Value can only be created in the realization of the business strategy

With a vast range of suppliers ranging from Transportation, ICT, Consultants, Equipment, Facilities, raw materials and packaging, procurement organizations are normally responsible for a spend that equals a value of about 55-80% of company turnover. In recent years, Procurement moved from a focus on savings and price negotiations for the business, to adding value in terms of Total Cost of Ownership, sustainability (purpose), innovation and risk management (resilience). Areas core to business strategies of companies, is where the real value for business is perceived and can be realized.

To succeed moving towards ‘value creation’, project management, early involvement in projects, working in x-functional teams, front end loading, idea generation and good feasibility assessments are crucial.

No other function than Procurement is so well placed to connect the outside world of suppliers and to come up with answers to the business needs and the realization of the company strategy.

Wasting money, delaying projects and creating risky supply situations

Looking at project management in companies, much can be improved. Innovation, typically an important project management area, is according to 84% of executives important, however only 6% of executives are satisfied about the results (McKinsey). Procurement and supplier involvement was typically in later phases of projects, to negotiate the price, finish the contract and assure the goods or services could be purchased through the relevant Purchase channel in the Purchase to Pay process. Downside of this ‘late involvement’ was that it often created the perception that procurement was slowing down instead of adding value. It could also happen that requirements and specifications were already preset in the project team without proper sourcing process looking outside to ‘market’ and supplier offerings.  This cumulation of events could result into company money wrongly spent, Total Cost of Ownership only partly influenced, and the company locked in in risky supply situations.

Why should we use the capabilities and resources of the supply base to the utmost?  And are we indeed ready and willing to use key competences of suppliers and integrate those in projects?

Obtaining your fair share of R&D investments at your suppliers

Many of the suppliers invest dedicated time and efforts in innovation and R&D, usually between 2-14% of revenue, to maintain leading in their markets and build on their value proposition.  They have sales and technical specialists able and willing to support their customers in those fields they consider as their core competences.  It would not be wise to ignore and not use these competences, products, resources and their interest for joint development or involvement in projects. It is helpful to understand how much your supply base is investing in R&D and to monitor if you get your fair share. As an example: if your revenue is 5 bln Euro, your own R&D budget is 8% of revenue (400 mln Euro) and your 3^rd party spend is 60%, being 3 bln Euro. Assume your supply base also invests 5% average on their revenue to your company, this would mean that your augmented R&D budget could be 150 mln Euro.

Back to project management, involving suppliers with their resources and competences in early phase of projects can speed up projects. It can increase the value of the product life cycle of the products and can prevent that your company ends up in single sourced situation which are expensive, risky and difficult to mitigate. Even so important, it can minimize risks and quality issues in later phases. Time spend in early phases and even joint development lead to better understanding each other’s systems, processes and requirements. Can this and should this be done with all suppliers?

Key supplier-, partner- collaboration in projects

Of course, not all suppliers can add this extra value to the business. Therefore, Procurement segments its supply base and selects those suppliers that are capable and fit to participate and contribute in the strategic projects. Typically, these suppliers are selected and managed cross functional in the business groups and a long-term plan is in place showing opportunities and benefits to work on. Also, in projects, it asks for another way of working and linking suppliers to the project, in which collaboration platforms should be considered.

If we would like to continue in this path and get the maximum benefits for your company, there are consequences for how you run projects, how you work with the supply base, how you select and scout for the right partners, startups and how you collaborate internally in projects with the supply base.

Interested in value-based segmentation, innovation sourcing or organizing successful project management with suppliers, please contact us at the AIE company.