How to Pick the Right Procurement Model in High-Margin Industries

You are a new CPO, or a new CFO and you spot wastage in the supply chain. You also see untapped value. You want to build a business case for change. But you are in a high-margin industry where the focus on cost containment is less critical.

In these industries, it is typical that procurement does not (yet) merit a “seat at the table” and is brought in late to mop up contracts, perhaps to squeeze out a few more pennies. But only rarely is procurement able to influence demand levers and strategic supplier choices or key terms.

The case for procurement transformation is widely documented, but the two most common business cases are built around:

1. An investment case in procurement in return for savings, usually promising a 5-10x return: An overall category ‘prize’ is jointly created and categories are prioritized into waves, with quick wins first and high return/high effort categories next and so on.
2. An investment in procurement to mitigate risk of regulatory or supply disruption: The company needs to have improved resilience and supplier oversight.

Often the transformation case looks great centrally and may be signed off by group functions or even the CEO. But the business, unaware of the great white hope that is incoming, have managed quite fine for many years. 

The next challenge then is...

How Far-Reaching Should the CPO Seek To Be in This Transformation? 

And how does the CPO ensure any new investment in capability is maximized and used upstream (on high value-add activities) rather than simply providing more downstream (low-value-add) capacity?

Your procurement target operating model design needs to consider, category-by-category:

•  Supply market structure:  

Number and geographical focus of the supply industry; the more global and monopolist the supply base, the more likely that centralization is appropriate.

•  Criticality of the buy:

If the category is critical to business unit profits, the case for decentralization is stronger.

•  Non-profit risks:  

If purchases expose the business to non-financial risks — for example ethical, social, environmental, or reputational risks, the case for centralization is stronger as this provides a second lens by divorcing buyer from the budget-holder.

•  Economies of scale potential:  

Where the combination of volumes across business units and geographies is likely to yield incremental gains, then centralization is likely to be more appropriate.

•  Frequency of the buy:  

One-off or irregular purchases may not merit centralization compared to frequent or regular requirements.

•  Homogeneity of requirements:

How bespoke is the requirement across the business and compared to market norms? Highly specific requirements may be better decentralized.

•  Extent of in-life governance:  

Whilst there are examples of centralized supplier relationship management, typically more in-life management means more decentralization.

•  The business culture and context around empowerment and stewardship:

The more freedom and autonomy intended in the desired culture of the business, the greater the decentralization expected. A greater emphasis on stewardship will lead to more centralization.

There is no one-size-fits-all answer and a hybrid model like the below will typically emerge from the analysis:

Having made the play to lead or follow more assertively and secured sign-off to a new business case what does ‘lead’ or ‘follow’ mean in practice?

In complex buying decisions, there are typically 6-7 key stakeholders who provide inputs, with procurement being one of them. Rarely is procurement the ultimate sponsor or budget-holder so in the context of ‘lead’ here it will mean one of the following:

• Facilitating and participating in the key set piece events with the supplier or supplier market
• Being privy to and developing ideas on specification and planning relating to the supplier or need
• Taking leadership of commercial conversations with senior leaders at the supplier(s)
• Regular discourse with the budget-holder to review options, improvements and ideas relating to the spend area and suppliers
• Being the in-house knowledge center for what is happening in the market for that spend area/supplier.

In a ‘follower’ role, procurement takes ownership typically of facilitating the competitive dialogue and contracting process, leads or supports negotiating and maintains tactical relationships with the suppliers and with the middle management of the budget-holder. 

It’s a less satisfactory role and more limited for the procurement professional but a common home indeed. It’s a category by category, budget-holder by budget-holder assessment, but one that’s necessary to make.

Also Read: Right Model for Digital Procurement Transformation

Top Tactics To Deploy in the Early Stages of the Transformation To Make It Stick 

Wherever the ownership of individual categories lies, the new procurement function can place itself as a leader in some significant cross-category activities. For example, in commercial acumen and training, sustainability and social value policies in the supply chain, incubation and innovation processes. 

•  Find a forum (or create one) that governs spending and major buys/ projects.  

This will be your forum for steering the work of your team and also providing a point of control over rogue buying.

•  Educate stakeholders on the value of more commercial focus upstream. 

This is to develop requirements, challenge the need, and consider alternatives like making or renting rather than buying.

•  Build bridges with related functions that deal closely with suppliers.

For example, onboarding, compliance, accounts payable, budget planning, CSR, and legal providing them more insight and visibility on plans and pipelines and nurturing around a common agenda.

•  Don't over-sell to potential candidates.  

The best candidates want a challenge, and they stand out a mile. However, they may quickly get disillusioned in the face of unexpected stakeholder resistance. Don't hide cultural barriers during interviews; instead, try and solve the problem together and get the stakeholder to interview them too.

•  Set up simple process models.  

One of the biggest issues with 'strategic' category management is PowerPoint! Getting your teams to spend weeks building a tome that will sit on a shelf goes a long way to disenfranchise existing team members. Adding multiple approval gates as control points may have the intent of creating visibility but can look like micro-management. Get the teams themselves to suggest process models and governance for large and small categories of buy.

Of course, technology is a great enabler of the above too, but these above points are among the foundational building blocks to success.