9 Disruptive Strategies for Best-in-Class Procurement
This article considers nine disruptive strategies of best-in-class procurement operations. These strategies are influenced by how the procurement function has evolved and how it continues to shape best-in-class procurement.
1. Desktop Procurement
Desktop procurement involves analysing spend, assessing the market, and developing strategies to obtain savings from suppliers. This was done with Excel spreadsheets in the past, but there are now a plethora of procurement tools available that encompass source-to-pay workflows, category strategy development and idea implementation management.
The drawback of these tools is that procurement professionals can become absorbed and spend most of their time looking at their screens. Superior data analysis is an aid but not a substitute for strategic supplier relationships that support the success of the business into the long term.
2. Supplier Fitness Programs
Supplier fitness programs stand on the shoulders of good desktop research and analysis. This involves category managers going out to their suppliers, understanding their value creation processes, and guiding them in conducting programs to cut costs, reduce inventories and improve quality.
This is by no means limited to the manufacturing sector. For example, in an airline context, ground handling, which includes services such as ticketing and baggage handling, is a major cost element. Rather than trying to squeeze rates, airlines achieve much better results by developing expertise in ground handling and highlighting inefficiencies when they see them. Opel and Toyota are the great proponents of supplier fitness programs.
3. Prescriptive Value Creation
Prescriptive value creation takes knowledge of supplier value creation to the extreme. Rather than helping the supplier to improve its value creation processes, it introduces a process that is new to the supplier.
A common form of prescriptive value creation is outsourcing. A company deems certain elements of its operations no longer core and looks for a third party that is suited to host those operations. Suitability often just means that the third party is located in the right region with the right labour cost. Apple has been using this approach for many years very successfully.
4. Design for Value Creation
Designing for value creation requires the product or service to be specified in a way that the supplier says they are able to deliver efficiently and effectively, but it is a two-way street. The supplier must be forthcoming about its core competencies.
If the supplier is too hungry for business, they may grab whatever they can get and paint themselves into a corner. At the same time, the customer needs to listen to the supplier and this listening process must start long before the business is actually awarded. Ideally, the suppliers will be brought on board at the concept stage when specifications are still fluid.
5. Collaborative Business Development
If the customer and a supplier are engaged in a mature relationship, then they already collaborate on a supplier fitness program to upgrade the supplier's value creation process. At the same time, the customer designs its products and services in a way that matches the supplier's competencies. When the customer and the supplier build on these two streams to define new, breakthrough products or services, we call this collaborative business development.
Daimler and Robert Bosch are classic examples of this approach. Both are headquartered in the Stuttgart region and over time their product lifecycles have largely converged. For example, the Mercedes-Benz S-class cars routinely launch with brand-new Robert Bosch technology as a showcase for what can be done.
6. 360-Degree Supplier Development
Short of acquiring a supplier, 360-degree supplier development is the most immersive way for a customer to interact with its supplier. Rather than focusing on particular aspects of the supplier’s value creation process and product or service design, the supplier’s entire business enters into the scope. Elements covered encompass the customer-supplier interface (activities often referred to as SRM and CRM), as well as the supplier’s R&D, procurement, operations, and its overall product or service architecture.
The ultimate objective of 360-degree supplier development is to make the supplier a much more capable partner that is able to provide better value for the money. Unilever was a great proponent of this approach, introducing modern farming techniques to suppliers in new regions to ensure high-quality produce.
7. Function Analysis
Where traditional cost-reduction techniques ask, “How can we reduce the cost of an item?” and then, “How can I do that for less?,” function analysis asks, “What does it do?”
It starts with a breakdown of the product or service into discrete elements. For each of these elements, the functions are listed, expressed in verb-object pairs consisting of active verbs and quantifiable nouns.
As an example, the functions of a mounting bracket are to “support load” and “attach part.” Each function is then classified into two buckets—useful (such as “support load”) and harmful (for example, “adds weight”)—and the cost of the product or service is allocated across the engineering system. Identifying elements of the product or services with unfavourable cost-benefit ratios highlights where to attack cost.
Often, the most straightforward way to attack cost is to simply eliminate an element with high cost and harmful functions. With the elimination, its harmful function and its cost disappear. What remains is the task to teach the remaining elements how to fulfil the useful functions of the eliminated element. In manufacturing industries, this often requires deploying scientists; in service industries it requires raw creativity. Samsung has used function analysis since the early 2000s to gain a competitive edge.
8. Core Cost Engineering
Core cost engineering takes away layers of ancillary functions that have piled up on products and services. It starts by asking, “What is the core function that the customer really expects?” Then it looks for the most efficient way to perform this function and, finally, adds minimal extra functions that are required to be able to actually sell the product.
In the airline industry, low-cost carriers started by asking this question and understood that the core function that passengers expected was to travel safely from Point A to Point B. Their willingness to pay for leg room, newspapers, meals, luggage space, and drinks turned out to be very limited.
Asking the question, “How would a disruptor who is not burdened by legacy thinking or any other constraints do this?” opens up the door to game-changing products or services. This approach requires top-notch knowledge of how suppliers create value for us and how we create value for customers. Those who apply it need to adopt an end-to-end perspective and combine it with readiness to overcome industry thinking in a radical way.
They will need to focus on functions that really matter to customers, minimize life-cycle cost, eliminate non-value-adding components, design for manufacturing, configure an agile supply chain, and ensure disruptor performance in their own and supplier-owned factories.
Tesla is a great example of this having brought the fleet footedness and quick development discipline of the consumer electronics sector to the automotive sector, driving a seismic shift in how cars are made and developed.