Daily Archives: February 20, 2008

Procurement’s Expanding Role and the Executive of the Future

Today I’d like to welcome Jon Hansen of Procurement Insights.

In 2006 CPO Agenda’s London-based editor chaired a panel discussion asking the question “are there any limits to procurement’s role?”

The panel which included senior procurement personnel from organizations such as Nestle, Danone, British Airways and Merrill Lynch provided some interesting insights into the prevailing (and emerging) attitudes towards procurement from an executive suite perspective. (You can obtain a copy of the panel’s discussion through the following link.)

While the panel’s discussion was generally interesting, there were a number of noteworthy revelations (especially in the context of my recent posting on the pending talent crunch). An example that immediately comes to mind was the assertion by one executive that truly talented individuals “should move out of purchasing after five or six years and do another job, whether it’s finance, human resources, manufacturing or marketing.” Taking into account the fact that some of the panel members by their own admission are either “new” to procurement or do not consider themselves to be “a purchasing professional” makes me wonder if this represents an expansion or an assimilation of the purchasing department’s role within an organization?

There is a significant difference between expansion and assimilation in that expansion acknowledges that purchasing can have a broader role in the organization’s overall success while still recognizing and working within its unique operating framework. Assimilation on the other hand tends to view procurement as an adjunct of a core practice (i.e. finance) where there is a greater tendency to overlook important attributes that are indigenous to the practice. One panel member’s opinion that “procurement is becoming more a profession for generalists, rather than specialists,” represents the assimilation view to which I am referring.

Another comment that caught my attention was the position taken by one panel member that out of his organization’s 20,000 suppliers only a few (i.e. 100) will merit engagement from a strategic perspective. As a result, there is going to be a continuing need for what was referred to as “low-level” buyers. However, the same individual concluded that “one strategic business thinker with the right skills and capabilities is worth 10 or 12 of your normal, run-of-the-mill purchasing people.” This “class distinction” as I will call it is certainly not new to the industry. It is however a potentially detrimental viewpoint in that it can increase the risk of a serious disconnect with and between key stakeholders. Particularly if you are of the opinion that there will be a continuing need for traditional purchasing personnel.

Procurement through the looking glass?

Recognizing that there are “hard-nosed purchasers” as well as “creative and innovative guys” (the reference to guys only is duly noted) one panelist highlighted the benefits of the increasing number of CPO’s that are “coming from outside the procurement world.” Referring to these individuals as “people who come from business . . . and therefore understand the business language,” the executive indicated that the new CPO’s “tend to be wonderfully connected in their organizations” bringing an element of creditability that will “help to bring procurement into the mainstream.”

While collaboration is essential to the ultimate success of any initiative hence the benefit of being “wonderfully connected,” is this necessarily the most important qualification for a CPO? Or is it the hallmark of a project champion or a key stakeholder contributor? This is another important distinction given that the panelist later made the statement that “I come from business and when I leave procurement I’ll go back to business.”

I have a first hand understanding of the corporate mindset in terms of increasing one’s value through a diversity of experiences (one day I will have to tell you the story of a top sales manager’s decision to accept the head position in his organization’s service department solely to increase his odds of being promoted up the corporate ladder). However the risk of being perceived as an outsider or an interloper under these circumstances is very real, especially if you already have your foot pointed to the exit door.

Unfortunately departmental resistance has been one of the most common challenges associated with a failed procurement initiative. This poses the question, are the only individuals who possess the capability to run the procurement department of the future, the ones who do not think of themselves as being procurement professionals?”

If the answer is yes, what does this say about corporate commitment in terms of personnel development within their purchasing ranks?

A question of corporate culture

How an organization views the role of its procurement department differs from one company to the next. One panelist made the following observation when asked if the shortage of talented people was the greatest constraint a CPO faces: “the context, history and the culture of the company is important. Take a specific category as an example. I moved to Nestle from a company where procurement was heavily involved in any new capital expenditure project right from the start. Now I find myself in a situation where we have very limited involvement to actually influence the buying decision.”

This indicates that some companies confine their purchasing departments to a narrowly defined functional role versus being a strategic contributor. While I do not have specific data regarding the percentage of organizations that operate under this misconception, the consequences of doing so can be catastrophic.

One example is the computer manufacturer who built the Hot Wheels and Barbie PC’s for Mattel in the late 1990’s. Operating on razor thin margins the pressure to use low-cost components from off-shore OEM’s was great. Unfortunately, the power supply that was ultimately selected failed in 60% of the machines (adding insult to injury was the fact that the failures occurred on Christmas morning when excited children attempted to turn on their new PC’s).

The company, whose sales grew from $27 million per year to $118 million in just 18 months collapsed under the wave of return costs which eroded the aforementioned paper-thin margins. The manufacturer went into bankruptcy in early 2000, while Mattel was left to deal with a public relations nightmare.

What role did the PC manufacturer’s purchasing department have in the power supply selection? Did upper management’s pressure to meet an unrealistic selling price unduly influence their decision? Finally could the purchasing department’s management have done anything to avert the disastrous outcome? Not wanting to pick on Mattel, the same questions could be asked regarding Thursday’s recall of 967,000 plastic preschool Fisher Price toys that were manufactured by a China-based supplier. The recall was due to “excessive amounts of lead” used in the products’ paint.

The above examples certainly demonstrate the breadth and width of the potential impact that is associated with the purchasing process. What needs to be seriously considered is whether the purported benefits of handing the reigns to a CPO who does not have a purchasing background versus developing a leader from the existing talent pool within the department itself make sense in this period of dynamic change?

It is really a question of creditability. In which individual would the CEO and board have the greatest level of confidence?

Referencing Jim Collins’ book Good to Great*, if an organization fails to invest in developing its leaders from within then it is likely that they will look to someone outside of the corporation. In the majority of such cases (note that I did not say in every case), the odds of sustainable success will be limited.

*Note: The book Good to Great referenced the practice of looking outside of an organization for leadership. While there are certainly instances where an individual outside of a company was brought in to run a particular procurement department, I believe that the term outsider can also be extended to include individuals from other unrelated areas of the same business.