Tackling disruption through procurement Part 2 – Tapping opportunities in strategies
In this post series, I take a look at tackling disruption from procurement perspective. This post discusses the importance of revising strategies.
When talking about strategy in the context of procurement, there are three levels of analysis that we need to consider: the corporate level, the function or department level, and the category level. At best, corporate level objectives are cascaded down to department or function level and from there to category level. This ensures that category strategies are aligned with corporate goals, and contribute to achieving them.
Sometimes the link between category level activities and corporate-level goals may not be so evident. Yet, when the link is clear, category management can be a powerful means to help a company achieve its objectives. A company I used to work for was experiencing profitability crisis caused by a tightening market situation. Thus the top management mandated a profitability improvement program across the total procurement spend, including previously non-managed direct as well as indirect product and service categories. A savings target of 10% of the total spend was established, and communicated to everyone involved, including stakeholders in e.g. HR, marketing and R&D who were used to dealing with suppliers on their own and had never even heard of purchasing category management. With this clearly set and communicated goal, cross-functional category teams were set up, and approximately 50 new category strategies were created, some of them from the scratch. The identified savings potential exceeded the goal significantly, and the new strategic mindset in the category teams helped establish the procurement department as a strategic function in the company.
Category strategies are guided by corporate level goals and should contribute to achieving them. How well are category strategies aligned with corporate goals in your company?
It is one thing to create strategies at times of stability – when corporate goals reflect innovations, sustainable practises or profitability – than at times of disruption, when preserving profitability, securing and optimizing supply, and minimizing risks are priorities. The rapidly changing situation on the marketplace makes alignment done six months ago obsolete as objectives need to be revised swiftly to reflect the changing business environment. As the strategy process becomes more fluid, there is a need for an on-going strategy dialogue between procurement and top management, and also within and across category teams. The traditional top-to-bottom approach needs to be complemented with bottom-to-top approach. Since category and procurement teams are the first first to experience the effects of supply disruptions, they have first-hand knowledge of their effects and impact on company operations, profitability and performance. The feedback loop from category teams to sourcing and procurement function, and to the corporate top must become more elaborate than before to enhance its efficiency and effectiveness.
For the category or commodity manager, dealing with global market volatility, disruptions and increased supply risk means revising the existing category strategies. One of the key tools here is the Kraljic matrix (Kraljic, 1983) that can be used to segment product and service categories according to supply risk and profit impact. This positioning exercise is usually done on an annual, or bi-annual basis, making it a snapshot at best (I once worked with a company that reassessed their purchasing portfolio every five years which was way too seldom!). With the rapid pace of change on the supply markets today, managers should evaluate the supply risk for their commodity and service categories more often than once a year. The key question is this: has the nature of the buy changed due to increased supply risk? The positioning, albeit theoretical, implies how the category can be managed as one size does not fit all. The traditional strategies for dealing with increased supply risk include reconsidering the make-or-buy / do-or-buy decision, building safety stocks, re-engineering, dual sourcing and supplier collaboration. Naturally, the manager should assess the viability of these actions. If the buyer volumes represent only a fraction of the supplier’s revenue, the supplier is not likely to engage in a time-consuming re-engineering project, as an example. Thus, procurement must improve their understanding on how suppliers see the buyer company as a customer. Some companies do this by surveying their supply base and using the results to determine, where they can improve as a buyer in order to become a more appealing, or even a preferred customer to their suppliers.
One of the means to tackle supply risk for strategic products or services is product development. Advanced companies are already involving suppliers early into new product development, as this can contribute to better manufacturability, improved quality and a more cost-efficient designs. On a shorter term, companies may benefit from product re-engineering. Many companies manufacture based on legacy specifications and designs that haven’t been challenged for decades. Yet, it is the product design decisions that lead to purchasing specific raw materials, components or materials from specific supplier(s) located in specific geography in the first place. By opening up legacy specifications and looking critically at existing designs and cost drivers, teams can identify opportunities for streamlining and simplifying supply requirements, This may open up opportunities to find new suppliers and reduce risk. Here, best results can be gained if teams are truly cross-functional, involving experts from from procurement, engineering, technology and production. Also suppliers should be involved, as they possess a lot of valuable knowledge and expertise. In some cases also 2nd tier suppliers could be invited to the redesign initiative.
Typically, the focus in product re-engineering is reducing costs. At times of disruption, joint re-engineering initiatives are not so much about cost reduction as they are about risk reduction and coming up with ideas on e.g. alternative materials that can help avoid availability related risks. The point is not how the focal buyer company can reduce its own risks upstream but equally, how the 1st and 2nd tier suppliers can reduce the probability of being hit by disruption within their supply management operations. In this spirit, the mindset should be geared towards designing for the least risky supply chain for all the involved parties.
To conclude, at times of disruption, it is imperative to enhance the link between corporate goals and procurement and category team activities. As supply markets are in a flux, category teams need to consider the impact of disruptions on supply risk, and revise their category strategies accordingly. Opening up existing designs and specifications and implementing design-to-supply chain initiatives can help teams challenge existing ways of doing things and come up with new solutions to navigate better in a changed market situation. Here, it is essential to involve both internal and external stakeholders in these initiatives in order to create shared understanding and gain commitment.
What do you think? Please share you feedback and comments. Stay tuned for the next blog post in this series discussing procurement technologies. More blogs can be found in community.sap.com, simply type in the desired topic into the search bar to find relevant content.
Kraljic, P. (1983). Purchasing must become supply management. https://store.hbr.org/product/purchasing-must-become-supply-management/83509
Disclaimer: This post bases on writer’s own insights and experiences.