At the helm or all at sea?
Despite a lot of excellent work, the past two years have not been an unqualified success for those in the vanguard of procurement change, argues consultant and coach Dick Russill. All too often, procurement is associated with cost reduction rather than the goals of the business - an image that many senior practitioners reinforce.
Procurement is a core business process, not a "support" activity. While cost savings are necessary and provide a compelling story early on, CPOs also need to create the conditions for procurement to play a strategic role: using supply markets as sources of competitive advantage, attracting innovation and preferential treatment from suppliers.
Russill proposes two models that can help to reposition procurement's role and win active internal involvement from the CEO down: a 14-step "roadmap" with two parallel journeys; and the five-star framework that considers its contribution to sales growth, improved costs and margins, securing supplies and relationships, optimising cash and working capital and better productivity and processes.
You'll know you've arrived, he says, "when the company looks to procurement to provide solutions to business problems, not just supply ones".
CASE STUDY: REHAU
Scanning for innovation
For Rehau, a German manufacturer of window frames, water pipes and car bumpers, having "cleverer products" than its competitors is key to its prosperity, says Rainer Schulz, the firm's chief operating officer. This is particularly true in the automotive industry, which accounts for 30 per cent of its annual sales.
Four years ago, Rehau introduced a new role of "innovation scout" into its 140-strong procurement team. It now has 16 scouts working in its three business divisions, spending up to 30 per cent of their time on new product ideas from customers, suppliers or internal staff. Being open minded, a good networker and having deep technical knowledge are among the key characteristics needed, says Marcel Auer, an automotive buyer and scout.
Successes to date include a heated bumper for the Audi Q7 car. But Rehau is now looking for twice as many ideas and three times as many innovations in the next three years. Close, trusting relationships with around 250 key suppliers are needed to achieve this, says Schulz, who notes that CPOs have a crucial role to play in creating the right "atmosphere" for collaboration, both internally within a company and externally with its supply base.
The carbon imperative
Nicolas Reinecke, Michael Sohn, Hans Jakob Strößenreuther
The world's climate is changing and it is already having a fundamental impact on business, as regulators, customers, investors and employees modify their behaviour in favour of those companies that show their "green" credentials.
Despite a lot of uncertainty, five things are becoming clear, say the authors, McKinsey consultants based in Germany. First, CO2 emissions transparency will become essential, both for companies and their supply chains. Second, firms will have to halve their carbon use by 2030, encouraged by higher taxes and a cap on emissions.
Third, customers and competitors will pile on the pressure to improve environmental performance. Fourth, other issues such as air quality, water pollution and wildlife habitats will have to be addressed. And fifth, premium prices for energy will drive greater use of energy-efficient materials and processes.
CPOs should take a leadership role, they argue, because the vast majority of energy use takes place in the supply chain; because carbon transparency will give firms an opportunity to reduce suppliers' costs and make savings; and because being proactive on green issues is a great way to attract talented people into the function.
Because it's worth it
Barbara Lavernos, L'Oréal
Since taking over as L'Oréal's CPO in September 2004, Barbara Lavernos has followed many of her peers in global firms in centralising and better co-ordinating procurement activity. This programme of change has helped the cosmetics giant to weather big price rises in packaging and raw materials - a fact publicly acknowledged by its CEO.
In the next three years, Lavernos sees corporate social responsibility (CSR) and innovation as the two main priorities for purchasing. Because of the product complexity, pace of change and competition it faces, L'Oréal must work more closely with more of its strategic suppliers on co-development programmes, she says. This will be helped by the fact that, at her behest, the company's CEO, Jean-Paul Agon, is now starting to engage with his opposite numbers at key suppliers.
On CSR, L'Oréal buyers have spearheaded a big supplier auditing programme since 2002. To date, more than 1,000 suppliers have been checked for health and safety and other working conditions. Although this is mostly about compliance, Lavernos says CSR can also be "a new lever of innovation" too. Selling CSR to suppliers can be tough, though, and it's vital to find ways it works for them too.
Riding the wave
China remains the hottest of low-cost sourcing destinations, but double-digit growth is overheating the economy and pushing up inflation. For Western companies with procurement operations in the country, there are five key trends that need to be monitored: rising costs, skills shortages, logistics improvements, social and environmental pressures, and Chinese firms moving abroad.
Costs increases are driven by factors such as wage rate rises of 10-20 per cent a year and the imposition of VAT on basic raw materials. Skills shortages are particularly acute at manager level, with high levels of staff turnover in many sectors; but focusing on non-pay benefits such as training and clear career paths can help stem the flow.
Logistics remains a problem, with slow transportation and a preponderance of inefficient small providers. However, major investments are being made in new transport links, including a pan-Asian train link to Europe.
Pressure from foreign companies and government legislation is forcing domestic firms to comply with higher social and environmental standards. At the same time, Chinese firms are increasing their sourcing from other Asian countries and beyond, buying foreign assets and building up their own consumer brands.
What are the opportunities and challenges in M&A integration?
8 panellists, Brussels
Merger and acquisition activity continued apace in 2007. To discuss the opportunities and challenges for procurement in post-merger integration, CPO Agenda assembled a group of senior professionals in Brussels.
Cost savings were seen as the main opportunity, but there was disagreement about the extent to which procurement was involved in setting the targets during due diligence. Johan Wiegman of Ericsson and Robert van Motman of Pfizer both noted that takeovers in their companies were growth rather than savings led but that the latter was procurement's main contribution. Other opportunities mentioned included organisational redesign, globalisation, and upgrading the function's status.
Challenges included trying to take best practices from acquired firms while moving quickly to capture benefits and make changes; overcoming cultural barriers; streamlining IT systems; developing skills in smaller, less sophisticated companies; and accurately forecasting time and resource requirements upfront.
Advice for those in an M&A situation included focusing on people, being pushy to get involved early, checking contracts carefully, and not being afraid to ask for specialist help with integration work.
In the late 1990s, many group purchasing organisations (GPOs) were born, promising to pool buying requirements and deliver big cost savings, particularly in indirect goods and services. But squabbling among members and a lack of benefits led most to fail.
Despite this, collaborative buying is alive and well in the shape of organisations like Corporate United, a US-based club that claims 120 member companies, and in industries such as healthcare, where examples include VHA, UHC and Provista in the US and NHS Supply Chain (a joint venture between DHL and American GPO Novation) in the UK, as well as elsewhere in the public sector.
But interest among the private sector remains low. A recent survey of big firms by AT Kearney found that only 5 per cent of CPOs saw shared procurement organisations as attractive in the next 2-4 years, with 80 per cent saying "not at all probable". Possible reasons include concerns about supply chain complexity, the difficulty of agreeing specifications, and associations with outsourcing.
Rob Woodstock, a consultant at Accenture in London, believes most firms are not ready for external collaboration because they still have plenty of room for improvement internally.