September 25, 2013
What is procurement excellence? The answer depends on whom you ask. It seems that each expert comes at the concept from a different perspective.
For Robert Rudzki, procurement excellence is about understanding corporate leadership’s expectations for the function—regardless of how basic or how advanced these are—and then meeting those expectations. For Philip Carter, procurement excellence is about managing risk. For Robert Monczka, it’s about improving competitiveness. For Timothy Fiore, procurement excellence is about aligning with overall business objectives, and then collaborating around those objectives.
As diverse as these definitions seem, however, they are all in a way interconnected. For example, meeting corporate leadership’s expectations requires managing competitiveness, collaborating on corporate objectives, and managing risk. Managing competitiveness depends on the ability to meet corporate leadership expectations as well as the ability to collaborate and manage risk. Managing risk requires the ability to manage competitiveness and create collaboration.
As Robert A. Rudzki sees it, procurement excellence needs to be defined by the perspective of the senior executives running the company, and their expectations for procurement. Rudzki is president of Greybeard Advisors LLC in Pittsburgh and author of three procurement-related books, including Next Level Supply Management Excellence.
The procurement people have tried to open their eyes. Unfortunately, however, management continues to maintain a tactical view of everythingRobert A. Rudzki, President of Greybeard Advisors
Senior executive expectations can take three general forms, from the most basic to the most advanced, Rudzki says. Traditional procurement focuses on buying, on price, on a silo and reactive mentality, and on task orientation. In such cases, expectations center on having “the right stuff at the right price at the right time.”
“Most companies, until they reach about $500 million in revenue, operate with the traditional procurement form, which is a tactical buying activity,” the consultant and author explains.
“Senior management just wants them to support the operation and not allow the plant to stop operating.” As such, excellence in procurement is defined tactically, again: Did you get the right stuff at a decent price and delivered to the plant at the right time?
Progressive procurement focuses on purchasing, on cost and quality, on an internal consultative focus with business units, and on skillful commodity management (both direct and indirect). The expectations at this level rise to cost reduction, quality, and continuous improvement. “This tends to occur when companies are approaching $500 million to $1 billion in revenue,” says Rudzki. “This is when they begin to realize that there may be more that can be done in procurement.” At this level, excellence is determined by how well procurement reduces cost, improves quality, and fosters continuous improvement.
Advanced procurement focuses on supply management as a whole, on total value and ROIC, on cross-functional teams, and on external strategies. And, importantly, it has a market orientation. Expectations include total value enhancement on revenues, costs, working capital, and capital expenditures; contributions to risk identification and risk management; and the creation of a strategic advantage for the company. “This involves a proactive approach, looking ahead and looking into the marketplace to understand it better, and being more strategic,” says Rudzki of this top level.
One role procurement executives can play is to help senior management see the value of evolving from one level to the next. This can be a challenge, though. Rudzki is familiar with one extremely large publicly held company that still has a very tactical view of procurement (which the company still calls “purchasing”). “The company actually has no policies to guide the overall strategy of procurement,” he says. “They have procedures only. As one might expect, the company is not doing well. It is story of staggering ineptitude at the management level. The procurement people have tried to open their eyes. Unfortunately, however, management continues to maintain a tactical view of everything.”
Procurement as Risk Mitigator
When Phillip L. Carter thinks about procurement excellence, he thinks about risk management. Carter is the executive director of CAPS Research and a professor at the W.P. Carey School of Business at Arizona State University. As he sees it, risk management is about two things: (1) preparing for what might happen so as to prevent or mitigate it in the first place and (2) having good people and practices in place to react if problems do occur.
It is important for companies to involve procurement in the potential risks that are being createdPhillip L. Carter, executive director of CAPS Research and professor at the W.P. Carey School of Business
“These days, a lot of companies are building their own supply chain risk management systems, looking at suppliers in the second, third, and fourth tier,” Carter says. In many cases, they have a specific focus on natural disasters, but they also work on other activities such as carefully plotting out capacity for the next 12 months and developing procedures to track quality more carefully.
Carter believes that companies are being forced into a focus on risk management as a result of at least four developments:
- A spate of very disruptive natural disasters in recent years such as the earthquake and tsunami in Japan and the massive flooding in Thailand.
- The increasing scrutiny by companies of their global footprints, focusing in particular on rising labor costs in China and the additional risks that long supply chains in these arrangements are causing. “Some companies are even bringing some manufacturing back from overseas,” Carter observes. “For example, labor costs in Mexico are competitive with those of the East coast of China.”
- Companies are becoming increasingly aware of the other risks that need to be managed, such as suppliers going out of business or cutting back on their capacity or product line.
- The SEC (Securities and Exchange Commission) has mandated more emphasis on risk management for companies in general.
Another way procurement can better manage risk is to seek innovation from the supply base, especially by creating collaborative partnerships with smaller suppliers, with a focus on innovation. For this to happen, risk sharing and reward sharing processes need to be in place, Carter believes. In the past, bigger companies tended to want to get control of the technology early on and pay suppliers for it as part of the normal pricing mechanism. “However, they found that suppliers weren’t happy with this, so, in order to get the best suppliers, companies now need to rethink these arrangements and create more sharing kinds of relationships with suppliers,” Carter says.
Procurement leaders also need to look not only at current risk, but also at future risk around the development of new products and markets, for example. “It is important for companies to involve procurement in the potential risks that are being created,” says Carter. For instance, if a company introduces a new product, it may involve new technologies and new suppliers.
Procurement, for its part, needs to understand the potential risks with these technologies and suppliers, such as those associated with relying on a single source for the new technology.
When Robert M. Monczka, thinks of procurement excellence, he thinks of the role procurement can play in helping the company improve its competitiveness. “In the past, procurement excellence was defined as how well you cut costs, with a functional orientation, and excellence was based on how well you performed that function,” says Monczka, who is director of strategic sourcing and supply chain strategy research for CAPS Research, and professor of supply chain management at Arizona State’s W.P. Carey School of Business. “These days, it is how the supply base and business characteristics are able to contribute to the overall competitive strategies of the business,” he says. “This goes far beyond cost reduction.”
Indeed, procurement still needs to focus on the basics, such as cost management and contract negotiation. At the same time it must pay close attention to the concepts of speed and agility, especially in terms of the following:
- How quickly procurement can respond to changes in customer requirements.
- How quickly it can develop supply bases in regions of the world where their customer base is expanding.
- How quickly suppliers can introduce new technologies if the company itself doesn’t maintain technology as a core competency—that is, finding suppliers that can provide the technologies and have the business capabilities the delivery on the technologies.
These days, it is how the supply base and business characteristics are able to contribute to the overall competitive strategies of the businessRobert M. Monczka, director of strategic sourcing and supply chain strategy research for CAPS Research
This technology component is particularly important, as Monczka explains: “Procurement people need to work closely with their engineering people and technology people. They also need to provide commercial insight and review of the suppliers to identify their capabilities and abilities to deliver on the technologies. Finally, they need to identify the risks from a business and technology standpoint of doing business with these suppliers.”
As Monczka sees it, procurement must be involved in new product development earlier in the process, specifically in the selection of design, materials, suppliers, and services. “Procurement executives need to raise red flags if there are errors or omissions,” he says. Procurement also needs to work cross functionally to standardize, to the degree possible, the technology and design to simplify the overall supply chain, he adds.
Experts agree that collaboration is a key component of business success today. And if senior management doesn’t insist on collaboration both internally and externally, then it is up to procurement itself to initiate it, Monczka asserts. “Procurement needs to begin working with business unit managers on their own, especially if they find they are being asked to respond to continual problems that result from the choice of the wrong technology, the inability of suppliers to deliver what’s expected, or other problems.”
Collaboration Is Key
Supply chain executive Timothy F. Fiore, senior vice president or supply management and CPO for ThyssenKrupp North America, echoes the point about collaboration as a hallmark of procurement excellence. The starting point for a collaborative effort is having a well-known and not too complicated sourcing process. “It is important to get the team going in the direction…consistent with the company’s overall business objectives,” Fiore says. “I like to focus on getting management teams and functional experts together with joint objectives, and then ‘moving the ball down the court’ in a non-threatening manner.”
You want people who are tied in with the business objectives, and then rewarded and recognized when they are successfulTimothy F. Fiore, senior vice president or supply management and CPO for ThyssenKrupp North America
Over many years of procurement experience in a number of different industries, Fiore has learned that achieving procurement excellence on the personal level is not so much about knowing what to do, how to do it, and when to do it as it is about making sure that everyone involved in the process feels as though they are empowered and engaged effectively.
In this way, everyone has a sense of accomplishment and ownership when a project is done. “I like to get things started, and then slowly back off as organizations and teams accept more and more responsibility,” he explains. “I find that if I have to stay involved on a day-to-day basis, something is wrong. Either I haven’t been effective in empowering people, or they’re not capable of accepting it.”
Being able to do this is part of becoming a good general manager, Fiore believes. You can lay out strategies and force people to follow them, he says. However, in the end this is not sustainable, because they will eventually go back to doing what they were doing.
“A good general manager knows how to empower people around a common objective that makes sense,” Fiore concludes. “You want people who are tied in with the business objectives, and then rewarded and recognized when they are successful.”
Reflecting on the insights and observations of these experts, a central story line emerges. Procurement excellence means aligning procurement strategies and programs with the overall objectives of the organization, helping everyone to align with those objectives, and managing the risks that are inherent in the procurement processes. The ultimate goal: A more competitive business.
Editors Note: William Atkinson is a freelance writer specializing in procurement and supply chain. He can be reached at [email protected].
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