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Executive debate

What are procurement's key challenges in the next 10 years?

How is our profession likely to develop during the next decade? CPO Agenda sought the opinions of procurement leaders in France by convening a debate in Paris

 

Autumn 2007

 

PARTICIPANTS

  

Claire Brabec-Lagrange  is vice-president, purchasing, at Thales, a big aerospace, defence and security systems company

 

Claire Dacier is director of indirect sourcing at Alstom, a power systems and transport group

 

Xavier Cassignol is corporate vice-president, global purchasing, at FCI, an international manufacturer of electronic connectors

 

David Chambeaud is chief sourcing officer at Thomson, a leading digital video technology company

 

Philippe Courregelongue is director of consulting services at Emptoris, co-sponsor of this series of debates

 

Jean-Pascal de Casanove is commercial purchasing director at Messier-Dowty, a maker of aircraft landing gear

 

Sylvain Fresnault is purchasing director at La Poste, France’s national postal company

 

Laurent Jehanin is group vice-president, procurement, at Safran, an aerospace, defence and communications group

 

Luc Jodry is general purchasing manager at SFR, a leading mobile phone network operator in France owned by Vivendi and Vodafone

 

Geraint John is editor-in-chief of CPO Agenda and chaired the discussion

 

Marie Christine Jonon is corporate sourcing manager at Alstom

 

Pierre-François Kaltenbach is a partner and head of the sourcing and supply chain practice in France for Accenture, co-sponsor of this series of debates

 

Emmanuel Montoya is purchasing director at Groupama, a French banking and insurance group

 

 

Geraint John (GJ): What are the key objectives and challenges for you and your procurement function at the moment?

 

Laurent Jehanin (LJe): Several of the markets that we operate in, like aerospace or security, are booming, so the first of our two main short-term objectives is really to go back to basics – making sure we provide the goods and services on time and with the right quality to support sales.

 

Our second objective is to stick to our financial targets despite the increase in raw material and energy prices. It’s very difficult to do that.

 

Luc Jodry (LJo): As a relatively new purchasing department, our priority at SFR, apart from cost reduction, is to fix our processes. The telecom market is moving very fast: every three months there are new services. One year ago, the length of a project from the beginning of an idea to the delivery of the service could be over 20 months. Now we have to deliver in six to eight months, so the time it takes to manage a consultation is very important. The purchasing team must be upstream of the project, to be ready to make RFQs and contracts. We don’t have a year to do an RFQ, we have a month, so the team has to fix major processes that can allow us to go very fast for each requirement.

 

Sylvain Fresnault (SF): We are a state company and there are three things we have to do all the time: contribute to reducing cost, satisfy needs, but also guarantee the quality of purchases against European directives and rules. For this year and the next two years, the most important thing for us is to contribute to building a new network for mail activity, which is the area I am responsible for. It’s a major project, costing


€3.5 billion over five years where we are building new plants all over France. It’s very operational – having the right machine in the right place at the right moment.

 

Claire Brabec-Lagrange (CBL): Thales is a worldwide group organised into six divisions that are more or less integrated and which have different business models. There is a purchasing organisation at each division level with different kinds of objectives, because the purchasing challenges are not the same. For a division that has a product kind of business model, the strategy is cost reduction, purchase price variance, delivery on time and on quality, and managing outsourcing activities because we are outsourcing most of our manufacturing. Divisions focused on system integration and export also have to cope with offsets and local content issues.

 

The challenge for purchasing is to be involved at the bid stage with the sales and programme teams, to be involved when we set up partnerships with local companies that may one day become suppliers. Despite these different business models, the Thales group is seeking convergence by implementing group-led projects, although not a systematic centralisation of transversal functions. I manage purchasing at group level in a matrix mode; I am not managing a central purchasing organisation, but each of the division purchasing directors is operationally responsible. My objectives are to manage and improve the purchasing system, organisation and policy. We have now defined a set of processes – bid and programme management, development, purchasing, finance, support – adapted to product businesses and system integration businesses and there is a project managed at the group level to implement these processes group-wide. We have defined with divisions purchasing people and the purchasing process, and we have to implement it in all the divisions.

 

Moving towards group-led projects means that we need to develop project management skills in purchasing. That requires different capabilities: we need leaders, we need communicative people, people who understand the business, the challenges, the way we are organised. It’s a complex organisation: my team is composed of eight corporate managers and a set of 12 lead buyers from the divisions, fully dedicated to group projects. We count 800 people in purchasing globally, which means we really have to change the skills – that’s the main challenge. So our overall objective this year is to implement the organisation that we’ve launched, to implement three major projects and to integrate Alcatel and deliver synergies.

 

Jean-Pascal de Casanove (JPC): The purchasing organisation at Messier-Dowty is also relatively young. For indirect purchasing, we have to consider our role as a supplier of our internal customers. We have two internal customers. The first one is customer-focused: engineering, testing, R&D and production. We have in our scope all the capital expenditure. In this case, the main objective is to support the people in contact with our customers. We have to deliver what they expect on time and also help them deliver what they promise to their customers. Our role is to help them to find suppliers, to be sure that the machines and the capex are delivered on time and at the best price.

 

The second area is general expenses and this is different because our customer is our plants. They need to have facilities management, they need to have performance contracts, they need to have good organisation for products, maintenance and repair. Our target is to deliver contracts because today the contractualisation level for indirect purchasing is very low.

 

Emmanuel Montoya (EM): Groupama recently decided to set up a global purchasing organisation. The main reason is that the insurance market is very competitive and a way to get more customers is to decrease costs, mainly the costs of purchase. Initially, the main goal for this function will be to be accepted in a decentralised group, which is always difficult. The second goal will be to create a purchasing culture in Groupama.

 

Xavier Cassignol (XC): Eighteen months ago we were bought by a private equity firm, Bain Capital, so we tried to develop a vision of what purchasing should look like in five years’ time and to agree on the objectives. We basically agreed on three: cost reduction, low-cost country sourcing and trade working capital, because that and leverage are very important elements for the shareholder. So the first year was all about building the foundations and making sure we had the right commodity management in place.

 

This year is about making sure the three support functions within purchasing are working well. One of these is our sourcing office in Shanghai, which we are strengthening because it’s a core element of our sourcing strategy. The second is a small group of analysts in India who do data management and the analytical work for our purchasing and commodity managers. The objective here is to make sure that they do the right profiling and segmentation of what we buy, and that they are evolving towards knowledge management. The third area is to make sure that we have the right supplier quality in place, and that’s a major challenge.

 

GJ: There is a perception that private equity ownership makes cost and working capital pressures more intense. Has that been your experience?

 

XC: Well, surprisingly, not exactly. They [private equity firms] are not only making sure that we address the business plan, but also looking at what they call the “equity story” – making sure that we acquire and integrate companies successfully, and part of that is about our purchasing effort.

 

So it’s not purely pressure on cost, but also making sure we are able to support the growth of the company because they will be selling us in the future – maybe one or two years down the road – and they will need to find a buyer that is not only looking at the company as it is but also at its growth potential.

 

Pierre-François Kaltenbach (PFK): Commodity price volatility is a big issue,  one that almost all of our customers are facing at the moment. One has more than $3 billion of spend on stainless steel and steel castings, so a 1 per cent movement is a lot. They are having to develop a hedging and commodity-buying capability and I don’t see any sector escaping this trend. Energy and currency exchange are also contributing to huge swings in price and the question is how you deal with that. The second challenge is the new type of skills that enable purchasing to work together with R&D, production and customers, to get innovation and a fast time to market or exclusivity for some new ingredient that enables you to charge a higher price for your product. It’s about being a change agent.

 

Philippe Courregelongue (PC): I would highlight three things. First, getting the basics right. What we hear a lot from our customer base is the issue of making sure they understand their spend, that the CPO has control of that spend for the company; this is still a foremost objective of a sourcing organisation. The second objective would be to work on compliance and internal processes to make sure that any kind of cost-reduction initiative is actually hitting the bottom line. This is still a common problem. And the third issue is about agility – making sure that you can adapt to market conditions. All of our customers are faced with rapidly moving supply bases, innovation drivers and markets, and the ability of the procurement function to adapt to these changes in terms of organisation and systems is a preoccupation today. In terms of the agenda this year, many customers are thinking about the issue of supplier-driven innovation and how to harness this and make sure that it is properly funnelled into the enterprise.

 

GJ: Looking slightly further ahead, what are the main challenges you expect to face over the next few years?

 

David Chambeaud (DC):   What we see coming up now and over the next three, four, five years is the need to expand our capability to source not just traditional commodities, but also to manage new areas of spending. Thomson has been buying components for the last 40 years, but not software, IT equipment and services. This calls for a shift in skills among our buyers. Making sure that we still retain sufficient capability in sourcing for our systems global business lines, but also moving into software, licensing and services is becoming a major challenge. That’s been one of our main activities over the last two years.

 

The second thing is for sourcing to challenge our business partners, who can be suppliers but also new providers of technology. It’s about innovating and finding new partners, new sources. I see sourcing being not just a function to secure cost or cash, but a value proposition to our businesses – becoming business partners internally thanks to our knowledge capability and ability to attract new providers that will sustain us. The third point is that, more than ever, sourcing will need to be a “junctioning” function, mastering communication between operations and R&D. That requires a central, recognised, focused organisation. Today, our customers are talking to our suppliers and our suppliers are talking to our customers. So the sourcing role is not about being a policeman, but to understand what is happening in the market and to anticipate it. For example, our contract manufacturers in China and elsewhere are suppliers today, but tomorrow they may be competitors as they integrate and move along the value chain, so we need to take care of this aspect. We need to develop a function that can be an activist in this kind of business environment.

 

Claire Dacier (CD): I totally agree. Alstom has a decentralised sourcing organisation, except for indirect sourcing. Currently there are three sourcing directors representing our three sectors and the vice-president of strategy held the Alstom Sourcing Board, where sourcing directors discuss issues, and set up a network inside the sourcing community. It’s sometimes difficult to launch common initiatives. It isn’t a problem for indirect sourcing since we bundle the volume at group, sector or country level as is relevant and we have set up an organisation without problems.

 

LJo: As I said earlier, we have to fix our processes in order to “industrialise” procurement, and when we have done this we will be able to fix our long-term objectives. Cost, especially long-term cost, can be the most important goal, while building a partnership with suppliers will help to increase efficiency and long-term savings. The challenge for purchasing is to lead supplier relationship management within a
properly qualified team.

 

CBL: As well as our two to three-year operational plan, we also have a strategic business plan for the next five to 10 years. In the past, purchasing was not part of this exercise, which mainly involved sales and strategy, operations and technology. Now we are part of this strategic exercise and this has made a huge change because it has led purchasing to get closer to sales and strategy in order to understand where the business wants to go and what will be the requirements in sourcing. What are the core technologies that we need to have in-house? What are the key enablers we need to source outside? Who are the key competitors out there and are they our suppliers? Do we have to go to Asia because the business in aeronautics is moving to Asia? How are we going to source locally for local needs? By being involved at this stage we are recognised as being business partners to the sales people, to the technology people and globally to the strategy.

 

It is the first year we’ve been integrated in this strategic plan and three divisions have been through this exercise. I convinced the business that if we are a strategic function we need to be involved in this strategic plan, otherwise we are just executing purchasing orders.

 

LJe: To prepare for the future, we are just finishing a relatively difficult exercise to build a global group purchasing policy, not for each product or service category but to define where we want to go as a company in terms of purchasing. It has been a long process because I consulted not only each head of procurement in each group company, but also all the CEOs and the main directors. The aim is really to position purchasing in the whole company process.

 

The first change will be to involve purchasing in the negotiation phase with our customers because the size of what is purchased has become bigger. We have to be sure that if we sign a contract with a customer it will be profitable and that we have secured the costs. But it’s also about risk. Aircraft manufacturers are pushing risk through the supply chain and we have to be sure that we can take part of this risk, but also pass part of it to our suppliers.

 

The second area is the involvement of purchasing early in the R&D process to be sure we can attract the best of suppliers’ innovation and that we are involved in optimising the make-or-buy decision by providing an analysis of the marketplace. It’s very early days; the involvement of purchasing at the early stage is virtually nil today. We want to go in that direction, but it will take several years before we can reach this objective.

 

PFK: I would make five points about future challenges. In terms of career path, we are still far away from a situation where you can offer your best buyers a clear perspective. Sourcing organisations are pretty flat, maybe two or three levels, so how can you show your best people that over the next 10 years they have a clear future in the company? Today, we don’t really see any companies that are delivering on this promise. My second point is about profit centres. I think all CPOs are struggling to justify their contribution, to measure savings. No one can do that, there is no solution. So if you want to move away from this headless discussion with your CFO, you need to shift away from, “What savings did I make?” to “How much incremental revenue did I get for the company?”

 

The third thing is outsourcing. I think a lot of the indirect purchasing and the requisition-to-pay process will be outsourced, so that you will see big indirect and process factories in low-cost countries. The fourth point is about innovation because there are companies now that have innovation objectives, such as Procter & Gamble. And the fifth one is about integrated supply chains, because when you are looking at what your customers and suppliers are doing, sourcing on its own doesn’t make sense anymore. You need to be part of a global supply chain, not just look at your suppliers and try to cut costs.

 

Marie Christine Jonon (MCJ): In Alstom our main challenge for the next 10 years will be to capture innovation from our suppliers. Currently, we don’t consider our suppliers as partners and don’t invest in the innovation of our suppliers. Now, because of internal growth, our main target will be to push our suppliers and to help them to innovate and to be a preferred customer.

 

PC: Technology will remain a key challenge and certainly an opportunity in the next two to three years’ time frame. As CEOs increasingly ask their CPOs to step up to harness supplier innovation in order to contribute to growth and manage supply chain risk, quality and performance, requirements will mature towards solutions that can offer a holistic supply management approach – extended collaboration with internal stakeholders as well as suppliers, tight integration with execution system and total visibility. CPOs will need to connect and support 10 times more users on core systems, with a wider set of collaboration needs across the supply base, as well as finance, operations, legal and sales.

 

SF: We shouldn’t also forget the importance of purchasing in sustainable development. It’s changing our relationship with suppliers and customers. In five years it will be more important, I guess, and in 10 years much more important. We have to organise our purchasing activity with that in mind.

 

GJ: In 10 years’ time, what will your procurement organisation look like if it’s successful? How will you be positioned and what sort of relationships will you have?

 

XC: The objectives will probably be completely different. In my view, it will be less about cost – almost nothing about cost – and probably mostly about how many alliances, how many partnerships, how many joint ventures you have built and how deep they are with your suppliers.

 

Being intensively present in Asia, we see the gap quickly narrowing between our low-cost country suppliers and our suppliers in Europe. Second, our internal purchasing cost is increasing fast – when we hire a purchasing director in Shanghai or Bangalore, it’s almost equivalent to what we pay in Europe. And third, all of our competitors are moving into almost the same area, so I see the gap clearly narrowing in terms of cost. So we will need to build our competitive edge on things other than cost and I believe strongly in successfully integrating our suppliers in our supply chain, making sure we capture their skills and their expertise internally. So it’s mostly going to be about how collaborative your organisation is with your suppliers. I sense that very strongly already and that will be the case in five or 10 years, or maybe less.

 

CBL: We have three pillars to our purchasing vision. First, we want to be recognised as a strategic function because we are really contributing to the competitiveness of the offers and to the profitability of the company. Second, we want to become the preferred customer of our suppliers. And third, I want purchasing within Thales to be a career path for high-potential people, to show that it is not a dead end but a platform for involvement in operations, in other areas of the business. We have to succeed in that because it’s the only way to attract the right skills. Most of the people we need are inside the Thales group, they are not in other purchasing organisations.

 

SF: I recently received an invitation from the commercial and sales department at La Poste – something I’ve waited two or three years for. I will be in front of 50 or 60 key account managers from the company and I will discuss two points. One is to explain about purchasing, the other is for me to try to understand the needs of their customer, to prepare the purchaser of tomorrow. It’s not evident at the moment, so we need to have that kind of exchange in the company. To be at the heart of the company is very difficult, but also very interesting. It might not take 10 years, but for a new purchasing organisation it takes time to be invited to discuss customer needs.

 

LJe: I totally agree with what’s been said. The objective is really to make the best of the supply chain, but we can’t base that only on cost because it’s not sustainable. Sustainability is not just about being green or socially responsible, it’s also about the model we can project. We see the results of the past policy in the car industry. On one hand, several branches of the supply chain have been destroyed by cost pressure, and on the other, some other suppliers are much bigger and sometimes more powerful than the car manufacturers. We want to work with our really strategic suppliers and to be their preferred customers, as Claire said, and to work with their suppliers as well to optimise the whole supply chain.

 

Today, if you look at the aerospace industry, the global supply chain is incredible. Parts are moving all over the world, so it’s very fragile. It’s a miracle the stuff arrives on time and this complexity has no value. We need to redesign the supply chain and to help the other actors to produce more value because that’s the only way we can take part of this value for ourselves without destroying our suppliers’ margins.

 

DC: Long term, because competition is going to be fierce and the environment is going to be complex, I don’t see any choice other than to outsource what is not core. Six years ago we decided to outsource indirect purchasing because it’s non-core activity. I don’t think any company in the future will be able to invest in every aspect of sourcing; you need to invest in talented people, good communicators, business-driven people, not just good negotiators, who can manage superior customer relationships. If you want to invest there and in IT tools and integrated systems, then you will have to choose.

 

We decided to outsource our indirect purchasing in Europe and half of our spending is being managed by IBM right now. This has been working well for several years. If you can do it, I think it’s better to do it. It will revolutionise sourcing over the next few years.

 

CBL: We have to understand that by getting suppliers involved in the whole lifecycle of a 30-year programme, we have to become risk managers. Risk in the supply chain is huge and we will have to manage that. Risk can be financial or it can be about the supply of raw materials or about suppliers not able to manage their programmes or becoming competitors. It requires us to develop specific skills and also requires consultant-type people who are able to audit suppliers and to do business improvement to ensure
quality and delivery on time.

 

LJo: We are purchasers, so we have to manage relationships with suppliers. The basics are about cost, but I agree that we have to go further and maybe get into profit management – what will our supplier bring us in terms of innovation? Apart from the major ones, we don’t know who our suppliers will be in three years’ time. We are looking to be not a support activity but an operational activity, so we have to manage relationships and look at what purchasing can do about the development of new products, not just focus on the cost of products.

 

JPC: We should also have a role to define best practices in the organisation. We have seen a lot of IT projects fail, for example, because the specifications were not correctly done. So I think our role in purchasing is to explain that requisitions must be defined clearly, to help the organisation to procure. This is complementary to the role we have with suppliers.

 

GJ: But are we dreaming too much? In 10 years’ time will we still be here talking about cost reduction, compliance and today’s other challenges?

 

DC: For me, it’s not a dream. I think the function will change because our businesses are changing; our customers are more demanding than they were five years ago. So I think our function is about doing the right things in the right place. It’s not going to happen by chance, we have to put the systems in place, have the right policies and people with the right skills.

 

PC: As a technology vendor, we offer a solution that today is actually addressing some of these things. So they aren’t just dreams. When people talk about less confrontational, less cost-orientated and more value-orientated relationships with suppliers, Emptoris is enabling and implementing value management, in terms of negotiations, for companies to use with suppliers.

 

We’ve talked about risk management and hedging risks, and this is something that is available now from a technology standpoint. We’ve also talked about integrating with finance and becoming more of an operational entity within the company; most of the supply management systems today are looking towards being integrated with systems such as SAP. So again, it’s here and now, it’s not a dream.

 

LJe: I have another dream, which is one that concerns the maturity of the whole company, not just purchasing. I think we are confusing purchasing in general and the people doing purchasing. Today purchasing is fashionable, but before that it was marketing, it was IT, it was finance.

 

I started as a treasurer and cashflow was considered to be absolutely key. Financial people said that because cash was important they needed to lead the company. But today the maturity of finance means that everybody is contributing to cashflow. So my dream is for purchasing to reach the level of maturity where it is a common purpose for everybody.

 

For example, finance people will ask what it means in terms of purchasing if they need less working capital or if they need to acquire some more suppliers to protect their supply chain and so on. R&D will do the same in terms of recognising that suppliers have some good ideas.

 

PFK: Isn’t there a risk that this dream becomes a nightmare? If purchasing culture becomes common practice, what is the added value of sourcing?

 

LJe: To understand the function doesn’t mean you do it. You will let the specialists do it. Just because you understand cashflow and you contribute to that doesn’t mean you are the treasurer or the financial director. However, it will probably reduce the ambition of the CPO to become the leader of the company. I don’t think somebody is chosen as the leader because he is a functional specialist, I think he is chosen as the leader because he has leadership skills, strategic vision, and understands the interaction between functions.

 

GJ: And so the crunch question – how are you going to make this vision a reality over the next few years?

 

CBL: I usually compare purchasing to sales because I come from sales. When you look at the sales side you have very different kinds of jobs: you have strategy, product marketing, strategic marketing, key account managers, sales administration, and customer support. In procurement, we started with guys who were placing purchase orders, then we needed people to negotiate, so we created buyers. And now we need project managers who are involved in product development.

 

Supplier development is not a negotiation job, it’s something completely different. It requires different kinds of skills, a strategic vision and strong operational experience. But we have to create all that and prove it provides value because we are still a brand new function. I don’t think we are close to excellence today, but perhaps within 10 years we will be closer.

 

JPC: I come from the commercial side as well; I was in sales for 12 years. We have a lack of customer relationships and understanding of customer behaviour, inside and outside the organisation. When you are in front of a customer, you have to listen to him; you have to deliver what they expect. We have to sell our function and to teach our buyers how to sell.

 

SF: We have decided that each year, if it’s possible, four or five purchasers will move into sales activity, but in turn I want four or five salespeople coming into purchasing. There is also a new job in purchasing activity, that of mediator, where we have to find technical and commercial solutions together. I think that’s very interesting because, once again, it puts us at the heart of the business. It’s quite hard to find people to do these jobs.

 

CD: We have to create a strong partnership inside and outside the company. Inside, we have to anticipate people’s needs, to build a relationship with commercial people, finance people. And we also have to prove that we are competent, that sourcing is a key function in the company.

 

XC: We need to care of and fix the things that we have discussed – the vision, the collaborative thinking, plus all those “little” things such as cost and quality – and then leave the rest to others. In 10 years’ time the kind of role I would like to play is one where, because we have put the right people in place, I don’t have to tell my team how to do their commodity plan or their strategy; instead they will come up with their own ideas for reducing costs and doing other things with suppliers. This is critical because they’ll be closer to their internal customers, the division leaders, and will know what they need to do better than anybody else.

 

For edited transcripts of our recent debates in London (on world-class procurement) and Amsterdam (on savings opportunities), visit www.cpoagenda.com/debates
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