal sales role – to win the heart and minds of the organisation. I am not arguing for procurement to have a revenue as well as a savings target, but it’s a thought. Does your procurement team have a revenue improvement target? I’d be fascinated to know. Answers to the email below please.
“With such a wide remit, there is always the danger that procurement is trying to be all things to all people”
AGREE? DISAGREE? Email me at undercovercpo@ supplybusiness.com to share your thoughts
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