21 August 2014 | Gerard Chick
Procurement has a role in delivering value and smart cost reduction is about buying the products and services you need at a competitive price without exposing your business to risk or failure. If you are value driven, it goes beyond getting what is just cheaper, because cheaper in some industries could mean disaster.
There’s a lot more to being a category manager than being a buyer – they need to take account of the consequences of their actions and recommendations. I know of a company that bought cheap steel from China and then had to handle the fallout from a burst pressure vessel. In an industry as health and safety conscious as oil and gas you can’t afford for incidents like that to happen.
The preoccupation with cost can be traced to the early 1980s – an era in which supply chain management was in its infancy and the boardroom wanted to maximise shareholder value. The way to do this of course is to make a profit each year and when times are tough, the way to do that is to push down costs.
So the mindset becomes one of cost reduction; it’s the one thing people think they can control, but do they know what the supplier may be compromising in order to achieve such low prices? It comes back to the value argument.
A good category manager needs to focus on value rather than costs. If you were painting a ship, you would measure value in terms of the coverage you get from a tin of paint. So you may buy a tin of paint that’s more expensive because it is a specialist paint that stops ships from rusting. But if you buy cheap paint and your ship goes rusty, who’s the fool?
Procurement leaders need to know their market, and if they don’t, they have no chance of knowing what might mess it up. Making commercial decisions is just one half of the picture, the other is doing analysis. If you’re not an analytical person I don’t think you’ll be an effective contemporary procurement person. Deal shapers understand risks, they can handle data and analyse it and give people responses based upon it.
Category management is on the cusp of change and the legacy of it is the value of procurement. There are five key features of intelligent category management:
• Be aligned. Value created in category management is directly correlated with procurement’s internal alignment influence. Beware a narrow strategy of procurement push and cost savings only because you will quickly develop negative relationships with your stakeholders.
• Be positive. You may be unlucky as a CPO and inherit a poorly performing team and need to assess what needs to change, or alternatively you may inherit a ‘best-in-class’ team and need to consider if your style of category management suits the organisation’s needs. Whatever the scenario, be positive.
• Plan success. Stakeholders want to see timely, successful, high impact outcomes, so focus your team on a month-by-month and quarter-by-quarter project plan. Ultimately, it is successful delivery that really matters.
• Be powerful. Deploy proper governance programs, effective project management, solid market intelligence and transparent performance measurements and reporting. With analytics and the power of the cloud, market intelligence will be your game changer.
Employ good people. Tools and techniques are great but they’re only as good as the team using them. Find creative people who can challenge, develop, build and understand the skills mix they need to possess. You may have people from different lines – technical, projects and procurement working together. These people need to be able to work across boundaries.
☛ Gerard Chick is chief knowledge officer at Optimum Procurement Group