DeltaBid welcomes this guest blog post from Richard Davis, indirect and marketing procurement specialist. He discusses PepsiCo's recent choice to eliminate its marketing procurement department, noting how this choice reflects the company's overall view of Procurement.
Many people both inside and outside the procurement function believe its prime purpose is to somehow get more-and-more (from suppliers, in various forms) for less-and-less (cash, risk, time, etc).
On the face of it, this seems quite a useful point of view for any business professional. However, Procurement's single-minded ownership of that perspective has led to a myopic and limiting view of what's important or valuable to an organisation.
For Procurement, what seems to be important (i.e. what tends to be measured) is price management. The process of choice for this management exercise is negotiation. Procurement people tend to regard themselves as good negotiators and invest heavily in negotiating skills.
However, the idea of more-and-more for less-and-less (through negotiation or any other mechanism) is pretty limiting and ultimately self-defeating. At what point does trying to get more-and-more for less-and-less become a desire to get something for effectively nothing? Another word for getting something for nothing is exploitation. At what point does this approach simply get rejected?
Perhaps the 90% of marketing agencies who responded to a recent ANA (Association of National Advertisers) survey by saying that Procurement adds no value to business relationships were passing judgement on an approach that has had its day.
Of course, any supplier can simply walk away if Procurement’s single-minded focus on price management becomes too much for them. Whilst it is true this option is usually available, it completely misses the point. The only thing that matters in any business relationship is the value that can be created from the relationship.
In the simplest supplier relationships, most of what value means is reflected in a clear expression of need and the ability to supply. Value is largely moderated by price. Negotiating powerfully in this context has to be the best approach. When dealing with a stationery supplier, why pay 5 pence for a pencil you need when you could pay 4 pence? A pencil is a pencil, and it’s either needed or it isn’t.
What Is and What If
An orientation to price is a good example of focusing on “what is”. For a negotiator that is often expressed as “the zone of potential agreement”. For any negotiator the goal is to get more of that zone than the opposition. Basically this zone is the pie and buyer and seller compete for who gets more of it – the buyer (lower pricing) or the seller (higher pricing).
However, for the most important business relationships, what drives value shifts completely. In these key business relationships, value becomes a function of what might be or “what if”. The reason for this is that creating value is a generative process. Of course, it starts with “what is”, but its orientation is to the future, and its complexity invariably emphasises collaborative endeavour.
The most creative resources in any organisation are people. The skills required to succeed in creating future value out of the most important business relationships are, therefore, people-oriented.
Neil Rackham established that the skills and approaches needed to sell large, sophisticated or important items are quite different from those required to sell small, simple or less important items. There is a direct correlation with procurement skills.
In 2014, Delloite/Odgers conducted a survey of procurement leaders, and this is what they found:
“57% of this year’s respondents state their teams do not have the right skills to execute the CPO’s vision … Soft skills such as leadership, influence, communication and relationship building are the areas seen as most lacking.”
My belief is that the skills you need to squeeze price in the world of “what is” are fundamentally different from those you need to create value in a world of “what if”.
- Powerful negotiation becomes collaborative engagement.
- Control becomes trust.
- Development of relationships is preferred to simply testing them.
Good commercial management is still relevant, though. Most business professionals should know when and how to focus on risk, contracting and cost management. All businesses need to be able to manage supplier pricing, too, and be effective when selecting the right tools for the job.
However, organisations must decide where in the pecking order of priorities the single-minded pursuit of price management sits - particularly in its key areas of expenditure. One organisation has recently done just that.
The PepsiCo Procurement Decision
Many FMCG companies rely on significant levels of marketing expenditure to support their business. PepsiCo is no different. In the past it has used procurement professionals to manage this aspect of their expenditure. This “marketing procurement” approach has been common in large organisations for the last 20+ years.
However, PepsiCo has changed its strategy.
For PepsiCo, their marketing department will no longer have the support of a professional procurement department. PepsiCo has decided that Procurement’s job is done and that it has no role to play in the creation of future value in its marketing supply chain. It has axed its marketing procurement team.
This is a significant departure from what is considered by many to be good practice. The reality is PepsiCo execs feel they have an insight into a better practice.
It is really quite extraordinary that an organisation like PepsiCo feels it can create more value from its supply chain in the vital area of marketing without professional procurement support. It speaks volumes to the perception of Procurement’s value-creating ability with some of the organisation's most important suppliers.
It remains to be seen whether the example set by PepsiCo will be followed by others, and whether Procurement will be seen as having the ability to create value rather than simply manage price. Whatever the future holds, it will surely be based on an idea of what Procurement's purpose is.
A Procurement Metaphor
It is possible to see the business world entirely as a competitive construct: buyers and sellers are locked in an eternal battle to establish winners and losers. It is an idea that is actually quite appealing to many people and is still prevalent today. It is an idea that leads to Procurement being regarded as a protector and defender.
They defend an organisation from being exploited by largely unscrupulous suppliers, and they protect the financial needs of the organisation by:
- Controlling demand
- Establishing and policing protocols
- Negotiating powerfully
There is an alternative view; people and the organisations they build have an extraordinary talent for cooperation, collaboration, and creating something new and valuable with other like-minded individuals. This idea that could lead Procurement being regarded as bridge builders and energisers.
Creating resilient, useful, and resourceful relationships is akin to building bridges rather than dismantling them. It means focusing on what's important rather than focusing on what you can take away.
Creating energy in any relationship gives you access to extraordinary levels of discretionary resources, goodwill, and purposeful endeavour. Energy is created through maintaining high-quality connections with people. This requires the right intention and the right skill set.
It is surely the case that the most important supplier relationships in any organisation are likely to benefit from the second version of Procurement outlined above.
I do not know the rationale within PepsiCo, but I wonder if they decided they did not need defenders and protectors in the form of a procurement department any more.
Perhaps they might have preferred and valued a team of bridge builders and energisers, instead. Who knows?
The future of Procurement is unlikely to look the same as it has in the past. Ideas and organisations evolve and change. For Procurement to be able to adapt, I believe it needs to have flexibility in the way it understands its purpose and what it does to enable successful outcomes.
It is a guarantee that alignment with business objectives will allow procurement leaders to articulate new, useful strategies.
Perhaps price management is still the most important, and we continue to try and try again to get more-and-more for less-and-less from all our key suppliers. However, if future value can only be created through cooperative and collaborative work with key suppliers, then procurement leaders will have to ensure their teams have the skills and capabilities to deliver what’s valued most - or risk being side-lined altogether.
A note from the author: Richard Davis BA MCIPS
I am a procurement leader passionate about linking high-performance outcomes to high-quality connections. Procurement’s value proposition has evolved. Those operating between two organisations are expected to manage day-to-day issues and deliver opportunities for the future, which requires the sophisticated skill of making internal and external connections. This calls for adding the skills of engagement and influence to more traditional, analytical procurement skills. Tomorrow’s procurement professionals must be both innovation catalysts and effective cost controllers.
This article first appeared on The Value Network blog.