As we mentioned in the first column of this two-part series, our candid interviews with 60 executives throughout Asia-Pacific helped us see where they feel they are lagging in procurement capabilities at a time when such mounting pressures as cost volatility make it more important than ever to catch up.
Fortunately, they can learn from the best. We call it fourth-generation procurement — using the procurement function as a way to add value to the business year after year, shoring up the bottom line by keeping costs from mounting.
Based on our work with clients and our study of procurement capabilities, we have identified the criteria that raise companies above their rivals and found winners for each of the six important enablers: organisation, processes, tools and systems, profit and loss (P&L) effectiveness, talent and results delivery.
Leaders tackle procurement from an organisational standpoint, choosing a mandate and structure to maximise procurement gains. LG Electronics moved from managing its procurement according to product line to managing it according to manufacturing stages. Hence, it could buy the same part for washing machines and refrigerators. It also reorganised reporting structures and gave procurement a seat at the table in top executive meetings. The savings mounted. Procurement’s impact on the bottom line is estimated at US$30 billion from 2008 to 2012, and it remains a key factor in LG’s continued success.
Winners focus on the critical processes they need to get right: category management, vendor development and the quality of information. For example, they rigorously evaluate suppliers and contracts, always conducting a total-cost-of-ownership analysis.
Fourth-generation procurement companies rely on customised, dynamic dashboards that provide integrated and transparent data for both direct and indirect spending, highlighting performance gaps. With tools and systems for seamless access to centralised global information, Ford Motor Company’s procurement managers quickly see and adapt best practices.
To boost P&L effectiveness, companies with fourth-generation capabilities establish pull-based demand management with enforced compliance and formalised budgeting for all categories. One leading retailer’s advanced category management toolkit allows it to see the direct effect of its sourcing decisions on the bottom line — a first step in making adjustments.
Leaders make a serious point of investing in talent. They establish procurement as a grooming ground for leadership and cultivate the right mindset. At Royal Philips Electronics, stakeholders throughout the company are consulted whenever a key person in procurement is being recruited.
Finally, to stay on task and deliver results, forward-thinking firms establish risk teams that track and manage all transactional and strategic risks. For example, to make its savings stick, supply managers at Dow Chemical routinely sit down with business unit managers to review supply management performance and jointly determine ways to improve.
The road to procurement excellence
Our experience helping companies has taught us that the path to achieving fourth-generation maturity differs for each company, based on the sophistication of its operation, its unique objectives and the industry or market dynamics.
We have also learned that companies with fourth-generation capabilities share one common characteristic: procurement organisations work in tandem with the business. It’s carefully choreographed down to the last detail.
To get there, companies work on three key initiatives:
Spending transparency: Bringing full spending visibility under one roof leads to higher rates of compliance, to the point that maverick spending becomes almost extinct.
Going beyond savings delivery: The goal is to identify the full potential of savings and the steps that can be taken to capture those savings. Leaders analyse category and cost structure as well as the supplier landscape for each category. They conduct category workshops to verify findings, develop initiatives for each category and estimate the savings potential of each initiative. The results can be impressive.
Sustainability: With procurement savings identified and the right steps in place, the next move is to ensure the savings stick year after year. Companies focus on three areas.
First, they establish corporate and cross-functional interfaces. For example, procurement needs to work closely with the business, operating towards common targets and motivated by common key performance indicators.
Second, companies refine core procurement management capabilities. In our experience, category management and supplier management are the two most important.
Finally, they design their organisations for sustained results. For example, they organise for identifying and quickly making the most important decisions — and at the right level.
We have found that companies following this approach can save on procurement year after year. After those initial cost savings in the 8-12% range, the best players typically deliver 3-4% cost reductions per year.
For companies that choose to improve, advancing to fourth-generation procurement begins with a single step: performing a basic diagnostic to learn, in important detail, where you are starting from and what you stand to gain by taking the journey.
Sharad Apte is a Bain & Co partner and head of the firm’s Bangkok office. Francesco Cigala is a Bain partner based in Kuala Lumpur and leader of the firm’s performance improvement practice in Southeast Asia. Gerry Mattios is a Bain principal based in Beijing and a member of the firm’s performance improvement practice.