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Perspective Detlef Schwarting

Robert Spieker
Harald Dutzler
Peter-John Liberoth

Next Wave Sourcing


Reinventing Procurement
To Drive Growth and
Profitability
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CONTACT INFORMATION

Amsterdam Copenhagen Düsseldorf Vienna


Robert Spieker Peter-John Liberoth Detlef Schwarting Harald Dutzler
Principal Partner Partner Principal
+31-20-504-1918 +45-3318 70 15 +49-211-3890-124 +43-1-518-22-904
robert.spieker@booz.com peter-john.liberoth@booz.com detlef.schwarting@booz.com harald.dutzler@booz.com
NEXT WAVE Executive Summary
Over the past 10 years, company
As confidence in procurement
departments soared, companies
SOURCING procurement departments have
counted on them to take on even
more challenging projects. Now,
done well, on the whole, in
Reinventing meeting a series of new challenges.
procurement chiefs are being asked
to undertake a host of new respon-
Procurement to Whether it meant working with sibilities: decrease supply chain
Drive Growth an increasingly global vendor complexity; speed products to
market; stimulate supplier innova-
And Profitability base or managing partnerships
tion; enhance operational security;
with back-office service
and even consider the social and
providers, procurement generally environmental impact of the sup-
accomplished the task at hand. plier in sourcing decisions. And they
With each success, the visibility are experiencing diminishing returns
and importance of the function in with yesterday’s best procurement
strategies, such as optimizing supply
the overall organization grew—so
structures, e-auctions, and finding
much so that procurement now
suppliers in low-cost countries.
controls half of the annual budget
in many industries and up to To find out how cutting-edge
procurement departments are
80 percent in sectors such as
meeting these challenges,
manufacturing and retail. Booz & Company conducted a
survey of more than 100 business
leaders, including CPOs and
C-level executives at leading global
companies such as Toyota, Procter
& Gamble, Vodafone, and Novartis.

We learned that addressing issues


like these requires a higher level of
talent and commercial acumen than
anything procurement departments
have tackled before. Indeed, these
aims demand a reach beyond that
of the organizational supply nexus:
They require a transformation in
the traditional way we think of
sourcing. In leading companies,

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sourcing is evolving from a stand- and, at the same time, decrease Overhauling the Organization
alone function that ensures that their supply chain complexity, meet Our survey indicates that there
materials move through the supply shorter response times, and build are four key organizational
chain at the lowest possible cost resilience. These opposing forces are changes necessary to initiating a
to a nerve center that monitors, rapidly leading to a crisis at many transformation in procurement:
anticipates, and responds to a companies—and, for a few leaders,
variety of needs throughout the an opportunity to create a new kind 1. More cross-functional integration
company—and even those of its of competitive advantage. 2. Better supply networks
suppliers. These companies take a 3. More collaborative supplier
Most of the executives we relationships
holistic, highly strategic approach
interviewed agree that their 4. Greater supply chain resilience
in which they look at every supplier
procurement department has the and risk management.
relationship from a variety of
potential to play a catalytic role
perspectives; it is designed to 1. More cross-functional integra-
in creating new value for their
ensure that procurement decisions tion: At present, the silos and
companies: Eighty-seven percent
maximize the long-term value of the borders that separate functions
told us that they expect procurement
company, in terms of both cost and often limit opportunities for cost
to take a more active role in defining
top-line growth. This 360-degree savings and value achievement.
and fulfilling the business strategy in
approach optimizes sourcing For example, the walls that
the coming decade. “We need to be
processes inside the company as well separate R&D, marketing, and
setting the strategic agenda through
as those of the company’s suppliers, suppliers inhibit jointly executed
growth and innovation,” one CPO
and extends even to the network and coordinated projects aimed
told us. “Procurement can act as the
of suppliers’ suppliers. Basically, at such goals as developing new
glue to make it happen.”
it encompasses any supplier in a products and services or driv-
position to create or destroy value Whether procurement is up to the ing down sourcing and life-cycle
for the company. job is another question. Despite costs. Breaking down these barri-
the widely held belief among many ers can have a substantial impact.
Many companies covet the potential
CPOs that the potential exists for
rewards of this kind of holistic, Two-thirds of the survey’s
procurement to play a more central
integrated approach to sourcing, respondents told us they believe
part in the corporation, most
but few are prepared to implement procurement has a crucial role to
procurement departments have not
the organizational changes such play in integrating departments
made the changes required to do
an approach demands. Often, the within their organizations. Even
so. In fact, our research suggests
sheer scope of the challenge can more, 73 percent, saw a need
that many departments are still
overwhelm management’s ability for similar procurement-led,
working hard to implement the
to visualize the steps necessary to cross-functional integration with
classic sourcing levers that constitute
accomplish it. external suppliers and partners.
yesterday’s best practices.
To understand how to bring about The procurement function is well
Today’s challenges are enough to fill
such a transformation, we will positioned to serve as the catalyst
up many CPOs’ agendas: To what
examine the forces pushing CPOs for bringing internal departments
degree should we manage our third-
toward their new future; the four and external suppliers closer
party suppliers? Do we need to find
key organizational changes neces- to each other: After all, the
a backup parts supplier for Asia?
sary to stay in front of the next function often serves as the
Have we done enough hedging on
wave of change in sourcing; and the communication link between
our energy buy? But among leading
capabilities that procurement orga- them. Many procurement leaders
CPOs, we find a growing awareness
nizations will have to build. point to better management of
that such day-to-day problems can
only be patched using the traditional specifications as a key catalytic
The Case for Change mechanism in this effort. In fact,
approach. They are concluding
Companies today are searching for 44 percent of CPOs see demand
that only a new program based on
new ways to leverage value from and specification management as
a holistic vision of sourcing will
their suppliers into growth and a top priority for procurement
enable them to find deeper answers
profitability. They want to take over the next five to 10 years,
to both their short-term and long-
advantage of global competition while another 44 percent believe
term concerns.
to find better sources of supply they will be doing more demand

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and specification work. One In our interviews with leading optimize cost, to drive top-line
CPO told us he wanted his executives, increasing numbers growth, and, sometimes, to
department to take an “active are telling us that the ability to develop breakthrough concepts.
role in challenging the core orchestrate a vast network of
CPOs still see a tremendous
value” by questioning engineers supply relationships will become
untapped potential in collabora-
on their product specifications. more important. Such networks
tion. Although 86 percent of the
This, the CPO believed, would will look at the supplier not
procurement leaders we surveyed
encourage the engineers to go just as a source of a material or
said they have worked hard to
beyond identifying unnecessary a component, but as a partner
develop collaborative partner-
design elements to better defining that will help improve delivery
ships over the past three to five
the product’s absolute needs. systems and design products
years, most believe their work is
The advantages of this kind of These executives anticipate using nowhere near complete. In fact,
dialogue are not limited to the a variety of strategies to improve 44 percent still see the develop-
CPO’s organization. Large global their ability to manage supply ment of these partnerships as a
retailers, such as Wal-Mart and networks. Fully three-quarters top priority over the next five to
Gap, have discovered that closer of respondents believe supplier 10 years, and even those who
contact with their suppliers cost modeling will become more don’t see such partnerships as a
allows the suppliers themselves important over the next five top priority say they intend to
to integrate logistics and returns- to 10 years, as buyers seek a pursue a greater level of collabo-
management solutions, as well greater understanding of their ration (38 percent).
as to adopt new supply chain suppliers’ underlying expenses.
Typically, collaboration with
technologies such as RFID And 81 percent of respondents
suppliers occurs in the areas
more rapidly. see low-cost country source
of new product development,
modeling as a key emerging skill.
Greater integration, and the order delivery and fulfillment,
Another important opportunity,
looser boundaries that may come and manufacturing. In a recent
CPOs believe, is joint action
with it, should not be confused example, a northern European
with suppliers in the continuous
with less discipline. On the airline uncovered valuable
reduction of waste: 47 percent
contrary, many CPOs complain synergies while working with
see the challenge to reduce
that buying procedures must a private airport to improve
waste as a top priority, and an
become both more rigorous and its luggage handling and
additional 30 percent say they
more widely applied. “There is check-in facilities. By ignoring
will be focusing more intently on
still too much maverick buying,” organizational boundaries, the
waste reduction in the future.
declared one CPO. A vast two were able to design a jointly
majority of respondents—86 All of these tools speak to the executed check-in process that
percent—believe that creating growing need of companies to was much more cost-effective
global purchasing processes gain a deeper, more differentiated for each partner—and more
and systems will be increasingly understanding of their supply convenient for their passengers
important over the next five to networks. “How to manage
In this new collaborative world,
10 years. strategic partnerships will
competitiveness will be based
become key,” one CPO told us.
2. Better supply networks: Today, on a detailed understanding
Another agreed, but warned
most supplier interaction of the suppliers’ costs, not the
that at present, “there is a lack
happens within a point-to-point back-and-forth of negotiations.
of clear approach and tools to
relationship—procurement to Companies will gain an advan-
manage this.”
supplier. This relationship has tage over their competitors not
evolved in some industries, such 3. More collaborative supplier by squeezing an extra nickel out
as the automotive sector, where relationships: Many unrealized of their suppliers’ margins, but
it is now standard practice for opportunities for value arise by working with suppliers to
companies to manage deeper into within a company’s supplier boost the level of efficiency in
their supply chains, down to Tier network in areas that neither the the supply network or to develop
Two and Tier Three suppliers. buyer nor individual suppliers new cutting-edge products.
But soon, even this extended can identify on their own.
management will not be enough. Collaboration is needed to

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The benefits of supplier of social responsibility in its labor First, the purchasing department
collaboration are becoming practices are fast becoming an will encourage cross-functional
well recognized. One study by important part of due diligence. integration to develop greater insight
the Toyota Motor Corporation into the needs of the business. Next,
One new kind of resilience many
found that whereas negotiations it will work more closely with
CPOs say they must develop is
can reduce costs by about 5 suppliers to help them address these
the ability to work with their
percent, collaborative practices insights in ways that go beyond
suppliers to create products
can yield as much as a 38 percent simple price cutting. To do this,
that are manufactured and
cost reduction. Toyota analysts procurement will build supplier
distributed with less carbon. And
estimate that the benefits of networks that work together to
as environmental sustainability
collaboration stack up this way: optimize the efficiency of the entire
or “green” business practices
5 to 10 percent in cost reduction supply chain, and they will create
become more and more popular
from engineering improvements; collaborative relationships with
with customers and even become
5 to 8 percent in lower inventory their network partners to engineer
a regulatory necessity in some
levels through just-in-time innovative new ways to create value.
markets, such an ability will
shipping; and, most productive Finally, purchasing will apply these
become a greater priority.1
of all, 15 to 20 percent in new capabilities to find ways to
sourcing raw materials and To build resilience and manage better manage the business risks
finding low-cost sourcing risk, one CPO told us, “we need their companies face and to boost
strategies for the supplier. to be broader in our understand- resilience (see Exhibit 1).
ing and have people working
4. Greater supply chain resilience Better knowledge management
in different functions across
and risk management: Many will be essential in meeting the
the disciplines.” Consequently,
CPOs believe they will need next wave challenge. Before, the
nearly half of respondents—45
to focus more on risk and procurement function needed to
percent—say they will be hir-
resilience than they have in the understand the cost drivers of its
ing professionals who have the
past, because they fear that suppliers. In the future, a much
types of strategic knowledge and
today’s extended supply chains deeper understanding will be
business sense that would enable
have made their companies necessary in all directions—among
them to tackle as-yet-unidentified
vulnerable to new kinds of suppliers, between suppliers
social, regulatory, and environ-
dangers. A total of 68 percent and procurement, and between
mental roadblocks. Risk manage-
of respondents believe their procurement and other departments
ment is a much-needed capability
greatest risk is the interruption within the company. This requires
as well, according to 18 percent
of deliveries from key suppliers. a complex and systematic web
of the CPOs.2
(By comparison, less than of cross-reporting and regular
half as many, 31 percent, fear consultation to ensure that the
physical damage to a company- Meeting the Next Wave supply network learns and keeps on
owned facility or breakdowns in Challenge learning as needs continue to evolve.
information security.) The last wave in sourcing’s evolu-
tion was based on disaggregation— The transformation will also call
“Risk management becomes that is, evaluating the potential for a new breed of procurement
more important as a larger part value of each supplier and then professional. When asked which
of production and development making sourcing choices based on two capabilities will be most
is done by partners,” said one that more granular understanding. important for sourcing professionals
CPO. In fact, this heightened The next wave of sourcing will build in the future, CPOs say most
dependence on external partners on that foundation and extend it in often a professional with strategic
has exposed companies to new a holistic sense, propelling com- understanding and overall business
problems that are falling under panies still further beyond the old sense (46 percent). The second-most
the purview of procurement. zero-sum approach to purchasing. popular trait is risk management
Issues such as a contractor’s level expertise (18 percent), followed

1
For more information on green sourcing, see Martha Turner and Pat Houston, “Start with Sourcing,” strategy+business, Summer 2008:
www.strategy-business.com/press/article/08206.
2
For more information on supply chain resilience and risk management, see Dermot Shorten, Jean Lewis, Joseph Martha, and Salman Syed, “Prepare to Bounce Back,”
Booz & Company, 2008: www.booz.com/global/home/what_we_think/reports_and_white_papers/ic-display/41289877.

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Exhibit 1
“Next Wave Sourcing:” Key Themes

Value Creation
(From price to cost and value focus, i.e.,
growth, profit, return on capital employed)

Cross- Supply Collaborative Business

Successful leadership strategies


Changing business environment

functional networks supplier risk and


integration relationships resilience

From silo to From From From risk to


cross-functional one-to-one transaction to resilience
value supplier collaboration management
perspective management to and capability and
managing leverage sustainability
supply networks

People Supplier Organization

Institutionalize Knowledge and Learning in the Engagement Model

Source: Booz & Company

by more cross-functional supply Finally, an elevated organizational and tactical plans. To accomplish
and value chain understanding (15 commitment will be required. this, CPOs will need to develop
percent). The response suggests For example, to release sourcing’s a culture of continuous learning
that CPOs see a need for sourcing potential to drive growth and within their departments, ensuring
professionals who combine deep profitability, the procurement that the procurement team is able
technical insights with broad department will need a strong to adapt to changing business
leadership skills, particularly an board-level presence: This conditions. At the same time, they
ability to manage cross-functional will ensure that the company’s will need to build an infrastructure
teams and skill in managing purchasing strategy incorporates to continually raise the level of
outsourced relationships. “Our and is aligned with its long-term performance management and
capabilities need to cover technical, goals. More critically, it will help controls. As one CPO told us, “We
commercial, and strategic issues. realize important changes, such as need to professionalize the total
We need to be broader in our arranging the sourcing footprint procurement organization.”
understanding and have people in a way that reflects the expected
Sourcing is at an important
working in different functions growth of the market or anticipates
juncture. Many companies are
across the disciplines,” said one future requirements for limiting
ready for a procurement transfor-
CPO. Fortunately, developing first- carbon output.
mation; others are not. But simple
rate sourcing professionals may be
But board support should not be a awareness is a first step: Companies
easier now that sourcing is a more
blank check. It must be given only that recognize the importance of
strategic element in business, and
if procurement’s values, processes, holistic sourcing practices are on
one that is increasingly seen as
and key performance indicators are their way toward implementing the
a stepping-stone toward the
aligned with corporate projections next wave of procurement strategies
executive suite.
and opportunities.

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