The Shift from Savings-Driven to Value-Driven Procurement

Nowadays the procurement professionals should concentrate more on the concept of Total Cost of Acquisition which is not only about purchase price, but also includes many factors that can drive you to select supplier or acquire material or services that seems more in cost, if you look to purchase price, but will give better total cost considering the buying cost, owning cost, logistic cost, operating and disposal cost.

It becomes obvious nowadays that the matter is not only about how and what you will save on the initial price, it is also about what values you will add to your business bottom line. This can be achievable by making several steps towards the integration with your suppliers and having a kind of intimate relationship of being business partners and not simply a buyer supplier relationship. This will help your organization when it comes to innovation and differentiation. When you are tied up with your suppliers they will customize their products to suite your business and they may come with innovative ideas and products that will provide you competitive advantage among your rivals. To achieve such integrated relation the way of communication and negotiations should be different from the classic ones. It should be an open book and transparent communication. The business relation should be based on Win –Win scenarios.

There are many examples from the business world that support such approach. I will share with you two stories that show how integrated relation provides you a competitive advantage and helps you to be innovative.

The first story is from the mobile industry: in the end of 2000 there was a factory owned by Philips that was destroyed by fire, the factory was supplying both Nokia and Ericsson with chips; the incident caused the flow of chips to suddenly stop. With mobile phone sales booming around the world, neither Nokia nor Ericsson could afford to wait! With Nokia having very integrated relations with the factory personnel, they get to know very early about the problem and they work on plan B and succeeded to get the materials from other source, as a result they recovered the impact of the expected chips shortage. On the other hand, Ericsson has a conventional buyer-supplier relationship and they got to know about the incident in a late time that no backup plans can be set. As a result:

Ericsson ? Cost to Group estimated at $400 million ? Market share fell 3% to 30% of market ? Withdrew from Handset market January 2001, outsourcing business to Flexitron in Singapore. (Loss making handset division later re-formed as new joint venture Sony-Ericsson in Oct 2001) ? Jan 01 - share price 50% below price at time of fire. Nokia ? Production targets met ? Market share increased by 3% to 30% (exactly Ericsson’s share) ? Jan 01 - share price 15% below price at time of fire.

The second story from cans industry: a company called REXAM has a tied up relations with its suppliers that was built up for more than 10 years. The relationship was focusing on improving and developing supplier’s quality and has a full support from the senior management including the CEO. The result was 83% improvement in quality and having exclusive innovated products that REXAM is the first to introduce in the market and having always a value added products from its suppliers. As a result REXAM is innovative and differentiated in its industry. It becomes the choice for most of the branded beverage manufacturers.

Therefore adding value can be by having information on time that provide you an advantage to deal with risks and mitigate that may affect your market share and hurt your positioning in the market. It could also be by having new products and innovative ideas that will be exclusive for your organization. Also by having extra services regarding quality tests and rechecking that can eliminate some internal processes and help you to cut cost. It could be an added value to the logistic and help you to get your products on time without being obliged to have extra costs on storage and delivery.

This can be achieved by embrace mutual respect, trust, transparency, motivation and having always a mentality of constructive negotiations to build up the culture of mutual benefits for both parties and always having win-win results and outcomes. This only can be achieved when it become a part of the organizational culture and supported by the senior management including the CEO. It should be part of the organization DNA and a kind of its strategic thinking and approach.

Accordingly, value driven procurement helps in positioning the company and makes it more competitive. To close with, always there is a limit for cost reduction,  you can't keep reduce the cost day by day, week by week, month by month, and year by year. There is a point that no more reduction can be achieved! However, for adding value the sky is only the limit. All depends on your relations with your suppliers and their capability to provide you with new ideas, products and services that helps you reduce your costs, differentiate your organization in the market and gives you the competitive advantage among your competitors.

PS: All the credit kept for the photos producers, I just copy it from the WEB!