Purchasing Chessboard in the time of crisis

The current crisis is not going away any time soon. And after a period of lockdowns and closed factories, procurement people around the world are adjusting to the new reality.

As a point of reference, COVID-19 is making life pretty difficult for procurement executives. Most of of your own factories are shut down or are preparing to reopen. With closed factories, you are not making anything and if you are not making anything, you are not buying anything. And even when you reopen the factories, you will be operating in a  much smaller market with less revenue.

And as your factories are preparing to reopen, you need to juggle supplier factories that are still in lockdown, closed borders, lack of trucking and air freight capacity and the threat of suppliers going bankrupt.

In this blog post and in a recent video, I discuss how the current crisis can be mitigated with the Purchasing Chessboard.

Your shrinking revenue in a shrinking market is not good news for your demand power. Even if your competitors are shrinking as fast as you do, it is safe to assume that on the x-axis of the Purchasing Chessboard, you will experience an overall shift to the left.

Your suppliers on the other hand are so preoccupied with keeping their people safe, securing their liquidity and overcoming logistical barriers, that production capacity will typically be reduced. Reduced production capacity translates into increased supply power, so on the y-axis, your suppliers will experience an overall shift upwards.

There may be exceptions to this rule of course. Your industry may still be stronger than an adjacent one, the supplier is also active in. In that case, your demand power may actually be increased.

As a rule of thumb, this crisis pushes you into the top left quadrant of the Purchasing Chessboard. And of course, this combination of low demand power and high supply power is where you normally don’t want to be. Anyway, it is what it is an let’s take a look at what the Purchasing Chessboard has to offer.

Broadly speaking, the methods in the upper left quadrant fall into two camps. The first one can be labeled Engineering. With the 12 methods in this camp, we are trying to modify specifications in order to commoditize the spend.

The simplest of these method is complexity reduction. Talk to your counterparts in product marketing, manufacturing and engineering to see which product configurations can be dropped in the time of crisis. No customer really needs 3 billion configurations of a car or 300 different types of yoghurt.

You can take it up a notch or two by going into design for manufacture, a method that Apple really excels in and that I have outlined in one of my recent videos on the iPhone SE.

Or you go to the extreme, to invention on demand. There is the old saying that war is the father of all things. An extreme health crisis like the one we are experiencing right know could also be the catalyst for great innovation.

So think about your ambition level. Do you just want to muddle through this crisis or to you want to emerge on top at the other end. If it is the latter, you may want to consider to out innovate your competitors and invention on demand is great for doing this in a novel way. I did a video on invention on demand a coupe of months ago.

The second camp can be labelled Entrepreneurship. With the four methods in this camp, we are trying to team with third parties in order to gain leverage.

Political framework management is super important in this crisis. A critical shipment form a supplier can’t get through the border - call your representative or the minister of commerce. A supplier factory is shut down because it is not deemed essential - call the mayor or the governor.

Vertical integration or M&A may also be very effective in this crisis. Is there a supplier with really interesting capabilities that would complement your company nicely - now may be the time to right out acquire this supplier.

In summary, the current crisis will shift a lot of the stuff you buy left and up in the Purchasing Chessboard. While the upper left quadrant is not where you want to be, there are still 16 methods to deploy.

Most of those will have you modify specifications in order to commoditize the spend.. Some will see you team with third parties in order to gain leverage. And maybe, these methods will not only help you to muddle through the crisis but to come out on top of competition on the other end.

Don’t stress out

This crisis puts a lot of stress on procurement and on suppliers, both professionally and in their private lives. What you want to do, is to get through the crisis without suffering too much damage and to come out at the other end of the crisis ahead of competition. In this post, I will show you how to manage the crisis so that everyone involved keeps their sanity and how to engage with supplier CEOs in an effective and decent way. This post complements a video on my YouTube channel.

Crisis management

Let’s start with crisis management. Here we drew inspiration from two sources. We looked at our own experience from the banking crisis of 2008. And we talked to our peers in China who experienced the current crisis a bit earlier than we did.From these sources, we derived five key principles that we are deploying at our clients right now:

1. Strong internal coordination, within procurement and across functions

2. Well coordinated external communication, providing clear guidance to suppliers

3. Self-help toolkit, that enables procurement team members to solve most problems by themselves

4. Clear escalation paths and completed staff work to protect decision makers

5. Focus on leading indicators to anticipate next wave of problems and opportunities

The first principle is about internal coordination. In this crisis, procurement will often find itself on the receiving end of demands from engineering or manufacturing. These demands will often be worded like “we need” or “the supplier must” and this is unacceptable as it totally puts procurement in the defensive. We need to covert this one way street into a dialogue with other functions. In this dialogue, we can agree on priorities but one thing needs to be clear, nobody will be able to have their cake and eat it

The second principle is about external communication. We often see companies competing against themselves in times of crisis. This competition can happen between commodity teams. And it can happen between functions, just recently we had engineering cut the funding for development projects at suppliers only to have the suppliers come knocking at the door of procurement and asking for cash. The aim here is that in crisis, we bundle all external communication to suppliers and provide crystal clear guidance.

The third and the fourth crisis management principles are about protecting our decision makers.

Suppliers will cause continuity of supply problems, they will have cash flow problems, they will have to postpone product development projects. And here the objective is to solve as many problems as possible locally. And for this, the procurement team members dealing with these suppliers need guidelines, methods, checklists, in other words a self-help toolkit. The more problems we can solve locally and immediately, the better.

But some problems will need to be escalated up the hierarchy. And here the risk is that the sheer number of problems overwhelms decision makers. You can have two problem solving meetings five days a week. Or you can have four problem solving meetings seven days a week. Don’t let it come that far. Here we are learning from the the US generals who won WWII. They did not let their officers overwhelm them with bad news and questions. They implemented something that is called completed staff work. In short it means “I don’t want questions, I want answers!” I will dive deeper into completed staff work principles in the next chapter.

With the fifth principle, we are looking into the future. The risk in the crisis is that we are only looking at the problem at hand. But there might be a much bigger problem or an interesting opportunity just around the corner. So we need to aggregate information and identify leading indicators that allow us to look a day or a week or even a month into the future.

Completed staff work

Let’s now take a closer look at completed staff work. We know that it originated in WWII and different sources attribute it to either Douglas Mac Arthur or Dwight D. Eisenhower, the later US President. And it does not matter who invented it. In WWII, these generals could have been overwhelmed by bad news and questions quite easily. But they did not allow this to happen by introducing completed staff work principles. They asked their officers to bring any matter to them in the predefined format outlined below:

• The officers had to describe the problem in concise language

• Then, they had to outline the desired outcome, how would a better situation look like

• Next, they were expected to develop alternative solutions, typically two or three at maximum

• These solutions had to be evaluated in a logical way against associated cost and benefit

• And finally there was a recommendation

• So all the general had to do was to decide yes or no

With this very simple approach, the US generals greatly enhanced their decision making capacity. Now imagine what completed staff work principles could do for the procurement leadership of your company. It would certainly prevent you from stressing yourself beyond a breaking point in four problem solving sessions seven days per week.

Supplier focus

So far, we have mostly talked about what happens inside your company and to procurement specifically. Let’s now change perspective and look at suppliers. In a normal economic environment, we recommend to segment suppliers in a Pareto. For most companies, 20 to 40 A-suppliers account for 50% of the spend and then there are B and C suppliers. And we normally also recommend that your CEO builds strong personal relationship to the CEOs of your A-suppliers.

In this crisis, we recommend to extend this to all mission critical B and C suppliers. Consider this, in the current lockdown, these supplier CEOs are sitting in their home office and are worried about the future of their company, just like you. What is highly effective in such a situation is to reach out and ask “Hey, do you have 15 minutes?”

And then you just have a normal conversation between two human beings finding themselves in a difficult situation. If you are looking for discussion topics, a good conversation starter would be to ask the supplier CEO what you as a customer can do to stabilize the supplier’s supply chain. This is not an invitation to ask for money but there certainly is something you can do in a the sequence you place orders or in priorities that you align.

A follow up question could be asking the supplier CEO what the supplier can do to make your company more competitive in a shrinking market. This question certainly has a savings aspects but suppliers may have more creative ideas.

Why are we recommending this outreach? First of all it is the humane and decent thing to do. But if also pays off and the key here is mindshare. In this crisis, you want to have as much of the supplier CEO’s mindshare as possible. Consider this, the suppliers have limited bandwidth and limited capacity. At some point in time, the supplier CEO will have to prioritize you against your competition. And if you have most of the CEO’s mindshare, you will be prioritized. Humans always favor other humans who they like.

Summary

So in summary, this crisis is causing a lot of stress to your procurement and your suppliers. But there are three simple and highly effective ways of reducing this stress:

1. Introduce good crisis management with strong internal and external coordination!

2. Protect decision makers and enhance your decision making capacity with completed staff work principles!

3. Build a strong personal relationship to the CEOs of your suppliers!

Procurement in the time of COVID-19

So, we have much of Europe in a lockdown, travel among major economic centers has been reduced to almost zero, and supply chains are being increasingly disrupted. This certainly must be the end of procurement as we know it. Procurement people can do nothing but hope for the best. Right?

Wrong. In the COVID-19 pandemic, linear extrapolation does not apply. It does not apply when projecting the number of confirmed infections. As all of us are learning now, the disease spreads at an exponential rate. It equally does not apply to the economy. While we have seen declines in orders and shipments, we should not extend this downward trend to zero.

Consider China. After a nearly complete lockdown that lasted for several weeks, industrial production and shipping capacity is inching back to 60% to 80%. We don’t yet know how long lockdowns and travel restrictions will last in Europe and in America, but the current situation will not be permanent.

The empirical landscape from the 2003 SARS, 1968 H3N2, 1959 H2N2 and the 1918 Spanish Flu epidemics suggest a V-shaped recession as the most likely economic result of the COVID-19 pandemic. The V shape corresponds to intertemporal displacement of demand with growth overshoot on rebound. In other words, people who come out of the other end of this crisis will feel enormous relief and will indulge themselves to compensate for the endured hardship.

Suppliers are people too

Companies will be forced to ride down the first leg of the V and subsequently ride up the second leg of the V. In addition to protecting their teams, mastering these wild swings requires procurement leaders to achieve two near-term objectives: 

1. Ensure continuity of supply

2. Leverage cost reduction potential

While the first objective is obvious, the second one may feel a bit counterintuitive at first glance. Cost reductions are of course welcome and will help retain the workforce and compete in a shrinking market. And the demand for cost reductions is also warranted. A lot of suppliers will benefit from lower input costs (e.g., oil price) and should pass them on. 

For both near-term objectives, it is paramount to put suppliers at the center of considerations. Even in normal times, looking at the supply chain through the lens of somewhat abstract categories and commodities is shortsighted. In this crisis, it is even more important to have a strong relationship with the CEOs of your key suppliers.

Think about it, during a lockdown, the CEOs of your suppliers are sitting at home worrying about keeping their business afloat and preparing it to be ready for the rebound. There is no better time than now for reaching out. From CEO to CEO, place a phone call or send a text message to start a dialogue about the following questions: 

• What is the best way for both our companies to ride out this storm, including measures to protect against financial difficulties?

• What can we as a customer do to help stabilize your sub-tier supply chain?

• What can you as a supplier do to make our products more competitive in a shrinking market?

• What can we do jointly to come out on top in the rebound?

In normal times, we recommend that CEOs nurture close relationships with the CEOs of their A-suppliers. In our definition, A-suppliers encompass those vendors that account for 50% of the company’s spend. Companies have 20 to 40 A‑suppliers on average.

In this crisis, we suggest expanding this list to mission-critical B- and C-suppliers. It is not trivial to identify mission-critical suppliers in this crisis. As a rule of thumb, labor-intensive supplier factories are more exposed than asset-intensive factories. If you are a carmaker, watch out what is happening at suppliers making wiring harness for example. Suppliers of steel should be comparatively cautious.

By bringing in other board members to take care of supplier CEOs, the capacity to build strong relationships can be greatly enhanced. These relationships can prove to be extremely beneficial. When supply is constrained and the CEO of a supplier needs to make a judgement call, the customer with the highest mindshare will be favored. The same holds true for the readiness to benefit from the rebound. Those who invest now will be rewarded later on.

First and foremost, decency pays off. The CEOs of your suppliers are facing the same personal and professional challenges you are facing. Talking to them can provide you with a valuable sounding board and give you confidence in making the right decisions in testing times.

A hard look at the way you do business

If your company is in the enviable position of still having running factories, you probably had to prioritize. For some product lines, most of the material is available, so let’s mobilize everyone to get the remaining stuff as well. Most likely, you are making the products you can make and not necessarily the products you would prefer to make.

This leads us to two long-term objectives for procurement:

1.    De-risk the supply chain

2.    Simplify the product portfolio

The earthquakes, tsunamis, and floods of the past two decades that disrupted supply chains should have been a wake-up call. The looming trade war of the past couple of years should have been a wake-up call. Yet, as the COVID-19 pandemic shows in a cruel way, most supply chains lack even basic resilience and transparency.

Too many companies rely on single-source suppliers as well as complex and long logistical networks. This may be great for short-term profit seeking, but it has proven to be too fragile too many times.

Going forward, companies will de-risk their supply chains. Single sourcing will be perceived as an unacceptable shortcut. Labor-intensive supply chains will be pressure tested against new waves of epidemics. Asset-intensive supply chains will be pressure tested against natural disasters. Global supply chains will be pressure tested against political risk. All supply chains will have to become more transparent, far beyond tier 1 suppliers and down to the sources of raw material.

Some company boards will drive the de-risking of supply chains in a proactive way. Some will be forced to do so by shareholders, others may be forced to do so by their governments. For example, having most active pharmaceutical ingredients come from a handful of Chinese factories might be perceived as a national security problem by some countries.

Procurement will also be asked to scrutinize the product portfolios of companies. So far, this has been a one-way street. The mantra was to cover as many perceived customer segments with highly tailored products delivered by a lean supply chain. In the post-COVID-19 reality, the pendulum may swing the opposite way. 

*****

In summary, procurement will play a pivotal role in getting companies through the COVID-19 crisis. Those companies that together with their supply chain can ride down and up the legs of the V-shaped recession in the most agile way will emerge at the other end of this on top. Initiatives will vary between companies and stages of the crisis, but all will have the ultimate objective of gaining competitive advantage.

Co-authored with Alenka Triplat, Wolfgang Schnellbächer and Daniel Weise

Own the product life cycle

We are continually reminded of the importance of procurement owning the entire product life cycle end to end or at least having substantial influence. Procurement needs to be there from the first moment when an engineer starts thinking about a new product and procurement still need to be there to manage the end of life of a product. If you as a CPO ensure this, you will make procurement the most important function in your company and you will open the door to make it to the very top.

 I have also published a video on this topic and it supports the content with helpful visuals. Most companies start their product life cycle with the kick off. This is when product marketing and engineering put pencil to paper for the first time. Key milestones for procurement are contract and start of production.

 Typically, everything starts with a top down cost target for the product. That target is set by finance and provides a guideline for everyone involved in the project to develop and deliver this product. In reality, this flat cost target looks like an up and down of the expected price before SOP and the actual price after SOP.

 Let‘s take a closer look at what happens to this cost curve over time. In the early stages of the product life cycle, it stays quite close to the top down target. This is not so much owed to discipline but more to the fact that at this point in time the engineers are more worried about making the product work than about its cost.

 As the thinking of the engineers matures, first cost estimates emerge. And typically, these cost estimates are higher than the top down target. The hope here is, that „we will figure this out later“. Typically, when the concept is ready or „frozen“, procurement comes in.

Procurement will deploy all kinds of levers to negotiate the lowest possible price at contract award. Most companies involve lots of suppliers to activate competition to achieve this. The more sophisticated companies use cost engineering to calculate a „scientific“ target cost. And here is where we hit a major problem. Procurement can basically pull this point down as low as they want. There will always be a smart supplier who strikes a deal at this price. But it is like pulling a rubber band. You can pull and pull but the other end won‘t move.

 The smart supplier will agree to the low price and then wait for engineering or product marketing. And every change request that comes will lead to a cost increase. We have seen that in many industries, this cost increase between contract and SOP is in average 7%. And the really disturbing fact is that between SOP and end of production many product never reach the contract price.

 And this behavior damages the reputation of procurement. CFOs worth their money will immediately understand what is going on and discount pretty much everything coming out of procurement. CPOs who put all the focus on the price at contract award are not doing the best for their companies and they are not doing the best for their career prospects. They will rarely be on the shortlist of candidates selected to succeed the CEO. So how can you get on the shortlist?

 You can do this by owning the entire product life cycle. It means that in the early stages, when the engineers and product marketing put pencil to paper, you need to be there. You need to influence their thinking. You need to ensure that they consider the right innovation from the right suppliers. You need to be vocal, competent and trusted. If you can do that you have laid the groundwork for lasting success.

 In the Phase between charter and concept freeze, you need to do a lot of handholding with engineering. This handholding has two objectives. First, you make sure that the engineers provide you with specification that don‘t favor one supplier. Second, you get engineering to enable promising new suppliers. The engineers will not do this on their own. For them, it is far easier to work on the specifications with one preferred supplier and qualifying new suppliers costs time that engineers typically don‘t have. Without the handholding, you will lose all room to maneuver and you will be reduced to just executing a transaction that has been prescribed by engineering.

 Now we are coming back to the cost creep between contract and SOP. Very often, nobody feels responsible for this. Engineering will be preoccupied with making the product work and hitting the SOP date. Procurement will not object too much to the cost creep because it is a source of savings that they believe they can harvest later on. Don‘t fall into this trap. It will burn your credibility with the CEO, the CFO and other board members. And first and foremost it is wrong, it hurts the company. Aim to assign clear accountability for keeping the cost creep under control. Deploy the cost engineers to perform brown field calculations immediately after SOP. Renegotiate prices aggressively immediately after SOP.

 After SOP, the story is not over. Again, it is about room to maneuver. Don‘t permit single sourcing. It is a bad idea from a commercial standpoint as it effectively locks you in with a monopolistic supplier. In many industries it is super hard to change supplier after SOP. 

But there is another reason. Look at the all the earthquakes, floods and tsunamis of the recent years. Every time, they disrupted supply chains and left those with single sourcing highly vulnerable. And in todays environment with ever shifting trade wars and a looming pandemic it is even more important to have a resilient supply chain.

 And finally, don‘t let others constrain you in the selection of levers you deploy. A lot of procurement teams I have seen are limited to commercial tools while engineering owns what is called technical tools. This is wrong. Leverage to full scope of methods in the Purchasing Chessboard. 

 So in summary, if you want to be successful as a CPO, be bold and own the entire product life cycle. Influence engineering in the early stages. Increase your room to maneuver between charter and contract. Assign clear accountability for the cost creep between contract and SOP and use all available commercial and technical levers after SOP.

Dream job

After 25 years as a procurement consultant, I have a natural bias toward the trade. So you will not be surprised to read that I encourage people graduating from college to consider a career in procurement. I very much believe that this will be a dream job that will give you influence on the direction the company you work for, allow you to travel to new countries and have you meet interesting people. 

Should you want to know more about my reasons for still loving procurement after all this time, click here. But in my advice for young people, I am not extrapolating from my past into your future. Far from it. My pitch to you is based on logic. The 21st century is an age of disruption. Tech firms are breaking into the domain of traditional companies. Amazon is disrupting retail. Tesla is disrupting the automotive industry. Apple sells more watches than the Swiss watch industry combined. Uber and Lyft are disrupting transportation. 

And this is just the beginning. I am convinced that going forward, every company that wants to succeed needs to become a tech company. Or let me be more precise. Every company that wants to survive in the 21st century needs to become a tech company. Now, you may ask what does all of this have to do with procurement?

Think about it, 95% of companies don‘t have the required high tech competence in house. So where can they get it from? From external suppliers. Bringing in this high tech competence from external suppliers will be a major transformation exercise. It will make procurement a function that is top on the list of priorities of the CEO. Procurement will become central to charting the company‘s way forward. This will become the golden age of procurement and this is why I put „For those who are shaping the 21st century‘s most important corporate function“ as my channel‘s claim.

Maybe we should briefly talk about what makes a dream job. Of course, there is no one size fits all but I believe you and I can agree about a couple of fundamentals. It is not about money. Money is a result of what you are doing. I think a dream job should give you influence, it should provide you with opportunities to grow. It should have you interact with interesting people. First and foremost, it should energize you. You should get up in the morning looking forward to going to the office. 

I believe that a job in 21st century procurement ticks all of these boxes. By the way some of you may wonder if I am talking about a job in industry or in consulting. I think what I am saying here applies to both. Procurement is becoming more important to industry and it is becoming more important to consulting firms.

Now you may have become really excited about procurement but then you figure out that you didn’t learn much about procurement in college. I wouldn’t worry about this. Most colleges and universities don‘t teach procurement. And those that do lump it together with logistics and supply chain management. All you need is a solid education that sharped your ability to think logically and an open mind. 

I sincerely hope that I have wetted your appetite for a career in procurement. Not many of your peers may make the choice but this is for the reasons we just discussed and that should encourage you rather than discourage you.

I love procurement

With my first TV memory being THE moon landing, all I ever wanted to do was buidling rockets and space ships. And as a side note, I am very grateful for Apple TV’s For All Mankind to show us what might have been as opposed to the watered down version of post-Apollo that we got.

Anyway, when I graduated, it dawned on me that I had been born either to late (missing the original space race) or too early (looking at what is happening now between Space X and Blue Origin, I was right about that one).

Consulting appeared like an interesting option, so I applied and was accepted. In those days, you were not asked what you wanted to do but you got assigned to a project. Mine turned out to be a strategic sourcing project at Daimler and I wrote about this in my previous post.

Once I understood what procurement is, I started loving it and after 25 years as a procurement consultant, I still do. In this post, I am outlining why I believe that procurement is a fantastic career choice both for industry people and for consultants. And I will outline how procurement can take you to the very top of your organization. There also is a recent video on this topic on my YouTube channel.

1. Savings impact

If you know which levers to pull, there always is a way to deliver savings that are much higher than everyone expected. And this will get you on the good side of the CEO and the CFO. They can use the savings to invest in new topics of plug some holes.

You may argue that savings are transactional and that procurement should be about much more than just reducing cost with suppliers and I totally agree. But big savings early on can buy you the most valuable currency - credibility. Once you have the reputation for being able to deliver, key decision makers will trust you with other, more qualitative objectives. I will come back to those further down in this post.

The ways to deliver savings have undergone a remarkable evolution. When I started 25 years ago, 7 step sourcing was front and center and it put a heavy emphasis on opening up to international suppliers and on preparing negotiations really well. It was effective but took its sweet time. Project lead times of eight to twelve months were not unusual.

Today, savings need to be delivered much faster. I believe that the Purchasing Chessboard brought a lot of badly needed clarity on how to select the right strategy to reduce cost with suppliers. And together with my colleagues Alenka Triplat, Wolfgang Schnellbächer and Daniel Weise, I am in the process of rolling out a new approach that is drastically faster.

2. Gain insights

If you really want to be successful in procurement, you must go beyond just delivering savings and this starts with gaining insights into the company. The two key tools for Procurement executives are a cup of coffee and and airline ticket.

The cup of coffee is a proxy for spending quality time with internal stakeholders in order to truly understand how the company is delivering value to its customers. The airline ticket stands for going out to suppliers to truly understand how they deliver value to your company. Once you understand these two key aspects of your job, you can place yourself right at the intersection and you will be highly effective.

This expansive view on procurement goes far beyond the traditional more transactional role of the function. CPOs who proactively gain insights into their company and their suppliers are ready for the next step. An old mentor of mine once observed that “The key qualification of a CFO is to be ready to succeed the CEO” and I believe that the same holds true for a CPO. Looking at the current CEOs at Apple and VW confirms that assertion.

3. Shape the future

Today, every company is a tech company. Leveraging innovation from external suppliers is a must. The question is, which function is taking the lead. One of my clients let me participate in his town hall meeting a couple of years ago. His key message was that while the company spends $1B per year on R&D, the company‘s tier 1 suppliers spend $25B per year on R&D. Gaining access to the resulting innovation is key to the future of the company and there is no doubt about which function was tasked with taking care of this - procurement.

The topic of having a seat at the table with engineering comes to mind. Many procurement people complain about being involved too late in the product life cycle. Often, engineering has already taken all decisions and procurement is limited to just handling the transaction. Then they ask for new roles and responsibilities. But this misses the point. The key to shaping the future with engineering is technical competence. Procurement people need to have intimate knowledge about the product they are responsible for. If you buy steel for example, you need to know how steel is made. You need to know steel grades. You need to know the key people at key steel makers. You need to know how to shape steel. You need to know the key people at key tool makers. You need to know the key people at key companies for surface treatment. You need to know the key people at key research institutes. If you tick all of these boxes, nobody will ever wonder if you deserve a seat at the table.

4. Interact with CEOs

Procurement offers incredible learning opportunities. If you cover 1, 2 and 3 as outlined above, the CEOs of your top suppliers will notice and will want to spend time with you. I am pretty sure that no other function lets people who are at an early stage of their career interact with CEOs at such a regular basis. And if you spend quality time with CEOs, if you challenge them and let them challenge you, their „CEOness“ will rub off on you. This in turn will contribute to making you ready to become a CEO yourself.

Talking to CEOs is not a vanity project. It is high time to bring procurement back to its roots. In essence, procurement is an activity where two business leaders agree on a joint vision of the future. Over the past decades, an over-emphasis on categories and analyses has made procurement abstract, slow and transactional. If you talk directly to the CEOs of your suppliers, you can make unusual things happen. Watch this video if you would like to learn more about this topic.

5. Invent new ways

Procurement still is a fairly new topic. There is precious little research. Hardly any university teaches procurement. There is a lack of meaningful literature. At the same time, being effective in procurement requires you to master topics as diverse as engineering, manufacturing, supply chain management, data science, psychology and strategy. As a result nobody really knows what good looks like in procurement.

This is a great opportunity to invent new ways of working. Take me as an example, I wrote my first procurement book (in German) less than eight years into my career as a procurement consultant. It did not leave a dent in the universe but it gave me the skillset to write books. Without this initial experience, there would be no Purchasing Chessboard. There is easily room for several dozen procurement books covering different aspects of the trade. Stake your claim!

25 years a procurement consultant: 7 step sourcing

Today marks my 25th anniversary of being a procurement consultant. In January 1995 I kicked off my first project at Daimler. I was double fortunate. Not only did I have a prestigious client, I also had the privilege of working with the team that 10 years prior had conducted the Global Sourcing project with GM’s Ignacio Lopez.

As to be expected, I found myself on a steep learning curve. While being a mechanical engineer by training, my focus at university had been on jet engines and later on artificial intelligence. Therefore, a lot of the automotive terminology was new to me.

What was even more novel, was procurement. Like many other graduates, I had heard about accounting, marketing and general management but I could not recall procurement ever being mentioned in any of the classes I had attended.

The good news was that my new colleagues had a crystal-clear approach to deliver the high savings that our client expected. It was called 7 step sourcing. At that point in time, it was revolutionary. Before 7 step sourcing, procurement was merely an administrative function focused on processing paperwork with suppliers. With 7 step sourcing, procurement had a razor-sharp tool to deliver the breakthrough savings that CEOs wanted. In a way, 7 step sourcing got procurement into the board room.

For those of you too young to remember 7 step sourcing, here is a quick overview:

Step 1 – Determine commodity profile

Here we found out who buys what from which supplier. Companies did have this data structured by divisions or by products they sold. But we needed it by commodities that were relevant for suppliers. The result of shoveling around tons of data was a spend cube.

Step 2 – Develop commodity strategy

We had three commercial strategies and three technical strategies. Picking a strategy depended very much on intuition or in my case on the experience of my seasoned colleagues. Today, we have the Purchasing Chessboard with 64 differentiated methods and a clear guideline how to pick the right one for a specific situation.

Step 3 – Generate supplier portfolio

Those were the days before the internet. Access to information was hard. We had heavy reports with list of suppliers in Iberia, Eastern Europe, Mexico, India and even China. But these were also the days when German companies bought from German suppliers, French companies bought from French suppliers and US companies bought from US suppliers. Our lists turned out to be powerful.

Step 4 – Select implementation path

Here we brought everything together and estimated the cost benefit ratio of the emerging alternatives. We also looked at how much time the alternatives would require and what the associated risks were. The outcome was a recommendation for action that we would align with management.

Step 5 – Determine competitive price level

Looking back, I believe that in those days a lot more emphasis was put on preparing negotiations. The Harvard approach with MDO, LAA and BATNA was commonplace and hip shooting was frowned upon.

Step 6 – Implement competitive price level

In case of leverage back with incumbent suppliers, this was just updating the prices in the ERP system. But supplier switches were frequent. Lots of supplier validation and proving sample parts were required. I vividly remember a supplier driving prototype shock absorbers over the Alps in a snowstorm in order to get them installed in trucks departing for a winter test in Norway.

Step 7 – Ensure sustainability

Letting the prices swing back was not an option. A clear plan to maintain pressure on suppliers was part of the package and expected by the client.

*****

Procurement was a contact sport then. We assembled boxes with drawings and specifications to be sent to suppliers. We had to keep the fax machines going. Negotiations verged on the brutal. 

Procurement has made great progress since. Lighting fast analytics. Clear decision support. Real time access to suppliers. But maybe it has become a bit too sophisticated and sterile. A healthy dose of the can do, make happen mindset of the 1990s might be helpful.

Check put the related YouTube video.

Letter to the CEO

Dear chief executive:

Congratulations, yesterday’s earnings call has been received much better than the previous one. Revenues are up from last quarter. Analysts appear to be happy. With profit margins roughly at industry benchmarks, unfavorable comparisons to industry peers have been dropped – for now. As you reflect during your morning run, here are a couple of thoughts on how to change the narrative for good.

The analysts did have half a point last time. Yes, you have bolstered presence in core markets through a smart combination of organic growth and M&A. You have launched an exciting new product line and you have substantially decreased exposure to high labor cost. But so have your competitors. Striving to stay one step ahead of them is a good thing, of course. But this more of the same will make every earnings call one that could go as well as this one or one that goes as poorly as the previous one. You deserve to become the industry benchmark. How about doubling the financial, operational and strategic benefits from procurement and doing this every year?

You and your industry peers are consistently overlooking procurement. It controls roughly half of your cost. It largely determines quality. It gates the speed of your operations. It could be a major source of innovation. It could bring you down with yet unknown risks in your supply chain. It has the potential to fund your journey to industry leadership. It should inform or even shape your strategy. Yet, you treat it like an administrative function that hardly features in your thinking and never gets mentioned in earnings calls. If you took a closer look, you would encounter a transactional culture content with delivering the usual two to four percent of annual savings and ensuring continuity of operations. Getting more, a lot more, is possible but it will take a more enlightened effort than just roughing up your procurement people. 

Business as usual may even get you less out of procurement. It benefited from globalization like no other function. With politicians around the world busy pulling up draw bridges, globalization is taking a rest. Factor cost are on the rise everywhere and import duties are in vogue again. The analysts are probably not going to hassle you over shrinking profit margins that are hitting the entire industry. And you will be able to blame adverse macroeconomic trends. But there is a better way that will allow you to break away from the pack.

You should embrace procurement. Make it a top priority in the board room. Have it reach across the value chain and influence conversations with customers. Harness its insights and relationships plan and achieve a lasting competitive advantage. Pioneering chief executives have gone there before. Follow their example. They have charted the journey. You will shape it to your specific situation, of course. But broadly speaking, the journey will have three main legs:

First, you will agree on a joint masterplan with the chief executives of your key suppliers. This plan will outline how the operations and the direction of the suppliers will be improved with your help. It will outline how you aspire deeper relationships with fewer suppliers. It will shatter monopolies by enabling challengers. It will offer a strong incentive to grow to the capable and willing. The plan will also describe a future in which you and the capable and willing suppliers will jointly reshape industry segments with breakthrough product architectures.

Second, you will need to give a broader mandate to procurement. Invite it to shape your agenda. It will increase your agility across the product life cycle. It will challenge the established thinking in other functions. Getting the best cost, quality, speed, innovation, and the lowest risk out of suppliers requires a different way. Picturing procurement as the mirror image of marketing and sales in strategic decision making is a good way to get started with this broader mandate.

Third, you will make procurement the place to be for skilled and ambitious people. Technology is finally ready to free them from traditional transactional tasks. Empower them to do a lot more of strategic thinking and execution. Bring in fresh talent where needed. Make it a showcase for digitization. It is a great place to start because compared to other functions, the team size is relatively small and the data quality generally good. 

 Do you want to take the legs in this or in a different sequence? Or do you want to take them in parallel? What type of financial, operational and strategic benefits would excite you? Doubling everything every year will be a good hypothesis. Double savings. Double quality. Double speed. Double innovation. Half the risk. Double strategic impact. Year over year for the next three to five years. Paired with your eloquence, this should raise spirits internally and whet the appetite of shareholders and analysts alike.

Co-authored with Alenka Triplat, Wolfgang Schnellbächer and Daniel Weise