The Winter Edition of CPO Agenda had a great article on how stand-out procurement functions are continuing to extend their reach and value despite volatile market conditions. In How the Stars Shine Brighter, the authors reviewed the 2008 Assessment of Excellence in Procurement from A.T. Kearney (AEP) that surveyed and benchmarked almost 500 respondents against their industry and geographic peer groups as well as best-in-class companies.
The study identified three key trends from leading procurement practices that can be directly linked to the attainment of sustainable competitive advantage:
- Leaders achieve a broader mandate to drive change,
- Leaders develop dynamic new value-creation strategies to satisfy ever-increasing customer demands, and
- Leaders continue to develop and maintain robust enabling capabilities in performance management, knowledge and information management, and human resources management.
Leaders Drive Change
In direct materials leaders typically control two-thirds of external expenditure — twice that of the average firm. In indirect materials, the proportion is 73% for leaders, 42% for followers. By addressing a larger portion of the total corporate spend, leaders are yielding overall procurement-related savings that are 2.3 times greater than the followers. For a $20 billion company that could represent a 21% advantage in earnings per share versus its competition.
How do they do this? They:
- Align with Corporate Strategy
The CPO maintains a close relationship with senior management to help him or her align procurement strategies with the overall corporate strategy.
- Refine the Organizational Structure
Today’s procurement organizations frequently follow a center-led model that features common policies, approaches and practices for purchasing company-wide.
- Increase Strategic Focus
Leaders focus on strategic initiatives, not transactional activities that are best left to automated systems.
Leaders Develop New Value-Creation Strategies
Leaders go above and beyond the basics, initiate supplier collaboration, and differentiate themselves through superior approaches to risk management, best-cost country sourcing, and sustainability. They
- Take Sourcing Practices to New Heights
Leaders take a highly systematic approach to the application of traditional sourcing strategies, including volume concentration, best-price evaluation and global sourcing, as well as more relationship-orientated approaches such as product specification and joint process improvement, and relationship restructuring. Leaders also create value by using sourcing and category management methods such as innovation network leveraging, product “teardown” (a common method of analysing competitors’ products), collaborative cost reduction, expressive bidding and price benchmarking, to name but a few, to a far greater extent than followers. As a result, they attain higher levels of cost savings and value.
- Drive Supplier Collaboration and Innovation
Leaders are redefining boundaries and reaping the benefits of true partnerships, such as more product and service innovation and faster time to market.
- Unlock Value through Risk Management
The majority of leaders systematically use internal risk mitigation strategies to ensure supply continuity, develop category management contingency plans, align supply security with their overall business risk tolerance goals, and define, measure and track risk management and supply chain key performance indicators (KPIs).
- Source from Emerging Markets
Leaders arrive to the party early, while the savings buffet is full and plentiful. Leaders demonstrate that potential obstacles around emerging market sourcing can be overcome by actively engaging with and investing in suppliers. The ability to manage risk — through supplier process auditing, process risk assessment, high-quality data reporting and analysis, and the placement of key procurement executives in offshore locations — gives the leaders confidence that their emerging market sourcing activities will bring cost improvements without introducing excess risk.
- Follow Sustainability and Corporate Social Responsibility Best Practices
Finding the right balance between economic viability, environmental awareness and social well-being is a significant challenge, but a competitive advantage can be gained by companies that locate intersection points for all three. Sustainability leaders are differentiating themselves in a number of ways, be it through reductions in energy use and waste, taking on a holistic, future-orientated focus, or extending sustainability outward to the extended enterprise.
Leaders Employ Robust Enabling Capabilities
Leaders measure actual benefits, perform audits of procurement benefits, examine the function’s impact on profit and loss, and track productivity performance indicators. Leaders
- Employ Best-of-Breed Technology
Leaders have taken spend visibility to the next level, linking systems to product development and product lifecycle management tools to further improve control and influence procurement decisions earlier in the design and decision-making process. Leaders are improving their business intelligence capabilities with respect to spend management, using techniques such as predictive modeling at a much faster rate than followers. And leaders hold, on average, more than five e-sourcing events per business day — a rate four times greater than that of the followers.
- Win the Fierce Battle for Talent
Leaders realise that continued success depends on their ability to attract and retain the right people.