Leading Procurement Strategy

Driving Value Through the Supply Chain

Carlos Mena, Remko van Hoek, Martin Christopher

• Publisher: Kogan Page
• Year: 2021
• ISBN:
  9781398601598
• Edition: 3
• Topic: Business
• Subtopic: Operations
• Index: Business

Delivering successful procurement programs has helped businesses like IKEA, Tesla and Nike maximize the potential of their resources and gain the competitive advantage. Learn how to develop similar strategies, that meet the needs of the business, customers and suppliers, and lead their implementation using insights from the experts in procurement strategy. Leading Procurement Strategy provides readers with a complete overview of the skills, knowledge and tools needed to implement a successful procurement strategy. The expert author team of Carlos Mena, Remko van Hoek, and Martin Christopher present practical advice and guidance underpinned by academic theory and supported by an extensive range of real-world case studies including IBM, IKEA, John Deere, NASA, Nike and Tesla. Readers are shown how to develop, deliver and sustain procurement performance with clear and accessible guidance.The third edition offers the latest insights into the future of procurement and digitalization, updates on green and socially responsible procurement and a revised structure. The key issues affecting the procurement function are covered and tips for developing the best practices in teams are found throughout.

Part One

Procurement strategy

01

Introduction

The strategic role of procurement

CARLOS MENA

The most strategic decisions in an organization are made around the boardroom table; however, the procurement function is often conspicuous by its absence. In many organizations, the chief procurement officer (CPO) or purchasing director reports to another function such as finance, operations or supply chain and does not have a seat at the table.

While some organizations have recognized the strategic value of procurement, many have yet to realize the potential benefits it offers in terms of quality, innovation, sustainability and, most notably, resilience. The COVID-19 pandemic has shown the devastating impact that systemic risks can cause on supply chains. Across product categories, from ventilators to vaccines, it has become evident that procurement decisions directly impact business continuity. As sad as it is, this realization should serve as the catalyst that makes procurement a more strategic and influential business function.

In this chapter, we first explore how procurement can create competitive advantage for any organization, discussing its potential contribution to both the top and bottom line. We then evaluate how to maximize the impact of procurement by developing and delivering strategies, aligned internally with the needs of the organization, and externally with the requirements of customers and suppliers. Finally, we look at the leadership role that procurement can play, not only within its organization but also across the entire supply base. In essence, in this chapter we argue why procurement deserves a seat at the boardroom table and how we can present this argument.

Procurement and its impact on the bottom line

The impact of procurement decisions on the bottom line has long been recognized. On average organizations spend around 40 per cent of their sales revenue on external goods and services (CAPS, 2017). For some, this figure can be much higher, for instance, a retailer such as Walmart spends around 75 per cent of its revenues in sourcing the products it sells to consumers. This means that every $1 saved in purchasing is equivalent to about $4 in additional sales.

Figure 1.1 presents a cross-industry comparison of the proportion of spend in relation to sales. It shows that sectors such as industrial manufacturing and aerospace and defence spend around 45 per cent of their revenues on raw materials and services, giving procurement a big responsibility. For other sectors, like financial services, this proportion is considerably lower.

Figure 1.1 Spend as a percentage of sales: cross-industry comparison 2017

SOURCE Based on data from CAPS (2017)

Figure 1.1 details

The details of the diagram are as follows: The step 1, organization and step 2, supply base leads to step 3, short-term competitive advantage which step 4, if sustained over time due to resource imitability, substitutability and mobility. The first step production shows productive use of firm resources that are valuable, rare and appropriable. The second step supply base shows productive use of inter-organizational resources through relationship investments, knowledge sharing, complementarity and effective governance. Steps 1 to 3 represent competitive advantage phase and step 4 represents the sustainability phase.

Procurement and sustainable competitive advantage

Given the substantial impact that sourcing products and services has on the bottom line, procurement professionals are often proud of negotiating great deals and achieving cost reductions. However, a myopic focus on ‘deals’ can be a distraction from a more strategic role of procurement – its impact on long-term competitive advantage. Failing to recognize that procurement is the gateway to the supply base, which can bring innovation, quality, technology and access to new markets, would be a significant oversight.

Organizations gain competitive advantage through the use of resources at their disposal. These resources allow organizations to exploit opportunities or neutralize threats, leading to superior long-term performance (Barney, 1991, 1995). These can include scarce physical resources (eg land or raw materials), human resources, know-how, technological resources, financial resources and intangible resources (eg reputation).

Traditionally, organizations have sought to develop and exploit internal resources to create competitive advantage. However, managers increasingly recognize that they can tap into resources beyond their own four walls, by establishing appropriate external relationships, finding synergies and creating new complementary resources (Dyer and Singh, 1998; Lavie, 2006). This opens the doors for procurement to play a strategic role in developing and sustaining competitive advantage.

Figure 1.2 depicts how both 1) organizational (internal) and 2) supply base (external) resources can lead to 3) short-term competitive advantage. For these resources to contribute to competitive advantage they need to be valuable (ie they can make the organization more efficient and effective), rare (ie they are not possessed by large numbers of organizations) and appropriable (ie once an organization appropriates them, they cannot be exploited by others). Eventually, some of these resources that are difficult to imitate or substitute can lead to 4) sustainable competitive advantage.

Figure 1.2 Procurement and sustainable competitive advantage

SOURCE Adapted from Wade and Hulland (2004)

Figure 1.2 details

The details of the diagram are as follows: 1, organization, production use of firm resources that are valuable, rare and appropriate and 2, supply base, productive use of inter-organization resources through relationship investments, knowledge sharing, complementarity and effective governance leads to 3, short-term competitive advantage an...