Where does your supply management organization fit in the overall business structure? Is it a back-office function or focused on driving more from suppliers for less? Or is it viewed as a critical role—one that contributes to greater profitability and a higher return on investment (ROI)?
Odds are good that it’s the former. For decades now, supply management teams have slogged through the purchasing and negotiation process—making sure that goods and services are delivered when they are needed and costs remain low. Seen by many in their organizations as tactical, these teams continue to work diligently to meet metrics around cost savings and working capital.
Times are changing, though. Driven by a highly volatile global marketplace, ever-shrinking product lifecycles and the never-ending need to balance risk with continuing innovation, visionary supply management leaders are boldly stepping up their game by stepping into the larger business picture. The result is a procurement strategy that focuses on boosting profitability and company valuation. When supply management teams make decisions based on financial metrics, the impact on top- and bottom-line performance can be dramatic.
Lower costs and higher supplier performance are, of course, givens. But the breakthrough comes when procurement advances value, such as:
- Operating margins (OM).
- Returns on invested capital (RoIC).
- Gross margins (GM).
- The cost of goods sold (CoGS).
- Returns on assets (RoA).
Making this shift isn’t something that can be done overnight. But the results matter—in ways that count in the boardroom and on Wall Street.
Toward Greater Value Contribution: Key Areas for Investment
Even after years of demonstrating sustained ability to improve supply chain performance through supplier management and lower total cost, few procurement leaders are part of the executive suite. Changing that—and changing the way supply management is viewed by the organization as a whole—is possible. It requires transformations that are foundational, fundamental and game-changing.
Foundational Transformation: Tearing Down the Status Quo
Altering the way things have always been requires leadership and change management. World-class supply management leaders are agents of change that align and integrate the procurement process to business goals. A recent study by Supply Chain Insights found alignment as one of the top three pain points for supply chains. These visionaries move procurement outside of its own four walls to cultivate strong working relationships across all supply chain functions and the business at large, fueling innovation and sustainable value.
With strong leaders in place, the real work begins. Alignment with, and accountability to, business outcomes elevates procurement from a tactical need to a strategic must. Understanding what stakeholders in marketing, product development, operations and leadership value, are measured on and require, and then translating procurement value into those terms is a critical first step. Procurement has to start speaking the business language.
At the heart of this shift lies change management. Revolutionary transformation takes place only when leaders recognize that change is hard, change is continuous, and change must be tied to specific, measureable and relevant goals. Without metrics, the organization experiences little more than change in name only.
Fundamental Transformation: People, Process and Technology
We all know that you can’t build organization excellence without the three-legged stool of people, process and technology. It is even more important for supply management teams.
Transformation starts with how procurement teams are structured. For large organizations, center-led supply management models strike the best balance between local autonomy and enterprise-wide management. Centers of excellence ensure alignment with an integrated business strategy that is focused on supply chains, supplier management and critical commodities. Flexibility and agility are essential to success across the enterprise and for each locality.
Technology-enabled business processes are a must. Global operations, highly fragmented supply chains, and increasingly complex regulations can quickly turn the supply management processes into chaos in the absence of rigorously defined business processes supported and enforced with technology.
In The State of Strategic Sourcing 2013: Speed is Good, Agility is Better, Ardent Partners found that best-in-class supply management organizations integrate three critical solutions to drive stronger alignment and higher performance:
- Spend analysis solutions.
- E-sourcing solutions.
- Contract management solutions.
And when supplier performance management is added to the mix, there’s a significant uptick in the time to achieving success in the value contributed by the supply management organization to the business.
One more thought: We can’t talk about fundamentals without talking about performance measurement. Today, most procurement organizations focus on two deliverables for shareholder value: cost reduction and working capital. But real value comes by looking at speed to market, new product introduction and total cost of ownership, combined with all spend under management, to significantly broaden the scope of procurement’s contributions to greater value.
Let’s face it—getting the perfect order today means different things to different stakeholders. Quality matters most to product development, while time to market keeps marketers awake. In any situation, understanding what the overarching business objective is allows supply management to evaluate the inevitable trade-offs and make modifications as needed to arrive at the best possible decision for the business. With the insight into what matters most, gained through information-sharing, collaboration and transparency among all stakeholders, there’s a clear path for supply management to make the right trade-offs for the desired value—and that’s a game-changer.
Beyond the organization’s four walls, there’s a significant opportunity for procurement to increase the value it contributes as well. Facilitating collaboration between internal stakeholders and suppliers can improve efficiency, resolve quality issues, lower the risk around material specifications and drive other innovations that translate into revenue.
The Opportunity Is Now
Supply management can make powerful value contributions to the business. It’s not a short-term effort.
There’s no doubt it’s a worthwhile initiative. One technology company delivered seven points of company margin by driving supplier innovation, bringing more than 95 percent of spend under total and complete management, and emphasizing ways to improve working capital.
There is no time like now to get started. Getting on the path to significant financial performance requires:
- Taking a good hard look at where the organization is today.
- Defining where it needs to be in order to support the business tomorrow.
- Identifying what is required to get there.
- Becoming strategically aligned and delivering value to meet the business needs.
There’s a great deal of opportunity to make the kind of value contributions that move the discipline and its disciples to the front line in the race for business excellence. Grab it and make it happen.
Mickey North Rizza is the vice president of strategic services at BravoSolution.