02.3 / The future of Procurement is NOW, Procurement is here to save the world!

by Bertrand Maltaverne

Yeah, the title is a bit extreme… But, it is, to some extent, true. Based on the previous articles I posted, Procurement plays a key role in the survival of companies!

It is ALL about Make or Buy!

When you think about it, a company is a “make or buy” organism! And behind the question and decisions of making or buying, there are a lot of factors at play and Procurement plays a key role in getting the right answer.

The last years have seen a lot of changes in our world, not only in terms of technologies (as highlighted in the previous post) but also on the “attitude” companies have towards “make or buy”. Look at how outsourcing / BPO has made such a breakthrough! Many companies focus on their core business and get rid of the rest; outsourcing entire functions to suppliers! And the core business of a company may not be what they sell:

So, in a context of outsourcing, specialization… what a company buys is getting bigger and bigger, more and more complex, more and more diverse… so the “make or buy” decisions or the decisions about selecting the right partner are more and more meaningful; more than just getting cost savings!

This has profound consequences on:

  • the position of Procurement within a company,
  • on Procurement capabilities.

“Procurement executive’s ability to read trends accurately in a rapidly changing business environment can make all the difference between surviving or going under.”

On top of that, everything goes faster than ever! The lifecycle of manufacturing technologies and of products in general is shorter and shorter. Procurement must enable organizations to react/act fast! We are speaking of very different capabilities (people, process, and technology) than the ones required in a more stable and predictable environment!

It is NOW about tomorrow!

Porter’s 5 forces

If a company wants to continue to appeal to customers, shareholders, collaborators, suppliers… it has to always be in sync with its environment. Environment that changes constantly! The key question in sourcing decisions is then less about now, but more about the consequences on the long run. In short, Procurement has to forget about yesterday (Is what I ordered here?) and today (What do we need to order?) to focus on tomorrow!

Porter’s 5 forces are not new but they are even more at play now. Selecting the right supplier impacts them all. It really is about getting a competitive advantage on the long run. Competitive advantage in various domains, not only pricing!

Customers, shareholders, collaborators… are more and more sensitive to aspects that are not price-related. The selection of suppliers reveals if companies are truly sincere and are “walking the talk”!

As an example, CSR is more and more in the spotlight: companies are taking CSR into account far more than in the past and are therefore exposed to more risks when they do not do it sincerely (that is talking about it only at a marketing/selling level).

Obviously, companies take CSR seriously because these are serious issues and also because it makes sense from a business stand-point. Integrating these ideas in the “food chain” makes also a lot of sense. How would you sell “green” or “social” if you do not act as such and do not buy “green” or “social”? Some sectors thought to be miles away from such considerations are now making the leap:

Obviously, companies are getting in that direction because, as stated above, this makes sense from a business side of things:

  • Consumers / buyers are integrating these concepts in their purchasing decisions (not always but more and more… and this starts at consumer level then it goes up the supply-chain…)
  • Regulators are also changing the rules…

These are only a couple of examples but they illustrate that decisions about selecting the right supplier are now focusing on “value”. Plus, they relate to more than just what you buy to put in your product; it reaches new areas of spend because of outsourcing. Therefore, Procurement must evolve and integrate new capabilities to fully play its role.

“Spend analysis, cost modelling and strong procurement ‘execution’ capabilities are the prerequisites of a value-adding procurement organization.”

The basics remain, but Procurement organizations need to go beyond them. To become, among other things, a risk advisor (covering more than simple financial/bankruptcy: CSR, IP, supply-chain…) and a means of getting customers’ requirements and expectations right, then capabilities to read trends and to predict them are key. No wonder then that words like big data and predictive analytics are more and more commonly heard in Procurement. They represent a means of increasing a company’s agility while living in a world of uncertainty!

“This older paradigm was engineered to manage reasonably stable, high-volume production supported by relatively sustainable capital flows in a relatively fixed pool of low-cost-labor countries, most notably China. The emerging economic order, however, will have markedly different characteristics.”

These new capabilities have 1 thing in common with the origin of the disruptions this series of post is about! Technology!
Of course, technology alone does not fix everything, the People + Process + Technology equation applies; but it is a key enabler in terms of:

  • information gathering
  • information analysis
  • information communication

These capabilities are a must to build actionable intelligence!

“An overriding focus on purely or financial short-term performance will definitely not lead you to your procurement mojo.”

In the next article, I will explore how technology can help Procurement organizations to build these required capabilities to cope with continuous disruptions and bring even more value to companies.

More information and links:

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