Yesterday I had the opportunity for a longer conversation with the CPO of a global machine tool manufacturer. When asked him what his managing director colleagues expect from him in the next years, the answer was: “Our procurement department has to become more technical – just negotiating prices is no longer enough.”
For me personally, procurement is one of the most important levers for a sustainable competitive advantage in any industry: A company can only be world-class if procurement also works at a world-class level.
Traditionally, however, many procurement departments report to finance or are organized under one CFO and have a strong focus on price negotiations. However, there seems to be a change going on in the market. Many procurement departments report to the CEO or COO and in addition to excellent negotiation results, a CEO sets other priorities: Procurement must become an important partner of the business areas in which profit & loss of the company is generated.
Nevertheless, almost all companies I know established a “chinese wall” between their engineering departments and the procurement teams, resulting in a very old-fashioned and time-consuming process design:
- First, the engineers sit together and “brainstorm” about their annual budgets and which products need to be developed from the scratch and which products deserve a design “fresh-up”.
- Second, the engineering teams start part construction, setup a project and define target costs
- As soon as a component or part has a high maturity in its construction process, it is send to a procurement expert or procurement category manager with the order “Go and find the market price for that.” – Now the engineer has a loooong pause and can take holidays or start another project!
- The procurement guy takes the technical specifications, selects at minimum three suppliers, sends the specifications to the suppliers and asks them to provide their prices for this new specification – Now the procurement guy has a loooong pause and can take holidays or start another project!
- After some weeks the suppliers return their prices and if everything is running perfect, there is at minimum one supplier that provides a price below the target cost of the component. If not, then please go back to step 3. again and run through the process again and again and again…
I admit that I exaggerate, but believe me, that reality is not that far away from the above process. This process is perfect for companies with extremely long product life cycles. Not so long ago a new car had a development time of 4 yours and a market life time of ca. 7 years, that’s more than a decade!! OK, after 3 years in the market the car companies provided some “face lifts” on their old designs, but the basic technical architecture remained untouched. In these life cycles you can afford a long procurement process and many industries still have longer life cycles than a car.
But times are changing and becoming significantly faster, and this led to an expansion of “cost-value engineering” and specific CVE departments within procurement. An experienced CVE expert knows the suppliers and their production technologies and calculates in detail the manufacturing costs of a part based on the production steps. These technical cost structure analyses are often very helpful for negotiations. Unfortunately these complex expert calculations need experienced resources and take up to four weeks to provide a first result.
But is that enough today to make a procurement department more “technical”? How do you teach a (young) buyer which technical tender parameters influence his product group and how much these parameters influence the material price? The answer already lies in the question: A good technical buyer needs an excellent knowledge of the technical tender parameters. He does not have to be a production expert, because he only specifies commercial and technical parameters and each supplier provides this service in detail differently than his competitors.
Increasingly, companies recognized the added value that good data can provide: If you have a clean overview of the technical specifications of a product group, buyers AND engineers can not only negotiate better but also specify better! And companies that specify better can also standardize and modularize better and design global component platforms that use different business units to reduce their product costs.
Digitalization can decisively help purchasing to become more “technical” and a clean analysis of tender parameters for the purchased parts enables undreamt-of cost reduction possibilities that go far beyond “better negotiation”. But saying that, the market is now pushing procurement even further and wants them to monitor raw material prices, provide valid price benchmarks, establish carbon footprint metrics and faster should costing results. I believe that the time has come to establish a big data eco-system for every major category in procurement and I personally believe, that artificial intelligence will provide a major boost of performance increase in managing material & service costs, compared to the antique process designs described above. You don’t believe me? Please provide feedback or meet me online for further discussion!