Category Archives: Procurement Innovation

7 Tips to Align Procurement with the Boardroom

A recent article by Alexander Arsath Ro’is of Benefit, an Amsterdam Procurement Consulting Company, provided 7 tips on how to “align procurement with the boardroom” that are worth a second look. Based on research they conducted with two Dutch universities, which led to the construction of the “Benefit Boardroom Alignment Assessment Methodology”, they concluded that the following best practices would benefit any company that wants to align procurement with the boardroom and wants to start with an accurate assessment of the current state.

  1. Tell the Board First
    Make sure your Board understands the challenges before you start an assessment of your current state.
  2. Be Absent from Assessments
    This will allow the CEO, CFO, COO, and other CXOs to speak freely about their expectations of Procurement.
  3. Put Your View Across
    Initiate dialogue with the Board to challenge views in a positive way and talk about opportunities that will arise from a proper alignment.
  4. Remember, It’s a Start
    Alignment isn’t a precise measure — it’s a way to get perceptions in tune with reality.
  5. Ascertain What Others Want
    The goal is to be on the same page with what the Board expects and what your internal customers want.
  6. Create Understanding
    Effective alignment will only result when Procurement fits with the rest of the organization.
  7. Ask: Are You Ready
    An assessment won’t help if the organization isn’t ready for an accurate assessment of where things are and isn’t willing to do what’s necessary to get where it needs to be.

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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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What’s Your Procurement Value Level? … or Transformational? (III)

In Parts I and II I reminded you that Pierre Mitchell of The Hackett Group invited you to participate in a study designed to help you identify where you were on your procurement journey by way of 18 value streams that range from “naive apprentice”, where you’re measuring performance at an elementary (tactical) level, to “expert sourcerer”, where you’re extracting procurement value at a very advanced (transformational) level. Then I covered some of the seven tactical value streams and some of the six strategic value streams. In today’s post I will cover the final five transformational value streams, which range from:

Internal Procurement process cost savings are found from process re-engineering
through
Benefits due to currency hedging, inflation hedging, options/derivatives, etc.
to
Revenue uplift from supplier collaboration (e.g., innovation, diversity advantage, joint marketing, etc.)

Very few companies are transformational in their procurement. A company that is transformational goes beyond just taking cost out of the supply base, but finds ways to take costs out of all aspects of company operations while making the entire company leaner, meaner, and smarter about it’s organizational finances and processes. A truly transformational Procurement department positively impacts every area of the organization.

Internal Procurement process cost savings are found from process re-engineering

Instead of being reactive and trying to reduce costs after 70% to 90% of costs are baked in during the design phase, Procurement works with Engineering and R&D to help them select materials and specifications that will be the most cost-effective in the long run when multiple options exist. Instead of shaving a few percentage points off of list price, Procurement can be shaving a few dozen percentage points off of total cost by going out to market with designs that are much more cost effective to produce.

Benefits due to currency hedging, inflation hedging, options/derivatives, etc.

Instead of just looking at the total cost in today’s market, Procurement looks at the expected total cost over the lifetime of the contract and works with finance to select options that will insure the expected cost reductions are realized in spades over the contract duration.

Revenue uplift from supplier collaboration (e.g., innovation, diversity advantage, joint marketing, etc.)

Once a Procrement organization has truly embraced transformational procurement, it works with its suppliers to not ony take cost out of the end-to-end supply chain, but also to inject more value that will allow for greater revenue on each sale. Cost are reduced, revenue is increased, and the company’s profitability becomes world class.

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What’s Your Procurement Value Level? … Strategic? (II)

In Part I, I reminded you that Pierre Mitchell of The Hackett Group invited you to participate in a study that would help you identify where you were on your procurement journey by way of 18 value streams that range from “naive apprentice”, where you’re measuring performance at an elementary (tactical) level, to “expert sourcerer”, where you’re extracting procurement value at a very advanced (transformational) level. Considering that this survey will not only help you identify a path to increased value but that Pierre has promised to share some of the results with all survey participants for free, it’s a survey that’s definitely worth your time as Hackett has the premiere benchmarking data in the space.

I also told you that the first seven value streams were tactical and provided relatively little ROI compared to the ROI that is available through more advanced value streams. The next six value streams are strategic and will generally provide you with good payback over a longer term. They range from:

Costs avoided by receiving ‘no charge’ items and services
through
Early payment discounts, P-card rebates, or other supply chain finance benefits
to
Internal enterprise process costs are reduced via a new supplier solution

Costs avoided by receiving ‘no charge’ items and services

Now we’re into strategic procurement where the “savings” are real and sustainable. By negotiating in more items and services for the same money, you’ve considerably reduced your costs and increased the value that you can provide your end customers for the same price. And while it’s true that the ‘no charge’ items and services could disappear at contract termination, you’ve established with your supplier(s) that you expect a higher level of performance and service, which will make future negotiations, and cost-avoidances, easier.

Early payment discounts, P-card rebates, or other supply chain finance benefits

Now you’re starting to look at the total cost of the buy from an organizational perspective, and not just a unit cost or landed cost perspective. If your supplier’s annual cost of capital is 36%, and yours is less than 12%, you could be saving yourself up to 24% annually, or 2% for each month you shave off the total payment time. This can be substantive and is easily sustainable. Plus, once you get good at managing your working capital and finances, you’ll start to see even more savings opportunities appear.

Internal enterprise process costs are reduced via a new supplier solution

Once you get to the point where you start recognizing that sometimes you don’t know all the answers and that a smart supplier can point out additional opportunities for you to save money, you have not only mastered the art of strategic sourcing, but have reached the point where your sourcing is on the verge of becoming transformational … which is the topic of Part III.

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What’s Your Procurement Value Level? Tactical? (I)

Recently, Pierre Mitchell of The Hackett Group asked you if you knew the difference between procurement value and procurement performance (part I and part II) and invited you to participate in a study that would help you identify where you were on your procurement journey by way of 18 value streams that range from “naive apprentice”, where you’re measuring performance at an elementary (tactical) level, to “expert sourcerer”, where you’re extracting procurement value at a very advanced (transformational) level. (Pierre also posted a link to a corresponding finance study that you can share with your finance associates, which will help Hackett compile a full view on the problem.) Hopefully, by now, you took the survey and are eagerly awaiting the result and insights that Pierre has promised to share with you on Spend Matters and Sourcing Innovation. (Note that the posts will be distinct and that you need to follow Spend Matters as well as anything posted on Sourcing Innovation will not duplicate whatever he posts on Spend Matters!)

In my post last week where I directed you to the survey, I told you that I would be sharing some of the value streams with you and explaining their importance as a lead in to Pierre’s forthcoming posts. The goal is to help you understand the value that can result from a procurement journey that takes you from a tactical outlook, that results in minimal ROI, through a strategic perspective, that results in moderate ROI, to a transformational realization that results in significant, long term, ROI.

The first seven value streams, which are still representative of the procurement that takes place at the majority of organizations today, are tactical. You’ll generally see some “savings”, but not very much. And the savings are not very sustainable. They range from:

The purchase price of an item is negotiated down from a list price
through
A fixed price is created and cost increases are avoided when the market price subsequently rises
to
The price stays the same but demand/consumption is reduced/delayed to reduce total spend

The purchase price of an item is negotiated down from a list price

This is old-school style procurement, and doesn’t represent “real” savings because suppliers expect you to negotiate them down no matter what price they list, so they build some negotiating room into the price, pretend to cave, get the deal, and get back to enjoying their relatively fat margins and traditional, fat, way of doing things. And then you start the cycle all over again when the renewal comes up and have to renegotiate the savings that were never there in the first place.

A fixed price is created and cost increases are avoided when the market price subsequently rises

This is another classic example of tactical procurement. If you’re in an industry where the raw prices traditionally inrease steadily over time, you know that if you lock in prices, the price will go up, and you can claim “savings” that you never really negotiated in the first place. And then, as before, you have to start all over again from the new list price at renewal time, lock in a new rate, and then watch the “savings” evaporate at contract expiration.

The price stays the same but demand/consumption is reduced/delayed to reduce total spend

While still tactical, this represents the transition point to truly breaking into the realm of strategic because it gets away from simply beating up the supplier in a negotiation and locking the price in a contract and moves toward thinking about ways to reduce costs and identify sustainable savings. However, since you’re simply delaying an order until you need it, or being careful not to waste supplies, instead of finding a way to reduce demand in the long term, it’s still tactically focussed. But it hints at sustainable savings, because if you become more efficient at JIT ordering and delivery, and better at reducing waste, over time, the small amount of savings you do find will be sustainable.

In Part II, we’ll dig into a few of the strategic value streams and explain how they represent real cost savings and lay the foundation for truly sustainable cost reductions that are fully realized when you eventually become transformational in your procurement strategy.

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