‘Procurements Golden Triangle’
Supply Management is increasingly seen as a core ‘must get right’ competency, in leading organisations around the world and is beginning to take a role in product innovation and brand management. Organisations such as P&G, Deutsche Post DHL and HP realise that a large part of their relationship with their end customers is in fact, dependent upon their own suppliers. They understand that Supply Management is no longer just about consolidating the supplier base, establishing long-term contracts and leveraging spend potential. In such leading organisations it is increasingly about new product development, collaboration, innovation, and customer satisfaction. This customer centric procurement is at the heart of ‘Procurements Golden Triangle’:
Value based procurement strategies can have a significant impact on company performance by capturing and harnessing value from suppliers. M&A highlights this contribution where up to 70% of the value from M&A can come from procurement activities. Advanced procurement capability can enable organisations to drive both ‘cost down’ and ‘cost out’ of the supply chain while simultaneously delivering additional ‘value’.
The need to switch from ‘cost’ to ‘value, is increasingly recognised by procurement leaders, who retain control of all processes essential to meeting their corporate strategies, and outsource less strategic activities to their chosen partners. By developing market scanning capabilities to understand how markets are changing and how their processes must adapt to meet these changes procurement leaders identify the core processes needed to support company strategies and determine which will be addressed in-house and which should be outsourced to suppliers.
Strategic cost management capability is not an accident. It is not a knee jerk response to a down cycle. Excellence, occurs as a result of good business processes and applied management capability whatever the economic cycle and is embedded in to the organisation through a formal governance and control structure that embeds cost optimisation into the very culture of the organisation.
Establishing Supply Management as a Core Competency (SMCC) in the business value chain provides the systematic approach most likely to provide sustainable cost leadership.
For Supply Management the strategic goals must be:
1. Building Capability in Supply Management
2. Become a Source for Cost Leadership
3. Become a Source for Product and Service Differentiation
Such goals require Supply Management to understand the nature and significance of costs for business performance, so that cost can be considered in the context of the benefits they produce. The key question for procurement in this context becomes not ‘how much does it cost?’, but ‘what are the benefits it will produce?’ and ‘how can the business best organise” to manage cost to gain a competitive advantage?’.
Capability in collaboration is a key to sustaining competitive advantage. Innovations are now increasingly brought to market by collaborators external to the organisation in a seeker – solver model, coordinated by the seeker organisation. CPO’s must now develop collaborative strategies that include:
1. Recognising collaboration as a strategic capability,
2. Organising effectively for collaboration,
3. Investing over the long term to develop collaborative capabilities.
Collaboration can be used to create value that competitors cannot easily replicate. It aims specifically at creating a gap between the organisation and its direct competitors to create sustainable competitive advantage, improved margins and sustainable growth, by exploiting capabilities to their own advantage rather than for the benefit of the industry as a whole.
Procurement can contribute to securing competitive advantage by focusing on their organisations generic strategies around overall cost leadership, differentiation, or a combination of the two. CPO’s should seek to achieve best practice status on multiple dimensions of excellence:
1. Product/Service: Design, experience, look, touch, feel etc – eg. Apple
2. Differentiation: Product, Service, Brand eg. Starbucks
3. Marketing Advantages: Distribution cost, route to market – eg. Amazon
4. Cost Advantages: Cost of goods and services, administration expenses, eg – Dell, Wall Mart
5. Financial Advantages: Mergers and acquisitions, cash flow
Procurement strategies can add value to create competitive advantage in each dimension if they are; valuable, rare, costly to imitate, not substitutable.
Innovation places the skills and responsibilities of the procurement function right at the heart of its process. Helping define needs, Identifying and evaluating potential suppliers, negotiating complex deals and managing long-term partnerships with suppliers are activities that procurement understands and has a track record of delivery.
The challenge for procurement is to develop the new skills required when dealing in intellectual property; they must:
1. engage supply markets without revealing critical details about their intentions.
2. have the tools to evaluate how much they are willing to pay to explore and develop new ideas.
3. collaborate and to build partnerships that build preferential relationships with suppliers.
The opportunity for CPOs to support their company’s innovation programme is a significant one. By creating alignment across the organisation and integrating procurement both internally and with suppliers and customers alike the CPO can:
1. Gain equal status for procurement with other functions
2. Instil a real belief in suppliers as valuable allies and not simply cost levers
3. deliver quick benefits to internal customers, to prove the value of procurement in innovation
Procurement has existing core competencies that support innovation which in turn supports growth.
Supply management has captured the stage and must now set the scene to foster closer integration with their organisations customer-facing functions to get closer to the customer themselves. The aim is to achieve:
1. Greater emphasis on internal and external collaboration between partners
2. Increased focus on value, creation and delivery
3. More stringent definition of customer satisfaction
4. Faster decision making cycles
By understanding the supply chain from the customers perspective and building a network of suppliers who not only have the desired capabilities, but are also committed to both your organisations and your customers goals and objectives, Supply Management can direct strategy and operations to drive sustainable growth from a position of competitive advantage.