ObjectivesIdentify the suppliers that are essential to developing and maintaining competitive advantagesUnderstand the source of those competitive advantages, the skills and capabilities of the suppliers that must be protected to secure the competitive advantages Develop a strategy to enhance those competitive advantages and protect them from your competition |
Concept
- From Tactical Cost Cutting To Supplier Generated Growth: The Evolution Of Procurement
- Ten years ago, Procurement was emerging from the dumping ground for failed employees, just good enough to administer Purchase Orders. It became an important field for management, offering abundant opportunities. By consolidating volume across plants and harmonizing specifications, you were able to pressurize your suppliers to give you better terms. You forced your suppliers to adapt and improve, or die. Some disappeared or were acquired. Your team's negotiation skills were creating value by lowering the cost of the Bill of Material.
- Five years ago, your teams introduced strategic vision of the entire supply chain. You gained insights on the Total Cost of Ownership and redistributed responsibilities to reduce it through cross-functional initiatives. More recently, e-Procurement solutions gave you an additional transaction cost reduction. Your best suppliers opened their books, discussed their cost structure and their ideas to optimize interface costs, set-up and management costs. You helped them by auditing their plants and introducing some of your best practices on lean operations.
- The Value Of Exclusivity: Capturing a Supplier's Unique Skills
- All those efforts have increased productivity significantly, but your profit margin has not changed much in recent years. Seemingly offensive moves kept you at the front of the pack, but did not move you ahead. Can Procurement deliver more? The example above illustrates how Procurement has evolved from its administrative role by impacting profit through tactical excellence in negotiation, leveraging the full scale of the organization. Then it was integrated into the operations. Strategic decisions on organization and cross-functional interactions drove a reduction of the total cost of ownership further contributing to profit.
- Today, Procurement must develop suppliers to exploit quickly their skills and isolate them from competition. It contributes to shaping supplier's strategies to speed entry into new markets. It is about seamless transfer of information from the suppliers' development labs to the final consumers and back. That is the reason why Procurement must understand the life-cycle value creation potential of an item, not only as a driver of the Total Cost of Ownership but, more importantly, as a driver of product pricing through the premiums provided by exclusivity, and market growth for the company.
- Call to Action
- Concentration in many industries and the lowering of trade barriers have removed the price umbrella provided by marginal players. Most likely, the remaining competitors have their tactical operation effectiveness similar to yours. So you must lead your operation teams to focus on capturing differentiating competitive advantages. Procurement is the most promising area to capture a sustainable lead in your industry.
- The principles illustrated above may appear simple. Nevertheless, after years of focus on cost, and in organizations where each function works too much in isolation, this transition is a challenge for the top executives of most leading corporations. It is never too late to start, but in this field, it is difficult to catch up. Once the prime properties in the supplier leverage game have been captured, they rarely change hands. Today is the right time to make the capture of supplier provided competitive advantages a prime focus of your organization
