Moving from Bottom Line to TopMoving from Bottom Line to Top

Purchasing has often been viewed as a purely transactional function, one that acquires goods and services and reconciles invoices. However, this function has transformed significantly over the last 30 years into a strategic group that owns four key areas of responsibility: Purchasing, Compliance, Strategic Sourcing, and Vendor Management. This organization is now more commonly referred to as “Procurement”—a more sophisticated title reflecting its more sophisticated scope.

Purchasing paradox

But one thing has not changed: the procurement organization still maintains a laser-like focus on saving money and securing supply. This worldview is continuously reinforced by C-suite executives who are used to taking the cost savings that Procurement generates and “giving” it to Sales & Marketing in order to support business growth strategies or to defend the company’s territory from encroaching competitors. It’s no wonder then that Procurement is so conditioned to focus strictly on the bottom line.

Focusing strictly on the bottom line tends to produce unintended consequences and leads to what I call the Purchasing Paradox. This paradox exists because, on the one hand, the ability to impact the bottom line in a meaningful way diminishes over time—especially once the low-hanging fruit are gone and it becomes harder and takes longer to produce similar results year over year. On the other hand, this is exactly what Procurement is expected to do, and the end result is a growing gap between expectations and the ability to deliver against them. Consequently, this gap jeopardizes bonuses, promotions, and even job security for procurement professionals. Additionally, the pressure to continuously produce a certain quota of annual cost savings and cost avoidance can inadvertently skew the decision making process itself toward short-term gains at the expense of doing what is right for the business overall.

Procurement professionals are taught that “having all your eggs in one basket” is inherently risky. It makes sense then that Procurement itself should find an additional area for continuous value generation, one that does not lend itself to the Purchasing Paradox. The place to be is the revenue side of the business— the top line. But that's a big area, so Procurement needs to find a niche or sweet spot where it can really make a difference. Turns out that Procurement can play in a very specific area that is one of the most significant business segments you can find—innovation and new products.

Procurement can play there, and play effectively, because it already has a direct line to the outside world through its connections with suppliers and service providers. It can therefore very easily become a powerful magnet and funnel for innovation opportunities. It can also help companies overcome the “not-invented here” syndrome—paranoid company culture that rejects collaboration with anyone outside the company—because it has the ability to negotiate and execute upfront commercial agreements that protect the company’s IP and other considerations.

Evolving from the current bottom-line-centric worldview to a more holistic capability to impact both sides of the P&L requires a development plan and the road map to execute it. That roadmap consists of four enablers, or skill sets, that procurement personnel need to develop.

Step 1: Building credibility

This is about establishing oneself as the go to resource for new things, and this message needs to be heard by both the outside world and internal company stakeholders. This credibility is developed through effective and purposeful networking—connecting with industry leaders, attending major tradeshows (SupplySide, Natural Products Expo, etc), and joining industry-specific trade organizations (ISM, CSCMP, etc). It results in the ability to bring innovation opportunities to the company and then facilitate the process of evaluation and decision-making.

Step 2: 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 road map that moves the organization from the initial concept phase through feasibility, development and launch, and it ensures that a pre-determined set of deliverables at each stage are met before progressing from one phase to the next. Procurement professionals should be familiar with this process for two reasons:

• If the company already uses this process, Procurement is an important contributor and knowing how the various departments depend upon one another during each phase makes procurement an effective participant.

• If the company does not currently use this process, then Procurement can introduce it as a form of innovation and continuous improvement, thereby bringing significant value beyond just cost savings.

It’s always easier to learn a concept or a process through its application to a real scenario, so I have chosen a real and specific innovation to better illustrate the next two enablers.

In this case, the innovation is not a product per se but rather a unique delivery platform that is perhaps best described as a hybrid between a soft gel and a gummy (as in Gummy Bears). This delivery platform has many attributes, such as:

1. A chewable format that enables companies to reach the significantly underserved population of the swallow-challenged, up to 40% of Americans by some studies.

2. The ability to mask the actives in a great tasting product means significantly greater compliance among children, especially important for fish oil and vitamin/ mineral supplementation.

3. Portability and convenience, with no water required.

4. Avoidance of the sugar and corn syrup found in most gummy products.

A Norwegian company owns the IP for the delivery platform, and they own a production facility in Norway that manufactures products utilizing this technology for certain brand companies, mostly in Europe. For the purpose of this illustration, I am assuming that Procurement is aware of this company’s plan to penetrate the North American market and that it is capable of bringing this innovation to the company.

Step 3: Facilitate capabilities &

innovation sessions

There are a lot of nuances between these two activities—capability and innovation—and those differences relate to scope, objectives, participants and confidentiality/IP considerations. These differences are the topic for a future article, but the focus here is on bringing representatives of the Norwegian company in for a presentation that covers its unique value proposition and the potential benefits to the company. Marketing and R&D are the target audience, but folks from finance, supply chain, and manufacturing may also add value. If, after an initial evaluation, the company desires to continue the dialogue and explore specific aspects of the supplier’s value proposition, Procurement can facilitate the follow-up.

Step 4: Negotiate & execute

agreements

Should the company and the supplier agree to collaborate, Procurement then needs to produce an agreement that governs that collaboration. Development and supply agreements for new products or technologies are very different from regular supply agreements and there are several areas that need special attention:

• Cost of development work. There are many types of arrangements here but the thing to remember is that generally the party that pays these costs has a strong claim to the results of development work. This has significant implications to IP rights.

• IP. Nuances relative to ownership of recipes/formulas vs. ownership of relevant manufacturing processes must be recognized and agreed upon upfront.

• Exclusivity. If that’s on the table, what is the scope and what commitments need to be in place in order to receive that right?

• Manufacturing capacity & flexibility. Uncertain sales velocity and replenishment cycle post-launch require a delicate balance between dedicated production line time and overall manufacturing capacity flexibility. This is a crucial operational concern, especially in this particular case since production is in Norway.

• CAPEX. If needed in order to expand manufacturing capacity or, alternatively, establish manufacturing in North America in order to shorten lead times and reduce cost, how much will be covered by the supplier and how much by the company?

• Continuous improvement. Production efficiency and component sourcing are never optimal in the beginning so there needs to be clear contractual language about driving down costs and how each party benefits. The procurement function has increased its scope dramatically in the last 30 years. This is certainly a welcome trend, but throughout this great evolution one issue remains—Procurement is still not living up to its full potential. That has consequences for procurement professionals and the companies they work for.

Procurement's continuous focus on just the bottom line is counter-productive, so it needs to find another area for generating continuous value. Procurement is uniquely positioned to drive innovation and accelerate new product launches, and it can do so by mastering the four skill sets described above. This will enable Procurement to impact both sides of the P&L and, consequently, become a significantly more valuable part of the organization.