Face time
Procurement is making a bigger impression on corporate executives
By David Hannon -- Purchasing, 3/3/2005 7:00:00 AM
There are more chief procurement officers and vice presidents of supply chain now than ever before. But gaining the right amount of attention, support and the resources for strategic sourcing initiatives is still a struggle for procurement or supply chain organizations.
There are two reasons: First, there is the intensive internal competition for limited capital and resources. Second, procurement must battle the historical mindset that views their function as a strictly tactical operation and a "spend center"—and not the strategic resource it could be.
But the good news is that while the struggle continues, some positive forces are at work.
"Procurement continues to shed its back-office reputation, with 60% of companies now using their procurement expertise to help set, rather than just execute, corporate strategy," says John Blascovich, an A.T. Kearney vice president and leader of a recent study on the importance of purchasing and the supply chain in the corporation.
As a result, more companies are elevating the top buyer to the "C" or "VP" level, and, when that occurs, it helps put the procurement organization on par with sales, finance, human resources and other functional areas.
Indeed, two-thirds of the companies surveyed by A.T. Kearney have at least one senior procurement executive on the executive management team—an increase from just 40% in 1999. "CEOs see procurement as an increasingly important and strategic capability and are looking to their procurement organizations to create value in their organizations beyond cost-reduction efforts," says the report.
Yet that doesn't mean procurement's importance has turned the corner everywhere, says Blascovich. "While today's CEOs expect procurement to help drive other operational benefits such as improved working capital or increased quality of products and services, many organizations are [still] falling short."
In some cases, that procurement "C" or "VP" role is being filled by a person who has limited experience in driving initiatives, fighting for resources, or singing the praises of his or her organization to higher-ups. Today's procurement and supply chain leaders not only need to be good at the functional aspects of their job, but they also need to be able to highlight their organization and sell their ideas, initiatives and priorities to those that matter.
Getting face time
The most effective way for a chief procurement officer (CPO) to highlight his or her department's successes and where the procurement and supply chain organization is headed is to gain access to and time with the senior leadership in the company. But keep in mind that the design of a company's internal reporting structure (the organizational chart) can have a major impact on the ability to get into the right meetings and "sell" the company's procurement and supply chain initiatives. That is, the closer that the top procurement or supply chain executive is to the senior leadership, the more effective the "selling" will be.
"If the purchasing organization is being directed to manage all areas of corporate spend, it is a clear mismatch for the purchasing function to report up through the operating segment of the company," says Lowell Hoffman, a former procurement executive and now a consultant with Global Sourcing Solutions of Chapel Hill, N.C. "For example, for a consumer products goods (CPG) company, 50% of all spend is in the indirect arena. In order (for purchasing) to be effective in discovering, influencing and directing this spend, the purchasing function must be corporate in scope and clearly accountable to the CEO as it becomes involved in the specialized corporate functions such as advertising, legal, real estate, insurance, etc."
But, as Hoffman explains, the reporting structure varies by industry, with procurement and the supply chain typically closer to the CEO in a CPG company and closer to manufacturing and finance in more cost-centered process industries.
In a past CPO position, Hoffman worked for a particularly insightful CEO who set up a periodic breakfast meeting with Hoffman upon hire to discuss procurement issues one-on-one "before I was painted in the company colors" as Hoffman puts it. It's best, he says, if those kind of sessions are initiated by the CEO. But if there is an opportunity to propose regular meetings, a CPO should take it—even if it means working with someone between the CPO and the CEO to avoid going over anyone's head.
But that's not the norm. Most often the procurement or supply chain function is in its own silo, consumed with trying to run and improve the function without insight into surrounding functions, says Bruce Arntzen, a supply chain consultant with Avicon in Waltham, Mass.
"The way a lot of work actually gets done is in the enterprise-wide processes and not function-by-function," Arntzen says. "There are people representing the different functions, but no one is representing the end-to-end process of the quote-to-cash process or new product process. So there are no measurements or rewards on those processes." Ideally, Arntzen says, companies should be organized so these processes have equal representation on the senior management team, but it is something of a rarity.
Making an impression
Once a top procurement or supply chain executive gets the chance to speak with the CEO or board members, knowing what to say—and perhaps more importantly, knowing what not to say—is the key to making the most of the time. While it's natural to want to highlight the past achievements in the organization, most executives do not want that level of detail.
So when Lisa Martin, vice president of global sourcing at New York-based healthcare giant Pfizer, gets the chance to speak to the people at the top of the organizational chart, she makes the most of it. "The secret to presenting to the chairman is to keep it very short," says Martin. "I see him only when I need to. I usually keep the presentation short—from three to six slides—and I always include [the actions that] I need him to do. If I don't need him to do anything, I won't take up his time. He's very busy and an update that just says things are going well is not worth his time."
To discuss sourcing and supply chain issues with top management, Deb Lynch, director of sourcing and supply management at outdoor products maker Toro Co. in Bloomington, Minn., has a scheduled monthly meeting with the company's CFO, CEO and senior counsel. She typically starts those meetings by going through the financials and comparing the sourcing organization's plans with its results, and then moving onto things like cost savings, status of initiatives, specific commodities and any future or proposed initiatives.
She says it's important for procurement professionals to understand what the company's objectives and needs and to align its initiatives to deliver results against those objectives. "I work hard to integrate what we're doing with the overall business objectives when I present to those leaders," says Lynch. "Our cost savings or supply chain plans are integrated into the corporate planning schedule [so we can obtain] resource allocation. If we're all agreed on what we're working on through the year, we can put it into a tracking format and we track the project monthly. Then we can share that information with the businesses at their level. If we're lagging—and the officers know we had some deliverables that were important to the bottom line or strategic initiatives—we can go to the officers for support if we need to make things happen."
As an example of how the procurement organization at Toro keeps corporate goals in mind when creating and pitching initiatives, Lynch cites procurement's role in Toro's 5 by Five cost savings initiative (see Oct. 7, 2004, page 44). "There was some skepticism of how we were going to fit into that initiative, so we did six short-term projects that saved $2.5 million in three months It was enough to get [senior executives'] attention without disrupting the company."
Another proven sales tactic: pitch concepts or initiatives one level at a time, starting with other business leaders and progressing to the CEO before going to the board of directors, says Gene Tyndall, associate director of the supply chain center at the University of Miami and formerly an executive vice president at Ryder Logistics. While the CEO is likely on the board of directors and likely knows the company well, he or she may not know the supply chain function very well. Then when the ideas are presented at the board level, the practice leaders will be familiar with them and hopefully supportive of them.
Talking the talk
To really drive home the impact of the proposed initiatives to higher-ups, procurement professionals need to put it in terms that company executives are used to hearing. Procurement professionals tend to be very process-oriented and focus on problem solving and the firestorm of the day, which board members are not as concerned with.
"You have to speak the language of your customer," says Hoffman. "I have seen procurement people give a presentation on how they saved 7% on a chemical that very few people in the room understood. You have to convert [that savings] to product cost per margin, cost per case, or cost per unit. [When you do that], you demonstrate that you understand the business beyond your individual area."
Executives and board members "really don't care too much about how you do things unless there is a major problem," agrees University of Miami's Tyndall. "[But] they WILL care about your results and what you are achieving. [Don't] emphasize unique things [you] did to improve [your] job. Executives and especially board members will likely tune out on that. You have to present the results and some key metrics and then be ready to provide more detailed information if they ask for it." Tyndall even recommends reading the type of reports and publications that the CEO and CFOs may read to help understand their "language" and priorities better.
Toro's Lynch considers it an advantage in her interactions with company executives that she did not come up through the purchasing organization. "I have broad cross-functional experience in R&D, manufacturing, quality, supply chain, program management and learned how a manufacturing organization works. And I tell my staff that if you want to go high in purchasing management and learn to talk the executive talk, you have to leave purchasing for a while and get some experience outside."
For example with the price of steel so high throughout most of 2004, Lynch encouraged executives to measure cost of goods vs. margins in order to get them to see that a savings of $1 million in purchased materials costs might equate to the same as $4 million to $6 million in added sales. From there, executives were able to see more clearly the benefit of having procurement more involved with product development because so much of the cost of the product is built-in during the design and it is easier to remove cost initially, than after design.
As a consultant, Arntzen says he often finds himself "selling" ideas and improvements to company executives in much the same way a CPO might. He typically starts with a broader view of some financial metrics that may expose a weakness when compared to competitors. Some examples include: How much does the company spend on selling, general and administrative expenses as a percent compared to its direct competitors? How much is spent in terms of cost of goods sold vs. other companies? How many days' sales are currently outstanding? How many days of inventory are currently on hand vs. competitors?
"I look at these high-level metrics and compare them to competitors and then point out weaknesses and build a case for supply chain projects based on that and a vice president of supply chain can do the same thing," he says. "The top executives and the board of directors especially care about high-level financial performance and how it compares to competitors. If you can start there, point out a weakness, then make the connection back to the specific things in operations that lead to that weakness, now you have their attention. Now you pitch your program on how you can fix that operational issue, and you have shown them how that impacts that metric they care about."
Arntzen explains there is a major discrepancy between what board members and CEOs track and what procurement and supply chain executives monitor. For example, metrics that board members watch include: profits, market share, sales, stock price, and customers. But the VP of supply chain is often watching supply levels, inventory, purchase price, supplier performance and quality of parts.
The real challenge is to bridge the gap between the two sides and present supply chain priorities in light of the metrics that concern the CEO and board members.
"And when the sales team comes to you and tells you that they have won a new customer or made a new sale based on the strength of the performance of your supply chain or procurement organization, then you know you have arrived," says Arntzen. "That word gets to the board room and suddenly, senior people in the company better understand how operations like supply chain can impact the company's bottom line directly."
Recognize an opportunity
Knowing when to push a particular agenda is also critical. There is no point in pushing an initiative that will not get support, but at the same time, goals and attitudes within companies change (some may say too often) and what was viewed as a bad idea once, may be viewed as a good idea now.
For starters, purchasing and supply chain executives should learn their CEO's agenda and what's most important to them in the near-term, Tyndall says. If your company is buying materials and goods in order to grow the business, "you have a different strategy than if you're buying to cut back. It opens the door a little. If the number one priority is to grow, you can go into some more interesting procurement metrics than just cost per item. You can look at leadtimes, which are very important in global sourcing."
Sometimes the best time to elevate the role of procurement is when a company is particularly challenged. Trying to time a new initiative or a procurement overhaul with some kind of event is a good idea. For example, if the company's market share has dropped lately or cost of goods sold has shot up, procurement or supply chain heads can push the new initiative as a way to address those specific concerns.
"Timing a transformation with something that is happening within the company is helpful," says Martin. "Trying to push a major move for no apparent reason is hard. So sometimes if you're going through a particularly difficult time with a certain issue, it can be used to help you elevate the role and entire organization."
The recent explosion in commodity pricing has led many companies to implement company wide cost-reduction programs, which can be good or bad for a procurement organization. Such programs put procurement in the spotlight, says Lynch, but they also mean more pressure to meet closely-monitored goals or savings levels. "We have to rise above that and deliver to meet the needs of the company."
And from a career perspective, sometimes you may have to move to a new company before you can get the support and find the executives who see procurement role the same way you do.
"That's a decision you have to gauge individually," says Martin. "I have been in the situation where I wanted to take the role and function further than my management was interested in having it go. If you're in a company that views procurement as strictly tactical and you want to make it more of a strategic function, it's not necessarily a strike against you—it just means you have a different view than your management."
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