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
