When you change from seeing your top suppliers as competitors to enablers, and take a collaborative approach, how you negotiate with them will change dramatically.
This article was written by Sarovar Agarwal, Partner, Communications Media and Technology Practice at A.T. Kearney.
Procurement leaders are facing more pressure than ever in the current business environment. In the wake of prevailing disruption and increased competition from nimble technology-focused companies, the c-suite have become eager to see procurement leaders make their function deliver more and add value to the organisation.
However, the 2016 Return on Supply Management Assets (ROSMA) Performance Check Study, “What Good Looks Like,” released by A.T. Kearney at the end of last year found that only 15 to 20 percent of procurement functions deliver high value to their organisations.
The study revealed that there is a top-tier of standout performers, a middle-tier delivering value, but performing well below the top tier, and a large group of bottom-quartile performers that add limited value. For procurement leaders focused on becoming top-tier performers and adding significant value to their organisations, we suggest the following approach.
Work smart, not hard
There has been an organisation-wide push toward productivity improvement by businesses, especially by harnessing the power of technological advancements. Procurement functions should be looking at this as a great opportunity.
Historically, procurement has focused on the smaller 2000 suppliers since this is the area of least resistance. In productivity terms, this is like the tail wagging the dog, rather than the other way around. With resources squeezed, procurement leaders are now irrevocably turning to the top 20 suppliers, rather than the complete 2000, because these are the mega vendor agreements that can affect the organisation the most, and where the most value can be added if managed effectively.
Meanwhile, technological advancements (like RPA) are now enabling automation of the large volumes of transactional activity that goes on in procurement, especially for the smaller group of suppliers, to ensure the function remains effective and productive.
If we apply the 80/20 Pareto Principle to procurement, a shift in focus to the top twenty suppliers, nurturing those relationships and making them more effective, will result in better deployment of resources and so more peas – or greater results. One key thing to note is that simply switching focus to the top 20 suppliers isn’t enough, you need to nurture those relationships too, which requires a change in mindset.
Competitive to collaborative
When you change from seeing your top suppliers as competitors to enablers, how you negotiate with them will change dramatically.
When you move into the top 20 suppliers, you are dealing with strategic categories which if led and managed well can make a significant impact on the business. The challenge for procurement leaders is that the relationship status with these suppliers is often complicated.
For example, in the telco world, Cisco is a supplier to every telco’s network, they are also a sell-through partner, and a competitor for the sell-through business.
Which is why it’s very surprising that all too often procurement brings a toolbox – for example RFP, vendor management, basic category management etc – to the negotiating table. This industrialisation of the procurement process is useful for the tail end – those 2000 suppliers with low resistance – but it cannot be used for the top 20 suppliers who have the potential to impact your business and your role in such a way.
The tools to handle these special relationships put better collaboration and engagement of vendor partners at the forefront of the strategy:
Top-to-top engagement: The biggest critical differentiator for the collaborative sourcing approach is top-to-top engagement between the company and the partners – that enables proactive involvement of the c-suite. This can help establish the right leverage and also enable internal visibility.
Business led: A high degree of involvement from the business owners will further align procurement’s interests with the business challenges and opportunities. This requires great communication and trust between functions and top-line management.
Strategic alignment: Procurement functions should start with an open mindset, rather than spell out all the asks at the start. All too often, the cookie cutter approach takes over, which doesn’t deliver the right long-term solutions. This will help deliver tailor-made solutions based on vendor insights.
Collaborative solutioning: Procurement departments should adopt transparent and collaborative solutions. They should conduct design and immersion workshops with partners, to take them along on the journey.
Involved facilitation by procurement: Finally, they should drive proactive governance and risk management.
Procurement leaders are best placed to play the Lead Orchestrator role to this new way of thinking about the top 20 vendors. For those procurement leaders who are aiming to become a sustainable source of value for the business, the top 20 approach is smarter, more productive and gets better results for your function and for your position in the business.
The first step is changing your culture and mindset towards the top 20 from competitive, to collaborative; from contracting, to partnering – and this is often the hardest!
A.T. Kearney’s Enrico Rizzon will be speaking at The Big Ideas Summit Melbourne. Join us LIVE to discuss the big-ticket trends affecting procurement – grab a ticket here to secure your seat!