Building Advanced Capabilities in Procurement: Moving Beyond Table Stakes

Building Advanced Capabilities in Procurement: Moving Beyond Table Stakes

          
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Building Advanced Capabilities in Procurement: Moving Beyond Table Stakes

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  • Trends reshaping the business environment during the past decade have created new opportunities for procurement to enhance a company’s overall performance. Supply markets and management have become more dynamic and complex as companies develop global supply chains and pursue growth opportunities in developing markets. What’s more, the risk of supply chain disruptions has increased as commodity prices and foreign exchange have become more volatile.

    In this environment, even excellence in traditional core activities is no longer enough. Now procurement must be able to anticipate and address challenges in dynamic supply markets as well. To succeed, procurement executives will need to work closely with business partners to make decisions with a cross-functional, end-to-end perspective along the supply chain. To this end, many procurement functions now report directly to the CEO or CFO—a clear indication of their elevated strategic importance across the organization.

    To fulfill their new mandate, procurement functions must develop and broadly apply a range of specialized skills that go beyond traditional cost management to materially improve the bottom line. Typically, the challenges they face include determining which capabilities to prioritize, as well as facilitating and managing cross-functional collaboration.

    As leading procurement organizations have demonstrated, a structured approach to building capabilities is critical for success. Some companies that have established leading-edge procurement capabilities and addressed volatility and supply risks have improved their margins by more than five percentage points—a significant return on investment. Other benefits can accrue as well, such as developing more innovative supplier relationships, boosting growth rates in rapidly developing economies, and improving service capabilities.

    For example, a major alloy producer interested in learning more about its products’ value in use involved the procurement team in discussions with customers. The team worked with the sales division and production managers to figure out how raw-material characteristics affect the production process downstream. Team members also developed and conveyed their insights on key supply markets and shared their knowledge of supply market innovations concerning the characteristics with the other parties in the discussion. As a result of this collaboration with customers, which took an end-to-end perspective on the business impact, the team was able to optimize the mix of input materials. This allowed for better material characteristics and a higher price in the end market. Procurement’s contribution played a significant role in increasing the value in use for customers while improving the alloy producer’s operating margins by up to 8 percent. (See “The Benefits of Developing Advanced Capabilities,” below.)

    The Benefits of Developing Advanced Capabilities

    The benefits of developing advanced procurement capabilities can take many forms and may be achieved across industries.

    • Global Supply: Managing Risks. The procurement department of a major Asian automotive company played a vital role in ensuring business continuity following a major natural disaster. Procurement quickly assessed the industry’s supply chain, evaluated the status of global suppliers, and identified alternative supply sources. This helped the company to alleviate a critical supply shortage more quickly than expected and to achieve a faster recovery for its overall production process.

    • Machinery: Achieving Design-to-Cost and Scale Benefits from Platform Design. A high-tech company whose material costs accounted for 60 percent of its product costs aimed to reach competitor benchmarks for material efficiency and cost levels. The company hoped to improve its cost structure by more than 20 percent through economies of scale and by achieving greater uniformity in its supply chain. An important element of this turnaround agenda was developing a more standardized architecture for the company’s portfolio of diverse products, which were manufactured at global production sites. Procurement’s involvement was essential. It actively contributed to the company’s design-to-cost initiatives and product-architecture-standardization efforts and managed the effort to standardize the supplier portfolio for key commodities at all global production sites.

    • Consumer Goods: Applying Advanced Analytics to Surpass Targets for Cost Savings. A consumer products company hoped to cut costs so it could reach profitability targets within a year and free up money to invest in marketing. To help the company meet its goals, procurement introduced advanced analytics and scenarios analyses, as well as detailed cost models. To ensure that all regions and businesses benefited from these new tools, the function developed a global training program that was rolled out to more than 200 employees. Ultimately, the company achieved $200 million in annual run-rate savings above the original target of $50 million. When the head of strategy asked what drove the incremental savings, he was advised that procurement’s introduction of new tools and approaches had played a critical role in both generating new ideas and convincing stakeholders to proceed with the cost-savings initiatives.

    • Mineral Resources: Reducing Maintenance Costs by Aligning Contracts with Business Objectives. A major mineral-resources company reduced costs by reviewing targets for equipment availability and maintenance in light of new insights into operating requirements. For example, a cross-functional negotiation team finalizing maintenance contracts with equipment suppliers found that a much lower guaranteed uptime for production equipment would be sufficient for meeting midterm business objectives. By reducing guaranteed uptime by 15 percentage points, the company was able to significantly decrease the annual contract costs for maintenance and express delivery services.

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