PROFIT FROM PROCUREMENT
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LibraryofCongressCataloging-in-PublicationData:
Names:Klein,Alex(AuthorofProfitfromprocurement),author. | Whatson, Simon,author. | Oliveira,Jose,author.
Title:Profitfromprocurement:add30%toyourbottomlineby breakingdownsilos/AlexKlein,SimonWhatson,JoseOliveira. Description:Hoboken,NewJersey:Wiley,2021. | Includesindex.
Identifiers:LCCN2021000246(print) | LCCN2021000247(ebook) | ISBN 9781119784739(hardback) | ISBN9781119784982(adobepdf) | ISBN 9781119784913(epub)
Subjects:LCSH:Industrialprocurement. | Businesslogistics.
Classification:LCCHD39.5.K5342021(print) | LCCHD39.5(ebook) | DDC 658.7/2—dc23
LCrecordavailableathttps://lccn.loc.gov/2021000246
LCebookrecordavailableathttps://lccn.loc.gov/2021000247
Coverdesign:Wiley
Thisbookisdedicatedtoourwives, Michelle,Sonja,andInês
Chapter1INTRODUCTION:WhyProcurement, andWhyNow?1
Chapter2AMBITION:EnsuringYouAreSetUpfor Success15
Chapter3SOURCINGEXECUTION:MakingSureThat theEngineRoomDelivers27
Chapter4PEOPLE:BuildingaWinningProcurementTeam47
Chapter5OPERATINGMODEL:MakingItWork inPractice61
Chapter6CROSS-FUNCTIONALCHANGE: RepositioningtheFunctionasaTruePartner79
Chapter7SUPPLIERS:EngagingEffectively89
Chapter8NON-SAVINGSPRIORITIES:BalancingYour Objectives103
Chapter9SAVINGSREALIZATION:StemmingtheLeaks115
Chapter10TECHNOLOGY:InvestinginandAdopting theRightTools133
Chapter11CONSULTANTS:UsingConsultantsin Procurement147
Chapter12PRIVATEEQUITY:LearningLessonsfromPE165
Chapter13ROADMAP:MakingaConcreteand RealisticPlan177
Chapter14CONCLUSION:SummaryandFinalThoughts195
Acknowledgments207
AbouttheAuthors209
ListofAcronyms213 Index215
INTRODUCTION:Why
WhatFollowsIsaTrueStory
Manyyearsago,IwasatacocktailpartyhostedforexpatsinLondon, withmywife.ManyofthosepresentwerefromthebigNewYork investmentbanks.Atonepoint,Istartedchattingwithoneofthese individuals.
“So,whatdoyoudo?”heasked. “I’maconsultant.”Ireplied. “Consultinginwhichfield?”heasked.
“Procurement”Ireplied,atwhichpointhelookedatmewithan expressionofdisgustandsaid,“Excusemewhilemyeyesglazeover,” thenturnedaroundtosignalthattheconversationwasover.
Now,that’sveryrudebehaviour,butthat’snotthepoint.Thepoint isthatProcurementhassuchapoorimagethatit’snotevendeemed worthyofaconversationbythosewhoconsiderthemselvestobeatthe topofthebusinessfoodchain.Procurementisjustnotexciting,andit’s certainlynotsexy.
Well,howexcitingdoesithavetobe?Howabouthavingthe potentialofincreasingyourEBITDAbyathird?Howabouthaving
theresiliencetokeepyoursupplychainupandrunningduringa globalpandemic?Procurementisanenormousprofitabilitylever, anditshouldbeacorecompetence—especiallyinmoderntimes, inwhichcompaniesaccomplishmoreandmorethroughoutsourced relationships.
Yetinthemajorityofcompanies,Procurementisfarfromoptimized,andthereisamassiveprizetobehadifwecouldonlydoabetter job.SinceProcurementrepresentsbetween50and80%ofacompany’s costsdependingontheindustry,andsincemostsavingsextractedfrom thatspendflowstraighttothebottomline,thenI’dsaythatmakesit interesting!
Inthischapter,wewillsetthesceneforthebook,byexamining whythereisanopportunityinProcurement,whatthesizeoftheprize couldlooklike,andwhymanycompanieshavefailedtocashinon thepromisetodate.Attheendofthechapter,weprovidesomebackgroundtothebook,alongwithanoverviewofwhatyoucanexpect fromtheremainingchapters.
Let’snowsteprightbackandexaminewhythereisanopportunity associatedwithProcurement.Thereare,inessence,tworeasons:(i) Procurementistypicallyacompany’slargestcostbucket,and(ii)in mostcompanies,thatcostbucketisnotoptimized.Let’slookateach inturn.
ProcurementIsaCompany’sNumberOneCost,MakingIt aHugeProfitLever
Procurementrepresentsbetween50and80%ofacompany’stotalcosts, dependingontheindustry.Thatfeelslikeabignumber,butthat’sjust becauseexternalspendisnotusuallycountedinoneplace.Acompany’sexternalspendcontainssomanythings(fromofficesuppliesto rawmaterialstofactorymaintenanceservicestoenergy,fleet,marketing,andIT),fragmentedacrosssomanybusinessunits,geographiesand budgetlines,thatit’srarelyseeninaggregate (seeFigure1.1).
OK,sothespendisbig,buthowbigistheopportunity?Inmany companiesthathavenotyetoptimizedProcurement,itcanbevery significant.Figure1.1looksatatypicalmanufacturingcompany, withrevenuesindexedto100.Well,ifyousimplysubtractfrom that100yourEBIT(oraddbackinyourlosses),thentakeout
Figure1.1ProcurementSpendasaPercentageofTotalCashOutflows
depreciationandyourwholesalariesandwagesbill,thenwhat’sleft ofthe100isbydefinitionexternallyprocured.Inthisexample (see Figure1.2),thatamountsto60 … 60%oftherevenue!
Thenextquestionis,howmuchcanyoutakeoutofthat60?Well, acommonmistakeistoassumethat“10%shouldbepossible.”Maybe 10%ispossible,butnotonthewhole60ofspend,atleastnotinthe mediumterm,becausesomespendswillbenon-addressableorlocked in,andthereisalwaysa“tail”ofspecialistone-offsuppliers.These non-addressablespendscanbesignificant,soit’ssafetoassumethat maybe60%ofthe60isaddressableinthemediumterm.Ifyourorganizationisglobal,youmayalsohaveacollectionofverysmall,remote geographieswhosespendmaybetoosmalltomeritaddressinginthe mediumterm,whichcouldreducethe60%further.
Intermsofhowmuchcanbesaved,thisofcoursevariesbycategory andbycompany.But,longstoryshort,acompanythathasnotoptimizedProcurement,canlooktotakeroughly10%outofitsaddressable spend.IntheworkedexampleinFigure1.2,thatequatestoasaving of3.6fromanaddressablespendof36(60%of60).Giventhatthe
companyhadanEBITof10goingin,thenthat’sa36%upliftona 10%margin.Andthat’sbeforeyoufactorinanyCapexsavings(which ofcoursehitEBITonlyindirectly).
ThebeautyofProcurementisthatthisopportunity(oryourspend) isspreadacrosssome40orsospendcategories.Thiscomprisesavery diversesetofthings(fromOfficeSuppliestoLogisticsProviderstoRaw MaterialstoComponents … ),eachwithtotallydifferentsuppliersand itsowninternalstakeholders.SinceaProcurementeffortisbeststructuredaroundcategoryteams(seeChapter3:SourcingExecution),then thiscreatesanaturalportfolioeffectacrossyourtarget—onecategory mayfail,butanotherwillover-deliver.Thisportfolioeffectiscritical inProcurementeconomics,inthatitsignificantlymitigatestheriskof non-delivery.
Attheendoftheday,itwouldbedifficulttofindopportunitieswith asmuchpotentialimpactonEBITDAasProcurement,withoutthe needtoreduceheadcount,closeoffices,ormakemajorinvestments. So,atleastonpaper,theProcurementopportunityissignificant.
Figure1.2Procurement’sEBITImpact
That’sallverywellintheory.Butwhataboutinpractice?Howdo Iknowthatthe10%isactually there? Why isthereanopportunityin thiscostbase?Answer:Becauseinmanycompanies,Procurementis notoptimized.Let’sexaminewhythatisthecase.
WhyIsProcurementNotOptimized?
TheopportunityinProcurementexistsbecauseinmanycompanies, Procurementisnotoptimized.Thereareanumberofreasonsforthis:
▪ Procurementcomesfromanadministrativebackground,andoftenlackstheremittotakeastrategicorproactiveapproach.
▪ Procurementthereforedoesn’thavetherightcross-functionaloperatingmodel,andsometimesadoptsunhelpfulmindsets.
▪ Thisresultsinanunder-investmentinpeopleandtools,creatinga viciouscycleofunder-performanceandunder-investment.
▪ Theendresultisaspendbasethat’snotoptimized—notaggregated acrosslocations,andwithinconsistentspecificationsanddated supplierrelationships.
Let’sexploresomeofthesepointsinalittlemoredetail.
Remit
Thepointregardingremitisfundamental:itasksthequestion,whatis expected ofProcurement?Unfortunately,manyProcurementfunctions do not havearemitto“workwiththebudgetholderstoproactively optimizetheircostbaseusingthefullsuiteofsupplyanddemand levers.”Rather,theexpectationisthatProcurementwillcomeinat thelastminutetonegotiateandexecutethecontract.Thatremitwill allowProcurementtoachievemaybe25%ofitspotential.Andtherein liestheproblem,ortheopportunity … theProcurementfunctionis probablydoingagoodjob—butbasedonanoverlynarrowremit.
TherootofthisproblemisthatProcurement’shistoryliesinadministration.Thefunctionstartedlifeasamechanismtolegallyprocure goodsandservicesonbehalfofthebusinessandisthereforeseenasa supportfunction—onethatensuresthatsuppliercontractsgetsigned
andmaterialsshowup.Overtime,Procurementteamshavebeenbuilt ontheseadministrativefoundationsastheirfunctionshaveevolved. Inmanyorganizations,thebudgetholderactuallymakesmostofthe decisions—fromdecidingwhatpartisneeded,todecidingtogowith theOEM(OriginalEquipmentManufacturer)partto,veryoften,talkingtotheOEMandagreeingtoaprice.OnlythenisProcurement broughtin,toclosethedeal,signthecontract,andorderthepart. Andthat’sthetypicalremit … whichensuresthatprobably80%of thecostisalreadylockedinbythetimeProcurementcomestothe table,therebyseverelyconstrainingProcurement’spotentialcontributionfromtheget-go.
Giventhisrestrictiveremit,itcomesasnosurprisethen, thatProcurementoftenhasn’tdevelopedanywhereneartheright cross-functionaloperatingmodel:seeChapter5:OperatingModel, foramoredetaileddiscussionofthis.Tomakemattersworse,in theabsenceofaclearrole,buyerscansometimesadoptunhelpful mindsets.Insteadofadoptingaservicementalityalongthelinesof“I amheretohelpyouwithyourspend,”thereisoftenamindsetbased onperceivedauthority.
Mindset
We’veseenunhelpfulProcurementmindsetsatcountlesscompanies; themostcommononesIwoulddescribeas“thepoliceman”andthe “Procurementprofessional.”
Thepolicemanisahistoricallegacy.MostProcurementorganizationsweresetuptohelpgetcontrolofexternalspend,withafocus onpurchaseordersandnecessarydraconianpoliciesof“ifitdoesn’tgo throughProcurement,itdoesn’tgothrough.”Thishassetthemupfor decades-longfightswithstakeholders;fightsinwhichProcurementis thepoliceman,chasingdownthenon-compliantstakeholders(sounds likeaProcurementBladeRunner!).
Asaresult,manyProcurementteamshavecastthemselves(often unintentionally)ina“policeman”capacityvis-à-vis“thespenders.” Nowadays,thislegacymindsetreallydoesn’twashwithsophisticatedandintelligentstakeholdersinfunctionssuchasEngineering, Manufacturing,Technology,orMarketing.Infact,theoppositeis
required—acollaborative,open,intelligentapproach,nota“you havetogothroughProcurement”approach.Tothisday,IseevestigesofthismindsetinProcurementteams,andit’snothelping thecause.
Theotherthingthatdoesn’thelpiswhenProcurementpositions itselfastoomuchofaprofession.RatherthancredentializingProcurement,thiscansometimescreateabarrier—themessageherebeing, “Wehavetechniquesthatyouguysdon’tunderstand”and“We’rebetternegotiatorsthanyouare.”I’vefoundthatthestrongestProcurement peoplearetheoneswhoneverfeeltheneedtomentiontheirprofessionalskills.Theyjustrelatewelltothestakeholder,andtheydo goodwork.
Thesesomewhatdysfunctionalmindsets,whencoupledwithan alreadyweakremit,canacttoseverelyundermineProcurement’s potentialimpact.
ViciousCycle … andOpportunity
Thelackofremit,thelackofcross-functionalengagement,and, ultimately,thelackofimpactofProcurement,haveinturnled toaviciouscycleofunder-investmentinthefunction.Inmany organizations,Procurementisthereforeseenasastrictlybackoffice functionthat’slargelyignoredbyseniormanagement.
Butwhatthishistoricalneglectbringswithitisanenormousopportunity.MostoftheexternalspendwillberipeforStrategicSourcing: thespendwillnothavebeenleveragedoraggregatedacrosscountries ormanufacturingplants.Thespecificationswillbeoutdated,“what Engineeringhasalwaysused;”andtherewillbelongstandingsupplier relationshipsthatarenevertendered,readytobeshakenupwithabit ofcompetition.Inshort,significantsavingspotentialwillexistacross theentirethirdpartyspend.
Butofcourse,tocapturethatpotential,youneedtoworkbackwardsandfixtheremit,fixtheresourcesavailabletoProcurement, andfixtheinvestmentlevelinProcurement.Weneedtofindabetter way.Well,thegoodnewsis,thatbetterwayhasbeenaroundforover 30years.
TheBirthofStrategicSourcing—Dawn ofaNewEra … orNot?
Backinthe1980s,anewwayemergedforProcurementwhenGeneral Motorsplaceditsengineersandbuyersincross-functionalteamsand toldthemto“gototown”oncomponents,changingthespecifications, changingthedrawings,biddingGM’scombineddemandsinthemarket globally—anditworkedmagicallyandgavebirthto“GlobalSourcing.” Thiswassoonreplacedby“StrategicSourcing,”buttheconceptwas thesame—workcross-functionallytoproblem-solveachunkofthe costaway,please.It’snowthebread-and-butteroftheautoOEMsand theirdirectsuppliers.
ThismodelisstillwidelyheldupasProcurementbestpractice today.But,outsideofBigAuto,thelargepharmacompanies,and selectmulti-nationalmanufacturingcompanies,fewhavereacheda truly“worldclass”levelofsophisticationinProcurement—neitherin directspendnorinthe“indirects”arena.Weallknowwhatbestpracticelookslike,becausecompanieslikeGMandFordhavebeendoing itforhalfacentury.AtFordMotorCompany,theCPOsitsonthe board.Procurementisseenascareer-enhancing,andtheProcurement functionhasstrongpeoplewhoareabletoexecutecross-functionally. ThesavingsevenseemtobetraceabletotheP&L!Andyet,itseems, mostofusaren’tabletoreplicatethissuccess.Whyisthat?
OnereasonissimplythatFordandGMhavenochoice;theyhave tobegoodatProcurement.TheBigAutoOEMsbuyandassemblea hugevolumeofpartsfromaroundtheglobe,andthey’vebeenoperatinginanenvironmentwithverytightmargins(withlongperiodsof losses)fordecades.That’swhythey’retrulycommittedtoProcurement fromthetopdown,thereisverystrongProcurementleadership,there arehigh-caliberresourceswhorotateinandoutofthefunction, thefunctioniscareer-enhancing,workingcross-functionallyisinits DNA,andexecutionisofahighquality.Alldrivenbyeconomic necessity,whichinmanysectors,particularlygrowth-basedand technologysectors,doesn’texisttothesamedegree.
Asecondreasonwhysomanycompanieshavefailedtoreach bestpracticeisthattheygenuinelytriedbutfailedtodoitproperly orfully.Somedidn’tgettherightlevelofsponsorshiporinvestment
intothefunctionthatwasrequired.Othersyet,andtherearemany, havedeclaredvictorywhentheyhaven’tearnedit,whichthenblocks furtherprogressioninthosecompanies.
BadBestPractice
Thereisoftenaperception,particularlyamong$1billionplusrevenue companies,thattheirProcurementis“alreadybestinclass,”Strategic Sourcinghasbeendone,and“wehaveitallundercontrol.”Thereisa tendencyforProcurementtosay,“We’vedonealotalready,there’snot muchlefthere,we’reclosetobestpractice.”Personally,I’veprobably hadmorethan100Procurementleaderstellmethisdirectly,andit’s aproblem,becausetheygetawaywithit!TheC-SuiteviewsProcurementasatechnicaldisciplineandhas“fulltrustthatourCPOistaking careofit.”Inreality,that’sjustwhattheCPOcommunicatesupwards, andit’stakenasgospelbecausehe/sheisaProcurementprofessional, andpresumablytheyknowwhatthey’redoing.
Mypersonalbeliefisthatthisphenomenon—callitdefensiveness orwhatyoumay—blocksmanybillionsofdollarsofvaluebeingdeliveredthroughProcurementglobally.Icallit“badbestpractice,”andit’s surprisinglycommon.It’swhenProcurementfunctionsfalselybelieve thatthey’ve“alreadyadoptedbestpractice.”Themostcommonarea wherethisplaysoutisinStrategicSourcing.Ihavepersonallymet scoresofProcurementleaderswhohavebeengiventhe“Seven-Step SourcingMethodology”byoneofthebigconsultingfirms.These approachesmakealotofsense(andthey’reallprettymuchidentical, bytheway),buttheyhavetobeappliedproperly.Handingout cookbooksdoesnotmakegoodcooks.
Thereareother,oftenverylargeorganizations,includingbythe 1990ssomeofthelargerautoOEMs,inwhichthesourcingprocess hasbecomejustaprocess—veryinstitutionalized,butreducedtoa box-tickingexercise.I’veseenexamplesoftheworkofsourcingteams inorganizationsthatreligiouslybutmindlesslyapplyarigoroussourcingprocess.Theyhaveabaseline,theyhaveasupplymarketstudy, they’vecreatedastakeholdermap,andtheyhaveasourcingstrategy. Butthebaselineisincompleteandit’sunclearwhatthetotalspend is,thesupplymarketstudyisinterestingbutinnowayinformsthe
sourcingstrategy,thestakeholdermaphassatinafileforthreemonths nevertobere-lookedat,andthesourcingstrategyistobundlethe volumeandbeatupthesuppliers.
Badbestpracticeisaterriblething,becauseitblocks real best practicefrombeingputinplace.Andit’saremarkablycommonphenomenon.Manytimes,companiestrulybelievetheyhavedoneallthe rightthings.Inotherinstances,CPOsdressuptheirachievementsas adefensemechanismagainstexternalconsultantsorotherperceived threats.Inallcasesitactsasavalueblockage.
So,wheredowegofromhere?We’vestatedthattheremaybe alargeopportunity,we’veexplainedhowthisopportunityhascome about,andwe’veshownthatthereisacommonlyaccepteddefinition ofProcurementbestpractice,butfewhavemanagedtoattainthisgold standard.
Therestofthisbooklooksforwardtoansweringthequestions, “Howdowegetfromheretothere?,”“Howdowemaximizetheprofit potentialofProcurement?,”and“Whatarethefundamentalbuilding blocksweneedtohaveinplaceinordertosucceed?”
WhyNow?
Butyoumayask,what’snewinallthis?Procurement?That’sbeen aroundfordecades.Whythisbook,andwhynow?
Theanswertothisquestionisthat,whilethisbookwaswritten duringtheglobalCOVID-19pandemic,itscontentandmessages gowellbeyondthisandarejusttheaccumulated“wisdom”ofthree Procurementprofessionals.Ontheotherhand,COVID-19hasclearly putaspotlightonProcurement.Aswewatchedsupplychainsgrindto ahaltacrosstheglobe,itwaseasytospotthosewhowereprepared, thosewhohadtheirsupplychainsinorder … andthemanyothers whowerenotprepared,andwhowereblind-sidedbythecrisis.
FromaProcurementperspective,COVID-19putsintopartialquestionsomeofthecoresupplychainconceptscompanieshaveworked hardtoimplementoverthelastfourdecades:JIT(just-in-time)delivery,singlesourcing,“bestcostcountrysourcing”fromgeographically far-flunglocations … theseconceptsdrivecostoutofthesupplychain, butattheexpenseofincreasingexposuretorisk.Aglobaldisruption
likeCOVID-19islikelytothentestthosetightlystrungsupplychains tothelimit.
WhatthepandemicshowedagainisthatProcurementsitsatthe heartofthecompany,it’stheinterfacebetweenthecompanyandits suppliersandserviceproviders—andascompaniesoutsourcemore andmore,thenumberandscaleofserviceprovidersgrows.Now,the COVID-19pandemichasmadeusaskquestionslike“Dowehave enoughcontroloverallourkeysupplierrelationshipsandcontracts?,” “Dowehavecontingencysupplierswhocanrapidlyrampupcapacity forus?”and“DowehaveastrongLogisticspartner?”
It’scommonlyacceptednowthattherewillbemoreglobal pandemicstocome,solet’sbesuretolearnourlessonsfromthe currentone.Butalso,whynotusethepost-COVID-19eratorevisit ourProcurementcostbase?Nowisatimeforeveryonetolookat theircosts,sowhynotcombineitwithareviewofoursupplychain resilienceinthefaceofaglobalcrisis.
Sonow does seemlikeagoodtimetorevisitProcurement,and maybeask“Howfarhavewereallycome?”Howbigistheopportunity, wheredoesitlie,andhowdowecaptureit?Thesearethequestions thisbookseekstoanswer.
Butwhilethepandemicpartlyprovidedtheimpetusforwriting thisbook,attheendoftheday,noneofthemessagesinthisbookare “COVID-specific.”ThepandemichasshonealightonProcurement, butwhatithasrevealedwasalreadythere.Thisisnota“COVID-era book,”andwewillnotbediscussingthepandemicfurther.
AboutThisBook
Thisbookisnotanacademicbook.ItrepresentsthedistilledopinionsofthreeProcurementconsultantswhobetweenthemhavemany decadesofdirectandhighlyrelevantexperience.Buttheviewsand ideasexpressedinthisbookarenotfacts.Indeed,youmayworkfora world-classcompanytowhommanyofthestatementsdon’tapply.This bookisabouttypicalsituations,basedonwhatwe’vefoundthroughoutourcombinedcareers,andit’ssquarelyaimedatthe“bottom80%,” ratherthanthetop20%.
ThecentralthesisofthisbookisthatProcurementisamajor underexploitedprofitleverandinordertomaximizeitspotential,
anumberofcomponentsmustbeinplace,includingafit-for-purpose Procurementfunctionthatexecutescross-functionallyanddelivers crediblebenefitstothebusiness.Fromthere,thebookexploreseach ofthesecomponentsandhowtomakethemworkinpractice.
ThebookisaimedattheentireC-Suiteandisrelevantnotonly totheCPO,buttotheCFO,CEO,COO,andCIO.Why?Because (i)theyallstandtogainsignificantly,and(ii)theCPOneedstherest oftheC-Suiteifhe/sheistosucceed.Thebookisalsoaimedatthe PrivateEquityOperatingPartner(oranyotherprofessional)looking toleverageProcurementforEBITDAimprovements.Wehavethereforewrittenthebookinanexecutivestyle—notfromaProcurement perspective,butfromacross-functionalperspective.Wehopethat thebookspeakstotheentireC-Suiteandhelpstofurthereducate CEOsandCFOs,inparticular,abouttheopportunityinherentin Procurement.
Thisbookisnotanall-encompassingguidetoallmatters “Procurement.”Lookatitasacollectionofessaysonkeytopics.All ofthesetopicsareofrelevancetotheCPO.TheCFOandotherexecutivesmightprefertodipinandoutofspecificchapters,butwewould arguethattheIntroductionandConclusion,andthechapterson People,SourcingExecution,OperatingModel,SavingsRealization, andCross-FunctionalChangearehighlyrelevanttoall.
Wehavetriedtopepperthebookwithrelevantandinteresting clientanecdotes,withoutboringyouwithtoomuchdetail.Finally, thethreeauthorsaremanagementconsultants.Wethinkthisgives usaverygoodperspective,sincewe’veseenalltheissuesdiscussed herewithmultipleclientsmanytimesover.Italsomeansthatwehave alargetoolboxofconsultingframeworks.Whatwe’vefoundisthata smallnumberoftheseframeworkshaveprovenparticularlypowerfulin transformingProcurement.So,atcertainpointsinthebookweintend tosharewiththereaderthe“secrets”ofsomeofthemoresuccessful Procurementconsultingframeworks,andhowtogetusefromthem inpractice.
We’rekeeninthisbooktomovebeyondthehype,soourintent hasbeenverymuchtobehonestabouttheProcurementopportunity andhowtocaptureit,andtokeeptheadvicepragmaticanduseful. Ouraimwasto“tellitlikeitis,wartsandall,”the“Nob-s!,”C-level
guidetoProcurement.Wehopewe’vefulfilledthataim.We’dloveto hearfromyou,butpleasedon’twritetotellusthefollowing:
▪ “You’resuchabunchofconsultants”—Weknowthat,wecan’t helpit!Wedon’tthinkweknowalltheanswers,butwethinkwe haveavalidexternalperspective;wehavehumblyshowcasedonly asmallnumberofconsultingframeworksthathaveprovedeffective overtheyears.
▪ “You’rerepetitive”—Yes,andthat’sagoodthing!Therearecertainthemesthatrunthroughtheentirebook,revisitedinChapter 14:Conclusion,thataretouchedoninmultiplechapters … and thesearethethingswe’dlikeyoutoremember;hencetherepetition.
▪ “Thebookisn’texhaustive”—No,itisn’t.Thisisnotastructuredtextbook.Viewitmoreasacollectionofessaysonsomeof themostimportanttopicstotakeintoaccountwhentransforming Procurement.
▪ “MycompanyisverygoodatProcurement.We’vealreadydone muchofwhatyou’readvocating”—Great.Werecognizethat manycompanieshavesophisticatedProcurementfunctions;this bookisaimedatthosethatdon’tandarelookingtomaximize Procurement’spotential,aswellasthosewhodobutwanttoget someinsightintowhatothercompaniesaredoingthattheymight learnfrom.
▪ “You’redownonProcurement”—No,we’renot.We’redownon badProcurement,andProcurementwhosepotentialisnotmaximized,andsometimeswe’requitevocalaboutthat.Butweare championsofProcurementteamsthathavedevotedtheircareers tothecause.
▪ “Allyourexamplesfeaturesimpleindirectspendcategories”— Thisistrue.Wetriedtofeaturemorecomplexdirectmaterialscase studies,butthey’renotuniversallyunderstoodandrequiremore explanation,whichmakesitawkwardtorefertothem.Hence, we’vereliedmoreonindirectcategoryexamples,suchasTravel, MRO,andOfficeSupplies.Whilenot“strategic,”thesecategoriesareinfactquitecomplexandserveduswellinillustrating ourpoints.
▪ “You’retoofocusedonsavings”—Thepremiseofthisbookis thatProcurementisasignificantandunderexploitedprofitlever, whichdoesputsavingscenter-stage.Ofcourse,Procurementhas otherobjectives,asdiscussedinChapter8:Non-savingsPriorities. Butwefirmlybelievethatit’sthebottom-linecontributiontoprofitabilitythatputsProcurementonthemap,andthatisthecentral thesisofthisbook.
Ofcourse,youcanwritetousanyway,buthopefullytheabovehelps toclarifywherewe’recomingfrom,andwhatthisbookisandisn’t tryingtobe.
Inthefollowingpages,thisbookwillexaminetheProcurement Transformationjourneyfromallanglesandasksthequestionsthatthe C-levelexecutiveshouldbeasking:
▪ Whereistheopportunity,andhowbigisit?
▪ HowdoIcapturethisopportunityanditscostsavingsinpractice?
▪ Whydosomanycompaniesgetitwrong,andhowdoIgetitright?
▪ HowdoIbuildtherightteaminProcurement,andhowdoIwork effectivelycross-functionally?
▪ HowdoIensurethesavingsactuallyflowtothebottomline?
▪ WhatProcurementtechnologiesdoweanddon’tweneed?
▪ HowdoweuseProcurementtominimizesupplychainriskand drivenon-savingsagendaslikeSustainability?
▪ WhatcanwelearnfromPrivateEquityanditsapproachto Procurement?
Thecentralthemethatrunsrightthroughthisbookis cross-functionality.Procurement’spotentialcannotbemaximized whileoperatingwithinafunctionalsilo.Thatmeansthattheentire C-SuiteneedstoengagewithProcurement,andviceversa.Which iswhythisisnotabookforjusttheCPO … Procurementisan inherentlycross-functionalendeavor,andsuccessisonlypossibleif theC-Suiteworkstogether.
Wehopeyouenjoytherestofthebook.
AMBITION:EnsuringYouAreSet UpforSuccess
ADirtyProcurementWord
IattendedaProcurementpaneleventlastyearwheretheaudiencewas puttingquestionstohalfadozenseniorandwell-respectedpeoplefrom theProcurementprofession.Theaudiencewasitselffullofsuccessful Procurementpeople,andit’soneofthoseeveningswhereyoulearna lotabouttheprofession.
ThethemeoftheeveningwasthefutureofProcurementandwhat peopleshouldbeconsideringwhendecidingonthenextpriorities fortheirfunction.Inotherwords, WhatshouldProcurement’s ambitionbe?
MostofthepanelwereCPOsfromlargecompanies—acouple ofthebrandswerehouseholdnames.Thepanelhadbeengenerally agreeableupuntilthatpoint,butthankfullyitcontainedacouple ofcharacterswhoareknowntoholdstrongviewsandnottobeshy aboutvoicingthem.
OnequestionandanswerroundIfoundparticularlyfascinating waswhenthefollowingquestionwasasked: “Doyouthinkthat Procurementshouldbemeasuredonsavings?”
Now,thefirstreasonIthoughtthiswasinterestingwasbecauseof thewaythequestionwasasked.Thequestionermightaswellhave addedthewords“surelynot!”attheend,suchwasthetoneused.It’s funnybecausesavings(oranyotherwordtodenotemonetarybenefits) hasbecomeabitofadirtywordinProcurementinrecentyears,asif peopleintheprofessionareashamedtotalkaboutit.
It’scertainlylessfashionabletotalkaboutsavingsateventssuch asthese,wheresurelytheremustbesomenewandexcitingthingsfor Procurementtoaspiretoafteralltheseyears!
Perhapsthatisbecausesometimessavingsprogramshavefailed,or CPOshavebeenunabletotranslatesavingsintowiderbusiness-speak andthereforeconstantlycomeupagainstinternalbrickwalls.Then therearetheCFOswhohave“learnednevertotrustaProcurement savingsnumber.”So,allofasudden,wehaveanentireindustrynervous toassociatethemselveswiththethingtheyallthoughttheyspecifically existedforjustafewyearsago.It’saninterestingphenomenon,andI waseagertoseehowthedebatewouldplayout.
FirstupwasthesuccessfulCPOofoneoftheworld’slargest engineeringservicescompany.Sheimmediatelydeclaredthather functionwas“pastthat.”Indeed,apparentlyherlatestProcurement strategydidn’tevenhaveasavingsnumberinit.Shewentonto explainthatthesuccessmetricstheyuseareengagementlevelwiththe business,automation,andquality.Finally,andonlyasshewasoffering someclosingthoughts,didsheadmitthatsavingsweresometimes usedasametric,butonly“whereappropriate”andforcertainprojects.
ThemicrophonewasthenpassedtotheCPOofawaterutilityto answerthesamequestion.Heseemedtobejustaskeennottobeseen asasavingsCPO.Ithinkweare“waypastthat,”hesaid.Apparently, hisfunctiongetsmeasuredonmanyotherelementssuchascustomer satisfaction,supplychainsatisfaction,sustainability,andevencarbon neutrality.Butthenhetoobegantointroduceabitofnuancetowards theendofhisanswer.
“IthinkmanyCEOsandCFOsseesavingsasagiven,”hesaid. “Youhavetobe,andremain,costcompetitiveinthemarket,”he explained,beforeadding,“Ithinkothertypesofvaluearesecondary tothat,inreality.”Withthatfinalcommenthisvoicetrailedoff,and heappearedtobracehimselfforreactionfromtheaudienceandhis
fellowpanelists.Afterall,hehadjustdoneabitofaU-turnandsort ofadmittedtoahundredofhispeersthatsavingswereinfactthe numberonepriorityofhisfunction!
Thethirdspeakernailedit,forme.HewastheCPOofoneofthe largesupermarketchainsintheUK;hespokeconfidently.“Thefact is,savingsareimportant,”heexplained.“IfyouinheritaProcurement teamthatdoesn’thaveastandinginthebusinessthenyourabilityto getcredibilityrestsonsettingathree-yearvalueformoneyimprovement,callitsavingsifyoulike,andachievingit.”Hesaidthatonce youdeliverthat,youthengetpermissiontoexpandintothingssuch asdrivinginnovationinthesupplychain,havinggoalsaroundsuppliersatisfactionandalltheotherworthygoalsaProcurementteam shouldaspiretoaswell.Hethentalkedsomemore,butwassimply re-emphasizinghiscentralpointthattheonlywaytogetcredibilityin theorganizationfirstasaCPOistodrivecostimprovements.
Yes,thereareotherthingsthattheProcurementfunctioncanand shouldeventuallydotoaddvalueinwaysbeyondsavings,butthey comesecond.
Walk,ThenRun
WhatIlearnedfromthatexchangeconfirmedtomewhatIhave seenthroughoutmycareerasaProcurementconsultant.Namely, manyCPOsandProcurementprofessionalsaspiretobesomething otherthanpeoplewhosavemoney.Thatisexcellent,becausethereis certainlymoretoProcurementthansavingmoney,butmuchcareis needed.
ThepeopleonthispanelweresuccessfulCPOswithmature Procurementfunctions,andeachofthemhadestablishedthemselves intheirrespectivebusinessesandearnedtherighttogobeyond savingsinpursuitofmorecorporatevalue.However,inpublicthese days,eventhesepeoplethrowinthesavingspieceasabitofan afterthought,asifitisn’timportant,likethefirsttwospeakersonthe panel.Andthisisthewrongmessage.
Thisisapeculiarstateofaffairs.Afterall,didn’tProcurement initiallyexisttobethecommercialconscienceofitsorganization? Theanswertothatis:yes,itdid.Whencompaniesrealizedjusthow muchoftheirspendwasgoingtothirdparties,theysawanopportunity
toprofessionalizethewaytheypurchase—togeneratesynergiesandto removecost.
Aswesawinthepreviouschapter,itwastheautocompaniesthat werefirsttothepartybutalmosteveryotherindustrysincehassetup Procurementfunctionstohelptheirorganizationsspendmoneybetter andmoreefficiently.AssomeProcurementfunctionsbecamemore advanced,theyearnedtherighttoexpandtheirremitandjustifiablyso.
ButwehaveseenmanyexamplesofCPOstryingtoskipthestep ofestablishingthemselvesaseffectivesavingsCPOs,goingstraightto attemptingtoclaimownershipofallsortsofdifferentareasthathave littletodowithsavings.IfyourCPOhasavisionforhisorherdepartment,howmuchofitwereyouexpectingtobeinthere?Thechances areifthereareanysurprises,yourCPOisprobablytryingtorunbefore theycanwalk.
CPOsneedtoberealisticabouttheirstartingpointandthe needtowalkfirst,exactlyasthesupermarketCPOonourpanel said.Beingrecognizedandrespectedasthecommercialconscience oftheorganizationisparamount;it’sthemainevent.Andwhy wouldn’titbe?
Asweexplaininthisbook,andindeedtheveryfirstchapter, Procurementcanboostprofitsbyawhopping30%,ormoreinan organizationwhereit’sdonereallywell.ThisiswhytheProcurement functionexistsfirstandforemostand,unlessaProcurementfunction isalreadyachievingthat30%boost,itneedstoretainthatasthe singlebiggestpriorityintheambition.
It’sworthclarifyingatthispointwhatwemeanbysavings.Put simply,itisensuringthecompanyisgettingbettervaluefromthesupplymarket.Itisnotrestrictedtopricereduction,thoughthatcertainly isasaving.Itcan(andmust)alsoincludesavingsontotalcost—for example,youbuyamoreexpensivepartthatlastslonger,thuscostinglessoverthelife-timeofaproductthatcostslessbutdoesn’tlast aslong—andevencashflowimprovements,ifcashisimportanttothe company.Wegointomoredetailonsavingsandhowtotrackthemin Chapter9:SavingsRealization.
Thedifficultyofunderstandingyourstartingpointiscompounded bythefactthatProcurementfunctionscansometimesthinktheyare betterthantheyreallyare.Andthisisnotbecausetheyarearrogant
ingeneral,it’sbecausetheyhaveadifferentunderstandingofwhat Procurementisachievingintheircompanytodaythanmostoftheir peersinotherfunctions.
Forexample,Procurementoftenquotessavingsfiguresithasdeliveredwhenaskedaboutachievements,buthowmuchofthesesavings arebelievedbytherestofthecompany?Thatiscritical.Withoutthat commonunderstanding,thesavingswillnotgiveyoucredibility.And ifaProcurementfunctionaspirestopursueothercausesthansavings, itneedstobecredibleonsavingsfirst.
Butit’snotallProcurement’sfault.IfProcurementtendstoovervalueitself,thencompaniesalsotendtoundervalueProcurement.But, unfortunately,it’suptoProcurementtoredressthatbalance.
Infact,totrulyunderstandthestartingpoint,it’snecessarytoknow whatvaluethebusinesscurrentlyascribestoProcurement.
WhataretheyexpectingProcurementtodeliver?
WhatProcurementultimatelywantstodeliverdoesn’treallymatteruntilitcanfirstlydeliverwhatthebusinesswants,andthatisusually acommercialbenefittothebusiness.So,oneofthemostcrucialthings aCPOcandowhensettingtheambitionisaligningthatstartingpoint withpeersandstakeholders.
AsoursupermarketCPOsaid,deliveringfromthatstartingpoint givesyouthecredibilitytoexpandyourmandateandremitandgo furtherthanjustsavings.
WhattoAimFor
Giventhatthelevelofambitionisdependentonyourstartingpoint, it’susefulatthispointtoexaminesomedifferentstartingpointsthat arereallifeexamples.Ofcourse,theambitionwilldependonother aspectstoo—suchascorporatedirection,size,andqualityofteam—but thestartingpointisoftenjustafunctionofthese.Theseexampleswill providegoodindicatorsofwhatyourambitionshouldbe.
Firstly,wewilllookataProcurementfunctionwithlotsofhistory,a sizeableteam,butnorealstandinginthebusiness.Next,aProcurement functionthathasstartedtogaintractionwithitsorganizationthrough twoyearsofimpressivecostsavingsdeliveryinacompanythattraditionallyhadnoprofessionalProcurement,andfinallyaProcurement
organizationthathasconsistentlydeliveredyear-on-yearcommercial benefitsforitscompanyforadecade.
Thefunctionwithnostanding
SomeoneIknowjoinedasaCPOforalargeglobalpharmaceutical companyafewyearsago,reportingtotheCFO.Procurementwas alreadyarecognizedfunctioninthecompany.Ithadafairlygood-sized teamforthespend,ithadagoodmixofstrategicandoperational resourcesbothcentrallyandintheregions,andindividualswithinthe functionhadgoodrelationshipswithsomeoftheircounterpartsin thebusiness.
PriortothenewCPO’sarrival,theProcurementfunctionwas reportingimpressivesavings—infactupwardsof10%onsome categories.Theyalsohadwell-documentedProcurementpolicies andprocedures.TheCPOhadachievedsomestellarresultsat previousblue-chipcompanies,leadingProcurementtonewheights inthoseorganizations.Onthesurface,alltheingredientswerethere forthisnewCPOtoaimtotakeProcurementto“thenextlevel” straightaway:thatistosay,beyondsavings.ButthisparticularCPO didn’tmakethatmistake.Rather,hewasrealisticabouthisstarting point.
TherealitywasthatProcurementwasnotinvolvedinanyofthe importantbusinessdiscussionsbecauseitwasnotfullytrusted.Key decisionsaroundwhichdrugstobringtomarket,commercialviabilityofthosedrugs,whichsupplierstoinvestin,andmanagingsupply chainriskwerenotyetwithintheirremit.Crucially,thesavingsthey achievedwereeithernotbelievedornotvisibletothepeopleinthe businesswhomattered.TheCPOknewthis,andknewitbeforehe hadtakenonthejob.So,hisfirstprioritywastomaketheProcurementfunctionknownforsimplydeliveringacostbenefit.Fromthere hewouldbuildcredibility.
Withinthefirsttwoyears,aswellascleaningupsomeoftheadministrativeprocessesandreinvigoratinghisteamandhowitinteractswith thebusiness,hehaddeliveredaprogramofsavingsthatmostofthe companywasbehindandcouldseethebenefitsof.Fromthere,the remitandmandatehadexpandedorganically,aspeershadseenhow
