Interview: Procurement function is moving towards delivering capabilities
(Pic Courtesy: Chris Sawchuk)
Procurement function is truly at crossroads. Sourcing managers worldwide have grown wiser after deftly managing the disruption caused by the COVID-19 pandemic. What’s in store for the function in the near future is a question on many people’s minds. Beroe spoke with Chris Sawchuk, Principal and Global Procurement Advisory Practice Leader at The Hackett Group, to get a sense of how the Procurement function is carving out a niche for itself in companies across the globe.
It was 8 a.m. in Tampa, Florida, when Chris received Beroe’s video call.
Let me begin by asking your opinion on the ongoing Russia – Ukraine war. Supply chain issues have cropped up due to the conflict; palladium, fertilizer, logistics, transport, and many more areas are affected. You speak to a lot of CPOs on a regular basis. What is the business sentiment you are picking up?
The first thing that our clients were trying to understand is what they were sourcing out of Russia and the Ukraine. Their procurement teams were quickly assessing the impact on their supply chains as we all saw prices spike for several commodities.
In many ways, Procurement Organizations were much better prepared for the sudden supply chain disruptions caused by the continuing war due to their larger experience during the COVID-19 pandemic over the last 2 years. One of the things that we learned from the disruption caused by the pandemic is that we designed supply chains too heavily based on cost and didn’t necessarily balance that against the need for agility and reduced supply risk. More specifically, we lacked geographical diversity in our supply base. In many cases, we were securing supply from a single geography and potentially a single source. In response to that we have seen organizations embarking on more broadly diversifying their sources of supply.
So, what you're seeing now is much more focus on the risk versus cost paradigm. Procurement teams are now asking: “Can we mitigate some of that risk even if the cost goes up a bit to assure supply?”
And businesses have been very focused on surety of supply to protect the top line -- this has been a big area of focus. I think it has prepared us more for the environment that we're in right now. But the last thing I would say is, it really comes down to a deeper understanding of cost through modelling.
That’s interesting. Why the focus on cost modelling?
As a Category Manager, you must have a good understanding of what you're buying. For example, if the product you are purchasing has five percent aluminum in it, then you should be able to model various cost scenarios to inform company management as to the possible impact of aluminum price rise on company margins and work collaboratively on mitigation strategies. This is where cost modelling is quite helpful.
Companies began to move away from the lean supply chain concept and began to stock up on inventories due to the pandemic. Is that trend still on?
Yes, there are a number of organizations that have increased inventory levels where possible; again, this is symptomatic of the environment that we have and continue to experience. We continue to see companies making shifts from the lean levels that were maintained in more predictable and less disruptive times by increasing inventory.
Now, don’t get me wrong, lean supply chain is not going away, but there will be more consideration to the risk it may present when you experience the types of disruptions we have over the last couple of years. Today, we are seeing practices such as multi-sources and greater inventory to assure supply and protect revenue.
What's the relevance of the procurement function in the age of catalog buying, inspired by the Amazon model of self-serve? What are the definite benefits of having a separate procurement function doing purchasing as opposed to business teams themselves handling their sourcing requirement?
I think it's an interesting question and it's not the first time that I've heard somebody make this comment. CPOs and their team have many more options at their disposal today in terms of how they might architect “procurement capability”. In its purest sense, the capability needs to enable the business. Now, I know, that sounds pretty simplistic, but “enabling” might take different forms such as ensuring access to supply, cost competitiveness and time to market. The key is to design the capabilities from the “outside in” perspective. Basically, through the lens of our business stakeholders, customers, and even suppliers. With that, you will find that some of the activity procurement does today will be eliminated through further digital process automation; some will be redirected back to the business through self-service; while other activity will migrate from procurement into enterprise service centers.
Can you please explain a bit more about the importance of delivering capabilities to enable business?
Hackett has developed an operating model construct that delineates the activities that are owned by the Procurement Organization and activities that are shared across the broader enterprise. Take, for example, analytics. You could argue whether or not you need analytics within the four walls of procurement or should it be a broader and shared enterprise capability. An activity that may reside in an Enterprise Centre of Excellence (CoE) versus at a functional level -- and thus is shared more effectively and efficiently across multiple functions to provide for more flexible resource management.
In an enterprise CoE, you will still have individuals highly skilled in supply management analytics, but they may also have a minor in finance analytics. This model provides for much more flexibility. As companies continue to optimize their procurement capability architectural design, they will be shifting things around and making decisions as to the best place to conduct an activity -- be it in a procurement CoE, enterprise CoE, in the business, with a third party, in a shared services center, or through digital tools and so on.
Well, so you are saying somewhere down the line that Procurement must look beyond running a process and focus more on delivering capabilities?
Yes, capabilities that are focused on enabling business success, which will vary by company. For many years, we have focused on transactional and repetitive work enablement, but there are other types of work we perform: namely knowledge and collaboration-based activity. So, in effect, procurement is and has been evolving to enable its knowledge and collaboration work, something we have seen accelerate over the last two years since the onset of the pandemic. Process-oriented work continues to be mitigated through technology. Are we fully there now -- that is -- are we at a stage where we are fully automating all of the procurement process? No, not yet.
Now, when you consider activities such as supplier sourcing, organizations rightly see this to be strategic, but there are many activities within sourcing -- and even within broader category management -- that are not. Today, there are tools that allow us to reduce much of the process-oriented effort associated with these activities -- thus freeing us to focus on the knowledge and collaboration aspects. AI is evolving within these processes to allow supply management professionals to engage more effectively with the data associated with them. If we are going to truly become the trusted advisors needed by our businesses to enable their success, then knowledge and intelligence will be key to providing that and most importantly, creating competitive advantage.
In this case, procurement will need to be much more reliant on data, technology, and advanced analytics to create much needed insight. And this requires enhanced skills within the procurement function to engage in this kind of environment. And so, over time, you see the continued emergence of a much more intelligent, knowledge-based and expert capability within procurement.
With the current market challenges, some of the effective Procurement teams are using cost models to understand the impact due to inflation. They are also running scenario analysis to inform and guide their businesses as to the optionality of various responses. These are very important capabilities, which when combined with the power of advanced analytical tools and AI, offer a powerful opportunity for the Procurement function to truly be business advisors.
I think it's an exciting future for the function. I don't see a future where that function goes away.
So finally, Chris, what's hot in the Procurement tech space?
Data solutions are hot. Organizations are realizing that being able to manage data is a precursor and enabler to many of the digital projects they are undertaking. If you're looking at it right now, we continue to see significant focus on the movement to and expansion of cloud-based procurement suites, but now we are also seeing a similar level of focus on data management such as data visualization, advanced analytics, and master data management tools.
Meanwhile, we are also seeing organizations engaging in many newer technologies. For example, the emergence of AI being embedded in process automation technologies such as Contract Lifecycle Management to bring insight into the data contained in the contracts across the enterprise.
One of the newer initiatives we see is the emergence of digital test beds -- also known as “digital garages” -- where Procurement teams can test and experiment with the plethora of emerging digital technology tools.
I believe staying on top of this rapidly evolving technology space both inside and outside the procurement ecosystem is a critical activity. Understanding how these technologies might impact us in our ability to enable business success is a natural question to ask.
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