A Tale of Two Procurement Books: Cox's Sourcing Portfolio Analysis (Cox) & Strategic Sourcing in the New Economy (Keith et al.)
A new face of procurement is emerging which is recognizing that a new set of value drivers must be developed in the face of massive environmental changes. Some of the emerging views on the “future of procurement” focus on the importance of being a strong internal consultant, the importance of building relationships, coaching suppliers, post-award contract management, and relational contracting. These topics are emerging in the context of the new view that procurement is about building value for the enterprise.
It is against this context that the two books in this review represent two anchors that exist in the procurement environment, both the old, traditional model of power-based, “red meat eating” buyers, and that of the procurement professional focused on driving relationship contracting and vested value to create mutual benefit for both parties. Each book represents a different perspective, and thus provide a representation of the current debate going on in procurement strategy meetings around the globe.
Andrew Cox’s new book “Sourcing Portfolio Analysis” represents the more traditional “power-based” view of procurement. The book relies on a series of prescriptive two by two matrices, that are further segmented into eight by eight matrices, that establish different typologies for supplier segmentation,. The application of these frameworks to the universe of buyer-seller relationships proposed (ostensibly) to lead to improved sourcing outcomes…for the buyer only that is! The book clearly views the supplier as a party that must be “beaten down” through the application of power-based negotiation tactics, the assumption being that buyers have been “exploited” by suppliers for years, and the tables have now turned.
This work builds on much of the prior strategic positions concepts introduced by Michael Porter’s Five Forces analysis in his book Competitive Strategy (1980), Peter Kraljic’s “Category Segmentation Matrix” published in the Harvard Business Review (1983), as well as Professor Cox’s own articles, working papers, and book chapters (which consume 3 pages of the reference section of the book). Unfortunately, the most up-to-date reference (apart from his own work) that are cited are from 2008, and it is clear that there is a gap in Cox’s use of more modern research paradigms that are related to relational contracting and negotiation. In fact, the subtitle for the book, “Power Positioning Tools for Category Management and Strategic Sourcing” gives it all away. This book essentially depicts how buyers can leverage their market positions to gain more power over suppliers in negotiating contracts. But in doing so, Cox has taken the tools of Porter and Kraljic, and put them on steroids, without adding any significant insights that help the reader better understand how to deliver value in supply chain relationships. The author spends the entire book focused on building even more detailed segmentation matrices within segmentation matrices to define different types of sourcing environments. This results in several new terms for buyer-seller relationships that he is able to form into a typology. Unfortunately, the resulting typologies are not only completely confusing, but indeed without meaning! Take, for example, this one:
Reciprocal – Supplier Development + Supply Chain Sourcing: Full lean / agile / agilean supplier collaboration at the first tier + arm’s-length sourcing from within the supply chain, in which neither party maximizes their share of value.
Or another good one:
Buyer Dominant – Supplier Development + Partial Supply Chain Management: full lean/agile/agilean supplier collaboration at the first tier + information-based collaboration only within the supply chain, in which the buyer maximizes their share of value from all suppliers in the chain.
A good example of this type of relationship would be……what exactly? These buzz-words might be heard from a supply chain consultant who has had too much coffee at breakfast! But without a strong set of definitions, a practical set of examples, and a reference to more recent academic research, these descriptions are both confusing and lack tangible exemplars to demonstrate them. I expected more from Professor Cox, who has a lengthy set of publications in refereed journals.
What bothers me about this book is that it is entirely focused on power, and how a buyer can reduce their dependence on suppliers, and therefore “receive better value for money deals”. The notion that dependence may not be a bad thing, so long as it is governed through effective contractual mechanisms, performance measurements, open exchange of information, and mutual benefits is entirely lacking. While I am in agreement that driving competition in any type of supply chain relationship is a good thing, it can involve increasing dependence through long-term mutually beneficial relationships. For example, my experience with Honda is that they often seek to build “supplier for life” relationships, that are focused on robust should-cost models, target costing, supplier development, and continuous improvement strategies in collaboration with suppliers. In another industry, oil and gas, I have witnessed supplier relationships that span ten years or more that are based on complete open books cost plus strategies that seek to drive demand management and improvement strategies. These types of relationships do not exist in the world of Cox’s Sourcing Portfolio Analysis. But then again, not everything can be simply labeled in a two by two (or eight by eight) matrix.
Unfortunately, the typologies identified here fail to provide practical examples or cases that define exactly what is meant. And that is a telling problem with this book – these are theoretical models that have worked well, but which cannot be readily identified in practice. Perhaps this may be due to the fact that Professor Cox has had engagements primarily with organizations that are already in a position of power. His work was used for a long time in the 1990’s within IBM, a large buying company, which was known primarily for implementing Cox’s ideas around leveraging spend and driving to touch-less procurement technologies that minimized face to face contact with suppliers. Cox’s work has historically focused on an environment in which procurement is embedded in large and powerful buying organization, procuring an uncomplicated product or service from an acquiescent supply base.
Interestingly enough, it seems even large behemoths like IBM have also turned the corner on this antiquated view of procurement. I remember years ago at an IACCM conference seeing the senior director of procurement answer a question “how do you define strategic supplier relationships?” with the response “if they do a lot of business with IBM.” However, the most recent 2013 IBM Chief Procurement Officer study published by the IBM Institute for Business Value found quite a different result. They found for instance that companies with high performing procurement organizations have higher profit margins and had the three following common attributes: 1) They focus on improving enterprise success, not just procurement performance, 2) They engage with stakeholders to understand and anticipate their needs and values, and 3) They embrace progressive procurement practices and tools to drive results. These role models are also more likely to collaborate with suppliers to develop new technologies, that emphasize brokering new relationships with suppliers to introduce new ideas and innovative thinking.
These components are entirely missing from this book, as the ecosystem depicted in the Cox book is far too simplistic to capture the realities of the complex world that procurement professionals are faced with today. It assumes that buyers control their environment, and that price is the primary driver of value. And this simply is no longer the case, as IBM itself points out in their study.
If Cox’s book is anchored in the past, then the new book by Keith, Vitasek, Manrodt and Kling is completely focused on the future. This book is a remarkable contrast, in that it adopts a diametrically opposite view to the notion that power is the basis for buyer-seller relationships. In fact, the introduction of the book begins by acknowledging the contribution that Porter, Kraljic, and the firm A.T Kearney (who espoused the term “strategic sourcing” to focus on leveraging volume to reduce price). But then the authors go on to note that their time has passed, and a new approach is needed for proactive procurement strategies to emerge:
No one would debate that these pioneers have led an evolution in procurement that made a lasting impact. But times have changed. Today’s environment is more dynamic and is filled with greater uncertainty. The tried and true tools and tactics adopted over the last 30 years as the gold standard are not as effective as they once were. Organizations that historically have won by leveraging their power or by strategically maneuvering to shift power in their favor find those strategies are losing effectiveness.
Specifically, the authors adopt the acronym VUCA to describe the current business environment, standing for volatility, uncertainty, complexity, and ambiguity. Procurement must approach sourcing decisions in this environment, with the knowledge that incremental changes will not do. In a VUCA environment, traditional static models of leveraging power no longer work. Procurement must earn the trust of the business to fully succeed, and in doing so, it must embrace a vision that goes far beyond the thinking of today, leveraging creativity and know-how to change not just the function from within, but the overall business value procurement can deliver.
The authors of the book set out to achieve this, in seeking to deliver on two key objectives: 1) to build awareness that reliance on conventional power and leverage approaches in sourcing relationships is limited, and 2) to invite procurement professionals to better understand the benefits of using relational contracting approaches through the use of Sourcing Business Models. Much of this work is grounded in the work by Kate Vitasek, the developer of the “Vested” model. Vested is a Sourcing Business Model in
which buyers and suppliers carefully craft highly collaborative relationships supported by true win-win economics. A win for buyers is a win for suppliers. Buyers and suppliers are vested in each other success.
The work is also highly grounded in the work of Oliver Williamson, the Nobel Prize winning author of transaction cost economics. This paradigm is one of the most highly cited models used in the sourcing research literature, and posits that buyer-seller relationships range from highly competitive marketplaces to establishing corporate hierarchies through insourcing. This work is used as the foundation to construct the seven Sourcing Busienss Models identified in the book. The authors also provide a Business Model Mapping Toolkit that provides step-by-step instructions for determining which Sourcing Business Model is most appropriate for your situation. Interestingly, the authors provide a link for readers to download all of the models through their vested outsourcing website, believing that use of the tools will propagate their use. In the remainder of the book the authors discuss other approaches that are required to fundamentally change the nature of the dialogue between buyers and seller, and the importance of building trust in relationships.
An important differentiator of their approach is the prominent discussion of the term relational contract, defined as a combination of written contract(s), interface protocols, and distinct social norms that enable a continuously efficient and effective commercial relationship. The relationship is efficient when the parties cooperate to minimize friction toward the commercial goals (i.e.,
when the transaction costs before and after the contract award are optimized). As the authors note, “the secret to make this happen is continual alignment of interests.”
The book is written in a format that is an easy read, without the use of buzz-words and plenty of examples and illustrations for the concepts. A number of case studies are written using unnamed individuals from the procurement world who have gone through different experiences and situations. I like this approach, as it provides a real-world feel and also emphasizes the importance of individual personality and capabilities and mindset as a critical ingredient of buyer-seller relationships. These cases also clearly explain the aftermath that occurs after a “meat eating buyer” has gone through and beat up a supplier. This often involves serious lapses in supplier performance, or post-contract markups and engineering change notices that wind up costing even more money than the supposed cost savings that occurred in the contracting stage. The alternative involves Trust, choosing to be open, transparent and credible. The benefits of opening up relationships that could not occur otherwise are illustrated again and again throughout the book.
I also liked how the authors draw on a historical perspective of the sourcing function, including a description of the now-famous destruction of relational capital achieved by the “procurement pitbull” Dr. Ignacio Lopez. There are also references to other visionaries in the procurement world such as Gene Richter and Thomas Stallkamp.
In contrasting the two approaches, a comment from a former IBM procurement senior executive who helped me with my review is useful to consider:
Overall procurement strategy development does need to continue to evolve. While I understand the notion behind VUCA, and there are certainly ever-present variables, I do not see these conditions necessarily being present 24/7 in the majority of commodities/relationships in which I have participated. Similarly, I do not see these elements as necessarily providing guidance as to how to build a supply chain team nor a supplier strategy. I tend to focus and tailor the solution to the operational variables of our business, the inherent flexibility of the products and processes to react to change, and the level of dependence on suppliers for technology, innovation, and risk mitigation. “Power” and “Leverage” are the results of the strategy, not the starting points. Conversely, the idea that ‘spend’ is not an inherent lever in driving the best financial results is equally mis-guided (IMHO).
In developing and deploying procurements true value proposition to the business, everything in these two books have something to add. However procurement transformation, lessons from the past and classic maturity model thinking must be put in context. Modest changes in capability and thinking can help but will not bring the value modern business demands. There is also an emerging need for technologies that drive sourcing analytics, risk management, supplier life cycle management, and market intelligence will become critical in building effective procurement transformation components – yet the linkage to these approaches is not well described or understood in the procurement community. Procurement must progress and as George Bernard Shaw put it so eloquently “Progress is impossible without change, and those who cannot change their minds cannot change anything”.