For years, we have been told by the brightest minds that procurement needs a seat at the leadership table. The best companies already make procurement a strategic partner, but the majority do not. When will boards see the procurement role as strategic? What will drive this transition?
Deloitte in its CPO Survey of 2019 argues that CPOs should eliminate complexity that “introduces risk and hampers procurement performance … where possible” while exploiting so-called “good complexity.” They see complexity as the catalyst for transformation of the status and influence of procurement.
“Complexity can be exploited to expand procurement’s influence beyond traditional sourcing-centric spend management toward a broader engagement model and service offering. This includes efforts to more broadly influence business stakeholders in strategic areas (e.g. capital expenditures, enterprise risk management), as well as to more deeply influence stakeholders through demonstrated leadership in areas such as corporate development.”
AT Kearney descries the disparate spread in outcomes between the haves and the have-nots, quantified by something they call the Return on Supply Management Assets score.
Those who get it right are two to three times as efficient as the average company and more than ten times as efficient as the weakest performers.
The overarching problem is that supply chain is not plugged into the C-Suite the way it should be.
“Procurement executives at the leading companies see themselves as strategic business partners. They are aligned with the CFO. They maintain strong credibility and visibility within the enterprise. And they work collaboratively with business units – not just to reduce basic costs, but also to evaluate trends and identify new drivers of value. As a participant at our CPO Roundtable explained, ‘CPOs get fired for not delivering high-impact cost reduction, and promoted if they also deliver strategic value that goes beyond cost reduction.’ … While 80 percent of leaders focus more than 70 percent of their procurement team on strategic activities, only 17 percent of other companies do the same.”
It may well be that strategic value is far more important than cost reduction. Procurement may be optimizing for the wrong objective.
Here’s Accenture on what they call the “strategic disconnect:”
“The strategic disconnect between supply chain and the C-Suite can have negative consequences. At many enterprises, the business as a whole simply doesn’t see the supply chain as a driver of differentiation and aggressive growth. Chief Supply Chain Officers, meanwhile, blame the absence of a clear business strategy, together with an inadequately skilled workforce, and incompatible legacy systems for their function’s failure to drive value.”
A combination of complexity and C-Suite bias means that most procurement departments lack the teams and the technology to do anything more than keep their heads above water, in a self-reinforcing cycle of tactical reaction leading to being discounted strategically.
And that was before Covid.
Covid is an opportunity for procurement (as part of a broader supply chain organization) to reset its relationship with the rest of the enterprise, but particularly with the C-Suite. To do so, they will need to emphasize two lessons:
- Procurement is risk, not cost: We have written about this elsewhere. Cost minimization is indistinguishable from a conscious decision to take additional risk. It is no different than an investment manager who writes options on his portfolio to juice his returns. It works until it doesn’t work. Procurement risk can make or break a company in times of crisis where the winners win big and the losers go away.
- There is upside risk, as well as downside risk: The Covid crisis with its K-shaped recovery in which there are big winners as well as desperate losers demonstrates that risk is opportunity for those who are exposed to benefit from it, or who are nimble enough to recognize it early and adapt.
- To manage risk, we need data and tools: McKinsey summarizes it well when they write “… digitizing supply-chain management improves the speed, accuracy, and flexibility of supply-chain risk management. By building and reinforcing a single source of truth, a digitized supply chain strengthens capabilities in anticipating risk, achieving greater visibility and coordination across the supply chain, and managing issues that arise from growing product complexity.”
The good news is that we don’t have to reinvent the wheel.
Again from the McKinsey note:
“Organizations should build financial models that size the impact of various shock scenarios and decide how much ‘insurance’ to buy through the mitigation of specific gaps, such as by establishing dual supply sources or relocating production. The analytical underpinnings of this risk analysis are well understood in other domains, such as the financial sector – now is the time to apply them to supply chains.” [emphasis added]
If there were ever a moment for procurement to step up and claim its rightful piece as a strategic function within the enterprise, now is the time. Part and parcel of this aspiration has to be to show the rest of the management team that procurement has the tools and the approach to deliver. They will want to see data. They are already familiar with financial risk management. Put those two together and procurement leadership can shine.
This is precisely why we built EdgeworthBox. Our background is in financial services as risk managers and developers. We saw the need to build a layer that could enable risk management in strategic sourcing the way investors look at and shape the risk profiles of their portfolios. We bring tools from financial markets including central clearing of vendor administration, central clearing of structured data, and social networking with which the enterprise can assess and mould its exposures, in a way that complements whatever they use today.