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.