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For years, we’ve been hearing about how procurement leaders want a “seat at the table.” In its Procurement Key Issues Study, The Hackett Group reports that in 2015, procurement’s #1 priority is to become a trusted advisor. And their researchers say that getting to that stage of procurement transformation is one of the 5 characteristics of world-class procurement organizations. The problem with intellectual concepts like this is that they can lose their meaning over time, or mean different things to different people. To get down to the details, we sat down with Emily Rakowski, VP of Marketing for Ariba and SAP Procurement.
Q. When we talk about procurement getting a “seat at the table,” who is sitting at this proverbial table?
A. In the minds of procurement leaders, the main stakeholders that they want to be having meaningful conversations with are the people making the top decisions about the direction of the business. While the boss might be the CFO, that’s not generally the person that’s making the decisions about the business. Usually there are presidents of the different lines of business that make up that corporation, there are COOs that actually make decisions about how the supply chain is run, there are strategy teams and CEOs that are making strategic decisions about what the company investing in, what is the company divesting from, and overseeing M&A activity.
Q. What’s the conversation about?
A. I’ll give you a few hypothetical examples of the strategic decision-making processes that procurement leaders care about and want to have a positive impact on.
Say we’re talking about a large consumer products company with one business unit that is not bringing them a huge amount of revenue.
The unit’s manufacturing relies on commodities that are rising exponentially in cost. And a decision needs to be made about the future for that business. Procurement would potentially be a part of that conversation, saying, “We understand the supply markets for the raw materials that make up 80% of the cost of these products, and we don’t foresee this coming in line in the next five years. So we’re looking at a relatively unprofitable business. Maybe we want to divest from the business and sell it to a company that has better economies of scale for those raw materials.” You see announcements all the time where, for example, a P&G sells off a beauty line to someone like a Unilever.
Or say it’s a financial services company and they’re expanding the types of banking products that they are making available to small business.
Procurement can give advice on the cost makeup of those products even if those costs are services-related. For example, if you’re going into a new line of business supporting more small businesses, that might take more hand-holding, more account managers, more call center services, more different types of credit cards. There may be procurement aspects that have implications for whether you decide to move in that direction.
Q. How can procurement start contributing more to the conversation?
A. To earn a seat at the table, procurement needs to understand more of the nitty-gritty, then pull it all into the big picture. The person that knows how to do this can really provide a lot of insight. Not just whether or not to invest or divest but also how to invest.
Imagine you’re talking to the CMO at Newell Rubbermaid--which owns the Graco baby product line—and your company wants to invest in a new line of car seats.
You know the cost basis is 80% in the molded plastic and that petroleum prices are dropping precipitously. So you can say, “This molded plastic is going to become less expensive and that’s going to massively enhance the profitability of these products.” But you can go further, because you’re also aware that—due to the cost-profiling of the product—there are features that have been skimped on in the past. You can point out the opportunity to invest in some innovation in these baby products—maybe offering more colors, or padding, or other features that will take these products from high-market to a real premium level. Or perhaps it allows you to sell into a new geography that requires certain features you haven’t offered before.
Procurement can bring strategic insight to product development, portfolio mix, and even getting into net new markets.
But if you’re going to come to the business with those new ideas, you need to be intimately familiar with these 3 areas:
- The categories of spend that typically drive the cost makeup of the product,
- The relationships you have with suppliers presently, and
- The innovations the business has been holding back on and could improve market share
Procurement has to pull the whole picture together—costs, supplier relationships, and opportunities for innovation. You have to know all that detail, in order to have meaningful conversations with decision makers. It can’t just be the person who knows plastics and it can’t just be the one who knows cloth and it can’t just be someone deep in the spend analysis that knows their category breakdown for the products. It has to be someone with the business acumen to understand ultimately how the business strategy aligns to the different types of procurement investment strategies they can take.
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For more on this topic, take a look at Part Two of my interview with Emily, where we talk about the #1 thing procurement can do to evolve its image, and why talent is so important. Plus, see why Kurt Albertson from the Hackett Group says top procurement performers bring executive presence to the business--you can watch the video here.
