Profit from Procurement. Jose Oliveira Valentede
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to the P&L! And yet, it seems, most of us aren't able to replicate this success. Why is that?
One reason is simply that Ford and GM have no choice; they have to be good at Procurement. The Big Auto OEMs buy and assemble a huge volume of parts from around the globe, and they've been operating in an environment with very tight margins (with long periods of losses) for decades. That's why they're truly committed to Procurement from the top down, there is very strong Procurement leadership, there are high-caliber resources who rotate in and out of the function, the function is career-enhancing, working cross-functionally is in its DNA, and execution is of a high quality. All driven by economic necessity, which in many sectors, particularly growth-based and technology sectors, doesn't exist to the same degree.
A second reason why so many companies have failed to reach best practice is that they genuinely tried but failed to do it properly or fully. Some didn't get the right level of sponsorship or investment into the function that was required. Others yet, and there are many, have declared victory when they haven't earned it, which then blocks further progression in those companies.
Bad Best Practice
There is often a perception, particularly among $1 billion plus revenue companies, that their Procurement is “already best in class,” Strategic Sourcing has been done, and “we have it all under control.” There is a tendency for Procurement to say, “We've done a lot already, there's not much left here, we're close to best practice.” Personally, I've probably had more than 100 Procurement leaders tell me this directly, and it's a problem, because they get away with it! The C-Suite views Procurement as a technical discipline and has “full trust that our CPO is taking care of it.” In reality, that's just what the CPO communicates upwards, and it's taken as gospel because he/she is a Procurement professional, and presumably they know what they're doing.
My personal belief is that this phenomenon—call it defensiveness or what you may—blocks many billions of dollars of value being delivered through Procurement globally. I call it “bad best practice,” and it's surprisingly common. It's when Procurement functions falsely believe that they've “already adopted best practice.” The most common area where this plays out is in Strategic Sourcing. I have personally met scores of Procurement leaders who have been given the “Seven-Step Sourcing Methodology” by one of the big consulting firms. These approaches make a lot of sense (and they're all pretty much identical, by the way), but they have to be applied properly. Handing out cookbooks does not make good cooks.
There are other, often very large organizations, including by the 1990s some of the larger auto OEMs, in which the sourcing process has become just a process—very institutionalized, but reduced to a box-ticking exercise. I've seen examples of the work of sourcing teams in organizations that religiously but mindlessly apply a rigorous sourcing process. They have a baseline, they have a supply market study, they've created a stakeholder map, and they have a sourcing strategy. But the baseline is incomplete and it's unclear what the total spend is, the supply market study is interesting but in no way informs the sourcing strategy, the stakeholder map has sat in a file for three months never to be re-looked at, and the sourcing strategy is to bundle the volume and beat up the suppliers.
Bad best practice is a terrible thing, because it blocks real best practice from being put in place. And it's a remarkably common phenomenon. Many times, companies truly believe they have done all the right things. In other instances, CPOs dress up their achievements as a defense mechanism against external consultants or other perceived threats. In all cases it acts as a value blockage.
So, where do we go from here? We've stated that there may be a large opportunity, we've explained how this opportunity has come about, and we've shown that there is a commonly accepted definition of Procurement best practice, but few have managed to attain this gold standard.
The rest of this book looks forward to answering the questions, “How do we get from here to there?,” “How do we maximize the profit potential of Procurement?,” and “What are the fundamental building blocks we need to have in place in order to succeed?”
Why Now?
But you may ask, what's new in all this? Procurement? That's been around for decades. Why this book, and why now?
The answer to this question is that, while this book was written during the global COVID-19 pandemic, its content and messages go well beyond this and are just the accumulated “wisdom” of three Procurement professionals. On the other hand, COVID-19 has clearly put a spotlight on Procurement. As we watched supply chains grind to a halt across the globe, it was easy to spot those who were prepared, those who had their supply chains in order…and the many others who were not prepared, and who were blind-sided by the crisis.
From a Procurement perspective, COVID-19 puts into partial question some of the core supply chain concepts companies have worked hard to implement over the last four decades: JIT (just-in-time) delivery, single sourcing, “best cost country sourcing” from geographically far-flung locations…these concepts drive cost out of the supply chain, but at the expense of increasing exposure to risk. A global disruption like COVID-19 is likely to then test those tightly strung supply chains to the limit.
What the pandemic showed again is that Procurement sits at the heart of the company, it's the interface between the company and its suppliers and service providers—and as companies outsource more and more, the number and scale of service providers grows. Now, the COVID-19 pandemic has made us ask questions like “Do we have enough control over all our key supplier relationships and contracts?,” “Do we have contingency suppliers who can rapidly ramp up capacity for us?” and “Do we have a strong Logistics partner?”
It's commonly accepted now that there will be more global pandemics to come, so let's be sure to learn our lessons from the current one. But also, why not use the post-COVID-19 era to revisit our Procurement cost base? Now is a time for everyone to look at their costs, so why not combine it with a review of our supply chain resilience in the face of a global crisis.
So now does seem like a good time to revisit Procurement, and maybe ask “How far have we really come?” How big is the opportunity, where does it lie, and how do we capture it? These are the questions this book seeks to answer.
But while the pandemic partly provided the impetus for writing this book, at the end of the day, none of the messages in this book are “COVID-specific.” The pandemic has shone a light on Procurement, but what it has revealed was already there. This is not a “COVID-era book,” and we will not be discussing the pandemic further.
About This Book
This book is not an academic book. It represents the distilled opinions of three Procurement consultants who between them have many decades of direct and highly relevant experience. But the views and ideas expressed in this book are not facts. Indeed, you may work for a world-class company to whom many of the statements don't apply. This book is about typical situations, based on what we've found throughout our combined careers, and it's squarely aimed at the “bottom 80%,” rather than the top 20%.
The central thesis of this book is that Procurement is a major underexploited profit lever and in order to maximize its potential, a number of components must be in place, including a fit-for-purpose Procurement function that executes cross-functionally and delivers credible benefits to the business. From there, the book explores each of these components and how to make them work in practice.
The book is aimed at the entire C-Suite and is relevant not only to the CPO, but to the CFO, CEO, COO, and CIO. Why? Because (i) they all stand to gain significantly, and (ii) the CPO needs the rest of the C-Suite if he/she is to succeed. The book is also aimed at the Private Equity Operating Partner (or any other professional) looking to leverage Procurement for EBITDA improvements. We have therefore written the book in an executive style—not from a Procurement perspective, but from a cross-functional perspective. We hope that the book speaks to the entire C-Suite and helps to further educate CEOs and CFOs, in particular,