Where to Look for Procurement Value
Nowadays, procurement professionals should concentrate on the concept of total cost of acquisition (TCA), which is not only about purchase price, but also includes many factors that can drive you to select a supplier or acquire materials or services at a higher purchase price but at a lower TCA, considering the total ownership cost, logistics cost, operating cost, and disposal cost.
It becomes obvious that the matter is not only about how and what you will save on the initial price, it is also about what values you will add to your organization's bottom line.
Developing Good Relationships
This can be achieved by making several steps towards having a kind of intimate relationship with your suppliers by building a business partnership and not simply a buyer-supplier relationship.
This connection will help your organization when it comes to innovation and differentiation. When you are closely tied to your suppliers, they will customize their products to suit your business, and they may come up with innovative ideas and products that will provide you a competitive advantage compared to your rivals.
To achieve such an integrated relationship, communication and negotiations should be different from classic frameworks. Communication should be an "open book": transparent. The business relationship should be based on win–win scenarios.
Examples of Value-Driven Procurement
There are many examples from the business world that support such an approach. I will share with you two stories that show how an integrated supplier relationship provides you with a competitive advantage and helps you innovate.
The first story is from the mobile industry. At the end of 2000, a factory owned by Philips was destroyed by fire. The factory was supplying both Nokia and Ericsson with chips, and the incident caused the flow of chips to suddenly stop. With mobile phone sales booming around the world, neither Nokia nor Ericsson could afford to wait! Nokia had a very close relationship with the factory personnel, and they learned early on about the problem. They worked on plan B and succeeded in getting the materials from another source. As a result, they recovered from the impact of the expected chips shortage. On the other hand, Ericsson had a conventional buyer-supplier relationship, and they learned about the incident at a later time and no backup plans could be set.
As a result:Ericsson
- Cost to group estimated at $400 million
- Market share fell 3%
- Withdrew from handset market January 2001, outsourcing business to Flexitron in Singapore. (Loss-making handset division later re-formed as new joint venture Sony-Ericsson in Oct 2001)
- Jan 01 - share price 50% below price at time of fire
- Production targets met
- Market share increased by 3% to 30% (exactly Ericsson’s share)
- Jan 01 - share price 15% below price at time of fire
The second story is from the beverage can industry. A company called REXAM had a close relationship with its suppliers, built up for more than 10 years. The relationship was focused on improving and developing supplier quality and had full support from senior management, including the CEO. The result was an 83% improvement in quality. Furthermore, REXAM had exclusive innovative products that it was the first to introduce to the market, and they could always count on having value-added products from suppliers. As a result, REXAM has achieved innovation and differentiation in its industry. It has become the choice for most branded beverage manufacturers.
Ways to Add Value
Therefore added value can be gained by having important information on time, which may provide you with the upperhand when dealing with risks that may affect your market share and hurt your position in the market. Added value could also be gained by having new products and innovative ideas exclusive to your organization. You can also add value by having extra services such as quality tests and rechecking that can eliminate internal processes and help you cut costs. Finally, you can look for ways to add value for logistics and get your products out on time without extra costs for storage and delivery.
Procurement value can be achieved by embracing mutual respect, trust, transparency, motivation and having always a mentality of constructive negotiations to build up the culture of mutual benefits for both parties and always having win-win results and outcomes. This only can be achieved when it becomes a part of the organizational culture and supported by the senior management, including the CEO. It should be part of the organization's DNA and its strategic thinking and approach. Accordingly, value-driven procurement helps position the company and makes it more competitive.
To close with, always there is a limit for cost reduction, and you can't keep reducing costs day by day, week by week, month by month, and year by year. There is a point that no more reduction can be achieved! However, for adding value the sky is only the limit. All depends on your relationship with your suppliers and their capability to provide you with new ideas, products and services to help you reduce your costs, differentiate your organization in the market and give you the competitive advantage among your competitors.
Ali Sadeddin is a mechanical engineer who has been involved in the construction field for around 20 years. Having more than 13 years of intensive exposure to procurement and operations in the construction sector, he is currently serving as Procurement Director at EFECO (Emirates Falcon Electromechanical Co).
At EFECO, he has built the procurement department and set the required procedures and policies for procurement function that are aligned with industry requirements. He has also set standards and processes for supplier performance evaluation as per procurement best practice.
Ali welcomes connections via his LinkedIn profile.
This article first appeared on LinkedIn.