There is more to Procurement than Savings

 

RP_waste_healthProcurement is a fairly new discipline. Having started in the mid 80’s where “the Chinese” made prices go down and Procurement had their glory because Procurement savings were a safe bet – we now have a new situation. What is the role of Procurement going forward?

THE NEW REALITY
After multiple rounds of cost reductions, customers and suppliers find themselves in a different world. Demographics in China have become unfavorable, and the cost of Chinese labor has more than quadrupled over the past 15 years. Growth rates are slowing or stagnating around the world, and politicians in Europe and the United States are promising to roll back globalization.

In this new reality, it is difficult to have much leverage over suppliers and pushing them further would mean that you would have to compromise on product quality, delivery reliability, or working conditions.

Procurement must create value in new ways and strategic innovation could be a helpful tool. In this blog post I am discussing ways in which you can start building your new value proposition as a CPO.

WHAT IS INNOVATION?

No matter whether you work in Procurement or anywhere else in the organization we are all dependent on our ability to bring in new radical ideas to the business. Not just the incremental ones but true radical ideas. We need to encourage to examine established beliefs, facilitate innovative solutions, and even challenge what is core. How can this be done in a structured way?What is innovation? This discussion is very important to have not only on an executive level but also with your employees. Quite often employees will think that innovation is something which is all about developing new products. It is much more than that. Frame the way you want to change the world. Start with defining and publishing innovation goals at the company level, and then ask teams for a breakdown into incremental, sustaining, and disruptive innovations.

This discussion is very important to have not only on an executive level but also with your employees. Quite often employees will think that innovation is something which is all about developing new products. It is much more than that. Frame the way you want to change the world. Start with defining and publishing innovation goals at the company level, and then ask teams for a breakdown into incremental, sustaining, and disruptive innovations.

INNOVATION IS MORE THAN PRODUCT DEVELOPMENT
Encourage your employees to think about innovation from different domains – it could be the 4 P’s: profit models, processes, products, and policies. By highlighting the different arenas in which employees can be involved with innovation, companies can help employees add value in areas where they have deep knowledge and a desire to get involved. Tools which could support you here is an innovation intent. If your company does not have an innovation intent – get inspired by the innovation intent which Grundfos has created right here. If your company has an innovation intent – describe to your employees how you expect them to translate that in procurement. By highlighting the different arenas in which employees can be involved with innovation, companies can help employees add value in areas where they have deep knowledge and a desire to get involved.

If your company has an innovation intent – describe to your employees how you expect them to translate that in procurement. By highlighting the different arenas in which employees can be involved with innovation, companies can help employees add value in areas where they have deep knowledge and a desire to get involved.

FIND YOUR CHAMPIONS AND DEVELOP YOUR INNOVATION CULTURE
Big businesses have large employee bases with clear reporting lines.  While this structure provides a number of benefits, it can also be a roadblock when it comes to creating a culture of innovation.  While a company may preach the benefits of innovation, middle managers are still tasked with ensuring optimal performance in the business’s core activities.  They have little desire or capacity to jeopardize core initiatives for unproven innovation efforts. Innovation champions can help employees find friendly spaces to test their new ideas, while also providing a level of protection against managers who are charged with focusing on the core.

NEW METRICS & FRAMEWORK
New initiatives can’t compete at the same level, and they are killed off before they’re given a chance to prove themselves.  Performance metrics often suffer from the same problem.  While employees are told to be innovative, their performance goals and compensation packages don’t create the incentives to do so.  Even the best ideas aren’t going to get any traction if the value they bring to the organization isn’t made clear.  And that’s often where companies fall short.  I recommend that you invest in innovation programs to bring in new ideas. You should give individuals the tools or frameworks to show why those ideas which have been generated are worthwhile. So instead of teaching employees how to come up with new ideas, you should rather teach them what to do with the good ideas they come up with, from knowing who should hear the idea to what that person should be hearing.

The world needs new solutions & more effective collaboration to solve some of the biggest challenges. That is why we inspire companies to move to more open forms of strategic innovation. We are doing that by mobilizing capabilities and resources for mutual benefits and by putting more focus on trust in the relationship. Get inspired on the Collaboration Growers platform.

Is Procurement Getting Disrupted?

 

A lot of business stories show that simply managing well, developing quality products and building up well recognized brands is insufficient to remain in the top. “Disruption” is the buzzword used. It will probably be the business word of the year as it is on everybody’s lips.

The key question is why Procurement should take disruption seriously in order not to get “disrupted” and how Procurement executives should act.

What is disruption?
Clayton M. Christensen describes disruption as:

“A process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses. Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others”.

Translated – it is all about the fact that there is a new logic in strategy. Typically companies define their most important competitors as other companies within the same industry, meaning companies offering products that are a close substitute for one another. What is happening is, that in more and more market’s we will see industries competing with other industries and entirely new categories. By that I am not saying that the industry is irrelevant, I am just saying that using industry as a level of analysis is not enough any longer. Also, the competitive advantages once achieved might no longer be an advantage as they can be copied quickly, challenged by new technologies or challenged by customers seeking other alternatives.

Should Procurement take disruption seriously?
I would rather ask the question – what will happen if Procurement will not take disruption seriously. Typically when a company has achieved a solid position within an industry the company is encouraged to optimize their people, assets and systems around these advantages. The issue is though, that since these advantages are not sustainable it might not make any sense. Instead companies should focus on leveraging ephemeral things such as deep customer relationships and the ability to design irreplaceable experiences across multiple arenas. Where is the role of Procurement if it is not in optimization, that is the big question in the light of the new logic in strategy.

High potential for Procurement
Procurement still has a vital role to play. To win in these volatile and uncertain environments executives (from all over the company) need to learn how to “exploit short-lived opportunities with speed and decisiveness” (Rita McGrath; The end of Competitive Advantage, Preface). Collaboration with all types of partners, and their willingness and ability to share their knowledge, will be crucial and key to a successful development and execution of new disruptive concepts. Bearing that in mind, Procurement has an opportunity to facilitate that supply partnerships emerge from a pure cost orientation towards a strong focus on joint collaboration and innovations. For Procurement to be successful in these innovation oriented supply partnerships I believe, that it requires new models for relationship building and collaboration. It also requires procurement to integrate across the whole organization.

In many companies it is typically a challenge to include suppliers in the front end of the innovation process. Procurement teams are often disconnected from the functions they serve and the markets they engage with. They are not fluent in the nuances of the business and hence lack experience and authority. Also in many companies, Procurement are used to “innovation” being an internal capability and are hence not used to working together with external partners on delivering innovation.

How do executives act?
Summing up all of the above has significant implications for how Procurement professionals are trained, developed and deployed in future organizations. You might not know what kind of people you will need. That is why Procurement executives should hire for the ability to acquire new skills (learnability) and not for existing skills. As a Procurement executive I believe you will be measured on your ability to move from advantage to advantage and prepare for the needs that lies ahead.

To do that you will need a flexible learning environment. Take a close look at the Procurement Academy. A flexible solution where you can train your staff to what is required for their role, and in line with your business challenges and strategy.

Can Procurement help redesign capitalism?

RP_Responsible_Procurement_ManagementSometimes I can not stop thinking whether there is a limit to how much economic growth the world can support. Are we too cautious in our approach and should we be much more proactive? Could Procurement play a much greater role in actually redesigning capitalism?

I feel inspired by the founder of the Institute for Leadership and Sustainability, professor Jem Bendell who says:

“One opportunity for the new generation of leaders is an awakening. Everywhere I turn, I’m hearing people asking “how long can it go on?” Financial and ecological crises are leading people to sense the need for a transformation of economic systems. In the past years working on sustainable development I’ve seen positive initiatives, products or services, but they remain marginal. Social innovations can no longer be the side show to systemic decay. Its time to team up for massive change, and take positive innovations from the margin to the mainstream. For that we need leaders who are adept at learning from the edge, because those ideas that seem strange to you today may hold the solutions for tomorrow.

In a sense, the challenge of this generation of leaders is the same as any, to transcend the mental barriers we are brought up with, between us and them, us and nature, my generation and yours, my specialism and yours, my faith and yours. These barriers are inventions, yet we maintain them due to our egos, and fears, and our need to belong to one particular group. In an interdependent world we now need globally responsible leaders: not just leaders serving their own, but conscious of the world, and how they affect it. I’m not talking about leaders from the West, but leaders from the rest of the world, caring about all of the world.”

The same applies to Procurement professionals – and leaders. There is a strong need to provide these leaders and business professionals with insights and help them develop appropriate strategies. Create a new form of capitalism. They should be careful not to be too cautious in their analysis and too narrow in what ideas they draw upon. They have to uncover the hidden assumptions in order to develop new insights into the strategic implications of our current crisis. It takes a strong leader and a willingness to take the risk. There is no plan B – so what’s to loose out on?

Collaboration Growers help companies move to more open forms of innovation and collaboration with external partners. We do that by mobilizing capabilities and resources for mutual benefits by building more trust. Get inspired for more on the Collaboration Growers platform.

 

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