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Procurement
Transformation- what really matters

Supply Management Insights - Edition 03/2019 INVERTO Customer Magazine

Become resilient

Procurement Transformation is a critical step and continuous process for companies in times of upheaval. A precise understanding of future success factors and change levers as well as sustainable initiatives leads to success.

Hardly 15 centimeters tall, robins are rather harmless birds, which would be easy prey for many. However, robins have developed a close cooperation system that also protects them from much larger enemies. When a predator appears, the flycatcher who sees it first cries out. The other birds of its flock then surround the enemy closely until it withdraws in an irritated manner. In fact, this behavior is a give and take with the robin: birds react to the call for help of a fellow bird who has fought for them before.

Companies can be inspired by this behavior. As the economic climate is cools down rapidly, cooperation and an agile reaction to unexpected threats are essential if a resilient organization is to be established in the coming years. Those who do not develop mechanisms that are as effective as the robin’s mechanisms are in danger of being left behind quickly.

Resilience

Resilience generally refers to the ability of a person or social system to deal successfully with stressful life circumstances and negative consequences of stress (Stangl, 2019).

Particularly in these difficult economic and political conditions, procurement is crucial to ensuring that companies can produce efficiently and cost-effectively, guarantee security of supply and implement innovations jointly with internal and external partners.

In this environment there is a need for action in procurement, especially to remain competitive in the 2020s, companies should actively pursue “Procurement Transformation” today.

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It is important that both the purpose and goals are aligned in order to improve procurement and company performance.

Defining the Purpose of Procurement

Procurement transformation is an ambitious journey to achieving procurement’s purpose, vision, mission and objectives. This transformation journey will be multi-year, enhancing capability, incorporating new roles and a new mindset. Crucial will be the alignment with internal business partners to connect end customers to the supplier network.

Purpose

“Purpose is developed at the intersection of aspiration, external need, and action. A purpose is an enduring aspiration formed around a need in the world that a company is willing and able to act on, using either intrinsic strengths or capabilities it could develop.“ (Henderson Institute)

Which conditions will determine success in the coming decade?

A recent BCG study identified the most important success drivers for the next decade. Companies must adapt to a new environment to be successful in the 2020s: This new competitive logic also has an impact on procurement’s future role:

As part of the Procurement Transformation, an organization should be established that supports these drivers:

The ability to establish new business models and successfully deploy new technologies both in one's own organization and in companies' supplier networks is seen as vital for competitive success.

Successful digitization goes beyond process automation and analytical decision support. The available data enables automated decisions in connection with the manufacture, handling and operation of physical products.

Finally, companies must recognize systemic risks and shocks due to economic and geostrategic uncertainties early and fundamentally improve their ability to respond to them.

Procurement transformation is an ambitious journey to achieving procurement’s purpose, vision, mission and objectives. This transformation journey will be multi-year, enhancing capability, incorporating new roles and a new mindset. Crucial will be the alignment with internal business partners to connect end customers to the supplier network.

In addition to economic influences, individual customer needs play an important role as drivers of the procurement transformation, because their satisfaction is the first priority for a company to thrive and should therefore be anticipated in procurement.

Those who really want to sustainably change procurement in a sustainable way should establish a goal for procurement’s role on a three to five year horizon. This role can be quite diverse. Will procurement be an innovator, and together with Research & Development teams, take the company into the future through new product development and introduction with suppliers? The focus here is on competencies such as cooperation in early stages of development or targeted technology scouting in critical supply markets.

The traditional procurement role as cost leader with the responsibility of efficient, cost-effective procurement requires other core skills, from cost modelling to systematic demand management and advanced negotiations. Only with the use of the right tools and analytics can the commercial effectiveness of procurement be increased further.

When translating purpose into the operational goals of procurement, for example availability, costs, value contribution, as well as innovation and sustainability, it is important to concentrate on the goals which the entire team is focused and working on. This can look very different depending on procurement’s purpose. It is important that both the purpose and goals are aligned in order to improve procurement and company performance.

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The decisive factor for success is coordination with all partners in order to map the entire supply chain - from the supplier to the end customer.

 

Roadmap design: Achieving long-term goals and rapid results

A concrete transformation plan should be drawn up on the basis of the procurement purpose and point of differentiation. This plan should be developed in close coordination with the C-suite leaders, business partners, the procurement team and suppliers. Even the most innovative procurement department must see itself as part of the whole. Depending on whether the focus is on cost performance, sustainability, innovation or risk management, the way in which procurement transformation takes place also changes. A clear prioritization is unavoidable here, because some goals can be contradictory and complimentary: Should the procurement team boost the company’s profit or ensure that sustainability is delivered?

What differentiates successful procurement organizations?

Clear procurement purpose, strategy and goals

Ambitious superior performance in terms of value delivery, from cost and risk management to customer value, sustainability and innovation

Build partnerships and alliances

“Driving business results” internally and externally through a “broader ecosystem of suppliers”; open innovation (or exceeding business partner expectations based on clear dialogue on expectations and priorities)

Constant capability building

Rapid upskilling of procurement organization and behaviours e.g. capabilities like leadership, relationship management, creativity, digital and analytics

Great team collaboration

Agile delivery and fast response based on a highly motivated, skilled team

Deliver, clear digital roadmap

Well defined digital and system strategy to address pain points, future proof, optimize processes and analytics

Implement all value levers

From traditional e.g. volume allocation, price negotiation; to sophisticated e.g. demand management, supply chain financing, designed costs [ZBB]

Based on the priorities, clear responsibilities must then be defined. Nobody will be helped if every decision leads to lengthy internal discussions. It therefore makes sense to work out the implementation plan top-down and assign the individual roles.

This ensures that the procurement department has the backing of leadership on the one hand, and that the team is integrated on the other.  Changes become tangible so that the team understands their goals and tasks within the framework of the transformation.

So-called ‘lighthouse projects’ can be helpful here. If the first outstanding successes are shown early in the transformation process, this motivates the team – and also convinces leadership – as results become directly visible.

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Nobody will be helped if every decision leads to lengthy internal discussions

Developing procurement function
towards industry excellence

   
 
  
 

Digitally empowered business partner

  • Maximum replacement of transactional activities by automation/tools
  • Digitized ecosystem: Internal and external collaboration models based on technology
  • Big data management and digital analytics as integral part of decision making & negotiations
 
 

Competitive advantage value driver

  • Strategic review of supply market trends and risks
  • Active integration of suppliers as source of innovation
  • Value focus beyond just cost/TCO
  • Active role in pulling technical levers (re-design, make versus buy)
 

Cross-functional supply chain management

  • Best-in-class supplier network as a competitive advantage
  • Addressing cross-functional improvements (specification optimization)
  • Integrated cost levers (demand management and process optimization)
 

Functional excellence

  • Established best practices across company
  • Consistent use of commercial levers (supplier management, bundling, tendering and best-cost sourcing)
  • Policies implemented
  • Tool based support
     

Transactional support

  • Pure focus on transactions, no decision power on external spend
  • Very operational focus, with limited collaboration across businesses

Developing procurement function towards industry excellence

Transactional support

  • Pure focus on transactions, no decision power on external spend
  • Very operational focus, with limited collaboration across businesses

Functional excellence

  • Established best practices across company
  • Consistent use of commercial levers (supplier management, bundling, tendering and best-cost sourcing)
  • Policies implemented
  • Tool based support

Cross-functional supply chain management

  • Best-in-class supplier network as a competitive advantage
  • Addressing cross-functional improvements (specification optimization)
  • Integrated cost levers (demand management and process optimization)

Competitive advantage value driver

  • Strategic review of supply market trends and risks
  • Active integration of suppliers as source of innovation
  • Value focus beyond just cost/TCO
  • Active role in pulling technical levers (re-design, make versus buy)

Digitally empowered business partner

  • Maximum replacement of transactional activities by automation/tools
  • Digitized ecosystem: Internal and external collaboration models based on technology
  • Big data management and digital analytics as integral part of decision making & negotiations

Depending on which goals have priority, the processes must also be changed. Here the idea of agile work becomes very important

For the transformation of procurement to be successful, these four areas should be considered.

1. Develop organization and team

Anyone who implements new processes and technologies needs the appropriate leadership and skills in the team. New experts can join the team or procurement can network more closely with other teams within the company. For example, if the CPO wants to analyze the existing data records – such as customer data and costs – he can hire a data specialist or check whether the in-house finance or IT team can already remedy the situation. Of course, you don’t necessarily have to get the expertise from outside, your own employees can also be qualified accordingly. It can also be helpful to create cross-departmental teams that address specific issues. In data analysis, for example, the data specialist can sit down with experienced procurement managers and a finance expert.

2. Optimization of processes

Depending on which goals have priority, the processes must also be changed. Here the idea of agile work becomes very important. This includes, for example, setting up teams that are largely autonomous, supported and encouraged by leadership. Of course, this only works if the vision and goals have been clearly communicated in advance, so that everyone involved knows what they are working towards. It is very important to put these teams together appropriately: Some employees like to work independently, others feel more comfortable in traditional structures. These two types can be brought together so that they complement each other.

But process optimization doesn’t stop with internal processes. The company has to cooperate closely with its suppliers and plan more efficient delivery routes and warehousing with them. Algorithms and data analysis can identify potential efficiencies by linking information that has not been merged before. The more complex your business, the greater the benefits. However, when implementing new processes, companies should bear in mind that they should also be able to withstand changes in the business environment if possible.

3. Identification of the right tools

Once the company has done its homework and created the necessary structures, it can tackle the digitalization of procurement – because only then is it clear where this step makes sense and which tools make sense at all for its own team. Big data, artificial intelligence and blockchain are popular buzzwords, but not every innovation fits every company. Your own team should also be able to use the new tools. Otherwise it complicates the work processes instead of creating efficiency gains. The lighthouse approach can also help here: A digital ordering system can initially be used for a product group or selected suppliers. If it works there, it will then be used more widely.

4. Inclusion of suppliers

The procurement transformation must inevitably also involve the suppliers. The best in-house ideas are of little use if the partners are not involved. Close cooperation can above all increase the resilience of procurement, for example through strategic partnerships. This calls for mutual transparency. If the supplier can plan for the long term with constant demand and is assured of this, then he may be able to accommodate procurement in other areas. Through a good relationship with the supplier, the own company can become a “Customer of Choice” and hope for preferential treatment. The constant exchange with the partners is important. For example, you can rely on surveys to get an assessment of the cooperation and to find possible ideas for improved cooperation.

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CONCLUSION

The transformation of procurement to meet new needs, requirements and conditions is becoming the norm. This makes it all the more important to have a robust procurement transformation process that translates, for example, technology investments in procurement into targeted added value for the company.

Procurement purpose, goals and value contributions must remain clearly recognizable and match the ambition of the company and business partners.  In turn, procurement leaders must adapt their transformation plans and behaviours to provide inspiration and direction for procurement teams.

The pace, scale and impact of procurement’s transformation is only limited by its own purpose and ambition.

Our authors

Stefan Benett

is a Managing Director at INVERTO based in the Munich office with more than 20 years of professional experience in Procurement and Operational Excellence. As an expert in procurement transformation, he develops future-oriented procurement strategies and delivers results for Industrial, Technology and Energy companies.

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Lance Younger

is a Managing Director at INVERTO based in the London office. Through procurement transformations, digitalization projects, cost savings and supplier management, he helps his clients secure competitiveness and increase shareholder value.

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