7 Trending Business Practices disrupting Traditional Procurement.
When I was a kid, my mom had a ’93 Ford Escort.
I remember that car as clearly as I remember banging with my fist on it’s ceiling singing Tom Petty’s Makin’ Some Noise.
Days and years went by, and eventually, the ’93 Ford Escort was living in the hybrid-dominated world of the year 2004. My mom decided that the Escort had seen better days, and started a new/used car hunt. She soon selected the Prius as her car of choice for its environmentally friendly features. The Escort joined its fellow junk metal comrades in an automotive-parts junkyard a few miles away from my childhood home.
My mom didn’t really choose to get a new car. Her previous car no longer functioned at the same level it once did, and she needed to make a decision to adopt something new. It was a natural progression of time and technology.
The correlation between technology and time is a special one. For every year that passes of time, it seems our technology advances 5 years, and begins to disrupt our lives — professionally and privately.
But, when my mom was buying a new vehicle, she didn’t decide to scrap the vehicle from 1993 and purchase one from 1995. Time and technology had progressed, and there were a plethora of better alternatives on the market in 2004. She chose the hybrid route.
I tell this story because I believe it’s incredibly applicable to the modern business landscape.
Organizations are ‘going carbon neutral by 2025’, and ‘implementing Artificially Intelligent business systems’ and ‘sourcing form solely environmentally friendly suppliers’. Initiatives are being put in place to make these statements a reality, but are these organizations agile enough to shift strategies, process and operations — for real?
In some cases — yes, organizations are changing their attitudes and becoming incredibly innovative in their restructuring of traditional business practices. In other organizations, marketing innovative business practices is good enough, as traditional business practices remain at the heart of operations, one bad PR headline away from full-on cardiac arrest.
Disruption has taken a stronghold of us all, and the correlation between time and technology has made it impossible to stay ahead of the curve. Some business functions have been forced to change more than others in the efforts to combat disruption.
Procurement is a business function that has undergone a lot of change in the last few years. Due to globalization, growing consumer demands on transparency, the pertinence of sustainable development and technological advancements, procurement and supply chain professionals have been highlighted as an integral part of their organizations. As a believer in the power of procurement, this recognition makes me happy. But, we can’t begin our journey towards the future of procurement excellence in a ’93 Escort. Simply put, we can’t expect outdated business practices to achieve innovative results. So… out with the old and in with the new!
Here are 7 Trending Business Practices disrupting Traditional Procurement, and doing so with all right!
Sourcing has become an increasing business critical element of an overall procurement strategy.
In essence, sourcing is the first point of contact between the buyer and supplier organizations, which makes it a very formative phase of the overall relationship for collaboration.
Practices surrounding sourcing have moved from traditional sourcing values (selecting suppliers based upon cost) and have begun to take into account a larger scope of value (sustainability, environmental friendliness, quality and ability to innovate).
The price point of a product is becoming less important to the end consumer, as there are new demands on the sustainability of a product, and procurement teams are beginning to mirror/answer the market’s demands with responsible sourcing practices, even if that means higher prices. Responsible sourcing is a methodology rooted in choosing the right supplier from the start, based upon various parameters of ethicality and sustainability at a supplier and their sub-suppliers.
A report in 2016 by GT Nexus, “showed there is a demand for ethically and sustainably sourced products. The survey of more than 1,100 U.S. consumers found 52% said they would pay more for food and beverage products that were sourced under ethical and sustainable means. When it came to clothing and footwear, 45% of consumers would pay more for such products and 44% of consumers would pay more for ethically sourced over-the-counter pharmaceuticals” (McAvoy 2016).
Consumers are clearly willing to pay more for responsibly sourced products, so procurement teams have seen the need to change their practices to create product-market fits.
The responsibility of sourcing responsibly is shared between stakeholder, supplier, buyer and society at large.
Total Value Ownership (TVO)
As hinted at above, Value is — today — created within many new dimensions, taking on a more holistic perspective. For this reason, traditional models of evaluating procurement value adders have begun to shift as well.
Total Cost of Ownership (TCO) is traditionally defined as “an estimate of all direct costs and indirect costs associated with acquiring and operating an instrument throughout its lifetime” (Abbott). TCO is a widely recognized parameter for gauging the value of a supplier.
An emerging ideology that proves complementary to the contemporary views of value in procurement is Total Value Ownership (TVO). TVO differs from TCO because it is not solely focused on cost, but several dimensions of ‘total value’, such as societal, environmental and also financial aspects.
“An exceptional procurement team focuses on driving total value of ownership (TVO) to reduce costs, increase revenue, improve operational efficiency, mitigate risk, enhance sustainability, and foster innovation” (accentureacademy.com).
The two elements of this new perspective of ‘Value in Procurement’ that are rather revolutionary are beginning to take into account sustainability and innovation. Traditional procurement practices were less interested in the outward impact of their suppliers on their top-line value. TVO takes into account the leveraging of suppliers to drive value by mitigating risk, creating supplier enabled innovation and furthering sustainability initiatives. Value that is measured, encompassing sustainability and innovation — in tandem with cost savings and process improvements — creates a more complete understanding of the value that a supplier is providing for an overall value chain.
Request for Solution (RFS)
Have you sent out an RFI, RFP or RFQ lately?
Of course you have because it’s an integral element when selecting and sourcing from suppliers.
But, have you sent out an RFS yet?
Request for Solution (RFS) is a new outlook on the traditional process of Request for a Proposal. RFS differs from an RFP mainly in the engagement on the part of the supplier or ‘prescriber’ of the proposal.
An RFS is a far more collaborative process than that of an RFP. An RFP is typically sent with clearly set terms and is rather detailed within their questions and requirements. An RFS, on the other hand, is a looser proposition sent to a potential/existing supplier. Why would one want to work with looser requirements?
RFSs are best utilized when you’re looking for the supplier to reply with an innovative proposal, or solution. It’s sometimes better to let the supplier, or marketplace, offer a solution rather than narrowing down the proposal to a list of specifications.
Supplier Enabled Innovation (SEI)
A 2017 report by Institute for Supply Management (ISM) found that suppliers account for “25%-45% of revenues coming from product innovation and up to 65% of innovations sourced externally through external partners and suppliers, SEI represents a treasure trove of opportunity” (Abdullah 2017).
Being that the majority of innovative products and services are sourced externally, there is a precedent for procurement teams to start investing resources in creating opportunities to facilitate supplier-enabled innovation.
SEI requires a procurement team to see a supplier as more than just a vendor, and view them as a partner.
Your supplier-base contains an incredible potential for innovation, but sometimes engagement is needed on the part of the buyer to support a vision for innovation. Stop trying to run over your suppliers in negotiations, but rather begin to listen and leverage their expertise.
Implementing an SEI strategy can result in a stronger competitive edge, cross-organizational alignment within procurement KPIs and Goals, and an expansion of an organization’s competency internally. SEI is an ideology of ‘give and take’, creating win-win opportunities for buyer and supplier.
The circular economy is a trending topic within supply chain management that could hold a major impact on corporate social responsibility and sustainability initiatives, should it’s methodology be applied correctly in practice.
An ideal circular economy would mean that the lifecycle of a product doesn’t end at the end-consumer, but instead takes on a ‘circular’ existence.
Let me explain…
Say I purchase a car. Maybe a ’93 Escort… 12 years later the transmission gives out and the repair costs are more than purchasing a new/used vehicle.
In the perfect circular economy, every bit of that car that can be recycled into an ongoing production for new vehicles would be recycled. This never-ending lifecycle puts a new demand on procurement teams to look to source and procure from suppliers providing recycled materials. Sometimes these materials or products have a higher price tag, because of the manufacturing costs, but their impact on an overall CSR initiative is invaluable.
The idea of a circular economy is larger than an end product. It traces back to aiding the restoration of natural resources.
Striving towards a circular economy doesn’t just create disruption within traditional procurement; it creates a disruption in the way we think about buying and consuming goods as customers as well.
Technology is the link between people and collaboration at scale.
This is a notion that has become widely accepted by procurement professionals, and therefore a movement for digitalization of procurement practices has been embraced at scale.
Procurement teams are interested in utilizing technology to support processes, optimize strategies and harmonize existing procurement solutions.
Deloitte’s 2018 CPO survey offers a rather contradictory reality to this ‘wide-sweeping acceptance’ of a need for digitalization in procurement systems. Most CPOs don’t believe that their digital procurement strategy will have much impact at all on their overall enterprise digital strategy. However, as one can see below, 64% of procurement teams surveyed have implemented a digital procurement strategy to some extent.
This support, together with the number of organizations building a business case for a digital procurement strategy proves that there is a motivation to move away from traditional paper trails on the journey towards a digital future within procurement systems.
With a move from traditional procurement comes a move from what the traditional procurement team consists of.
This shift will require new talent.
The trends show that there is an upswing in the need for millennial talent in procurement teams. Digitalization is the number one cause of this need.
“Only 3% of procurement leaders believe their staff possesses all the skills required to maximize use of digital capabilities” (Deloitte 2018).
In order to bridge the gap of competencies when digitalizing procurement systems, positions need to be filled with technologically competent individuals. This means that procurement teams need to put a focus on the recruitment of young talent and train them in traditional procurement skills as a part of their on-the-job experience.
Hungry millennials are looking to make their mark professionally, and what a better way to leverage their technological competencies — and interests in social and environmental impact — than to let them run with transformation projects. “The best procurement professionals and organizations are always looking forward to diverse cutting-edge solutions. Directing millennials’ impatient tendencies towards finding these solutions will keep them focused on growing within their companies rather than looking for opportunities elsewhere” (Jaggaer).
What have we learned?
Procurement is a business function and organizational role in the midst of a great change from a traditional state.
Procurement’s transformation has and will continue to meet skeptics along the way.
My answer to those who don’t believe the above business practices will disrupt traditional procurement….
Keep cruising around in your ’93 Escort. The rest of us be waiting at the finish line in our Hybrids.
Until next week.