The Procurement Value Proposition: The Rise of Supply Management – Chapter 5

Chapter 5: Taking a Practical Approach to Improvement: Introducing the ACE Model

 

Overview

In the previous chapter we looked at the five game-changing trends that have necessitated organizations to re-evaluate how they operate and how they utilize the service functions within them to best meet new vision and capabilities needed to survive and thrive in the modern business world. Procurement must approach these issues in the knowledge that incremental changes will not do. 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 it delivers.

In developing and deploying procurement‘s true value proposition to the business, everything it has learned and practised 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.

In this chapter we offer some insights into how a procurement organization can interrogate the maturity model introduced in Chapter 2, and reflect too on the notion of the game-changing trends described in Chapter 4. From here, we look at ways in which we can practically develop capability and execution via procurement to deliver a greater contribution to strategy. We also look at ways in which the function can continue to remove the misunderstandings between itself and the rest of the business.

What do we aspire to be? Aligning procurement‘s value and capabilities

To realize the full potential of the procurement function, it is important to understand the alignment between its levels of capability and execution. In doing so we can uncover how value is delivered into the business in terms of the service mix, ie how procurement performs. Performance is measured in terms of capability levels – what level of capability do we have today or need to change? This is allied to the question of how well do we execute – how efficient and effective is procurement in the execution of its role?

Implementing the ACE model

Given the foregoing, it is critical to make sure that the capability levels we develop are aligned to some sort of demonstrable value proposition – via Aspiration, Capability and Execution. We introduce the notion of the ACE model (Figure 5.1 on p 116) to show how the function can enhance capability and execution and accelerate its transformation further by demonstrating the expertise it has to offer, which will bring substantial financial benefits to the organization. Let’s begin by taking a look at the component parts of the model:

  • A: AspirationProcurement leaders have to have a clearly defined procurement vision and supporting strategy, which must explicitly articulate how it ties to corporate strategy. Any misalignment will doom the function of aspiration to failure. Setting out on this journey may begin with a PR/communications programme. Raising awareness and finding new ways to build trust within the business procurement can extend an empathetic hand to work with spend owners to improve business outcomes. This might materialize in the form of a joint exploration of demand specifications, buying decisions and supplier engagement.

    Procurement must earn the trust of the business to fully succeed. It must embrace a vision that goes far beyond current practice, by leveraging creativity and know-how to change not just the function from within, but the understanding of procurement‘s potential to thebusiness as a whole.

    Procurement leaders must therefore have a strategy, which articulates this and includes a list of transformation projects to achieve their aspirations. Key will be procurement‘s role and impact on financial performance, risk management, supplier relationships and its impact on customer satisfaction.

  • C: Capabilities. There is a high degree of honesty required here. In examining capabilities CPOs and their teams need to be introspective when contemplating where they are today on the procurement maturity ladder (discussed in Chapter 2). This process is important because it is the first step on the journey of capability development; and if you don’t believe your story regarding where you wish to see your procurement organization, how can you expect anyone else to believe you.

    So once again alignment is critical because you do not want your plans to deviate from those of the wider business. CPOs must look at the capability of their procurement team and start to uncover the gaps between the ‘as is’ status and the ‘to be’. Are your plans realistic? The CPO must sort out this aspect across all three elements of the ACE model described below as well as, from the outset, highlighting any alignment gaps between them.

    There is absolutely no doubt that the number one issue in any discussion regarding procurement capability relates to skills and talent. An organization can have the best plan and technologies in the world but with the wrong people they are worthless.

    Regarding these procurement capabilities, the modern procurement function needs to understand what enabling technologies are available to them and which they need. In particular, with the increasing impact of the ‘internet of things’, clarity is needed within organizations regarding how they accommodate such innovations. For example, can a degree of self-service be furnished? How will they tap into the expanding issue of master data management? And how can they introduce analytics into procurement?

    Finally, procurement needs to develop its understanding of process sourcing, or put another way, the art and science of ‘buying’. Procurement outsourcing is critical for non-value-adding transactional work that most procurement organizations do. For example, tasks such as supply data management (catalogue management), invoice processing, PO processing and PO communications to suppliers; business process outsourcing is emerging to manage these non-core processes and spend categories.

    Removing these time-consuming and mundane tasks frees up procurement teams to carry out the increasingly important and value-adding work such as market intelligence gathering and full category management.

  • E: ExecutionThe effectiveness of how businesses carry out procurement has significantly improved over time, as we saw in Chapter 1; however, the focus has quite definitely shifted. Today, speed of execution and the importance of outcomes have significantly increased.

    The demands of strategic alignment will help CPOs to determine the services needed for the business to maximize the benefits that procurement brings. The delivery and management model to support strategic objectives will be built around the CPO’s knowledge of thecorporation. Clearly the message is to simplify processes – to reduce complexity and implement good business and procurement practices across the organization. CPOs need to know where and what to automate – this will help to reduce manual effort and errors, especially in the least intellectually stimulating areas of process. Smart IT enablement for lowest service-delivery cost is imperative and the ability to deliver leveraged standard services through service excellence will also bring the vision into being.

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Figure 5.1: ACE – the trinity of aspiration, capability and execution

The message that good procurement is not just about cost reduction, but productivity and speed in both transactions and purchasing has to be brought to life. Not only because our most traditional procurement value proposition has been challenged due to tight and volatile supply markets, but also due to the inalienable fact that maturing procurement execution has to be seen if we are to be believed. Whilst, for the most part, the investments that organizations make in procurement continue to pay off in a traditional sense, CPOs today have to bring the new value propositionto life.

The need to tread carefully

At the same time there is a very real need for procurement to tread carefully. It remains critically important to CPOs and their teams that they ensure alignment as part of their service delivery. Below are examples of what might happen if the three elements of ACE are misaligned:

  • Aspirational: you have a set of performance targets that are not aligned to your capabilities, and your operating model does not allow you to effectively revise your targets.

  • Capability: CPOs are not seen to be as capable as other CXOs. As a consequence the organization does not believe that procurement has the capability to add value at their level. Conversely, CPOs might be developing their strategic procurement capability in isolation, only to find out that the capability they eventually develop is neither valued nor sponsored by the rest of the business.

  • Execution: CPOs busy themselves working on higher-value activities, but receive minimal or no credit for them. To make matters worse, they find that they are not being measured on these activities but are still held responsible for them. Many procurement organizations become aware that they are not measured on supply assurance, yet most would probably be blamed in the event of a stock-out or some other shortage. In developing the profile and delivery excellence of their procurement teams CPOs will need to ensure that procurementis given credit for profit impact from smart supply risk management activities employed by them.

While the discussion to date might make conceptual sense, to our knowledge there have actually never been any procurement studies that have isolated, quantified and compared the notion of procurement value to procurement performance and capabilities. The latter two are more easily understood in terms of how capabilities can enable performance. However, there is a caveat and it is smart at this juncture to ask: does a more evolved procurement value proposition really compare with improved performance or do companies talk a good game but fail to deliver (or vice versa)? This might mean in practice to shake off the taboos of the past, that procurement organizations need to perform well enough to earn the right to be taken seriously – and then use that performance to leverage cash to build the new capabilities to deliver the new sources of value on its own.

Re-evaluating the procurement function

In developing a better understanding of the procurement value proposition we need in some respects to re-evaluate procurement, its role and its worth. The journey since the mid-1980s, as described above, allied to the growing demands of globalized markets demand this. In fact we need to do this for two reasons: first to ensure that what procurement is doing is current; the second reason relates to procurement‘s brand, PR and visibility challenges.

So in ‘redefining procurement‘ we need to develop an understanding of what the business needs from procurement and what it is capable of; and then apply what procurement means in the 21st century to this. These differences will, if nothing else, help procurement practitioners to accelerate change, continue in their traditional role of cost reduction and protect their brand and reputation.

As has already been alluded, procurement must understand its customers; set and deploy its strategic direction; and diagnose the problems in the three elements of ACE. The goal is to improve efficiency and effectiveness, transform the way procurement operates by collaborating across thebusiness, and ensure that the changes made are effective and, more importantly, sustainable.

Whilst cost reduction remains the cornerstone of procurement, it is no longer at a cost to enterprise growth or product or service innovation; procurement‘s intense focus on costs is evidenced throughout the activities and programmes of any procurement function, by let’s say improving productivity and efficiency. It is also the area where executives have realized that most past and future success will be about procurement‘s contribution to growth innovation and product development.

If we refer back to the procurement maturity ladder, we have already discussed the fact that procurement has to get the basics right – supply assurance and cost reduction – because procurement professionals have to earn their spurs first. And quite clearly mastery of the ‘foundations’ is critical.

The hard facts show that there are no ‘silver bullets’; procurement has to find a way to press today’s and tomorrow’s ‘hot buttons’ for the CXOs across the business. Managing costs is about moving more quickly towards agile supply chains, which allow rapid response to changing market conditions and variable cost structures that ramp up and down with revenues. In fact, one might say that this flexibility in approach is the antidote for cost volatility.

The future of supply management will depend on bringing flexibility through interconnected networks of suppliers, manufacturers and service providers that can be tapped on demand as conditions change. To leverage resources optimally, supply managers will employ intelligent modelling capabilities; using these modelling techniques will allow them to see the cost, service level, time and quality impacts of the alternatives being considered.

That said, as the strategic impact of procurement really comes to the fore, how procurement as a discrete function will operate remains uncertain. Clearly businesses will still care about managing their spending – but deploying a large, enterprise-level function dedicated to doing it? Probably not.

A change of focus to a more entrepreneurial, brand-conscious group with expertise in both commercial and technical aspects of business will become the order of the day. Capability and execution will be paramount – a team of enablers, with increased business acumen; people who can make sound commercial decisions.

These will be the new breed of procurement professional – executive and business savvy; working in their elastic multifaceted strategic business mode they will communicate their value propositions to the organization via targeted marketing initiatives. Procurement has for a long time had a brand and PR challenge; and visibility continues to remain one of procurement‘s greatest professional challenges.

From zero to hero: procurement‘s PR challenge

Gaining the visibility and developing alliances internally does not appear to be attracting the attention it needs in terms of activities and programmes to achieve this. Whilst many CPOs say they are focused more on strategy alignment, continuous process improvement and cost reduction, to be taken seriously future leaders will have to decipher business objectives and communicate them regularly and effectively to their team and the rest of the business.

Procurement leaders must be purposeful and effective, and whilst there is an abundance of evidence regarding the power of good procurement, it would seem that it is largely ignored. Procurement remains in the eyes of many the Mr Bean of corporate functions. In the early days the function was seen as a ‘blue collar’ department commanding relatively little respect, and was generally regarded as a cost to the organization.

Yet in truth procurement‘s journey from afterthought to core capability parallels the way in which the business landscape has changed since the 1980s and 1990s. As Mark Twain once wrote, ‘the very ink with which all history is written is merely fluid prejudice’ – and whilst others continue to pick at procurement‘s growing contribution and recognition, it often comes across as an obdurate form of status anxiety.

While some might view procurement‘s role as somewhat like that of Sisyphus, condemned to repeat for ever the same meaningless task of pushing a boulder up a mountain, others are seeing its role as having meaning and, more importantly, value. As for the cynics out there, now might be the time to imagine Sisyphus happy.

So, for procurementthe time has come to focus on ever-closer inner and outer synchronization: to build bridges across the top team and the operations of the organization and tighten its links between the supply base and out to the customer base. Aligning with inner and outer contexts is key for procurement. CPOs must think and talk strategy, culture, stakeholders and competitors.

Visibility, influence and focus are vital; contemporary supply managers have to be able to decipher business objectives and communicate them regularly and effectively to their team, the rest of the business and its stakeholders. Effective supply managers will garner the interest of the ‘right’ people about the important issues. The more the business appreciates their role, the more likely they are to include it in their determination of what strategic changes the organization needs to make. CPOs and their teams must aim to be ‘go to’ people in their organizations.

Application of the ACE model: a tool kit for business leaders to implement change

Ensuring clarity of direction and purpose will without doubt improve the competitive advantage of a business. Use of the ACE model will help business and procurement leaders to test that their strategy is clear, understood and fit for purpose. This relatively simple strategy deployment model can help you avoid costly strategic mistakes and ensure that resources are aligned and incentivized around a common vision.

By utilizing a methodical tool you can also build trust. You can promote the procurement brand across the business by having a clear and shared strategy to help present a single consistent face to your stakeholders, which is a key element in engendering trust.

Diagnose the problems in your procurement function

Conducting a rapid and objective diagnosis of how your procurement function is established and performing will drive action that will impact on how you are seen in your business. Proximity to the problems and a desire to realize your true potential are at the very heart of successfully bringing about change. It is critical, therefore, that you understand and address the real causes of problems.

Addressing the real problems will ensure that your action plan is focusing on the right improvement actions. It will help you to avoid the cost of failure by understanding where the issues are and the true problem at the root of those issues. All too often businesses become embroiled in perceived problems, spending large amounts of money on change processes that turn out to be wholly inappropriate.

The anatomy of successful change

Most people will agree that change is hard. Machiavelli in his famous (business) book The Prince talks about change makers at length, observing that it is a very dangerous role to be leading or conducting. He puts it thus: ‘For he who innovates will have for his enemies all those who are well off under the existing order of things, and only the lukewarm supporters in those who might be better off under the new.’[1] Lukewarm support from those who will be better off! Lukewarm for the simple reason that they will never admit the merit of anything new, as Machiavelli writes, ‘until they have seen it proved by the event’.

That said, change is necessary and when implementing change there are three golden rules to follow:

  1. Take time to ensure readiness before launching into implementation.

  2. Gain the appropriate support from senior management and, better still, the board – and install appropriate leadership.

  3. Be resilient. There is absolutely no doubt that you will meet resistance to the change project, programme, journey or whatever else you choose to call it. Reflect on the above and stay true to your goal.

Transform the way you do business: develop a customer mindset

Transforming your business will enable you to achieve your vision and deliver value to your stakeholders. Achieve a step change in business performance by using techniques such as ‘assumption busting’, which aims to identify and challenge the rules that dictate the way you do things. Find new ways of working, by employing strategic planning with innovation processes and creative thinking exercises with both your team and those you will work with across the business.

Aligning with the corporate strategy will mean that procurement must understand and align with customer demand. This is amongst the highest challenges to supply management today. There is a real need for procurement to have a customer-centric mindset and to become integrated with customer demand to deliver business value.

As a result, the role of procurement should be re-emphasized and customers must now be viewed almost as an extension of the business in order to help achieve corporate objectives. Customer input must add tangible value to your supply chain – and organizations do excel at meeting customer needs once they are known: it is the ‘knowing’ part that is difficult. Some supply chains connect with customers primarily to provide timely, accurate delivery.

However, despite the obvious need for customer interaction, many procurement organizations are pushed to focus more on their suppliers than their customers. Even in supply chain planning, with all the demand-driven hype, customer input is frequently overlooked. And yet, because customer interaction seems costly and time-consuming, it seems that many businesses feel that the cost can outweigh the benefits. But as the pressure grows to be more profitable, businesses will not be able to afford the excess inventory, lost sales and missed innovation opportunities caused by inadequate customer collaboration.

Essentially, managing value can help to deliver profitable growth; for example, innovation is focused on products and services that provide value to your customer. Procurement is expected to deliver innovation often from the supply base and this is reflected in the end product or service. Any innovation that does not provide additional value relative to the best alternatives is in essence money wasted.

Businesses need to get smarter and interact with customers throughout the product life cycle. In effect, any interaction with customers should become an opportunity for inherent customer collaboration. Smart procurement professionals should use their judgement and business intelligence to rise above and beyond the noise.

For the visionary organizations out there, many of which have embraced change and have already developed and continue to develop smart integrated procurement functions, there are clear financial as well as culturally tangible benefits to be enjoyed. Let’s now consider what benefits top-performing procurement organizations deliver to the business.

[1]The Prince is a 16th-century political treatise by the Italian diplomat and political theorist Niccolò Machiavelli.

The smart things that top-performing procurement organizations do

In a superb study, published in 2010, the US consultancy the Hackett Group identified a list of 10 things done well by world-class procurement organizations.[2] Doubtless some of these things will have changed, hence our comment above that the visionaries continue to change, but as a basis on what ‘good’ looks like they are a useful starting point. We have adapted them somewhat for the purposes of this book but they are useful in that they reflect the art of the possible, in practice:

  1. They leverage the full capability of their supply markets. The procurement team helps the organization to harness safely the power of supply markets in order to glean additional value from external spending. They shift their posture and become gate-opener as well as gate-keeper. For these procurement teams, value can mean spending less; but also it means getting more utility from spend – so procurement influences the business strategy rather than just supporting it.

  2. They have flexible rather than rigid operating models. This helps them to adapt their service delivery and transformation models to a diverse set of budget holders – who they see as functional partners – in the value chain rather than fixating on how to organize and control an n-step procurement process. They create clear value propositions that are understood and valued by stakeholders: they create a very clear value proposition and procurement ‘brand’ that can be understood, articulated and championed by the spend owners themselves.

  3. They execute ‘customer management‘ processes, which ensure that they are getting most value both from the suppliers, as well as procurement. They engage in business spend planning, not ‘spent analysis’. By working with the business on ‘spend planning’ as part of thefinancial and operations planning and budgeting team, they gain the earliest influence possible. This enables them to provide forward-looking economic spend and supply information rather than forensic of the typical ‘spent analysis’ activity or the ‘post-mortem’ strategizing oftraditional procurement organizations.

  4. They explicitly align to the business through a project portfolio plan. In essence they ‘join the dots’ in tying metrics, processes and capabilities to their value proposition. Traditionally, procurement organizations would work on them individually and in most organizations there exist many disjointed activities across the business’s procurement project portfolio.

  5. They protect the business from supply risk and from itself. By combining risk management and market intelligence techniques they provide the business with visibility into risk, as well as providing a governance structure and process to gain consensus with the Finance department and the wider business on which risks to treat, and how best to treat them systematically – often with constrained or limited funds.

  6. They understand how to shift the game from talent to knowledge. In these days of talent scarcity, or as is more common talent retention, these procurement organizations have moved from a purely talent management model – ‘throw the best people at it’ – to a knowledge management model. They do this by shifting from current full-time equivalent (FTE) staffing models to more flexible or agile resourcing models. Second, they invest in the provision of better IT support for better capture and reuse of knowledge and business intelligence.

  7. They dedicate time and resource to turn data into information, intelligence, knowledge and insight. Essentially, they use information management as a weapon to transcend basic ERP/e-sourcing to a more thoughtful information architecture that helps to manage extended supply chains and external intelligence.

  8. They measure suppliers, but also tap their hearts, minds and budgets. They work collaboratively with suppliers to reduce total supply costs, not just supplier margins, and create innovations that will deliver economic value. Today businesses are directing more and more oftheir budgets towards a complex web of global specialist providers and suppliers in order to help deliver on their core strategies.

  9. These procurement organizations treat their suppliers as if they are an extension of the business. As they would their internal workforce, they incentivize, coach, endorse and reward them in order to help achieve corporate objectives. They are around not just when you most need them, but also when they most need you.

  10. Finally, they understand how to use P2P transactional processes as an asset and not a liability. They establish not just ‘hands free’ processes to make life easier for procurement, but rather a fail-safe ‘guided buying’ experience to channel employees to preferred buy–pay channels. This implies integration between P2P and procurement as well as a deliberate ‘P2P transactional channel optimization’ methodology – a bit like applying lean processes to the P2P ‘transaction factory’.

The following case study provides insights into a CPO in a large global financial services company who is challenged to make headway, against a strong headwind of resistance to change. In this environment, one has to recognize that it may take years to change the culture – but change occurs one person at a time.

[2]Hackett Group (2010) ‘An Evolution of Value and Capability’, conference presentation.

Some conclusions

In closing, and with a view to how purchasing organizations gear up to tackling the demands they face in the modern business world, we need to understand that the nature of what a ‘company’ is has changed dramatically. Moreover, the labour cost of 30 years ago is today a supplier invoice – in that their job has now been outsourced. As a consequence, rather than condemn Sisyphus to repeat for ever the same meaningless task of pushing a boulder up a mountain, business leaders should reassess and clearly define the role of procurement in the company philosophy. Is it a process-oriented, savings-obsessed function? Or does it focus on customer service and helping the business to achieve its strategy?

Additionally, procurement should be gauged on its connection to the objectives of the budget holders it is there to serve. It must be fully aligned to what the business is trying to achieve and design metrics around areas such as innovation, stakeholder experience, risk mitigation, improved ways of working, and spending effectively rather than less.

All of the above will necessitate a new curriculum for procurement executives. Today’s procurement professionals require a set of skills and abilities that stretch across a very broad range. Skills such as relationship development and influencing with suppliers and stakeholders are seen in a completely different hue. They also need to be analysts, process mappers, researchers, negotiators, change managers, contract managers, project managers – in essence, students of their industry – bimodal in that these people will be commercial managers and analysts.

 

So, how well have your actions made the procurement organization and the broader enterprise stronger, more agile and better able to weather future challenges? In Chapter 11, there is some guidance on how to use this alignment framework to ask some hard questions about your current level of alignment across these three foundational aspects to running your procurement processes.

In the next chapter we explore where we find the right people, how we develop them and how we keep them.

Notes

  1. The Prince is a 16th-century political treatise by the Italian diplomat and political theorist Niccolò Machiavelli.

  2. Hackett Group (2010) ‘An Evolution of Value and Capability’, conference presentation.