The Procurement Value Proposition: The Rise of Supply Management – Chapter 9

Chapter 9: The Future: From Strategic Procurement to Value Procurement

 

Overview

Much of the writing on procurement since the mid-1980s has focused on the operational mechanisms that are used, in what are termed dyadic relationships. Put simply, a dyadic relationship is between two people both of whom have the ability to influence the other. This can provide set roles that in turn creates the glue for the relationship to stick. The stronger the connection, the bigger impact they have on each other. Essentially it is an understanding that requires both to cooperate with each other for the benefit of both. These relationships – in our procurement world – create, develop and sustain exchange transactions between buyers and suppliers.

Much of this literature owes its genesis to three philosophies. The first is transaction cost economics, then there is the ‘interactions’ approach and, third, the much broader and growing ‘relational’ approach associated with lean and agile principles of production and supply managementthinking.[1]

However, few of these approaches focus explicitly on the interests or the value that buyers and suppliers receive from transactions. Despite this, most writers assume that some element of mutuality (value as defined by the interests of both parties in the exchange) must occur for transactions to exist.

This implicit view of value does not allow practitioners to fully understand which elements of value must be achieved to sustain relationships for buyers or for suppliers, or the complex commercial and operational tensions over interests that exist in transactional exchange, whether in dyadic or the more realistic network relationship. Furthermore, one might argue that much of the current thinking tends to overemphasize operational and underplay the commercial interests that exist in business relationships.

The mutuality alluded to above needs to be contemplated, as in the majority of buyer–supplier relationships the buyer would benefit from an enhanced understanding of the supplier’s needs and wants. An understanding of the sources of supplier value could help buyers to manage a whole range of buyer–supplier interactions and develop them to gain strategic competitive advantage.

In the majority of buyer–supplier relationships the buyers often assume that they are in positions of dominance where they can simply instruct or command suppliers. However, the opposite is far more likely and buyers need to persuade suppliers to perform in their desired manner.

To be persuasive in the absence of significant levels of power, and without incurring significant on-costs, it is necessary for the buyer to understand what it is that suppliers want from buyers other than more revenue. Some suppliers, for example, might want stability and be prepared to improve their performance in return for simple, low-cost changes in ordering practices.

[1]For transaction cost economics see Williamson, O E (2005) Handbook of New Institutional Economics, Transaction Cost Economics, Springer, US, pp 41–65. For interactions method see Ford, D et al (2002) Understanding Business Marketing and Purchasing, Thomson Learning, London. For relational method see Lamming, R C (1993) Beyond Partnership: Strategies for innovation and lean supply, Prentice Hall, Harlow; Hines, P et al (2000) Value Stream Management: Strategy and excellence in the supply chain, Financial Times/Prentice Hall, Harlow; Christopher, M and Towill, D R (2002) Developing market specific supply chain strategies, International Journal of Logistics Management, 13 (1), pp 1–14.

The rise of strategic procurement

Since the global economic downturn in 2008 suppliers became far less dominated by their customers, in fact we began to see increasing numbers of ‘buyer’ specific investments. These include tangible investments in buildings, tooling and equipment dedicated to the supplier, or in products and processes customized to the components procured from the supplier.

What is particularly interesting here is that one of the biggest adaptations in procurement has been that of category management from the marketing field. Businesses, particularly those in consumer markets, quickly realized that success could be enhanced enormously by focusing on thecustomers’ needs rather than their own. If procurement as a function is to help improve the performance of the business, there is a need for a mirror image of the ‘marketing revolution’. So armed with insights into supplier preferences, and seeking to maximize their contribution to organizational strategic advantage through enhanced supplier performance, procurement could employ its knowledge of sources of supplier value to make themselves more attractive to the supplier markets.

Category management in procurement terms is essentially a structured process to realize and maximize value across an organization’s categories of third-party expenditure. Since the mid-1990s, many organizations in both the private and public sectors worldwide have adopted the practice of category management. While much progress has been made on many fronts, however, there are still significant advances yet to be made.

Category managementthe heartland of modern professional procurement

The objectives of category management are strategic in nature, but many procurement organizations never get beyond the ‘procurement push’, cost-reduction mindset. Consequently they don’t maximize the value generated throughout the entire life cycle of the category they manage.

This is often because the needs of a particular category are developed through a process inside the business with a view to maximizing profitability from a category. When it is funnelled through the procurement process to the suppliers, the goal of the procurement team becomes disjointed and they are looking to find the lowest price supplier, often at the behest of the leadership of the business. So whilst the business is measured on overall profit – the procurement team is being measured on cost savings.

In the middle are the suppliers, constantly being asked to engage in tighter integration of the supply chain, supplier investments in ground-breaking initiatives using ‘big data’ and analytics so that they can do a better job of matching demand and supply, tracking the effectiveness ofpromotions, understanding consumer behaviour better and so on. Yet their interface with the business via procurement is typically geared towards reducing cost, managing TCO and lowering inventory levels. It could be argued that the goal of these activities is to enhance the profitability ofthe category by reducing price – but it does so at the cost of sub-optimizing the overall profitability of the category.

The supplier is being set up to fail, because their decisions and behaviours are being influenced far more by the traditional procurement mindset of ‘drive cost out’ than they are by a mindset looking to maximize profitability and create value. Thus we see these somewhat competing processes with somewhat misaligned goals trying to influence the decisions and behaviours of the suppliers – this tension between the desire to implement category management and the traditional procurement mindset needs to be acknowledged and recognized so that it can be resolved and aligned.

If this is done then all stakeholders will benefit tremendously because everyone’s decisions and behaviours will be driven by the goals of the business. If not, then the suppliers will quite naturally utilize any misalignment to their advantage and work to gain from the situation. The ultimate goal for business therefore should be to get rid of any misalignment and develop congruency.

Procurement professionals are increasingly being seen as the ‘glue’ that holds the business together. They play liaison to internal business partners, suppliers and customers. When procurement works, everyone up and down the supply chain is happy. The key is operational excellence having the right combination of adoptable processes, technology, and skilled people with a strong customer focus, unerring attention to detail and the ability to lead change.

Category management has to begin and end with stakeholders

As we have alluded already this is not always the case, but the value to be gained by companies when they use category teams to develop supply management strategies is unequivocal. Moreover category strategies, by definition, need to include stakeholders as part of the team. For instance, if the procurement team is procuring engines, then it makes a lot of sense to include people from operations as well as engineering and marketing. By working across boundaries this team can provide forecasts, establish guidelines for selecting suppliers, bring greater understanding of new product introduction requirements, and so forth. This is where the notion of procurement being the ‘glue’ is most obvious.

We can deduce from this that as the ‘customer’ impact of the category increases, it becomes more important to involve key cross-functional team members. These individuals may be part of an ‘extended category team’, in that they come together on a periodic basis at key points in thedecision process, when much of the data is collected and consolidated for them to review. Together, the category team will develop a commodity strategy that provides the specific details and outlines the actions to follow in managing the category. A general guideline to follow is that category strategies derive their direction from business unit and corporate level objectives for success: ie they are aligned.

Before initiating any category strategy, there must be buy-in from the key stakeholders, especially at the senior leadership level. Without executive commitment, strategic sourcing results are unlikely to be successful. To ensure buy-in of the corporate team, supply management must clearly define the ‘prize’ or goal in order to obtain the go-ahead to pursue the strategy. To enable an effective category strategy, the team must:

  1. Allocate resources initially, including assessment of current spend, data collection, market research, training and people.

  2. Validate the savings or contribution to other company objectives achieved by supply management and drive them to the bottom line.

  3. Sustain the initiative through presentations to senior executives who support the move towards an integrated supply management function with other functional groups in the supply chain, including marketing, research and development, and finance.

To be perfectly clear, it is imperative that category team leaders establish their direction for building strategies directly based on business unit requirements. Supply management, in general, needs to build strategies that enable businesses to be more successful in developing new solutions that provide the best value to customers, and meet corporate objectives for cost savings, revenue and shareholder value. When in doubt, view every decision from the point of view of the customer (stakeholder).

By applying this rule of thumb, you will find that it is much easier to consider and evaluate issues that arise as you work through your category plan. By no means is this an easy undertaking. You will struggle with data collection, project scope creep, and uncertainty in decision making. However, by applying your best judgement to these situations, you are more likely to develop a plan that will not only meet stakeholder requirements, but will exceed their expectations and have them coming back for more!

Influence is critical

The importance of working with stakeholders in category management is clear and obvious. Ironically, most procurement skills – beyond, say, the MCIPS designation awarded by the CIPS – relate to people skills. The ability to build relationships and understand that value relates to levels ofsatisfaction points to how important it is to identify stakeholder (customer) feedback on procurementThe awareness of and ability to use methods such as face-to-face discussions, surveys and cross-functional comparison can help the category leader to ensure that the voice of thestakeholder is heard.

Procurement doesn’t own internal stakeholders’ budgets. What procurement does in actual fact is provide a professional service. Procurement‘s customers, in this case the stakeholders/budget holders should be provided with fact-based proposals on how to better manage their spend based on reality, their professional expertise and good procurement practice. To reflect how important influence, brand and reputation are for procurement, picture this scenario: a new CPO had just joined your business, and invites the entire team together to make sure they are absolutely clear on what is expected of them. However, rather than express these expectations directly to them, the CPO brings in the CXOs from Finance, Marketing, R&D and Manufacturing to come and tell the procurement team exactly what kind of a job that, from their perspective, they are doing.

How would you react? Would they give you a rough time with or without justification? Would you recognize the shortcomings and/or good performance being highlighted by them? The thing is: whether they criticize you or not is not the point. They need to know you and they need to know exactly what you can and can’t do for them. Procurement people need to ‘get out more’: they need to express the value they can contribute and then deliver it.

Value: is it time to reveal procurement‘s latest game changer?

Cost reduction will never disappear from procurement‘s agenda: after all, it is the cornerstone of good procurement practice. The ways in which cost savings are made, however, are high on every CPO’s agenda. There are indications that procurement is entering a further period of flux that will bring about further change as the function matures, which looks similar in its order of magnitude to the comprehensive introduction of category management. It could be that this change is no less than the demise of category management.

Organizations that embraced category management at the beginning of the 2000s have gone through their spend portfolios for as many as three or possibly even four iterations. Each category and subcategory has been standardized, rationalized and commoditized. If the big windfalls have not manifested themselves yet, it is possible that they will remain elusive. The savings were eked via price leverage; but the big gains came from the challenges set by demand management and total cost of ownership. Category management had a big impact but what, if anything, will be its legacy?

As has been alluded to above, in many organizations there exists a misalignment between procurement and other business functions. In fact, a poor understanding of strategic procurement/category management can lead to disastrous outcomes and a further diminution of procurement‘s name and the consequential questioning of the value to be derived from it.

For those organizations that have embraced strategic procurement and made category management work for them, there is no denying that it raised the profile of procurement. It got it engaged at a more senior level and secured an ongoing interest with the leadership of the business. Procurement began to call these people internal ‘clients’. It also began to contemplate stakeholder partnerships and corporate alignment. It bashed down the boardroom door. But the hubris created by this activity ignored a unique aspect of procurement practice, creating a fundamental flaw in the notions of partnership and alignment – procurement‘s business ‘clients’ do not have cost reduction as their primary aim. However, procurement does!

Why value procurement differs from value-based procurement

Many of today’s procurement systems are largely built on purchaser/vendor mistrust, the lack of rigorous purchasing procedures and a lack of tools that can be used to compare bids and assess value. Going for the cheapest option and pushing the risk on to the supplier looks attractive in theshort term, but is actually ridiculous in the long term.

Value-based procurement requires you to buy the goods or services that produce the best overall value. For example, if company A offers to build a software system that costs £5 million and later yields £10 million in added revenue, then company A’s bid has a net value of £5 million. In contrast, if the system offered by company B costs £10 million but returns more than £40 million in added revenue, then company B’s bid has a net value of more than £30 million.

Under a traditional procurement approach, company A’s bid (the low-cost solution) would win the contract. Under value-based purchasing, company B wins, paying more up-front but receiving much more in return over the long term.

Value-based procurement can take many forms. The benefit may be measured, for example, in an expanded set of services provided by one supplier’s solution over another. In other cases, gaining benefit may involve procuring a system with higher initial costs but lower life-cycle expenses and easier updating capabilities. Procurement‘s problem is how to judge the value of competing proposals; a task that isn’t easy when dealing with large or complex bids.

Value-based procurement is about developing solution-oriented bids, where the bid articulates the problem to be solved and requires the supplier to use their expertise to propose a solution. Or perhaps evaluating suppliers on factors such as total cost of ownership; the technical merit of thevendor’s proposal; the vendor’s past performance; and the probability of meeting your current and future business objectives rather than just cost.

A closer proximity to your supply base and involving the suppliers in a risk/reward structure incentivizes supplier flexibility and performance. Finally, by looking at the delivery promised by your supplier set against projected performance rather than past failures is another way of tightening the relationship and incentivizing the organizations you work with.

Defining value procurement

Value procurement is the realization of all of the benefits to be gained by the implementation of good procurement practice (as described in the model in Chapter 2). Everything from the foundations, the application of procurement‘s ‘five rights’ through to the reduction of unneeded demand activity, complexity, immediacy and variability; ultimately stimulating good demand and increasing business value derived from spend (and supply markets) rather than simply reducing spend magnitude.

This demands full alignment with the corporate strategy, and integration internally with stakeholders and externally with the supply base. Procurement must be as mindful of delivering customer satisfaction as any other business unit in the organization.

Value procurement has to begin and end with customers

The big question with the shifts in the ways that business is done is: are we witnessing the dawn of a big shift in the way strategic procurement is done? Category management has been the only credible procurement strategy since the late 1990s and that may be about to change. Thetechniques devised in category management strategies to choose suppliers and build strategic partnerships are due for an overhaul.

Today procurement professionals are under considerable pressure to deliver value-adding business performance; and it is no longer enough to build a supply management capability that is efficient, demand-driven or even transparent. Procurement must offer the organization something that is value adding; a new supply management where the strategic scope of procurement‘s value is delivered via innovation, a networked function and focus.

Procurement must be the function that is continually challenging ways of working. It must look to ensure that it helps its internal business stakeholders to achieve their goals and targets whilst, at the same time, taking the opportunity to challenge total cost, and facilitate customer of choice benefits such as access to innovation and, of course, the management of risk. Most critical of all is that procurement must be aligned to the corporate focus addressing the key question for any business: ‘what is value to the customer?’

The customer never buys a product. By definition the customer buys the satisfaction of a want, which in economics is defined as value. In essence, value is utility: ie the total satisfaction derived from a good or service. As we know, the utility that one derives from a good or service is difficult to measure, but we can determine it indirectly with customer behaviour theories, which assume that consumers will always strive to maximize their utility.

Caveat emptor

Many CEOs may not understand or even care why procurement wants to align with budget owners at all. Procurement‘s job, as CEOs often see it, again as alluded to above, is to be in conflict with them. The CEO as well as the CFO might well feel that it is they, not the budget owners, who are the only real clients of procurement. Moreover, as far as they are concerned, procurement‘s job is to deliver cost reductions, and certainly not to get involved with issues outside their traditional remit.

And yet, as business functions become aware of what procurement has always asserted, that the proficient management of supply markets is a critical capability, they are developing their own resources to take it back. Today it is the ‘other’ functions, for example IT, which are increasingly being outsourced and the responsibility for managing their ‘own’ suppliers is being taken back from procurement. HR too in many organizations is heavily outsourced and getting equally concerned about their responsibility for their own service supply chains; but have no doubt at all that this burgeoning development of shared service centres for all support functions will continue.

What is becoming increasingly apparent is that many businesses have already made a move into what one might term value procurement. Moreover, those that have are increasingly relegating straightforward cost savings to a lesser significance in the procurement operation. These early movers are focusing on intelligent cost reduction; a holistic approach, which looks to activity in the supply market where they expend their efforts on vendor management, not the zero sum game of incremental savings.

The drivers of this change relate directly to the way business itself is evolving. The proportion of spend that is accounted for by business and professional services has risen. Organizations now understand that their resource pool extends beyond the boundaries of the organization; and competitive advantage today is as much about the construction of supplier relationships as commoditization and competitive tendering has been to category management.

Taking the view from business to market

It is ironic how often the term value is bandied about, especially as it is so difficult to define what value actually is; moreover, its loose and frequent use across a number of contexts makes it difficult to anchor its meaning in supply management.

We can, however, reasonably attach various connotations to value:

  • Value is relative to an alternative – value cannot be judged in isolation.

  • Value is composite and decomposable – value can be analysed into a set of value drivers: for example, time, cost, quality and service.

  • Value can be used in several contexts – in B2B relationships it tends to be economic in nature, but other aspects such as the emotional, environmental and social may also be considered as having a value quotient.

  • Value is measureable/quantifiable – economic value might be seen as revenue, or cost savings, but other aspects have their own forms of measures: for example, the ability to exploit intellectual property right (IPR).

CPOs can map the way in which the customer gets value to the way in which the seller charges for value. For example, in the construction industry the value of a surface coating may derive from the area covered, while the price is far more likely to be quoted in volume.

Value management relies on multiple streams of information from inside and outside the organization – both internal and external perspectives are necessary. Today procurement holds information regarding customers, competitors, demand, offers, costs and production constraints. These data are all used in value management and this places procurement in a strong position to make this aspect of business their own (see Figure 9.1).

Click to collapse
Figure 9.1: Procurement‘s value proposition

Procurement leaders are faced with a dichotomy: cost (savings) versus value (creation); and this requires CPOs to think hard about how well they understand the market. If CPOs are to be truly market facing – and for too long their focus has been internal clients and stakeholders – then there is a real need to bring the balance of their focus to some sort of equilibrium. It will be because of this equilibrium between the business and the market that the long-heralded co-creation of value can take place. This is where the next big windfalls will come from, the next big gains and the next competitive advantages. Value procurement will be category management‘s legacy.

It is no longer enough to build a supply management capability that is efficient, demand-driven and transparent. Procurement must offer the organization something that is value adding – a new supply management where the strategic scope of procurement‘s value is delivered via innovation, a networking function that is focused.

So how does this change the game?

We have been wondering for some time: has the big business idea of the last 30 years gone rancid? The idea being that you drive cost out of the organization in order to make it more profitable and to maximize shareholder value – only to drive risk in. Why do organizations continue to get this so wrong, pursuing the will-o’-the-wisp of cost reduction with measures that end up increasing them? This preoccupation seems to have tainted the cream on the top of most business models.

It is quite clear to us that the procurement function is going through something of an evolution, as the strategic impact of it comes to the fore. Organizations are increasingly moving away from the discrete function of the past; the doers (buyers) are being replaced by enablers (valueadders). Enablers are deemed more useful to the organization and stay embedded in strategic business units.

Another interesting aspect is that more and more we are seeing profits replace cost savings. Consequently, the cost-savings focus is giving way to a strategically aligned emphasis on profitability. Moreover, as the discrete procurement function moves into a new modus, the battles to ensure that cost savings are reflected in their budgets will fade and the emphasis on cost savings only will have less weight than timeliness and quality.

If we reflect on the above it points to the ‘doers’ – those who excel at cutting deals in the back office – finding themselves and their role outsourced to third-party services organizations. Procurement then will be freed up to operate on a strictly strategic remit, perhaps embedded in other SBUs or operating as a loose network. Certainly they will be market/supplier-facing. They will be there when required, constantly moving and reinventing their roles as needs shift.

The commentary in much of the business press these days relates to the desire for the emergence of a new supply management to meet modern business needs. Procurement‘s horizon has clearly widened since the 1980s and has seen procurement transform from tactical to strategic. But the notion of ‘strategic’ remains hemmed inside the function, almost a prisoner of its own history. It requires a change in mindset and the development of a cultured understanding of the (strategic) value-adding capability of procurement – and, with it, the realization of what strategic can mean gets much broader.

Procurement needs to become more commercially focused, as its new highly strategic role requires that: 1) it understands the workings of the financial supply chains; 2) that it stimulates good demand and increasing business value derived from spend (and supply markets) rather than simply reducing spend magnitude.

These changes bring with them new issues:

  • As outsourcing takes off, many current procurement and supply-side activities, the ones that do not get pushed elsewhere in the business, will be outsourced as organizations adjust and ‘slim down’.

  • Increasingly third-party service providers call the shots as the quantity and quality of third-party procurement services increase. Their performance, across many spend categories, will surpass what can be achieved in-house; and as these operational activities move outside the business, often in extended supply chains with little transparency, this will have very real consequences.

    Naturally, there will be several areas of business management that will be materially impacted. At the top of the list will be corporate governance and risk. A cursory glance at today’s business landscape reveals why business leaders must ensure that activities in their extended and more complex supply chains are acceptable. This applies to both core and non-core suppliers in equal measure. For example, the scandal in the UK in 2013 where pork DNA was found in products supplied to the prison service in foodstuffs for Muslim prisoners.[2] Another good example is that of the professional services industry, where we are seeing a global debate on the Big 4’s (Deloitte, PwC, Ernst & Young, KPMG) grip on the audit market and the pressure to create more competition.

    There is also need to re-evaluate where business risks lie. Risk since 2008 has changed in nature. Today there is much more emphasis on fragility and, as such, the financial and reputational standing of organizations is subject to global market volatility. As businesses have replaced internal operations with external suppliers, risks associated with them are also externalized. Some recent examples of the impact of this include:

    – the Deepwater Horizon incident in the Gulf of Mexico in 2010;

    – the Aston Martin, Shenzhen Kexiang Mold Tool Co counterfeit plastic debacle, uncovered in 2014;

    – the collapse of the Bangladesh garment factory in 2013.

Added to these issues, an increase in collaboration brings with it potential problems regarding the ownership of intellectual property (IP). Since the 1990s the move from closed to open innovation models has facilitated innovation-oriented cost-saving strategies. Today, suppliers invest heavily in R&D, so it follows that relationships are established to facilitate this innovation to flow into the business – and equally for the suppliers to understand the needs of the businesses they service in order to guide and tailor innovation.

With the dawn of the ‘extended enterprise’ there are tangible changes regarding IP ownership and exploitation. Manufacturing has been led by the ‘make versus buy’ paradigm for many years and in so doing creating what is known as shallow depth of manufacture. Whilst themanufacturers intend to stay there, services organizations are increasingly engaged in outsourcing. Clearly as IP development moves into the supplier base any future exploitation of IP will depend on where it sits, and who owns it.

Suppliers are one of the main engines of income, and, as suppliers, take on bigger chunks of things they already do for their customers, for example by developing end-to-end solutions if they do not already exist. Where solutions do already exist, then customer enterprises must become much more receptive to sourcing them, with suppliers moving out of their comfort zones to drive customer performance.

Clearly the foregoing demonstrates that there are new sources of value for businesses to explore. Collaboration creates value. Developing structures to support shared purpose, ideas and insights is inherently value-creating. In turn this demands a shift in how the supply base is viewed. Suppliers can be enablers too, who will deliver value. For example, networks for innovation – a transition from the dyadic ‘buyer and supplier’ relationship to ‘integrated supplier networks’ – will enable greater coordination of innovation road maps across connected businesses and industries.

With developments such as these, organizations share risks and rewards. As supply management professionals get better at segmenting, defining and measuring value, they will begin to incorporate both gain- and risk-sharing into commercial relationships with suppliers. Ultimately this kind of relationship also facilitates ‘motivational contracting’. As well as sharing risks and rewards in contracts, supply management professionals will accept greater risk in commercial relationships with critical suppliers by leaving out all the demotivational stuff that inhibits supplier innovation.

[2]Report in the Daily Telegraph, 3 February 2013.

The evolution of procurement‘s value proposition

The focus of much of this book has been to establish the notion that new practice is needed within business with regard to its use of supply management and its position in the business. Today’s uncertain and volatile markets make agility and change inevitable as well as essential.

Supply management mind and skill sets must change. Many business leaders have ambitions to improve profitability by reducing costs. But to do so, they must also reshape their supplier relationships, aligning their supply chain with a more progressive strategy and securing a competitive advantage. So what are the new realities?

Moreover procurement professionals need to get savvy. Their professional credentials will be measured by their ability to influence, persuade and provide vision. Their mindset must be strategic, global, collaborative and, above all, commercial (see Figure 9.2).

No strategy – whether it is business-as-usual or a radical shift – can now be implemented without listening to and working with stakeholders and suppliers. We have seen how they fulfil the majority of a corporation’s needs. How well they are mobilized will determine how well theorganization can execute on its strategy. Procurement professionals have to be able to connect, network and trade.

In Chapter 5 we looked at the impact of technological applications on business. Today everything starts with an E! Procure-to-pay, sourcing, contract management and other automated solutions are integrated up and down supply chains, fully adopted, providing greater transparency and real-time insight.

Click to collapse
Figure 9.2: The evolution of procurement‘s value proposition

More and more we see people working ‘on the go’. A new internet-savvy and technically confident generation is entering the workplace using smartphones, tablets, embedded chips and other devices to create a mobile work environment for procurement professionals and suppliers alike. This coupled with the internet-of-things will change the shape and dynamics of supply chains and our working lives. We are seeing it now; it will only get bigger and faster.

To be in the swim we must connect and collaborate. For some considerable time we have been talking about dynamic supply chains and how networks are the way forward; but actually manifesting that in our day-to-day work-life has been difficult. Now, we have an opportunity where in 10 minutes you can find second- and third-tier connections in global networks, with people who know people you know. Buyers and sellers are increasingly relying on digital trading networks and communities that allow them to quickly and easily discover each other, connect and collaborate.

Business intelligence has become critical to the sustainability of corporates wishing to compete in global markets. Open pricing for goods and services is becoming increasingly transparent due to the internet, e-sourcing, global trading networks, online communities and procurement‘s intrepid scrutiny into still-cloaked categories. Might negotiation become a lost art? We are beginning to see too some consensus develop around risk and complexity and how to model risk. This is helping to develop more standardized, readily available third-party information and networked communities where people pool data for operational risk assessment.

The emergence of intelligent data is reversing procurement‘s reliance on looking backward at money spent or supplier past performance. The increased use of ‘big data’, the cloud and analytics enables procurement to work with information, data and models that predict – providing knowledge at your fingertips! With analytics comes more visibility regarding spend, risk and performance, which will be available when you need it. Ready access to accurate, timely, structured internal and external business intelligence will create unprecedented capability regarding information manipulation in support of decision making.

The CPOS enigma

There is probably no paradox more prominent in economic theory than the ‘paradox of value‘ or the ‘water-diamond paradox’, which appears in a passage concerning the meanings of value in Adam Smith’s The Wealth of Nations. There is an argument equally as recognized amongst historians of economic theory regarding the existence of any paradox – one that Smith himself saw in his discussion of meanings of value or the twin concepts ‘value in use’ and ‘value in exchange’. Value is very difficult to define. Things are often given great ‘value‘ when in truth they are worthless – diamonds in the desert have little if any value compared to water. Water is life sustaining, diamonds are not. Conversely, in a city water is plentiful and has little value (in exchange for money) whereas diamonds have tremendous value (in exchange for money) but their value in use remains the same as in the desert. In this instance let’s suspend belief and accept that the ‘paradox’ is ‘that value in exchange may exceed or fall short of value in use’.

It would seem that in business for some time a paradox has existed regarding the role and value of procurement to the organization it serves. Many have simply wanted to resign the function, apparently populated by dullards and failures, to the back rooms of corporations because they are of little worth other than saving the business a few quid. However as Warren Buffet famously said in 2008: ‘Price is what you pay; value is what you get.’[3] If you treat or perceive someone or something as if it has little or no value, don’t cry when it is gone. As has been alluded to already in this book, the global economic downturn that followed the October financial crash of 2008 emphasizes this. Procurement has a greater value to business than had been traditionally appreciated.

The fact that this is as much a misrepresentation as it is a myth seems to have passed most people by until relatively recently. It is very nearly 50 years since Peter Drucker coined the term ‘knowledge worker’, and never have employees who think for a living been more important or more in demand in organizations around the globe. Perhaps it seems obvious: but an organization full of thinkers is quite different from an organization full of doers.

With the introduction of the assembly line, theories of management focused on predefining the ideal outcome and creating performance measures that pushed employees to reach that goal. Efficient managers were those who set the course and very carefully defined, monitored and drove performance. Yet the new challenge in management is quite different. Organizations are less like finely tuned machines – operations with predictable processes and outcomes that can be predirected – but increasingly complex systems, living in vibrant and evolving ecosystems.

What is apparent here is that when the procurement function began it was a low-level tactical, mainly clerical role in most organizations and hence seen as delivering little or no value and, in some cases, being of little value either – anyone can do ‘buying’. So perhaps there is a paradox here and it is that procurement‘s value in exchange (as an outsourced service) may exceed or fall short of its value in use.

Click to collapse
Figure 9.3: Cost versus valuethe balance between business focus and market satisfaction

The dilemma, or enigma, depending on how you wish to look at it, is: what is modern procurement‘s value to the business? From the perspective of the CPO it must relate to the now long-standing debate between cost (reduction) versus value (creation). Or, more to the point, risk (management) versus value (creation). CPOs must create equilibrium in their focus between the business and the market it serves, by understanding the right levels of focus of their procurement team on their internal clients and stakeholders and the external market and customer base (see Figure 9.3).

As important as the foregoing is, they must also understand the threats to the viability and sustainability of the enterprise as a result of discontinuity, innovation and obsolescence, and they must be capable of applying a ‘commercial twist’.

[3]Chairman’s letter to shareholders of Berkshire Hathaway Inc. 2008.

Delivering commercial twist

Commercial twist relates to the ‘elasticity’ of the business model being deployed at any one time. CXOs in their efforts to chart the future course of their businesses will have several simultaneous objectives, which will require them to align their strategies to cope with rapidly changing business contexts.

They need to be able to execute those strategies effectively ensuring their supply chains are sustainable, flexible and responsive through their networks and collaborations. As mentioned above, CPOs must create equilibrium in their focus between the business and the market. They must be tuned in so that when conditions change as a consequence of any discontinuity they must be able to twist the commercial ‘ribbon’ at the point of change so that the enterprise can ride the wave (Figure 9.4).

Delivery of procurement‘s new value proposition must be seamless, without operational interruptions or performance slips. It will be a strategic balancing act and one that requires strong leadership crossing all lines of business and reporting into the board.

Rigid adherence to the tried and trusted, standard procedures or misplaced tradition, can mean that current needs are not well met and innovation stifled. There is a clear and present need for ongoing, active management of commercial focus balanced across the business. Agility makes a huge difference, not least in maintaining an understanding of business need as circumstances change.

Perhaps here procurement as well as other business decisions should be based on risk versus value rather that cost versus value, as clearly the stakes are higher: it is the difference between surviving and thriving. Procurement acts as an enabler to the business; it draws innovation from the supply base and plays the role of ‘assembler-of-innovation-communities-and-then-gets-out-ofthe-way’.

The two case studies below provide insights into some of the typical challenges being identified in deploying true value procurementThe first comes from an interview with a senior executive at a major oil and gas company. We have reproduced the transcript to provide key insights from this discussion. The second relates to how Honda of America placed such an emphasis on strategic cost management that they were able to make it a concern for every part of the business.

Click to collapse
Figure 9.4: Commercial twist: the balance between risk versus value

[4]Handfield, R and Edwards, S (2009) Cost Leadership Best Practices, white paper, Supply Chain Resource Cooperative, NC State University.

Some conclusions

For the introduction of this new approach cultural change is essential. Cultural change starts with a change in behaviour of the people employed within the organization. They need to know how strategic goals and operational performance are aligned with internal activity – in terms ofchallenging business rules and long-held beliefs and ways of working, improving policies and processes, allowing supplier-led innovation into the business, encouraging cross-functional working and so on.

Only then will they start thinking strategically about how the value procurement with all its component parts can empower them – as well as delivering efficiencies and lower costs to the business. The goal is to bring a high level of commercial rigor to how people go about their daily working lives.

Having a long-term perspective

Annularity has dominated the business mindset and calendar for some considerable time. Principally due to the focus on shareholder value maximization and all that that entails. But business is different now due to globalization and the consequent volatility in markets, which has evaporated much of the certainty of the preceding 30 years of business philosophy and practice.

Perhaps a long-term perspective of the effectiveness of value-driven procurement strategy is now what is called for. Value procurement is perhaps the vehicle to deliver business needs, and a longer-term view will ultimately pay rich dividends. All too often, attention moves on to the routine and the humdrum and important initiatives are forgotten.

Today’s deeper and broader supply base has made operations more complex; and yet it is not clear that businesses have the capabilities in place to manage these new ways of working effectively, even if some profess that they do. This again begs for a focus on the longer term but with an agile mindset to accommodate the twists in the ribbon and ensure business continuity.

The need for top-level support

We are clear that a new mindset is needed. A new way of looking at the role that procurement can play, how it is perceived, led and what it can contribute to business objectives and customer satisfaction. That said, procurement needs top-level support to:

  • manage the cost base commercially;

  • provide operational advisory services to the business;

  • influence and change behaviours, ways of working and business rules;

  • execute sourcing and supplier management in a contemporary and professional manner.

Businesses that get these elements right can expect:

  • a step-change in innovation;

  • improved corporate governance and reduced risk;

  • increased visibility and control;

  • better alignment of day-to-day operations to corporate aims;

  • improved cross-functional working;

  • higher productivity;

  • enhanced profitability.

The combination of a large externalized cost base with underexplored cost management strategies offers a compelling opportunity to unlock significant and sustainable improvements to performance, profitability and shareholder value.

Intelligent cost management

Managing cost in a progressive way can add value to a company’s balance sheet and can identify numerous ways of boosting the underlying profitability of the business. The new commercially focused demands of modern businesses are rocking this traditional area of procurementstrength.

Globalization has proven to be more about revenue growth than cost savings. Spend management is shrinking and the focus is on profits. Today your chief executive might well ask ‘how much that price might cost the business’. As a procurement leader, could you give a competent as well as confident answer? Moreover, in this age of heightened scrutiny from stakeholders, can any business afford not to explore the opportunity than a holistic approach such as value procurement can offer?

‘Make versus buy’ begets complexity. So what to do? Who do we do business with in the fast-growing and culturally different organizations developing in the emerging economies? We still need to select suppliers, but in this new world it carries much more risk. Couple this with the inherent complexity in a globalized marketplace, and it becomes clear that doing business is increasingly difficult.

Risk versus value

Fragility and supply risk and converging global trends in often-turbulent economies mean that a new systemic approach to risk must be taken. In the past, business approached risk by calculating the potential impact of an event multiplied by the time it affected their operations – how exposed their business was to the uncertainty of something happening. Uncertainty was the source of the ‘risk’.

However, the uncertainty of the (global) economic environment cannot be controlled; today, excessive complexity is the source of risk. Procurement must engender greater awareness around supply risk and also an expansion in perceptions of where risk lies. This must be set in the context of its contribution to business objectives and customer satisfaction.

Notes

  1. For transaction cost economics see Williamson, O E (2005) Handbook of New Institutional Economics, Transaction Cost Economics, Springer, US, pp 41–65. For interactions method see Ford, D et al (2002) Understanding Business Marketing and Purchasing, Thomson Learning, London. For relational method see Lamming, R C (1993) Beyond Partnership: Strategies for innovation and lean supply, Prentice Hall, Harlow; Hines, P et al (2000) Value Stream Management: Strategy and excellence in the supply chain, Financial Times/Prentice Hall, Harlow; Christopher, M and Towill, D R (2002) Developing market specific supply chain strategies, International Journal of Logistics Management, 13 (1), pp 1–14.

  2. Report in the Daily Telegraph, 3 February 2013.

  3. Chairman’s letter to shareholders of Berkshire Hathaway Inc. 2008.

  4. Handfield, R and Edwards, S (2009) Cost Leadership Best Practices, white paper, Supply Chain Resource Cooperative, NC State University.