There is growing recognition that the effectiveness of traditional category management and strategic sourcing is reaching its limits. Many procurement functions have looked to other value-adding activities, such as securing innovations from the supply base, and businesses have quickly realised the growth that this can bring.
But with the UK voting to leave the European Union in a referendum on 23 June, the threat of a recession – both in the country and beyond – has once again risen its ugly head. Many businesses will consider how they can counter that risk and a few will ask, once again, whether the answer is to squeeze suppliers on cost. The question for procurement is how it can prevent a return to those days and avoid a huge backward step in the function’s development.
The key thing is not to panic. Functions should take the opportunity to evaluate their operations and find a way to develop as a central business function.
It is also essential for procurement to educate the wider organisation on the difference between value and cost. Both have merit and can co-exist – but not necessarily within a single procurement function. By separating the value element, procurement can consolidate that leadership role.
Evaluate and educate
Some hard truths need to be clearly communicated. Procurement executives know that asking too much from their suppliers can damage the supplier-customer relationship to the point where the business moves from being a ‘core’ customer to one that is a ‘nuisance’. One-sided cost reduction in most supplier relationships is near exhausted and further demands will result in elements that add value, such as favourable payment terms, being withdrawn. There is a real danger that if cost pressures are pushed back to tier n that product quality will be compromised. Procurement must indulge in what we call ‘slave leadership’ to stand up to the CFO – standing their ground in situations where quality, and ultimately the brand, could be at risk.
This may be easier said than done, as procurement reports to the CFO in many organisations. Traditionally, procurement isn’t great at writing business cases, but those in the function need to develop such skills. If the function can produce a reasoned, informed and fact-based business case, based on a value approach, which achieves more sustainable outcomes to cost reduction, it will have greater influence.
Ultimately there are three things procurement must do:
Measure maturity through value – not tools or processes: Organisations must recognise that procurement needs to strive for the appropriate level of maturity to support the business agenda – not the highest goal. This means the function should develop goals in tune with the organisation. For example, if the direction is for procurement to support innovation, the CPO may choose to invest in a group of research and development specialists
Put innovation at the core of procurement activity: This will keep companies moving forward and looking for a competitive advantage beyond merely utilising costs as a lever
Take a fact-based total cost of ownership approach: Price-to-Cost (P2C) involves evaluating spend as a value group, breaking it into component parts and then using procurement levers to close the gaps between ‘should cost’ and ‘does cost’. It’s a fair challenge to suppliers as it is evidence based and can be used collaboratively countering traditional top-down discounting approaches. In addition, it’s a useful technique if organisations choose to implement a zero-based budgeting approach as a counter to a possible recession.
Even if the threat of a recession melts away, now is the time for functions to take stock and identify opportunities. Failure to do so will mean a regression in development and a return to an adversarial way of working – something nobody wants.
Natalie Henfrey is a procurement expert at PA Consulting Group