How do you go from buying cheap to buying smart? Beginning of the year, I had the pleasure to share my thoughts with in the “Procurement in 5 minutes" . In this article I provide more details and examples on how to add value to your company as a Procurement Organization.
Procurement plays a crucial role for a company’s success: stabilizing supply chains, reducing costs, freeing up cash, or enabling new business models as old ones became obsolete.
For doing all of this, buying smart instead of just buying cheap is key - if you sacrifice supplier relationships and your reputation for the sake of low prices, you cannot expect suppliers to support you in crisis times or to be willing to share risks with you
🤔So what does buying smart mean?
💡Providing to your company that goes beyond cheap prices
🤔How does this Value Add look like?
Providing Value Add as a Procurement Organization can be achieved in various ways:
1. Providing access to new technologies, products & markets
2. Ensuring financial stability via savings & cash flow optimization
3. Ensuring operational stability
4. Assuring reputation
5. Spreading skills across functions
Procurement can act as innovation scouts, scanning markets for innovative suppliers that may help to develop, build and sell new products and services. It provides the contractual basis for RD collaboration with innovative suppliers or for entering new geographical markets with existing products by local sourcing. In particular, when current business models are at risk due to technological/regulatory/social etc. trends gaining access to new supplier sets is key to develop a company beyond its current “framework”. Suppliers cannot only provide key components of your new product/service but also support you in understanding new markets.
Beyond optimizing your products, sourcing smart process solutions like rapid process automatizations, data analyses etc. can help your company to improve internal processes and costs as well. Indirect Procurement can provide substantial value add to a company’s performance which is not reflected in indirect material cost savings alone, but rather in supporting the digitalization and efficiency of a company. Moreover, as important parts of the value chain e.g. R&D activities or production steps are outsourced, having access to innovative, reliable suppliers is key. Focusing on the cheapest price instead of offering strategic partnerships, might prove as counterproductive.
In some industries material costs can make up 60-80% of the total product cost. Hence, material cost savings are crucial for financial success. Savings can be achieved in various ways: e.g. reducing demand (esp. important for indirect material cost), leveraging data analysis, game theory, auctions, bundling etc. For providing value, it is important to consider the Total Cost of Ownership (i.e. the cost to buy, operate, maintain, and recycle the product/service), as it may be cheaper, for example to invest more in automation in order to save direct labor cost or in high quality in order to reduce maintenance costs. Another important value add by Procurement is providing supplier & market knowledge already during the RD phase for new products (Design to Cost) and in serial production for existing products (Value Engineering).
In general, jointly addressing demand levers with your internal customers, looking at the Total Cost of Ownership and providing input already during product development help you to generate savings beyond commercial negotiations.
Besides savings of the Bill of Material, Procurement supports financial stability and creates headroom by working capital / cash flow optimization, which are also an essential part of smart buying. By not only looking at savings, but also at how the contract affects cash positions, Procurement can provide real value and get into the CFO spotlight.
“Ever Given”, semiconductor supply crisis and several Force Majeures in the chemical industry highlight once again how fragile global supply chains have become. Buying smart requires commodity strategies closely aligned with your Operations function and closely monitoring not only your Tier-1, but also Tier-2/-3 suppliers. Especially in industries with low stocks and just in time production ensuring supply is a key value add.
More and more governments try to establish higher environmental and social standards by regulating supply chains. Regulations, NGOs and critical consumers call for higher transparency of your supply chains, assuring social and ecological sustainability. For example, in the automotive industry more and more OEMs pledge to reach carbon-free footprints including their supply chain. Consequently, new criteria are added to RfQs and higher transparency and social and ecological standards are required for winning customers. Therefore, reputation risks, potential penalties etc. come into play when looking at the Total Cost of Ownership.
One special value-add that often gets overlooked are special skill-sets that Purchasing could spread across functions. Negotiation strategies, game and behavioral theory approaches, insights to auctions etc. are especially helpful for Sales or M&A colleagues as well and Procurement can spread the knowledge by offering internal trainings by senior buyers.
Obviously, Purchasing adds much more value than buying products for the lowest price.
First of all, buying smart and providing Value Add requires you to emphasize strategic activities instead of wasting time in cumbersome transactional tasks. Only when you focus more on category strategies and understanding the functional strategies of your internal customers, you gain the deep knowledge needed to buy the products and services at conditions that your stakeholders really value. You need to know in which countries production sites will be built next, which future technologies are needed, which materials are required for future designs etc.
Then ask yourself which Value Add precisely you should provide to your company, since depending on your starting point, you won’t be able to address everything simultaneously. As a former Director of Corporate Strategy, I recommend you to use the value proposition canvas used in business modeling to better understand your internal customers need, which pains they have, which gains they long for. In addition, it can also be useful pursue an agile approach when developing and implementing new approaches. I will provide more insights on the "How to get there" in a separate article.
BUT there is a trade-off you have to keep in mind, as sometimes buying smart may not be the short-term cheapest option. Therefore, you do not only need to act smart towards your suppliers, but also internally: Having access and a good relation to the C-Suite is key for convincing CEO, COO and CFO about the Value Add your function brings to the table.
That requires understanding and talking the language of your CEO and CFO and being accepted and trusted as a true business partner. Then you can convince them that Procurement can do much more than buying cheap.
If you want to explore opportunities of how these various aspects can evolve in your organization, please reach out to me.