Transformation is Necessary for High Procurement Performance

Last week, where I walked you through The Hackett Group’s 18 value streams that can take you from a naive apprentice to expert sourcerer, I noted that your procurement needed to be transformational. I also provided you with some examples of transformational value streams that included process re-engineering, financial hedging, and supplier collaboration. But I didn’t address how you shift from a strategic mindset to a truly transformational one.

The key is to think about reinventing your procurement organization. That requires going beyond simple strategic sourcing where you are sourcing current needs using the best tools, processes, and information available to thinking about your long term needs beyond the current project (and contract) and coming up with a strategy to make any savings you secure sustainable over the long term. For example, you might focus on securing a long term contract with a supplier who could become a strategic partner, or with a third party manufacturer committed to upgrading it’s production equipment and processes to deliver year-over-year cost reductions, or with a design firm who works with you to continually re-engineer designs to be more cost effective to produce.

As this recent article in Industry Week about how to achieve high performance points out, transformation is the process by which companies, business units, or locations make a step-change improvement in their operating performance. It’s more than just an incremental improvement. It’s a new way of operating. It’s not just shifting from cost savings (tactical) to cost reduction (strategic), but to cost avoidance (transformational). It’s going beyond a focus on lowest TCO to a focus on highest value. For example, maybe you could save 10% if you could increase your order from 75K units to 100K units, but when all is said and done, the company is measured on profit. Maybe it’s better to create a slightly higher quality version of the product, only order 50K, pay a little more, but sell them at a higher profit margin. Whereas a strategic sourcerer would try to negotiate the 10% discount on the possibility of 100K of demand as a stretch goal, the transformational sourcerer would accept a slightly higher price-point for 50K, slightly improved, units to maximize total company profit in the long term.

So where do you start? As per the Industry Week Article, you start by recognizing the gaps between your performance and that of best in class companies. If you don’t understand how much better you could be doing, you’ll probably never acquire the drive to be truly transformational. As a result, you’ll leave significant value on the table without even realizing it.

Then you set stretch goals that seem unattainable but are, in actuality, just a little beyond reach. Given that over 80% of all activity in most business processes is a waste — adding no customer value whatsoever — there’s a lot of room for improvement. And since no one says you have to get there all at once, shoot for 50% improvement. If you get 20%+ every year, you’ll be pretty close to your goal after a few years.

Finally, you get a strong organizational leader on your side. As with every other effort, the support of a strong C-suite leader is the key to success. At some point, someone is going to need to make a tough call because you’re going to have to radically change how things are done and there is going to be a lot of resistance at first. But that’s good, because that probably means you’re on the right track.

Stay there, and you might just find out what transformational procurement really is!

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