May 27, 2016

Wanted: New Talents and the Cross-Functional Approach

by Point-of-View, Procurement Trends

Originally published in OpusCapita Journal.

How did the global financial crisis affect supply chains? And what are the biggest challenges that the procurement functions of international corporations need to be prepared to mitigate in the future?

We interviewed a specialist in this area, Daniel Weise, Procurement Expert, Partner & Managing Director at Boston Consulting Group, Düsseldorf.

About lessons learnt from the economic crisis

“The big financial crisis of 2008/2009 was a real stress test for supply chains and the buyer-supplier relationships, specifically. Those companies with strong supplier collabor­ation handled the crisis much better. The crisis also brutally exposed risks and revealed many topics that CPOs still need to work on with regard to supplier collab­oration. For ­example, working with unstable suppliers and the subsequent insolvencies revealed huge supply chain risks and sometimes ­contractual risks emerged, for instance, ­from volume commitments that made procurement inflexible ­during the crisis.

“Procurement has a very strong impact on liquidity and can thereby be a crucial ­cornerstone for survival in crisis. With flexible arrangements, companies can call off supplier volumes on a ‘pay as you go basis’ and also by insourcing production and services back into the company. Furthermore, payment terms optimization, supply chain financing and lease-vs.-buy decisions can positively impact the working capital. Especially supply chain financing has been reconsidered in many European procurement organizations after the Late Payments Directive was passed by many national parliaments, and procurement organizations find here a win-win strategy to gain liquidity for their corporations, whilst acknowledging the suppliers’ need for early payments.”

About trends for growth

“There are four main trends as the glo­bal economy is picking up: a shift of global trade, a need for more supplier collaboration, stronger investments into transparency and product cost optimization.

“Firstly, global growth in the past years ­also led to a shift in global trade. Some ­former emerging markets are growing faster, creating significant domestic markets, but ­also facing inflation and cost increase, e.g. Latin America, Eastern Europe and the Asian ‘Tiger countries.’ The challenge for procurement is twofold: on the one hand, global procurement functions need to establish local teams to take care of the increasing procurement spend in those countries. On the other hand, those countries that were formerly ­attractive sources for labor arbitrage are ­becoming less and less attractive. Therefore procurement needs to make tough decisions, whether to stay with the outsourced production or services in those emerging markets, move them back home or to look for new suppliers and opportunities in other areas of the world.

“Secondly, there is a stronger need for supplier collaboration and risk management. Companies are becoming more and more interconnected and thereby procurement should take the role of building up and stress testing supply chains. Anticipating and mitigating potential disruptions and spotting new supply markets are sources of compet­i­tive advantage and sometimes even survival.

“A third trend that we see is that companies are investing more in transparency, i.e. real time information as well as analytical insight to manage complex internal and ex­ternal stakeholder networks.

“The fourth main trend is that product cost optimization for existing and new products will become more important. This means that product cost is optimized holistically in a cross-functional approach and continuously improved. It requires new capa­bilities for procurement teams in terms of cross-functional collaboration and analytical rigor.”

About future challenges

“There are three main challenges that procurement needs to keep an eye on: corporate social responsibility, maintaining high financial impact and up-skilling of the procurement teams.

“Corporate social responsibility (CSR) has become more important over the past years. The cost of neglecting CSR topics can quickly add up to millions and billions of dollars. This also means that procurement has to play a role in mitigating the risk that is arising from the supplier interface.

“The second big challenge for procurement organizations these days is to maintain a strong savings pipeline. This is challenging after the same spend has been tendered several times – sometimes with declining success. Sometimes, there is the opportunity to expand procurement services further into new categories and add further value. Procurement can implement already existing success models to indirect categories such as marketing and consulting services.

“Thirdly, procurement departments will need to bring new talents into their teams. This becomes especially visible in complex projects like the cross-functional product cost optimization, where team members need deep technical category expertise and analytical skills alike.”

About the age of the customer

This period of time has been described as ‘the age of the customer.’ How does this trend reflect in the B2B environment?

“It does impact the whole chain from supplier to procurement, procurement to its internal customer and then the internal customer to its external customer, who could be a business customer or an end-consumer. It becomes more important for stake­holders in this chain to not only ­understand the immediate next ­process step, but to also grasp the full complexity of the complete process.

“This implies that procurement must be able to bring suppliers, internal customers and potentially even external customers around the table and moderate a process to create solutions for complex problems. It also means that procurement is more than just a ‘cost savings machine,’ but can also trigger innovation, improve market share and impact revenues.”

About the characteristics of different regions and markets

The world has been highly dynamic and volatile over the last decade, and we have witnessed dramatically different developments in different regions and in different industries. The crisis mode seems to be going from one country to another almost overnight – just remember the financial crisis in Greece, the Ukraine/Russia conflict and the resulting sanctions, or the stalling growth of China. Therefore procurement departments must be prepared for constant fire-fighting.

The economic environment varies considerably by country and region. Procurement departments in the US and Europe are generally more mature, whilst in the Asia Pacific they have been sometimes just recently established. Thus, for Asian procurement departments, the topics of gaining spend transparency, automation, centralization, and proper stakeholder engagement are the major themes. For the more mature procurement organizations in the US and Europe expansion into new activities, such as Supplier Collaboration, will become the main topic along with maintaining a strong savings pipeline and improving efficiency.

In the mature markets, companies are also finding ways to incent cross-functional collaboration between procurement and other departments. Projects to introduce e-invoicing are good examples of such collaboration – between procurement, finance, accounting and IT – but it does not stop there. Procurement can foster cross-departmental collaboration for instance in the development process of new products in technology companies: drive design improvements and design-to-value, also together with the suppliers, and provide should-cost analysis. In manufacturing, the focus can be on throughput time optimization together with strategic suppliers.

About adapting to the real-time economy

In the procurement function itself, the main drivers for the development of the digital and real-time economy are mostly transactional order systems that are fully digitized. The category management related processes are based on isolated IT tools at best. This brings the opportunity to also automate sourcing-related processes in the area of category management. In the past, only parts of the sourcing related processes were IT supported, for example in Spend Management, eTendering/eAuctions, Contract Management, Supplier Relationship Management and Savings Trac, ing. Of course, paper-based, non-integrated process flows and a lack of standards lead to significantly increased documentation workload. Moving IT procurement processes to one platform or at least digitally integrating existing processes with well-defined interfaces is a mid-term priority for all major procurement organizations today.

The same is true for many processes within the wider corporation and in the interface with the customers, where procurement additionally plays a vital role in supporting its internal customers to bring digital solutions in-house. One practical example is the supplier interface into the company after implementation of a contract. Internal customers expect ordering systems that have customer friendly ‘Amazon-like’ user interfaces. The matching of invoices with orders should be automatic. Furthermore, eInvoicing is a growing theme in Accounting and Procurement, especially if one considers the high process cost of handling a paper invoice.

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