Needed: An Analytics Platform to Support the New Face of Procurement Transformation
As organizations continue to discuss the notion of procurement value transformation, there is a noticeable gap between the stated intentions of organizations to pursue value, and their actions as they pertain to on-going adversarial approaches to supplier relationships.
As Gerard Chick and I noted in our recent book “The Procurement Value Proposition” (2015), many organizations see their supply function as a key driver of competitive advantage. Procurement is at the heart of supply chain management but supply chain management shifts the focus from direct, relationships between buyers and suppliers towards entire end-to-end supply chains. In many organizations procurement is now an integral part of the supply (chain) management function, focused on the management of the part of the upstream, supplier-focused, supply chain (sourcing).
Whereas the focus of procurement is clearly on supplier relationships, the focus of supply chain management is on the wider business system that includes several layers, or tiers, of suppliers, sub-suppliers, customers, distributors and so on. In some ways supply chain management has absorbed a number of business functions involved in the process of supply, including procurement, operations, logistics and distribution management.
Today across many industrial sectors the proportion of value that stems from the supply chain is almost 80% and in many companies the outsourcing ratio can be greater than 90%. The consequence of the outsourcing trend is that companies become heavily dependent on the performance of their suppliers and therefore need to make sure that suppliers are effectively managed as if they were an extended part of their own company.
As a central function working with suppliers, procurement plays a key role in the management of supplier relationships. This role is not only a matter of cost reduction, although saving money remains a priority for any procurement organization, but it is also about ensuring that the need for a range of criteria, including for example quality, delivery, innovation and service, are being met by suppliers.
Moreover the changes witnessed in the last thirty or so years have brought with it a new complexity; and the need to procure complex performance requires not only deep collaborative relationships with suppliers, often spanning multiple decades, but also an understanding of how complex outcomes are articulated over time through a combination of contractual incentives and collaborative relationships, requiring new skills and competencies from procurement people. The need for developing effective talent is a key priority. To become effective at building change and value creation, procurement managers will require a different set of requisite skills.
The need for developing capabilities that connect these thoughts has been echoed by several leading supply management CPO’s at major industrial companies interviewed in 2013 in my study on The Future of Procurement. Many of these executives emphasized the need for change, as well as the role of universities in helping to create procurement forums that provide specialized procurement skills in critical areas facing the modern procurement executive in the global oil and gas environment. With the increased volatility and change in this sector, a new set of capabilities is needed to embrace this complexity.
Several executives we spoke with identified the limitations with the current view of World Class Procurement as the penultimate application of standardized approaches across the business. There is a move away from procurement as a provider of cost, and much more of an emphasis on being able to deliver alternative forms of value to the business.
With this evolution, comes the recognition that procurement has many different faces and roles they are being asked to play – as legal experts, internal consultants, financial managers who can drive procurement value to a P&L, relationship managers, analytics and intelligence experts, and the like. In doing so, procurement organizations need to spend more time thinking internally about their business partners, as a critical part of the value equation. The business unit or individual who is on the receiving end of your supplier’s product or service, if they are not getting the basic level of performance that they need to get their job done, will not be happy. In such cases, procurement will never be seen a value-added function, ever. Late deliveries, sub-standard quality, safety incidents, damaged shipments, and multiple other problems do not alleviate the benefits of a lower price, as many business unit leaders will tell you.
Many of these requirements need to be connected to an analytical platform, that ensures individuals use a fact-based, data-based approach to driving change and influencing stakeholders to build effective procurement strategies. In their paper “The Journey to Value”, IBM emphasizes that although the link between procurement performance and enterprise success is accepted, there is a not a clear linkage between the platform technologies developed to support procurement, and the cultural changes and leadership capabilities of procurement managers. In particular, the 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. Young early career professionals need to be mentored and introduced to the emerging needs of the procurement landscape, and be coached to be able to take on this new set of challenges.