The case for Procurement in high margin industries, picking the right operating model, and how to make it stick

On October's #ProcLive we discussed with @Ninian Wilson, CPO of Vodafone and @Keith McCabe of Avam Solutions what drives central/global versus decentral/ local decisions and operating models.... got me thinking and I've written this blog as a result.

The case for change

You are a new Procurement VP/CPO or CFO, you observe waste in the supply chain and untapped value. You want to build a business case for change. But you are in a high margin industry, where the focus on cost containment is less critical.

In these industries its typical that Procurement does not merit (yet) a ‘seat at the table’ and is brought in late to mop up contracts, perhaps squeeze out a few more pennies. But only rarely able to influence demand levers and strategic supplier choices or key terms.

The case for Procurement transformation is widely documented, but the two most common business cases are built around:

1. An investment case in Procurement in return for savings, usually promising a 5-10x return: an overall category ‘prize’ is jointly created and categories are prioritised into waves, with quick wins first and high return/ high effort categories next and so on
2. ?An investment in Procurement to mitigate risk of regulatory or supply disruption: the company needs to have improved resilience and supplier oversight

Often the transformation case looks great centrally, and may be signed off by group functions or even the CEO. But the business, unaware of the great white hope that is incoming, have managed quite fine for many years thank you very much.?The next challenge then is...

How far reaching should the CPO seek to be in this transformation?

And how do they ensure any new investment in capability is maximised and used upstream (on high value add activities) rather than simply providing more downstream (low value add) capacity.

Your procurement target operating model design needs to consider, category-by-category:

• ?Supply market structure: number & geographical focus of the supply industry; the more global and monopolist the supply base, the more likely that centralisation is appropriate
• Criticality of the buy: If the category is critical to business unit profits the case for decentralisation is stronger.
• Non-profit risks: If purchases expose risk to the business that are non-financial- for example ethical, social, environmental, reputational risks, the case for centralisation is stronger as this provides a second lens by divorcing buyer from budget holder.
• Economies of scale potential: where the combination of volumes across business units and geographies is likely to yield incremental gains then centralisation is likely to be more appropriate
• Frequency of the buy: one off or irregular purchases may not merit centralisation compared to frequent regular requirements
• Homgeneity of requirements: how bespoke is the requirement across the business and compared to market norms. Highly specific requirements may be better decentralised
• Extent of in-life governance: Whilst there are examples of centralised supplier relationship management, typically the more in-life management means more decentralisation.
• The business culture and context around empowerment and stewardship: the more freedom and autonomy intended in the desired culture of the business the greater the decentralisation should be expected. A greater emphasis on stewardship will lead to more centralisation.

There is no one-size-fits-all answer and a hybrid model like the below will typically emerge from the analysis:

If you are expecting a battle, read my companion article here.

Having made the play to Lead or Follow more assertively and secured sign off to a new business case what does ‘Lead’ or ‘Follow’ mean in practice?

In complex buying decisions, there’s typically 6-7 key stakeholders who input, with Procurement being one of them. Rarely is Procurement the ultimate sponsor or budget-holder so in the context of ‘Lead’ here it will mean one of the following:

• facilitating and participating in the key set piece events with the supplier or supplier market
• being privy to and developing ideas on specification and planning relating to the supplier or need
• taking leadership of commercial conversations with senior leaders at the supplier(s)
• regular discourse with the budget-holder to review options, improvements and ideas relating to the spend area and suppliers
• being the in-house knowledge centre for what is happening in the market for that spend area/ supplier.

In a Follower role, Procurement takes ownership typically of facilitating the competitive dialogue and contracting process, leads or supports on negotiating and maintains tactical relationships with the suppliers and with middle management of the budget-holder. It’s a less satisfactory role and more limited for the Procurement professional but a common home indeed. It’s a category by category, budget-holder by budget-holder assessment, but one that’s necessary to make.

Top tactics to deploy in the early stages of the transformation to make it stick

Where-ever the ownership of individual categories lies, the new Procurement function can place itself as a leader for some significant cross category activities. For example commercial acumen and training, sustainability and social value policies in the supply chain, incubation and innovation processes.?

• Find a forum (or create one) that governs spending and major buys/ projects. This will be your forum for steering work of your team and also providing a point of control over rogue buying.
• Educate stakeholders on the value of more commercial focus upstream (whomever does it)- to develop requirements, challenge the need, consider alternatives like making or renting rather than buying for examples.
• Build bridges with related functions who deal closely with suppliers. For example, onboarding, compliance, accounts payable, budget planning, CSR, legal- providing them more insight and visibility on plans and pipeline and nurturing around a common agenda.
• Don't over-sell to potential potential candidates. The best candidates want a challenge, and they stand out a mile. However, they may be quickly get disillusioned in the face of unexpected stakeholder resistance. Don't hide cultural barriers during interviews- instead try and solve the problem together and get the stakeholder to interview them too.
• Set up simple process models. One of the biggest issues with 'strategic' category management is PowerPoint! Getting your teams to spend weeks building a tome that will sit on a shelf goes a long way to disenfranchise existing team members. Adding multiple approval gates as control points may have the intent of creating visibility but can look like micro-management. Get the teams themselves to suggest process models and governance for large and small categories of buy.

Of course, technology is a great enabler of the above too, but these above points are among the foundational building blocks to success.

About me: I am a Procurement and Sales leader that helps transform either side of the commercial divide. I currently work for GEP, who provide procurement and supply chain related services and software. I also write articles on linkedin on procurement, sales, music and working styles (that very few people read), mainly because I can't seem to write in the short-form required of regular posts!