Supply Advantage: A New Mindset for Procurement

Just when smart companies thought they had squeezed the last ounce of savings from their supply bases, enlightened procurement organizations are focusing more on process than on function. Strategic players have learned that they can do much more than drive down costs. New-style purchasing organizations lead their companies to partner with suppliers to spur innovation, apply joint expertise to product development and create genuine supply advantage.

Purchasing has traditionally been only a minor blip on the CEO radar screen. Not any more. Strategic sourcing, a popular procurement tool that A.T. Kearney has brought to more than 200 companies, delivers significant cost reduction and other benefits. Now CEOs want even more. They want procurement to help create genuine supply advantage. Procurement in the past often has had a sole mission: Drive costs to the lowest possible price points, then track and report them.

Although CEOs still value cost-reduction initiatives, 60 percent of them recently surveyed said that procurement organizations should provide strategic positioning advantage and revenue enhancements beyond cost cutting. Go-getters in procurement have heard their CEO's message and are bringing supplier management to center stage as a major part of corporate success. Creating supply advantage depends on building a mindset that procurement counts, should be proactive and is indeed strategic. Companies and supplier partners form joint product-development teams. The partners move beyond sharing information to sharing ideas, collaborating on how and where products or components are made, or how services might be redefined for mutual advantage. Rather than one company designing or manufacturing most of a product's components, all companies in the extended enterprise work together to determine which activities add the most value for the customer.

A company and its supply-advantage partners share the following joint-operating philosophies:

Common purpose: The company and its suppliers work together to develop complementary strategies and objectives.

Joint processes: Processes are designed to flow seamlessly between the two companies. This includes business processes related to product design and development, as well as to requisitioning, delivery and invoicing.

Effective dialogue: The company and its suppliers promote communication by creating opportunities, processes and well-defined communication points.

Multidimensional relationships: The company involves its key partners at many levels and in many different business functions-stretching across all areas including finance, marketing and sales. The chief procurement officer builds procurement strategy around a framework that addresses six overlapping needs:

Organizing: Corporate headquarters takes on the role of planner and coordinator.

Changing corporate mindset: Creating supply advantage means changing the mindset that procurement is viewed not as a function but as a strategic organization.

Sharing information: Supply advantaged companies succeed in large measure because they are fully willing to share competitive information with suppliers and suppliers who in turn are open to change and welcome the opportunity to be involved early in the process.

Exploiting advanced technologies: The supply advantaged company moves beyond basics such as day-to-day automating of processes and adoption of integrated Enterprise Resource Planning (ERP) systems that electronically provide for receipt of just-in-time parts from suppliers, to newer or more advanced technologies.

Measuring performance: Performance measurement is the glue that keeps both strategies-procurement and corporate-aligned and working toward the same goals.

Managing the supply base: Companies that create supply advantage clearly understand the role played by each supplier in its sourcing portfolio. A select number of supplier relationships become highly strategic and collaborative-while most others remain largely transactional. Those who are willing to move away from traditional operating modes soon learn an important lesson: Building relationships inside and outside the organization is an ongoing process that never ends. "We do everything by the book in terms of sourcing, but we are still focused on the old procurement world," groaned one procurement officer recently. "We still lack the skills to trust our suppliers and to build the kind of relationship where there is give-and-take and where new ideas flow." For the company that can create supply advantage-that can build the necessary relationships and get the ideas flowing-the rewards will be competitive advantage, plus the opportunity to see competitors like this only in its rearview mirror.

Consulting Authors: Jose Morales, a Vice President of A.T. Kearney, specializes in strategic sourcing, supply chain integration, logistics strategy and materials management; Tom O'Neill, an A.T. Kearney Principal, specializes in strategic and global sourcing, operations improvement, reengineering and cost reduction; Niul Burton, former President of eBreviate, is a specialist in procurement, materials management and reengineering. The preceding is an excerpt from an article appearing in the third issue of Executive Agenda.