Changing the procurement paradigm

Changing the procurement paradigm

Short-term gains negatively impact top-line profit.

While procurement has come a long way since the days of being a strictly transactional function, most procurement professionals still are expected to focus on managing costs and securing supply. While these are crucial business areas, such a narrow focus prevents procurement organizations from achieving their full potential—impacting both sides of the profit and loss statement (P&L).

Whether sourcing new suppliers, managing existing suppliers, or securing supply, procurement practitioners are working on one of three things—reducing costs, preventing cost increases or determining what costs should be (should-cost analysis). This worldview is continuously reinforced by C-suite executives who are used to taking the realized cost savings and “giving” it to sales and marketing teams in order to support business growth strategies or to defend the company’s territory from encroaching competitors. Unfortunately, focusing strictly on the bottom line tends to produce unintended consequences and leads to what I call the Procurement Paradox.

This paradox exists because the ability of procurement to significantly impact the bottom line within an organization will diminish over time, especially once the low-hanging fruit has been picked. As many Procurement professionals will attest, it usually becomes more difficult—and takes longer—to produce bottom-line savings and results year over year. At the same time, the company expects meaningful reductions each year, and the end result is a growing gap between expectations and the ability to deliver against them.

This gap can jeopardize bonuses, promotions and even job security—not to mention the affect it can have on the everyday challenges in procurement. For example, the pressure to continuously produce a certain quota of cost reductions and cost avoidance can inadvertently skew the decision-making process itself toward choosing short-term gains at the expense of doing what is right for the overall business.

Procurement organizations seeking to reach their full potential and prove long-term value should find another area for continuous value generation. That area can be found on the revenue side of the business but, since Revenue represents a vast area of opportunity, procurement practitioners need to find a niche—a sweet spot—where they can make a real difference. In my experience, the revenue areas best suited for Procurement organizations are also some of the most important business segments you can find: innovation and new products.

Procurement can play a key role in these areas because the organization has a built-in network of suppliers and service providers that can contribute to the company’s initiatives. Furthermore, they can help their companies overcome the “not-invented-here syndrome”—a culture that rejects collaboration with anyone outside the company – because procurement leadership has the knowledge and expertise to negotiate with suppliers and execute upfront commercial agreements that protect the company’s IP and other commercial considerations.

Affecting both sides of the P&L benefits both the procurement organization and the company as a whole. The benefits to procurement are impressive—avoiding the Procurement Paradox and replacing it with a dramatic increase in value generation—but the benefits to the company are even more significant. Innovation and new products are, after all, a company’s lifeblood. Businesses that fall behind in innovation and new product development lose their competitive edge in the marketplace and risk becoming irrelevant. Procurement can be an additional weapon in this “survival-of-the-fittest war.

Transforming procurement organizations from a bottom line-centric worldview to a holistic one that influences both sides of the P&L requires a development plan and the roadmap. That roadmap consists of four enablers—or skill sets—which procurement professionals need to develop.

The first enabler: Build credibility
Establish yourself both externally (suppliers and service providers) and internally (your intenrnal stakeholders) as the go-to resource for innovative ideas and initiatives. External credibility is developed through effective and purposeful networking: connecting with industry leaders, attending major tradeshows (Natural Products Expo SupplySide, etc.) and joining industry-specific trade organizations (ISM, CSCMP, etc.). Internal credibility is developed through effective networking with company stakeholders, which means listening to them, understanding their needs and expectations, and then providing effective solutions that “make them look good.” Building procurement’s credibility allows its members to bring innovation opportunities to the company and facilitate the process of evaluation and decision-making.

The second enabler: Learn the stage-gate process
The stage-gate process is a best-practice tool that companies use when launching new products. It’s a cross-functional enabler that moves the organization from the initial concept phase through feasibility, development and launch. It ensures that a predetermined set of deliverables at each stage are met before progressing from one phase to the next. Be aware that the specific details of the stage-gate process will vary from company to company, depending on its business and unique needs. Procurement professionals must be familiar with this process for two reasons:

  • If the company already uses this process, procurement should be an important contributor. Knowing exactly how the various business units depend on one another during each phase consequently makes procurement a more effective participant.
  • If the company does not currently use this process, procurement can introduce it as a form of innovation and continuous improvement, bringing significant value beyond its traditional role.

The third enabler: Facilitate capabilities presentations, innovation sessions
These are opportunities for Procurement to showcase its capabilities. Keep in mind, however, that there are important differences in the scope, participants, and confidentiality/IP considerations between the two activities. For example, capabilities presentations are designed to introduce the company to the capabilities of a new or existing supplier. Here the participants are the company and the supplier, and a standard non-disclosure agreement (NDA) covers issues of IP and confidentiality. With innovation sessions, the scope is larger and more strategic; there are normally several outside participants in addition to the company, and IP/confidentiality issues are more significant. In fact, outside participants in Innovation Sessions should sign a release form beforehand, stating that all ideas and concepts discussed during the session belong to the company. In both cases, marketing and R&D are the target audience, but individuals from other departments (such as finance and manufacturing) may also add value. Bringing in the relevant business units will ensure an effective and productive process.

The fourth enabler: Negotiate and execute commercial agreements
When the company wants to move forward with an innovation or new product development project, procurement should take the lead in negotiating and executing the development and supply agreements that govern the collaboration with suppliers involved with that project. Development and supply agreements for new products or technologies are very different from the regular supply agreements that procurement practitioners negotiate. Following are several that need special attention:

  • IP. Nuances relative to ownership—for example, ownership of recipes/formulas versus ownership of relevant manufacturing processes—must be recognized and agreed upon upfront.
  • Cost of development work. How much, who pays, and when are some of the issues that need to be clearly specified in an agreement in order to prevent misunderstandings and arguments down the road. Note also that, generally, the party that pays these costs has a strong claim to the IP and results of the development work.
  • Exclusivity. This area needs a specific definition of its scope to avoid any ambiguities. If exclusivity is on the table, Procurement leaders need to help define what order-quantity commitments need to be in place in order to receive the exclusivity right.
  • CAPEX (Capital expenditures). If a capital expenditure is needed to expand manufacturing capacity in an existing facility or to build a new site, the agreements should clearly state how much cost will be covered by the supplier and how much by the company.
  • Manufacturing capacity and flexibility. Uncertain sales velocity and post-launch replenishment cycles require a delicate balance between dedicated production line time and overall manufacturing capacity flexibility. This is a crucial operational concern.
  • Continuous improvement. Production efficiency and component sourcing are rarely optimal in the beginning, so there must be clear contractual language about driving down costs and how each party benefits over time.

Although there’s a clear roadmap for Procurement to generate greater value for the company, don’t expect that to happen overnight. The company’s executive leadership needs to support the effort, and inevitably there will be some resistance to change. There is no doubt, however, that the benefits far outweigh the challenges. After all, focusing solely on the bottom line is counter-productive and, by enlisting Procurement’s expertise in in driving innovation and accelerating new product launches, the company gains a significant advantage in its fight for relevancy and survival.


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