How Does Procurement Create Value? Insights from CPO Speakers at Zycus Horizons Conference

I was attending the Zycus Horizons 2014 conference at Amelia Island today, listening to speakers.  In addition to the procurement executives, I also got to meet Captain Dick Phillips, the captain of note in the film “Captain Phillips”.  We had a chance to talk about his experience, and he also presented to the group about the incredible experience he went through.  If you haven’t seen the movie or read the book, it is a great story in leadership.

In addition, I sat in on a set of interviews on the main stage.  Chris Sawchuck from the Hackett Group interviewed three heads of procurement from three large companies, and asked an important question.  Does procurement add to top line revenue.  In general, the executives noted that this was a measure that was nice to envision, but not a measure that they could believe in.  How do you possibly show what suppliers do that could impact revenue.  the response was somewhat lackluster….

“In general, there are restrictions.  Some issues are customer-driven, but can procurement really affect revenue in a way that is believable by the organization?  It will always be difficult to change that perception.” Based on that feedback, Chris asked a different question:  “Looking out to 2025 –will we be using the same KPI’s as we do today?  And if not – what will change?”

The first response, from Anders Lillevik, Global Head of Procurement Support Services, QBE North America, provided a very interesting perspective:

“I’ve been doing procurement for a long time, in many different companies.  And we follow a pattern: you do an assessment, a sourcing wave, build a process, and do it over and over.  Over time, you get decent at this cycle.  It is amazing that we do the same things.  We don’t impact COGS much in financial services – but from an indirect side – we will continue to build procurement but won’t build the level of influence as manufacturing.  But vendor management and KPI’s will be impacted – and we need to evolve beyond saving money.  If we define ourselves as a one trick pony – that is all we will be.  Branching into process reengineering and KPI’s will be important.   But what one measure will be involved in 2025?  I would love to see a measure of the number of crises averted by having better management.  The vendor defrauded you, went belly-up, they printed someone’s information on the front of the envelope!  How can we proactively NOT get into those situations.  It is good and bad – that is what makes procurement investment very visible – but not the kind of attention we want.

A second response was provided by Niklas Hamnstedt Chief Procurement Officer at TE Connectivity: “I would like to see a stronger rating of supply risk and a supply risk metric.  If I could punch a button that yesterday we were at 50 now at 45!  Also more end to end KPI’s – our own inventory – but don’t have supply chain lead-times on end to end.

Finally, a response by Alex Brown, Chief Procurement Officer at AMD: “Two new areas of focus.  I can see the light that will maybe be a freight train someday.  From a corporate margin, can we measure not just cost savings but how are they contributing to the gross margin of the company? Another one that is predominant in manufacturing is corporate responsibility, around conflict minerals and human rights.  People will measure you on how well you are managing your supply chain.”

These insights provide a clue as to the real underlying value that procurement brings beyond price savings.  But the real value is not yet being fully realized, and we are only starting on that journey.  But it requires leadership, and individuals who are willing to take on risks beyond the “usual” procurement model discussed by the speakers.