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End of business-as-usual in Procurement

Presented at: CPO Forum India 2013 By: Valekumar Krishnan, Senior Research Manager July 6, 2013 Mumbai, India


Pop Quiz

How well do you know the supplier community? 1. Which of the following suppliers have a 2012 revenue more than Walt Disney and Abbot Laboratories combined (USD 79.7 billion) ? A. McKesson B. AmerisourceBergen C. Walgreens D. Cardinal Health A and D: McKesson and Cardinal Health 2. Johnson Controls in 2012 had a revenue of USD 40.8 billion. This is more than that of: A. Pfizer B. Johnson & Johnson C. Merck D. FedEx D: FedEx 2


Agenda • Procurement is on a Burning Platform

• Procurement is Evolving • Challenges & Future Trends • Conclusion

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Post the 2008 economic crisis, the World has changed

Opposing Economic and Business Cycles

Simultaneously Opportunistic Demand and Plant Closures

Unpredictable Markets and Suppliers

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This is what it feels like to be in Procurement

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Impact on Procurement •

Shorter Lead Times

Reduced time to market

Volatility in Raw Materials

Need for Stable Suppliers

To get the above means you will need to have

Supplier Loyalty

Secure Available Capacity – Operations – Design, Development Knowhow

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Today, many CEO’s across the world are investing in Procurement • Procurement excellence is increasingly seen as a business pre-requisite • Companies that are better prepared have stayed ahead and are improving faster

Pharma & Healthcare

Pharma & Healthcare

Food, Beverage & Tobacco

Food, Beverage & Tobacco

Metals & Mining

Metals & Mining

Chemicals

Chemicals

Hitech

Hitech

Automotive

Automotive

Oil & Gas

100%

80%

60%

Pre 2007

40%

20%

Oil & Gas

0%

0%

20%

40%

60%

80%

100%

2012 Source Beroe

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However, pace of transformation can only be sustained with a clear Org. level mandate on these KEY areas

Process (Few Examples)

• Effective category management (with equally effective supplier integration) • Cross-functional Integration

• Supply Chain Risk Management

• Procurement as an attractive career option

And most importantly People

• Procurement expertize vs. Business thinking conundrum • Empowerment to develop strategies (credible business partners/Leadership growth Pool)

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Changing the game Supplier intelligence and advocacy (% of respondents using often or very often) We know how our suppliers segment us as customers We ask suppliers about our stakeholders in the business We ask our suppliers about business issues they see in our company We make new connections in the business for suppliers We share opportunities outside current spend with suppliers We advocate suppliers in the business We ask suppliers to bring new business opportunities they see to us We listen to and learn from suppliers We ask suppliers for update us on their markets Source: PwC

The message is clear – very FEW CPOs really understand how their suppliers segment them – This is a key element in transformational sourcing. Some key questions we need to ask ourselves: 1. How much of future business plans are you willing to share with your suppliers to get the critical ones to be loyal to you? 2. What do our key suppliers want from our company? • Predictability, consistency, Low cost to serve, Discipline, Behavior, One face to the Supplier? 3. What percentage of our supplier conversation are no price negotiation centric? And what % of supplier’s cost is driven by my company? 9


Winning the game

Common Mistakes

Instead Focus On

1. We are getting all that we can from our suppliers !!! 2. We always think we know enough about the category 3. We do not consider who is competing for our suppliers capacity in category planning 4. We always think that we are important to our suppliers 5. We don’t get all party sign off to supplier strategies 6. If you tell a supplier your strategy, they will share it with your competitors 7. We think we communicate enough with our suppliers

1. What do we need to do to get more from our suppliers? 2. What else do we need to know about this category? Can our suppliers help us understand how others are buying this category? 3. How do we position ourselves to ensure we get the capacity from our suppliers? Do we need to fundamentally change the way we do business with this supplier? 4. How do our suppliers view us? Are we their customer of choice? If not, how do we get there?

Procurement needs to take a high level view to understand various aspects of sourcing instead of a periscope view

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Case Study: How not to Bleed Suppliers.. • European based MN with 25bn Euros spend p.a. 40 plants in 5 countries using the same supplier No internal co-ordination of demand & no category plan No understanding on supplier stability or growth potential • Management demanding lower prices every year • Procurement negotiating lower prices with supplier each year –

Separate negotiations for each plant; local congratulations for good result

• Suppliers could not continually reduce costs to match lower pricing: Procurement could not fathom the leading signals No communication channels were in place with Large MN or any plants Supplier reached strategic decision and declared bankruptcy • Supplier provided tool mouldings used on every product that Large MN produced • Supplier gates closed with tools inside Large MN took 4 weeks and a takeover costing 100+ Million Euros to stay in business Procurement learned the hard way about the benefits of cross business category management and how important it is to know about the supplier and the market 11


Transformational changes however cannot be accelerated without the right skills sets.. • The procurement experience vs. business thinking conundrum –

Which is the one you prefer? The center of gravity is seen to be shifting towards business thinking

• The attractiveness of procurement as a challenging career option –

The level of transformation taking place will definitely help the cause however will require strong internal and external marketing

• Strategic influencing, process excellence & compliance, exposure to other business functions are few key behavioral traits that will be crucial in transformation –

Fortune 500 CPO are increasingly looking for these

• Last but not the least CPO’s & middle management need to look beyond procurement next job options as tacitly impacts thought processes and expectations –

Galvanizes procurement function to see and align to the bigger picture

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Case study: Company P – Don’t change the rules change the game • European based MN with 25bn Euros spend p.a. 2500 FTEs in procurement world wide Low- med level talent Very little category strategy work done • Created Procurement brand and marketed it internally and externally • Raised barrier to enter procurement – very top talent & via assessment centre only • Broke pay-scale rules but no one stopped it • Conditions of entry: 2 years stay in procurement, then make a career in other function Personal growth mandatory Develop sell and execute category strategies across the business One mistake allowed • No procurement experience necessary

• Recruited 672 top talent in 3 years by competing with ATK • Reduced total headcount to 1800 in same timescale en route to 1200 Totally re-positioned procurement with credibility and success 13


Conclusions

Businesses will demand more value from procurement organizations

Managing an increasingly volatile supply market, from both a price and availability point of view Suppliers must be influenced to such a degree that they work with buying organizations, rather than against them. Becoming customer of choice is key Sourcing is complex: Finding the type of procurement professional who is able to cope will define how procurement organizations evolve Acceleration on change-Golden time to make the change and sustain it. Adding value to overall strategy-the burning platform needs to be leveraged 14


What it should really feel like to be in Procurement

Thank You

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The future of procurement end of business usual vale