The Procurement Value Proposition: The Rise of Supply Management – Introduction

Introduction

Overview

Procurement has a history that is linked in the core concepts of centralization, volume leveraging and cost reduction. The earliest traces of this can be linked to materials management. Charles Babbage’s book on the economy of machinery and manufacturers, published in 1832, referred to the importance of the purchasing function. Babbage alluded to a central officer responsible for several different functions in the mining sector: ‘a materials man who selects, purchases, receives, and delivers all articles required’.[1]

By 1866, the Pennsylvania Railroad had given the purchasing function departmental status, under the title of Supplying Department. The purchasing function was such a major contributor to the performance of the organization that the chief purchasing manager had top managerial status.[2]

The comptroller of the Chicago and Northwestern Railroad wrote the first book exclusively about the purchasing function, The Handling of Railway Supplies – Their Purchase and Disposition, in 1887. He discussed purchasing issues that are still critical today, including the need for technical expertise in purchasing agents along with the need to centralize the purchasing department under one individual. The author also commented on the lack of attention given to the selection of personnel to fill the position of purchasing agent. In Europe, organizations in theEuropean coal and steel community in 1951 began exploring centralization of coal purchases to drive greater leverage.

These early insights evoke a situation that is still not uncommon to what we see today. Although procurement has certainly evolved from its early roots, it still faces challenges in terms of executive recognition, talent management and organizational challenges. Modern enterprises are faced with a massive new set of challenges, including the forces of globalization, increased risk, complex supply chains, and the spread of government regulation on decision making, not to mention the tremendous strain of man’s presence on the earth’s natural resources. This book will seek to document not only what the future holds in store for the materials buyer, but also how this role is likely to emerge as critical to the future.

Our central thesis is that those organizations who are better able to position procurement as a core business function, with direct responsibility to the chief executive officer (CEO), will be able to drive a more competitive lever for change, and adapt more readily to the rapid forces ofchange in the current global environment. In the way that Charles Darwin identified that organisms better able to adapt to their environment ultimately survived, so organizations that embrace complexity – and manage it through more rapid responses, improved market intelligence, greater adoption and translation for internal stakeholder requirements, and adaptive capabilities – will survive.

Faced by these issues many businesses have turned to procurement, looking for solutions to these burgeoning problems. As a consequence of this responsibility, procurement as a business discipline has grown exponentially since the 1980s. Many organizations across the private and public sectors worldwide have elevated procurement to a strategic business role; the emergence of the Chief Procurement Officer (CPO) is manifest recognition of the rising profile of procurementThe trend towards outsourcing of non-core activities has clearly had a positive impact on thediscipline, as a large proportion of value addition to the business comes from the supply base and many organizations have woken up to this fact and manage their procurement function accordingly.

However, the elevation of procurement to a strategic business function is a relatively recent development and for many businesses procurement remains a low priority. Here procurement remains focused on gaining low prices from suppliers, regardless of whether the business strategy is focused on low cost or not. So, although procurement in some organizations has become more sophisticated, there remains much scope for improvement in the discipline.

Another interesting development is that an increasing number of people choose a career in procurement; however, as recently as the mid-2000s this was by no means the case. Procurement was often seen as a backwater, a somewhat dubious choice for a career. It can be argued too that the emergence of supply chain management has played into the hands of procurement, which is seen as a critical link in the supply chain. In other ways, however, the role of procurement in relation to supply chain management is all but clear: some people regard purchasing as an integral part of supply chain management whereas others regard it as complementary but separate.

Procurement executives today are being asked to bring more to the table in this era of globalization and outsourcing capabilities. Many are being asked to push procurement in directions that represent new business models and approaches. And yet many feel torn between delivering thetraditional demands of procurement – supply assurance and cost reduction – while frustrated knowing what the real potential of a world-class supply management organization is capable of delivering.

In an effort to explore ‘the art of the possible’, this is not a book with a primary focus on procurement and supply management techniques or practice, but a book that identifies and discusses the value proposition offered by contemporary procurement to the sustainability and development of the business it serves. In effect, this book is about change. And because change is constant, we acknowledge that the story is still being written. The inclusion of case studies focusing on organizations that are moving through procurement transformation are thus not depicted as ‘best practices’, because in a sense the story is still being written for each of these companies and their managers. Rather, the case studies provide a snapshot of organizations in transition, in a continual phase of movement, alignment, flux and adoption to the multitude of shifts that are occurring in each of the ecosystems they populate. And because change is so fundamental to the ideas presented here, we hope to provide a view of how to think about change, and how procurement needs to change. This is not so much an evolution of procurement, but a suggestion ofwhat procurement may look like at some point in the future. Not every organization will get there. Some may founder, or remain stuck. But in the end they will all change to some extent. What we hope to provide here is a roadmap for navigation to this change.

[1]Babbage, C (1832) On the Economy of Machinery and Manufactures, Charles Knight, Pall Mall East.

[2]Fearon, H (1968) History of purchasing, Journal of Purchasing, February, pp 44–50.

Structure of the book

Book overview

As shown in Figure 0.1, the book is divided into two parts:

Image from book
Figure 0.1: Book overview

Part A: Foundations and establishment of contemporary procurement

The chapters in the first part of the book focus on how, since the 1980s, procurement has matured as a strategic business unit (SBU) – transforming itself from the low-level clerical service it once was into the creative professional team that today brings value to the business and thecustomer.

As the point of departure, Chapter 1 (What is contemporary procurement?) begins by tracing the development of purchasing from a principally administrative, tactical service within organizations to a managerial, strategic, value-adding function. We introduce the implications of supplychain management for purchasing and conclude with an overview of how this impacts the structure of the rest of the book.

Chapter 2 (Procurement maturity: understanding performance versus value) is designed to offer some insights into how procurement has evolved; we introduce a maturity model to help the reader understand at what level of maturity different organization’s procurement functions are capable of operating at. Here we examine how the value of procurement is delivered into the business in terms of the service mix: ie how procurement performs. We look at what levels of capability we have today and to what extent it needs to change, allied to how well an organization can execute efficient and effective procurement. We also investigate the importance and nature of purchasing strategy and explore different purchasing organizational structures, skills and competencies. In Chapter 3 (From global trends to corporate strategy) we examine how a procurementexecutive’s ability to read trends accurately in a rapidly changing business setting can make all the difference between surviving or going under. We assess too the impact of emerging macroeconomic, social, environmental and business developments against the needs of a business. We ask whether the trends detailed in the chapter are in some way self-predicting; and what contribution procurement professionals can deliver to the business. Taking both internal and external procurement dimensions into account, we examine the five widely accepted key trends that dominate the business world today, and consider what the really good procurement organization does to maintain competitive advantage.

Chapter 4 (Five game changers: their impact on procurement and supply management) evaluates the big issues affecting business today. We explore the way in which procurement is structured and how procurement will increasingly find itself managing virtual networks of suppliers, stakeholders and internal customers, drawing on powerful new social media channels to communicate. We discuss why it is important that this technology does not come at the expense of face-to-face relationships because of their importance in establishing solid supplier connections. Alongside this, we look at the debate regarding the battle for talent.

We highlight why businesses can no longer afford to downplay the strategic role of procurement, and develop an understanding of the impact of the game-changing phenomena that have brought this about – and how procurement can offer the wider business opportunities to take advantage of some of them. Clearly not every procurement organization is at the same level of maturity, so we consider three levels of capability, as identified in Chapter 2 in terms of the achiever; the value-adder and the leader.

Part A continues on a pragmatic note with Chapter 5 (Taking a practical approach to improvement: introducing the ACE model). Here we introduce a model to work with in association with the maturity ladder to plot procurement‘s future. Whilst we continue our focus on how the issues discussed in Chapter 4 have changed the face of global supply chain management (SCM) we contemplate what options are available to those leading procurement set against the ACE model – via the three dimensions of the model’s aspiration, capability and execution and what they might offer to the ambitious procurement leader. In Chapter 6 (It’s all about people: talent acquisition and retention) we begin our examination of talent as well as mindset and skill sets. In Chapter 7 (Cometh the hour cometh the man: realizing procurement‘s potential by building winning teams) we contemplate how procurement has changed, the different levels of procurement maturity that exist today and the consequent impact on the people, talent and creativity needs of procurement. All too often we hear that we can’t find the people ‘out there’ to take on this new role. Clearly these people are available, because other parts of business such as finance or marketing can find people with the qualities required to work in the contemporary business world.

Procurement‘s journey from ‘also ran’ to core business capability matches the way in which the business landscape has changed since the 1980s and 1990s. Procurement began to change as the customer moved to the centre of the business universe and corporates such as Apple, Wal-Mart, Amazon and Zara gained dominant market positions largely by building and operating supply chains that outstrip the competition.

Part A concludes by focusing on the role of innovation in procurementThe first part of Chapter 8 (The dawn of procurement‘s new value proposition: innovation, collaboration and focus) discusses how purchasing can facilitate product development and innovation through the involvement of suppliers. The second part of Chapter 8 discusses what procurement might become and offers six signposts to the future. In Chapter 9 (The future: from strategic procurement to value procurement) we contemplate how an implicit view of value does not allow practitioners to fully understand which elements of value must be achieved to sustain relationships, or the complex commercial and operational tensions that exist in transactional exchange. We argue that much of the current thinking tends to overemphasize the operational and underplay the commercial interests, which exist in business relationships. We discuss the importance of understanding the supplier’s needs and wants as well as an understanding of the sources of supplier value, arguing that this could help buyers to manage a whole range of buyer–supplier interactions and develop them to gain strategic competitive advantage. We discuss too that it is necessary for the buying organization to understand what it is that suppliers want from them other than more revenue. Some suppliers, for example, might want demand stability and are prepared to improve their performance to get this. In Chapter 10 (Reflections and conclusions) we spend some time building on these insights to understand where we are likely to go in the next decade.

Part B: Innovation debates: creating your own value from procurement

Part B is more practical in nature than Part A. It considers how companies can implement some of the ideas in this book, by using both the procurement maturity ladder and the ACE model to examine ‘the art of the possible’ within their organization in order to explore new forms of supplychains and the need to engage with a range of network suppliers and stakeholders.

How to use this book

The structure of this book is designed such that the chapters can be read either sequentially in the order they appear, or the reader can opt to be more selective by dipping into topics of specific interest at their choosing. Throughout all the chapters in this book, we have sought to address what we perceive as the prime challenges facing procurement today in terms of understanding and developing value to both the business and, ultimately, the customer. Each chapter highlights specific issues or practical examples from industry and we have adapted major case studies to demonstrate core themes and concepts in each chapter.

As noted, we have woven stories of procurement change into every chapter, in the form of brief case studies. These provide not just examples of what we mean by change, but also provide some important practical examples of how to get started. Each case is not a success story – many ofthe companies are in transition, or faced with seemingly insurmountable obstacles. But they all provide a window into the mind of how progressive procurement executives are moving in the right direction. Finally, we feel it worth signposting the fact we have included blog posts from http://scm.ncsu.edu/blog/ in our book. We think this introduces a live element. A problem we perceive is that it is very difficult to get senior executives to devote themselves to opportunities with the potential to bring real change. However, by introducing the blog address we hope to generate a robust flow of new procurement management ideas.

What does the future of procurement look like to you? Today, it would seem that every CEO has a point of view about the strategic worth and/or direction of procurementThe blog gives us and you an opportunity to innovate and engage. Everyone has a voice. This is your opportunity to help shape the future of procurement and its impact on business. So come on and join the debate.

Notes

  1. Babbage, C (1832) On the Economy of Machinery and Manufactures, Charles Knight, Pall Mall East.

  2. Fearon, H (1968) History of purchasing, Journal of Purchasing, February, pp 44–50.