Procurement as a differentiator – Part 3 (what kind of differentiation?)

In a previous post (Part 1) I explored an expanded definition of what Procurement is becoming and then how it can become the link between Customer Demand and Supplier Innovation.

Then (Part 2), how Procurement’s potential could reinforce the basic Strategies of Organizational differentiation.

In this post I will explore in more detail what this differentiation could look like.

C. PROCUREMENT AND DIFFERENTIATION

The argument that Procurement can become a key Differentiator is supported by the fact that Innovation is a key contributor of business growth and that Procurement can be a great curator and creator of Innovation.

Jimmy Anklesaria in his great book “Supply Chain Cost Management” posits that Procurement should:

“leverage [the] collective intelligence of the extended enterprise (your customers and their customers, your suppliers and their suppliers), and generate substantial results”.

and also that

the next generation of cost management is: “breakthrough solutions”.

C1. COST LEADERSHIP AS A DIFFERENTIATOR

Jimmy Anklesaria also highlights the fact that genuine cost management is different from cost cutting.

Indeed, genuine Cost Management does look at the business as a whole and asks questions like:

-Do we really need this service?

-What is the value this service provides to the business?

-Is there a better way of doing this?

Moreover, he stresses the importance for Procurement to move towards embracing a Strategic perspective as, according to him, successful Cost Management will be the key differentiator in the future:

“So, here we are in the twenty-first century. What will differentiate your firm from its competition? Will it be technology? Or maybe it’ll be quality and reliability? Perhaps speed of delivery? Or excellent customer service? Or do you think your firm is the onoly one in the industry doing e-business? The answer,…, is that nowadays, frequent technological breakthroughs, high quality, reliability, on time delivery, top customer service, and e-business are merely the prerequisites for being in the global race for market share. Today’s customer expects this from a supplier; rather, demands it. And there are enough firms around the world that have overcome the “preliminary rounds” of technology, quality, reliability, delivery, service and e-business.

So, why should they choose your firm?

In a few years the only differentiation will be cost. Companies that best manage their costs through the entire supply chain to bring you the latest technology, best quality with on-time delivery at a price lower than the others will take home the prize-your check. There is no prize for coming second”.

C2. INNOVATION AS A DIFFERENTIATOR

Now, reflecting on the power of Innovation to drive growth we find evidence in Kate Vitasek’s reminder of Solow’s Law that states that business growth is driven by innovation.

Specifically,

“The population and the labour supply grow at a constant rate and capital intensity (or capital per employee) can be regulated. But without technological progress, Solow continued, growth rates for capital, labour and total production would all be about the same. As a result, technological development would be the motor for economic growth over the long haul. In Solow’s model, if continuous technological progress can be assumed, growth in real incomes will be determined by technological progress”. (Kate Vitasek, outsourcemagazine)

But probably the most important contribution Solow demonstrated was that only a small proportion of annual growth could be explained by increased inputs of labour and capital. Just how small? Thirteen percent.

In other words technological growth makes the crucial difference when it comes to economic growth – a whopping 87 percent. Now keep in mind technological growth happens in two ways: product and process improvements.

For both these ways, Procurement can play a pivotal role.

This notion is also reinforced by the view of Cavinato and Kauffman when they detail Technology Advancement (e.g. Product and/or Process Improvement) and Supply Chain Synchronization (e.g. Process Improvement) among the four key trends that will most likely fundamentally shape tomorrow’s procurement practices (here). The other two key trends being Globalisation and Industry Consolidation.

CONCLUSION

I think that the above amounts to a strong argument for Procurement to be one of the primary differentiators for the organisations of tomorrow. Utilizing the Procurement function towards clever Cost Management and stimulating Innovation will mean that organizations will empower a yet not fully explored source of creativity and immense potential.

Where do you think Procurement will be and should be by 2020?

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Procurement as a differentiator – Part 2

In the previous post (here) I explored an expanded definition of what Procurement is and how it can evolve into becoming the link between Customer Demand and Supplier Innovation.

It is important though to also explore the Procurement potential through the lens of Michael Porter’s model of Organisational Success in an effort to understand how the basic Strategies of differentiation could be reinforced through the Procurement profession.

Michael Porter

B) PORTER AND COUSINS MODEL FOR ORGANISATIONAL SUCCESS

Michael Porter in his seminal book “Competitive Advantage: Creating and Sustaining Superior Performance” describes three generic strategies for businesses.

These are:

“”Cost Leadership” (no frills), “Differentiation” (creating uniquely desirable products and services) and “Focus” (offering a specialized service in a niche market)”. (mindtools)

The above easily brings to mind the airline Tigerair reputed for low cost, 3M reputed for innovation and Qantas which with the formation of Jetstar pursued the “Focus” strategy (niche market differentiation).

Reflecting on this model it is evident that Procurement can clearly respond to 2 out of 3 of Porter’s differentiation strategies i.e. Cost Leadership and Differentiation and can affect the 3rd one.

B1. COST LEADERSHIP

Cost management and cost cutting has been an archetypal quality for Procurement.

B2. DIFFERENTIATION

I believe that the second differentiator i.e. Innovation, is the next frontier. Procurement can and is slowly moving

from

“purchasing goods and services at competitive prices”

to

also focusing on cost reduction techniques, improving cycle times, reducing time-to-market, and constantly seeking to exploit actual and potential innovations from within the supply market. 

Moreover, in the current environment, and considering Strategic Supply Management, the Organization should constantly re-evaluate what is core and what could be outsourced. So, Make or Buy decisions will become more common.

As Cousins et al, highlights:

“Supply strategy is increasingly a factor in identifying the organization’s boundaries. Supply management assumes responsibility for developing and implementing supply structures that will sustain the competitive position of the firm” (Cousins P. et al, 2008, Strategic Supply Management)

B3. CAVEAT

The necessary caveat of course is that the Organization views and enables Procurement to function in a strategic and collaborative way, internally and externally, and that the Organization has and is clearly communicating the preferred differentiation strategy it has chosen to all, so, that alignment of goals and business unit strategies is ensured.

In the next and final post of this three-part series, I will explore this differentiation could look like.

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Image courtesy of Wikipedia / www.wikipedia.com

Procurement as a differentiator – Part 1

“In 2020, company leadership will likely look at procurement not as a group that focuses on sourcing raw materials, goods and services, but rather as one that sources ideas. Creativity will involve engaging stakeholders in new, innovative ways” -Deloitte, Charting the Course, Why Procurement must transform itself by 2020

So, what would be the next step Procurement should aim for? Moving beyond Cost Cutting, can Procurement become a core differentiator for every Organization? I believe the answer is yes. Let’s have a closer look.

PROCUREMENT DEFINITIONS

Discussing Procurement, there is a variety of different elements to it: Direct, Indirect, Sourcing, Category Management, Contract Management, Supplier Relationship Management, Procurement Excellence, the list goes on.

In the traditional way of looking at Procurement (see below definition) it can be argued that not all these elements can be considered core.

However, if we expand our definition of Procurement from the more traditional approach of:

Procurement is “the overarching function that describes the activities and processes to acquire goods and services involving establishment of fundamental requirements, market research and vendor evaluation and negotiation of contracts including the purchasing activities required to order and receive goods” – purchasinginsight

to also engulf activities such as:

“make-versus-buy decisions, outsourcing and in-sourcing, supply chain management, inter-firm communication, strategy formulation, relationship management, performance assessment, inter-firm networking and innovation scanning” (Cousins P. et al, 2008, Strategic Supply Management)

then it becomes apparent that Procurement has the potential, if viewed strategically, to effectively link customer demand with supplier innovation and thus, change the way we view Procurement’s core elements.

In a practical sense though how Procurement fits in organizational Strategy and why should it be there?

Some thoughts are summarized below:

A) THE LINK BETWEEN CUSTOMER DEMAND AND SUPPLIER INNOVATION

a) Firstly, it is evident that Procurement is the function that forms the contract framework and the supplier relationship.

Hence, provided that the business outlook, targets and organizational vision allows, Procurement is responsible for defining the scope and setting the framework within which the supplier relationship will evolve.

In recent times, the requirement for suppliers to work with the business into strategic relationships (especially, discussing categories of high spend and/or high risk) is slowly becoming the norm.

Contract clauses that require continuous improvement and innovation as part of the contract are implemented more and more.

b) Procurement is also the function that has direct contact with new suppliers.

The business is well aware of what the current suppliers can do (although there may some gaps especially when the contract doesn’t promote sharing of new ideas and incentives for continuous improvement). However, the business does not know what it doesn’t know.

Hence, unless Procurement through its contacts re-assesses the supplier market and re-evaluates of what can be done e.g. what the suppliers’ new processes are and how innovation affects the market landscape, then the fast-paced market space we operate in may constitute the business activities too expensive and/or irrelevant by today’s standards.

It thus becomes evident that it would be very useful, if not essential, for the Organization to make Procurement the focal point of collective knowledge between internal functions and external sources.

Procurement can thus, be placed as the liaison between R&D, Sales and Operations on one hand and Suppliers on the others.

Furthermore, in pursuit of establishing the “fundamental requirements” or specifications for Sourcing the right products and services, Procurement has to assess supplier capabilities and can and should collect and communicate market intelligence back to the business in order for best practices and product development to be fine-tuned.

In the next two posts (part 2 and part 3) of this three part series, I will explore how Procurement’s potential through could reinforce the basic Strategies of Organizational differentiation and what this differentiation could look like.

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