Chapter 3: From Global Trends to Corporate Strategy
Clearly there has been a ‘procurement revolution’ since the mid-1980s and the function has moved from being transactional in nature to the strategic organizational tool it is today. There are operational trends impacting procurement such as stronger cross-functional working, which naturally increase strategic visibility; and whilst procurement acts as the main interface with supply markets we must also develop an understanding of what has come into the mix via challenges from without, what we might call global trends and how they impact procurement. We will look at these global trends from the standpoints of either adopting a ‘let’s just get through it’ mindset, or anticipating them and ‘taking a chance’ on the future.
In this chapter we look at how a procurement executive’s ability to read trends accurately in a rapidly changing business environment can make all the difference between surviving or going under. But how do you assess the impact of emerging macroeconomic, social, environmental and business developments against the needs of a business? Are the trends, detailed below, in some way self-predicting? And what contribution can procurement professionals deliver to the business to ensure the sustainability of the enterprise they serve?
The key global trends
Taking both internal and external procurement dimensions into account the five widely accepted key trends that dominate the business world today are highlighted in Table 3.1.
Potential for Impact
Increasing focus on impacts of corporate social responsibility
Corporate social responsibility will grow in importance for all organizations. Changes in demographics and global consumption patterns will impact the triple bottom line and have significant impact on green, social and financial strategies.
Burgeoning technological advances
Technological innovations will continue to grow and at an ever-quickening rate, impacting all that we do in society and business.
Global geopolitical and macroeconomic change
There has already been a shift in global markets. These market changes alter demand and consumption, which in turn creates increased pressure on the availability of raw materials and other resources.
Changes in demographics – be they declining birth rates, ageing populations or migration patterns they will have high-level impact on the availability of skilled and/or affordable labour.
Shift in the economic centre of gravity
Demand in the mature markets in the developed economies of the world is slowing down, whilst in developing markets and economies it is quickening pace and strong growth is being created.
These global trends are a pointer to the fact that existing procurement models may have reached their ‘use by’ date. Consequently, the first step in understanding how procurement will deliver to the business in the future is to fully understand how the procurement landscape is shifting around us, often more radically and quickly than we might first realize. Given globalization, ever-increasing logistics costs, increasing levels of risk and complexity, and the perennial issue of rising labour costs, could it be that now is the time for a major rethink regarding procurement and supply management strategy?
Where will any future global sourcing benefits come from, given all the above? These global trends are the ‘game changers’, which keep today’s business leaders awake at night. Just as ‘cheaper, faster, better’ has been their mantra for some time, these changes are a clear message about the need to understand and focus on uncertainty, the level of which we can expect to increase. A crisis on the other side of the world can now spread very quickly across the globe, creating unnerving turbulence. What’s more, this change is occurring across a backdrop of continued volatility across the supply chain, impacting nearly all industries; swings in the prices of commodities and currency shifts are unprecedented in many markets. On top of this are the opportunities and threats of a complicated global regulatory and tax environment.
The story of procurement since the early 1980s mirrors the wider business landscape. During this time, the profession has risen steadily to hold a strategic function, playing a critical role in helping businesses manage both direct and indirect spend and acting as the guardian of supplier relations.
The impact of globalization and technological advances has only served to further both the cause of procurement and its perception in the wider business world, with suppliers’ health and other risk-related issues increasingly seen as its prime responsibility, if not its unique selling point.
The next several decades promise to be even more significant. Having established its credentials, the profession will need to evolve and demonstrate the real benefits it can bring in a wide range of areas to add genuine value to business as a whole. Risk will increase in importance; corporate social responsibility (CSR) will be tied up with security of supply; and procurement will need to draw on market knowledge, supplier relationships and the use of new technology to identify major threats to a business.
The wider political and economic environment will become even more relevant to global organizations in this context. Recent events such as the Arab Spring that began in 2010 and the Japanese earthquake of 2011 have highlighted the risks of an ever-more interconnected landscape, while increasing logistics costs and concerns over security of supply will mean procurement professionals must compete to become customers of choice with key suppliers. How amplified will this be in the future?
The way in which procurement is structured and perhaps even where it is based will change, too. With teams spread around the globe, procurement will increasingly find itself managing virtual networks of suppliers, stakeholders and internal customers, drawing on powerful new social media channels to communicate. But it is important that this technology does not come at the expense of the face-to-face relationships that will be so important in establishing solid supplier connections.
Alongside all of this, procurement must continue to compete for talent and aim to recruit the best and the brightest people. Organizations will face competition not just from within their own countries but from the emerging economies, and talent that is attracted into the organization will expect – and be expected – to be mobile.
The five game changers
Let’s now take a closer look into each of these issues and their impact on business and on procurement, which cannot be ignored. They are game changers because they impinge on the very nature of business around the globe and are profoundly affecting both the way we work and where we work.
Corporate social responsibility
Since the mid-2000s, growing concern about the future of our planet and the inherent inequalities of an increasingly globalized economy has driven the corporate social responsibility (CSR) agenda firmly to the top of the list of boardroom priorities.
In this age of mass communication and heightened consumer awareness, organizations can no longer afford – either financially or in terms of reputational damage – to become embroiled in damaging environmental practices or child labour scandals, and the boundaries of responsibility now stretch well beyond the walls of any individual corporation.
The focus on CSR, though, now goes beyond how an organization is perceived. Increasing demand for raw materials from emerging economies and the impact of government legislation means organizations that fail to conduct themselves in an environmentally friendly and ethically sound manner face significant risk to the bottom line. They will also struggle to recruit an ever-more aware generation of talent.
Thus far, genuine attempts to reduce carbon emissions or introduce socially responsible methods of doing business have been interspersed with ‘green wash’ and ‘box ticking’. But the future will be different, and the current generation have become more interested in the whole supplychain and the social, economic and environmental issues that surround it.
We sense a distinction between issues that are creating barriers to economic growth as a result of resource constraints, and ethical issues, which are still at an early stage in terms of their impact on the corporate world. Whilst there is some overlap, the ‘ethical’ activity is being led primarily by consumer sentiment – people don’t want to think about other people doing nasty things in sheds somewhere in the supply chain. Environmental behaviour is largely being driven by legislation and regulation to its resource costs. The drivers are very different; they won’t go away, but they may morph or change in the future:
On the environmental side, the increasing scarcity of oil and other raw materials is likely to have a huge impact on organizational strategy. Already China sources around one-third of its oil from Africa and is rapidly acquiring mining rights for other valuable assets such as uranium, tin and coal. The emergence of natural gas in parts of the world may temporarily relieve the pressure but, with biofuels and renewable energy still some way off reaching their potential, the battle for resources is only likely to increase over the next two decades.
In the field of social responsibility, what is seen as acceptable in the UK may be viewed differently in other countries. Our point of view could well ‘cost’ a family elsewhere, as our ethical standpoint could take an earner out of the labour market. Issues such as these are likely to become even more prominent and contentious in the future, as new sourcing destinations emerge and more economies industrialize.
We sense too that the social and economic impacts of trade are likely to become intrinsically linked, particularly as the prospect of low economic growth looks set to continue. This could lead to greater pressure from consumers, media, shareholders and even governments for more local sourcing, as was seen in the recent debate over the award of the contract in the UK to manufacture trains for a new Thames Link contract to the German business Siemens.
The implications for the profession regarding CSR are significant. Procurement will increasingly be required to take ownership of this entire issue, helping to outline the threats for boards and other stakeholders, working closely with PR and marketing teams to ensure there is sufficient communication and transparency around the issues, within the organization and externally.
Procurement has to be the voice of ‘commercial conscience’, remaining impartial in terms of articulating its view to the business so that people can make decisions with all of the facts at hand. Indeed, procurement will need to strike the right balance between outlining the risks and benefits attached to policies or choices of supplier to the wider business, ensuring continuity.
Establishing just how important CSR is to the organization – rather than something that fluctuates depending on the economic climate – will become a critical feature of procurement‘s role and focus. This requires clear policy setting at board level. Increasingly, this means working with suppliers and alerting and influencing them to work with their own supply chains. If procurement only works with the first-tier suppliers it will simply fall away further down the supply chain. Procurement will have to:
play a prominent role in spearheading industry-wide initiatives to drive up standards across entire supply chains;
develop key performance indicators and utilize benchmarking tools such as the Dow Jones Sustainability Index or the Carbon Disclosure Project;
monitor and assess the performance of suppliers and those further down the chain.
These are critical features of procurement‘s role. An increasingly important role in the coming years will be the lobbying of government and other bodies to match their own efforts with legislative action that will further drive behavioural change.
Nowhere is the pace of change likely to be more visible than in the field of technology. Already today there are a number of new devices and applications – from smartphones, tablets and embedded chips through to the continually evolving use of social media – that are helping to revolutionize the way in which businesses operate.
A new internet-savvy and technically confident generation is already entering the workplace, while countries such as China and India are able to develop applications and technologies without the hindrance of legacy systems, which have acted as a brake on progress in the West.
Technology itself, however, is just the beginning. As new hardware and applications emerge, so too do innovative ways of working, whether in the form of remote working, virtual networks of partners and suppliers based all around the globe, or increasingly automated supply chains.
With this, too, come challenges, not least the issue of making sense of the torrent of information now freely available on the internet and the need to protect the business against reputational risk, in an era where one person armed with nothing more than a smartphone can wreak untold brand damage in a matter of minutes.
The use of social media in particular has the potential to revolutionize existing practices, in terms of how the profession interacts with potential recruits and within the business, but also in helping practitioners to develop new sources of supply from anywhere in the world. For all the talk of a generational divide, many experienced professionals already use platforms such as LinkedIn, while today’s graduates – and tomorrow’s future business leaders – now use such technologies as their primary means of communication.
We sense that the potential exists to develop entire virtual networks that could be a means of both sourcing new suppliers for low-value items and encouraging innovation from partner organizations. Increasingly, these are likely to be located in the fast-developing economies, which at thetime of writing are demonstrating significantly higher rates of year-on-year growth in innovative products and services.
New systems as yet undeveloped will emerge to facilitate the exchange of information between organizations, while procurement will need to develop closer working relationships with other functions, including research and development, sales and operations. Against a backdrop of more open relationships with suppliers around innovation, procurement will also be required to play a role in safeguarding intellectual property and identifying the potential for industrial espionage.
The use of such technology, however, will not negate the practice of due diligence carried out on suppliers. In fact, suppliers are likely to find themselves under far greater scrutiny than ever before, with performance and price just one criterion on which they are assessed, alongside others related to CSR measures and those focusing on financial health. Here, too, technology and the amount of information freely available online can help procurement to monitor and assess potential suppliers, with the potential to share information across organizations and possibly entire supplier networks.
This can cut both ways, however, and in an era where resource constraints and the wider economic climate could see an increasing shift in power towards suppliers we will see procurement organizations competing to become customers of choice. Factor in, too, the growth of outsourcing, tighter integration, and heavier reliance on the shrinking supply base and we will see that they will gain far more leverage in future buyer–supplier relationships. Instead of them selling to you, it may be you selling to them – procurement will have a new challenge – to remain attractive to key suppliers.
We sense too that procurement will become part of the trend towards more remote and virtual networks. As organizations establish country and regional hubs across the world, potentially relocating functions to major sourcing hotspots, will a global, virtual, procurement team be a requirement in the future? Will the next generation use technology and communication strategies to work across boundaries and across borders?
Technology (including social media applications) will also play a prominent role in the way in which organizations and procurement professionals handle risk, giving them greater access to information so they can map out and assess the dangers they face and make informed judgements on what strategy to follow. The use of systems with 3-D, 4-D and 5-D information modelling, mapping the supply chain and understanding the financial and economic risks, will become increasingly the norm.
Finally, as procurement continues to become a more strategic part of the organization and takes on more responsibility for managing virtual networks and risk, it becomes apparent that some of the lower-value activities will either be picked up by technical solutions or outsourced. And yet whatever tools that technology may create to help procurement professionals and organizations in general, they will only complement, and not replace; as procurement becomes pivotal to organizations, the need to develop personal relationships with executives, internal customers and external suppliers will increase in importance.
The increasingly globalized nature of many markets has featured largely since the mid-1990s and is likely to continue. New sourcing markets will emerge during this time, while the current emerging economies will become established destinations, as well as powerful consumers in their own right. Operating such a global supply chain – set against an increasingly protectionist stance by many governments and the constant spectre of political uncertainty – will create a heightened exposure to risk, and one that will require a fundamental shift in approach for procurementfunctions.
No longer will it be sufficient to look at risk mitigation and devise business continuity plans for specific events; instead, the focus will shift towards proactive risk management, using market intelligence and supplier relationships to make strategic assessments around risk and reward, and balancing the need for security of supply with the merits of low-cost sourcing and remaining competitive.
The growing demand for raw materials and commodities from emerging economies, and an increasing global population, will bring its own challenges for procurement. But the increasingly interconnected economy and supply chain will also bring other threats, with the potential for supplydisruptions from a range of economic, political and natural issues.
Events triggered in 2010 such as the Arab Spring, the eurozone crisis and the ash cloud, followed in 2011 by the Japanese earthquake and subsequent tsunami, along with the growing threat to oil supplies from the Gulf all serve as reminders of just how vulnerable entire supply chains are – and highlight the need to develop strategies that will allow organizations to respond swiftly to events, as well as minimizing the impact of unforeseen occurrences.
Some of the above events were predictable, or at least slow burners; others, such as the ash cloud and earthquake, less so. In the current economic landscape, and in an age where social media allows the mass mobilization of large numbers with very little notice, though, there is another emerging risk that procurement needs to be aware of – social and political unrest. Many chief executives see risk management as the ‘stay awake’ issue. The impact of supply will be judged by how well it manages contingency and risk, and how well supply chains are designed. This is where the real leaders of tomorrow will come into their own: by getting better at identifying the risks that a business faces and deciding the level of risk they want to take, which is about procurement becoming part of a strategic discussion.
We have seen examples of organizations failing to take a balanced view in the past, in particular the decision by organizations to manufacture inland rather than on the coast of China, due to lower labour costs. These decisions were made without recognition of the risk in their reliance on internal road, rail and electricity provisions. Management maturity is required in making these decisions, based not only on the benefits of lower costs – but on recognition of time factors, quality and service.
These issues point to an underlying pressure for a broadening of skill sets and a deeper understanding of the business landscape. Crucial to success in the future will be:
the depth of supply chain knowledge in terms of geographical location and political constraints;
ability to withstand unexpected events and environmental or social factors.
This begs the question of just how far down the supply chain it is possible to see. In the future, it could be the case that contracts will be developed for long-term performance and the creation of strategic partnerships, which effectively incentivize the supply chain. Procurement must broaden supply chain horizons, developing a deeper sense of how it operates and how it delivers benefits for the longer term:
The complexity in globalized supply chains is likely to lead to a greater emphasis on multiple sourcing plans as a mitigation strategy in the next 20 years to 2034, as all supply chains are now susceptible to turbulence. This is something that was brought into sharp focus by the impact of the earthquake and tsunami in north-east Japan and the floods in Thailand in 2011.
As part of our attempt to manage price volatility, procurement is likely to find itself having to take on far more responsibility for – and develop a greater understanding of – financial tools to help manage risk, such as hedging against commodity and currency fluctuations on themarkets.
The constantly evolving landscape and greater prominence of supply chain risk will fundamentally impact the relationship between procurement and suppliers in years to come, particularly where there is high demand and a shortage of supply. For example, organizations could find themselves faced with a supply base choosing partners they wish to work with based on the attractiveness of the relationship. In some industries, this could even lead to direct investment in the supply base to ensure supply.
For many businesses today, the issue of risk is a defining one. The profession and its role in the globalized age brings with it opportunities as well as threats. Procurement must pick up responsibility for supply chain risk and make this its professional unique selling point (USP), demonstrating that it adds tangible value to organizations.
Demographic changes: talent
Global demographic trends will have huge implications for businesses over the next two decades, as Western nations face ageing populations and developing economies emerge as hotbeds of talent. Recruitment and talent management will be the single biggest issue for most organizations, and competition will increasingly come not only from the same country but all around the globe, and China and India in particular.
The organizational requirement for global sourcing and managing a network of international suppliers, as well as a growing need for diverse teams to be based on the ground in far-flung locations, means that the procurement professional will be impacted by this trend more keenly than most. The skills required to cope with the demands faced by procurement over the next 20 years are likely to change, increasing in complexity, with greater analytical and technical requirements accompanied by an increased need for expertise in the softer skills:
Procurement professionals will need to be competent internal networkers, data analysts, developers of global supply bases and attractors of innovation, while category management will require an entrepreneurial streak and strong leadership skills. The transactional skills ofprocurement‘s ‘back-room boys’, on which the function was built, will become correspondingly less important, being subsumed by technology or performed by outsourced providers.
On the softer side, the profession will need people who are culturally aware, collaborative and innovative, and have strong leadership teams capable of transgressing functional, national and virtual boundaries. Leadership development programmes will need to reflect this demand, and job rotation within organizations will become an important learning tool as procurement becomes more firmly embedded within the business.
With ‘generation Y’ now firmly established in the workplace, many in leadership roles, procurement will need to appeal specifically to this talent pool. A willingness to countenance flexible or remote working, with reduced travelling time and opportunities for a better work–life balance, will be more important than in the past, while salaries will need to remain competitive to entice top candidates who will be starting out in their working lives with more debt than any generation in the past.
The profession needs people who are specifically focused on a career in procurement; it needs to lure top graduates away from investment banks, consultancies and law firms by raising the profile of the profession beyond the corporate world. Perhaps one of the solutions to attracting this generation into the profession comes in the form of one of the challenges it must confront as an issue going forward. This is a generation that has been brought up on environmentalism and CSR, and being able to influence that aspect of business will be a powerful pull.
Another factor for individuals coming into the profession is likely to be the opportunity to travel and work overseas. This is something that will fit in with the increasingly globalized nature of the profession and also act as a core part of the development process for young talent – and this will become an important requirement in the future, from both an individual and organizational perspective.
We sense that the likelihood to live and work abroad will increase in the next 20 years. Given the opportunities in the emerging markets and the current state of the UK economy people will have no option but to consider working in China, Brazil or India, because this is where the jobs will be. This shift to working outside the UK or Europe will require a cultural and generational mindset shift as the profession evolves with the times, thus adding another dimension to the way we do business, particularly regarding cultural aspects.
Yet while this desire for international exposure will work well for those businesses that can offer it, and have a genuine requirement for it, it could potentially make the challenge of recruiting talent even tougher for those that are unable to do so. This could require some innovative thinking on the part of procurement organizations, such as establishing talent programmes with other businesses in similar industries but in different geographies.
However this plays out, managing virtual teams will inevitably be a more prominent part of the procurement function’s role, as a means of interacting with internal stakeholders, suppliers and staff. This is where the relationship skills will come to the fore, and it is here that procurement will need to excel.
Working in an increasingly globalized environment will create a need to build talent pools around the world. Here, the challenge for procurement will be to strike the right balance between a local presence and international direction, as well as creating an environment that can compete for talent at a local level and where a diverse workforce can flourish.
An interim solution could be to develop a pool of talent recruited from around the world, which will have a rolling brief and be sent to various countries for a number of medium-term stints during their careers. In the longer-term, the emergence of and competition for procurementprofessionals in markets such as Asia, the Far East and Africa is likely to be every bit as pivotal and intense as developing home-grown talent.
Two key demographics for the spotlight are: first, the West’s ageing population and the East’s skills shortage. Operating a global team will bring with it its own challenges, such as managing a much younger workforce, and one with different views around what the function is and how it should operate. Second, the profession has to contrast established and emerging markets in terms of the demographics. Fundamental is the need to establish the profession in the developing economies with the same gravitas it has in the developed economies.
The shift in the global economic centre of gravity
The emergence of powerful new economies based predominantly in the East has been the most significant change in the global economic landscape since the mid-1990s. Today we can argue with some certainty that the real centre of economic gravity no longer sits in the West – theeconomic downturn triggered in 2008 has only served to accelerate the shift, which will continue to dominate both the political and economic landscape over the next 20 years.
China is already the world’s largest manufacturer and most estimates predict it will overtake the United States as the biggest economic power in the world at some point in the early 2020s. Other powerful economies include the world’s third biggest in the shape of Japan – as well as India and Russia, while Brazil recently overtook the UK as the world’s sixth biggest economic powerhouse. The overall shift to the East is undeniable and, with seven of the so-called ‘next 11’ (N11) – Bangladesh, Indonesia, Iran, Pakistan, Philippines, South Korea and Vietnam – tipped to follow Brazil, Russia, India and China (the BRIC nations) also based in this part of the world, the direction of travel is undeniably one-way.
This shift will inevitably have a profound impact on procurement, in terms of both sourcing strategy and how – and where – the function is set up. The emergence of these new economies as viable customer markets will have an effect, too, with procurement increasingly tasked with securing supply into as well as from such countries, using its local knowledge to help build sales operations.
Procurement will need to be better informed about the wider environment in which it operates. It will need to be more aware of the implications of the shift in economic power and understand how to manage and forecast future shifts. Over the next 20 years procurement will need more rounded individuals who can understand the strategic implications in the medium as well as the short term.
Up to now, the East has largely been viewed by the West as a source of low-cost materials, goods and services. In the future, though, these markets will change, with improvements in quality matched by higher costs, borne mainly out of increased labour rates. Chinese labour rates are already rising sharply, especially in the coastal areas, although for now they remain well below levels in the West.
With events such as the Arab Spring generating a newfound confidence in these parts of the world, the pressure for better pay and working conditions will, quite naturally, increase in the coming decade. This could be problematic for procurement, if its aim is to establish security of supplymatched with low costs. As the emerging markets become more mature, so too will those behind them. The N11 will take over as the major low-cost sourcing hotspots.
Working on the basis that low-cost country sourcing is all about labour rates, as countries win more and more business, they will also start to lose their competitive advantage. This is already happening in China and South America. So, in 20 years – where next, Africa? This constant process of evolution means that procurement must be ready to respond to shifts at short notice, even factoring in exit strategies once relationships have run their course in a particular country.
The availability of raw materials is another issue for the future, particularly as emerging economies themselves increase their own consumption and look to buy up sources of supply. There will be more people demanding more food, more water and using more natural resources. An increasing scarcity of vital raw materials – oil in particular – will have profound implications for organizations in terms of pricing and security of supply, and for the very nature of the relationships between procurement and its suppliers.
Alongside the continued evolution of the East is an increasing trend to consider sourcing – or manufacturing – certain products and services closer to home. In part, this will be driven by politics – a legacy of the economic downturn and high levels of unemployment, as well as the decline of manufacturing in traditional destinations. More significant, though, will be the growing issue of rising fuel and logistics costs, coupled with higher wage rates in the emerging economies and stagnating labour costs in the West. In the longer term, organizations in the West may have to look to rebuild their intellectual property, particularly in areas such as manufacturing and engineering.
Operating in global markets has implications for both the structure of procurement and the practical aspects of managing suppliers and internal customers. On the supplier side, procurement will be required to develop much more of a network mindset, where strategy is likely to be devised centrally but local knowledge will determine ways of working on the ground. Procurement will need to be wary of suppliers potentially becoming competitors, but at the same time must seek to develop closer working relationships to become the customer of choice, as well as the foundation for innovation.
Procurement will find itself operating in a more strategic role:
Advising internal customers and stakeholders on sourcing and outsourcing strategies and drawing on the knowledge of local cultures and quality standards.
It will need to be at the forefront, more proactive in delivering ideas around what should be outsourced, and perhaps what should be insourced to reduce risk.
It will contribute to strategy setting, rather than just being the receiver of strategy; it will thus become part of the fabric of the organization.
Procurement‘s strategic posture will be to link product and service development to supply chain capability to source and deliver with a deep knowledge of geographical and cultural nuances. The skills that a procurement professional will develop should be transferable to other areas of theorganization, creating more attractive organizational assets.
This applies to procurement‘s role in the emergence of new markets as sales channels for businesses as well as sourcing destinations. Deep local knowledge and relationships will be crucial in helping to identify opportunities and establish operations in heavily localized environments.
The profession of the future will need to be able to interact and operate seamlessly across many environments. There will be a need for different skill sets for different regions and different engagement strategies.
There is strong evidence that procurement‘s involvement in such fast-paced markets could lead to the emergence of two types of purchasing function: one that operates in a mature, non-growth marketplace, where procurement‘s role is to drive out costs; and another in a rapidly growing market to support the supply of goods and services into that marketplace, rather than from it, providing access to capacity. This would require very different business models and it raises the question as to whether one procurement activity can cover both.
The shift from West to East is likely to create a constantly moving environment for global businesses, and procurement professionals will need to be able to respond effectively. Procurement‘s position at the heart of such activity, however, should only serve to make the function more strategic and offer more career opportunities to its practitioners.
External impacts: what procurement must do today and in the future
From the points made so far, clearly we can see that procurement will encounter expanding risks and extended supply chains. The locations of suppliers for both physical and virtual goods and services, as well as the geographic location of internal procurement staff and facilities, may have growing and significant total cost and risk implications. Today, when it comes to managing supply chains on a localized basis (eg Southeast Asia), such activity is pressuring organizations, even those that are less resource-constrained than most.
For procurement‘s leaders there is recognition too that supply risk factors are increasing year on year and they relate not only to supplier financial stability and price, but also to supply assurance, customer perceptions and regulatory concerns. As scrutiny of business practice increases, there is also a requirement for procurement to understand the implications of its corporate responsibility and sustainability for purchasing and the supply chain. Technology is increasingly enabling businesses to do this in real time in order to predict and forecast outcomes, factoring into account a range of cost, compliance, transfer prices and other inputs.
Given these converging risks as well as increased organizational expectations and requirements, traditional procurement is trying to press today’s hot buttons as well as dealing with longer-term and more strategic opportunities.
Leading procurement organizations are already looking to develop their own advanced capabilities, such as leveraging suppliers as important sources for innovation, employing advanced commodity management tactics and focusing on currency and foreign exchange in partnership with other parts of the business. These boundary-spanning multilevel programmes will be critical in developing broader risk, sourcing and working capital management strategies to drive not just procurement-led savings and compliance but also company-changing strategies.
Developing corporate and procurement strategy to meet the challenges
To meet the challenges outlined in this chapter, businesses will have to supplement internal efforts with reliance on external expertise and capabilities to drive enhanced market intelligence and analytics (especially in non-core areas). Procurement for its part will need to build a new level oftrust and transparency within the broader business in order to facilitate innovation and develop their ability to successfully manage internal and third-party relationships.
New sources of information are already available in 2014 that were not there only five or six years ago. As a consequence we are seeing something approaching data overload for some, and intelligent supply-chain-bliss for others. Across categories and supply chains, available datasets for input and analysis continue to increase by an order of some magnitude. Businesses that do not have competency in managing information and intelligence today may fall increasingly further behind tomorrow, creating gaps that will become tougher and tougher to close.
For those leading new procurement functions, a near revolution will likely have to occur. Many of today’s fundamentals will obviously remain: category sourcing, baseline procurement systems, human resources management, purchasing performance, and knowledge management.
Over and above this, procurement will need to offer a new operating approach to optimize localization (ie regional enablement) and global support. Decisions around centralization and execution may vary between businesses, but the need to define functional and organizational structure will always remain as part of overall processes, category sourcing, leadership, and execution roles – just as it is today. Such structures not only will enable procurement to support internal customers (and their needs) at more defined and localized levels, it will also enable insight and action to adjust for balance of trade questions that might arise with customers.
Let’s say that on a localized basis a procurement organization opts to support global marketing with a shared, data-driven infrastructure that supports a macro-view of activities all the way down to local planning. Such a structure would enable a global marketing organization and agencies of record (and local teams and local agencies supporting execution) to collaborate on improving measured outcomes across all media planning. But the same business might take a hybrid approach for direct procurement categories, via centralized supplier management data collection in support of local – in country – procurement teams (including supplier quality and development resources).
As with traditional change management activities, leadership and stakeholder engagement will remain essential, but with a new, finance-centric alignment. So procurement will still need to engage other business colleagues, ranging from those responsible for profit and loss as well as those in functional roles such as legal, IT, human resources, marketing, engineering, design, customer service, manufacturing and so on. So, in essence, procurement will need very quickly to enlist change management tactics within the function, with finance partners and across thebusiness.
Finally, the foregoing may create the distinct possibility that who ‘works in procurement‘ will be different to who ‘does procurement‘, and this potential outcome is in itself a critical nuance. At the extreme, maybe half or more of the procurement function could be comprised of those carrying out procurement responsibilities as part of a rotating assignment.
Procurement‘s responsibilities for innovation, automation, compliance and value-capture approaches (including systems that report on performance) will remain, as will collaboration, benchmarking, measurement, and reporting processes and tools. But given the expanding definition and scope of procurement, these elements will grow to encompass additional areas, such as embedding previously internally focused environmental, health and safety (EHS) team members in continuous external-supplier development activities.
Bustillo, M, Wright, T and Banjo, S (2012) Touch questions in fire’s ashes, Wall Street Journal, 30 November, p B1.
Bustillo, Wright and Banjo (2012) p B6.
Efforts by procurement to make a bigger contribution to strategy continue, but sometimes at the cost of misunderstandings between procurement and the rest of the business. And yet procurement has much expertise to offer, which can provide substantial financial benefits. New vision and capabilities are needed. Procurement leaders might well ask not what their business can do for them; rather what they can do for the business.
This journey may start with finding new ways to build trust within the business by procurement extending an empathetic but challenging hand to work with spend owners to improve business outcomes through new exploration of demand specifications, buying decisions and supplier engagement. Or perhaps it will start with procurement assuming a risk management role that takes into account commodity, currency, political, regulatory and other emerging areas that bring both threat and opportunity. These early steps must quickly proceed beyond singular initiatives to address the future outcomes. Key will be procurement‘s role and impact on financial performance, risk management, supplier relationships and its impact on customer satisfaction.
Procurement must approach these issues in the knowledge that incremental changes will not do. Procurement must earn the trust of the business to fully succeed. And, in doing so, it must embrace a vision that goes far beyond the thinking of today, leveraging creativity and know-how to change not just the function from within, but the overall business value that procurement can deliver.
In developing and deploying procurement‘s true value proposition to the business, everything it has learned and practised still counts. However, procurement transformation, lessons from the past and classic maturity model thinking must be put in context. Modest changes in capability and thinking can help but will not bring the value that modern business demands. Procurement must progress and, as George Bernard Shaw put it so eloquently, ‘Progress is impossible without change, and those who cannot change their minds cannot change anything’.
In this chapter we have looked at practical ways in which we can assess the procurement organization and what good organizations do. In Chapter 4 we consider the shifts discussed above in more detail and look at what has brought this wholesale change about. We also look at how thevery notion of business and the organization has changed, before setting up a discussion around how we might practically approach these changes and offering some ideas regarding what procurement can do.
1 Bustillo, M, Wright, T and Banjo, S (2012) Touch questions in fire’s ashes, Wall Street Journal, 30 November, p B1.
2 Bustillo, Wright and Banjo (2012) p B6.