When we launched the website a few weeks ago we waxed lyrical (well, waxed) about the vitality of ‘ranging’, by that we meant broadly considering the drivers to our situation - global and local - and how that presents challenge and opportunity. With that, we mentioned featuring guest blogs on this site - insights and comment from interesting folks with a depth of experience and positive perspective across a wide range of disciplines.
So, the first of our series of blogs addresses strategic procurement. In particular, it’s about how business leaders can get the step-change in performance they need from their procurement or buying teams in these times. Given global bifurcation, rising inflation and fragmented supply chains, this has never been more vital.
So, we are delighted that the insights come from Angus McIntosh - an old friend and expert on global procurement. Angus leads the Procurement specialist practice area at Total Negotiation Group (www.totalnegotiation.com) and has a superb track record having led teams for major global businesses from Mars to Beiersdorf. We hope that you enjoy his thoughts.
If you want to contact Angus, either drop us a note or email him on email@example.com. We’ll be happy to connect you.
If you’re a business or sales leader right now then it’s likely you are wrestling with spiralling costs, supply interruptions and frustrated customers. You are probably also contending with shareholders who won’t accept excuses for interrupted growth or reduced profitability.
When things get as tough as they are now, it’s tempting to blame your Procurement function for failing to contain costs and maintain full supply. Your customers push back hard against your cost price increases and still demand unimpacted levels of customer service, so why can’t your own Procurement people do the same for your business?
Instead they seem to come back with wave after wave of bad news, each time supported by a stack of charts and news headlines on world prices and supply bottlenecks. You can’t help thinking that if they put as much energy into resisting these issues as they do in explaining them you might be in a better position.
In this article I look at how you can move beyond frustration and into a powerful and structured engagement with this function to the benefit of all.
The fire extinguisher syndrome
In good times, with stable supply and low inflation, too many business leaders assume that Procurement have their suppliers under control and focus their attention elsewhere.
This is rather like treating the function like an old fire extinguisher. You walk past it every day without a second glance – until you find yourself facing a raging fire. At that point this humble device suddenly becomes the centre of your world, as you rip it from the wall, try to figure out how it works and hope that someone has been maintaining it properly.
For many different reasons the fire extinguisher syndrome is a tragic missed opportunity, as the function be a great engine of competitive advantage, even in stable periods.
But here we are today, in the middle of the biggest economic and logistical upheaval since the second world war. What can you do right now to get the best possible performance from Procurement?
High challenge, high support
Fundamentally, you need to engage and if you’re not already doing so, you need to adopt a “high-challenge, high-support” model.
I talk to Procurement heads and teams in different industries and all regions every week and I can tell you they feel the pressure. Every day they find themselves confronting “take it or leave it” pricing demands or rationing of supply as suppliers take full advantage of today’s exceptional seller’s market. They hate to let you down and they will do whatever they can to avoid it. So do they really need more challenge from you?
In my experience, yes they do. Your high expectations communicate respect and confidence and your pushback is actually helpful to them in dealing with suppliers’ demands.
But let me put some structure on that challenge and offer you four areas where you could be pushing hard for excellence.
With limited resources and almost unlimited challenges it’s easy for Procurement to become overwhelmed, but it’s critical that they take control. Your Head of Procurement should be able to demonstrate the following to you:
That they have a structured overview of incoming risks and challenges
That they have criteria for categorising them for different forms of action depending on urgency and importance.
That they are redirecting their best people where needed to the highest priority issues, rather than sticking rigidly to existing job boundaries.
Your Procurement team should have a toolkit of analytical methods to break down and challenge the supplier’s inflationary demands. This is the right starting point, but they must be aware of the limitations of this approach.
If a powerful supplier is determined to drive pricing up, then Procurement should not expect their counter-arguments alone to have any effect, no matter how well-based they are. In this environment the outcome of negotiation depends on two factors: Leverage and Technique.
Your suppliers know that you have almost no real leverage in the short term, so your team will have to up its game in terms of technique and learn to play a weak hand with maximum skill and determination.
Challenge your Procurement leaders to tell you about the state of their team’s negotiation skills:
Do they have a consistent end-to-end negotiation discipline for all major negotiations?
Do they have the skill set and confidence to stand their ground and hammer out tough agreements with powerful suppliers, or as we at TNG call it, to “negotiate the non-negotiable”?
Do they know who their best negotiators are and are they using them flexibly across the portfolio to tackle the biggest issues?
What can’t be avoided in terms of cost push for individual items or services can perhaps be mitigated in other ways. With anything up to 70% of your total revenue flowing out in third party spend, savings opportunities are everywhere. Here is just one powerful spend mitigation strategy that I’m willing to bet you are under-utilising today.
A treasure-trove of untapped potential
Your Procurement team has what they call a “spend cube” (if they don’t, they should). This is a structured database of everything your company spends externally. They can slice and dice it in a million different ways – eg by time, spend type, supplier, and by budget area/geography. In your company it’s very likely a treasure-trove of untapped potential and it’s your Procurement team, not Finance, who understand it best.
We can’t do more than scratch the surface here on the ways in which you can use this data to find opportunities, but here are just two questions you can ask your Procurement team to analyse:
Which types of spend are growing faster than the top line?
For those spend categories, where are the hotspots by function, by business vertical or region etc?
With that information you can then assign further investigation and demand budget or policy interventions to drive reductions.
This is just one approach to cost mitigation, but it’s highly likely that Procurement has a cupboard full of other ideas to drive efficiencies, many of which may be blocked or on hold due to conflicting priorities and lack of resources.
Challenge your Procurement team to take the lead in generating a pipeline of projects, to reduce the total cost to own (TCO) associated with your spend.
Finally, and running across all of the other challenges, you should demand the highest standards of communication from Procurement - with you and other senior leaders, but also across the business with their peer stakeholders in all functions.
Are they bringing you the crystal clear business navigation you need on cost push, supply risks and mitigation opportunities you need when you need it?
Are they translating their data into the impact on customers, growth and profitability, or focusing their messaging on the Procurement function’s internal metrics?
So much for the four areas where you might want to challenge Procurement harder. I mentioned above that you need to develop a “high challenge, high support” approach to Procurement in these times, so let us turn to what that hight support looks like.
In my many conversations with Procurement leaders and team members four themes come out again and again.
Support from other functions
In almost every area of spend your buyers are facing de-facto monopoly suppliers. They are desperate for alternative sources to create price competition and supply security. In normal times the cross-functional resources needed to make this happen are in very short supply. These are not normal times, they are exceptional times.
Are you mobilising other functions to raise the priority given to qualifying alternative suppliers or to support the other mitigation opportunities I mentioned above?
A workable model
I know of more than one organisation which has implemented a radically lean operating model for Procurement, finding out only too late that the organisation is unfit for turbulent times. These are fair-weather Procurement functions with thinned-out strategic resources and a complex structure of onshore and offshore support teams and all held together by a tangle of detailed internal SLAs.
Have you gone too far down this route and created a bureaucratic organisation that is falling out of touch with suppliers and local stakeholders?
Are you investing in appropriate training and development for Procurement? What are their critical skills needs and do they have the space and budget to address them? What are the training investment benchmarks versus other critical functions?
Smart technology investment
Assuming Procurement has an ambitious digitisation programme then are you supporting it with appropriate investment? If so, then are you asking to see an ROI in terms of improved output or just further reduced fixed costs? Good technology delivers both, but the main weight of the business case you ask for should rest on better sourcing performance.
Finally, please try this little exercise: Without thinking too long, write down on a piece of paper your top three priorities for Procurement to deliver this year. Then ask your Head of Procurement to tell you which KPIs are used to drive the assessment of their personal and collective performance.
If you are surprised by what you discover then a critical piece of support you can give to your Procurement function is consistency of messaging and measurement.
I have outlined four areas of challenge and four key pillars of support that you can use to turn your Procurement function into a lever for competitive advantage and resilience in this crisis. With your engagement you will be amazed what Procurement can do for you and with you.
At TNG we have combined decades of experience in identifying and fixing issues like the ones discussed here, so if any of them resonate with you please don’t hesitate to get in touch.