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How is Procurement Your Company’s Most Strategic Function?

Part 1:

Try to visualise this scene. Your R&D department has just finalised your new product design. You’re excited! The development from prototype took months. Jeff from procurement happens to walk by.

“Hey, that looks cool.” He picks up your new GPS integrated, smart phone compatible, Spotify connected, ultra slim, fully waterproof fitness watch, and rubs its smooth, sleek finish. “It’s such a shame we’re going to lose the waterproof functionality.”

“What!” You exclaim. “But that’s our core functionality!”

“Really? No-one told us that. Yeah, the supplier of the small silicone O-rings, protecting the watch from the water, has ceased production. We highlighted his company as a risk, but R&D wanted to push on with the spec he designed. We suggested an alternate supplier who was developing a new type of thermoplastic rubber, but we were told we couldn’t wait that long. I think they’re now in partnership with Fast Fitness.”

“How could this have happened! Everything’s ready to go. Our marketing campaign is centred on the waterproof functionality!”

“Hey man don’t ask me; I only work in procurement.”

The evolution of procurement

Sound familiar?

The modern business landscape is dynamic and ever changing. In order to keep the pace, procurement has had to constantly evolve and adapt to these shifting trends. Globalisation, technology, consumer demands, outsourcing, and sustainability, constantly drive change in the business environment. In parallel, procurement has shifted from a function of tactical support to one of a key strategic player.

Modern industries focus more on developing their core capabilities, with 82 % choosing to outsource activities not part of their ‘sweet spot’. The reliance on suppliers has therefore increased exponentially. As the manager of suppliers, procurement has been pivoted into a core strategic role, responsible for sourcing, maintaining, and driving quality suppliers who are innovative, trustworthy, and add value to the company.

The ‘new frontier’ of procurement is the effective management of suppliers, building meaningful, long-lasting relationships that are win-win for both parties. As the critical link between company and supplier, procurement’s strategic role cannot be underestimated.

Strategic procurement is company strategy

In ‘What is the Future of Procurement?’, KPMG (2019) outline that CEOs are looking to the procurement function to adopt a wider set of strategic responsibilities than ever before.

Strategic procurement is built around the needs of the company and supports corporate planning and value systems. In order the company to achieve its long-term goals, corporate, business, and functional levels must have their strategies aligned. This ensures that the vision is united, as everyone is on the same page.

To use a simple example: The Apple brand’s quality design is a core element of the company’s overall strategic plan and unique value proposition. However, if procurement was not aligned with this strategic vision, cheap components could be sourced to achieve cost-savings (which many companies would applaud). However, this is not part of Apple’s long-term goals and would ultimately damage their brand image.

For procurement to be strategic it should:

  1. Be focused on potential risks and opportunities that impact strategic goals.
  2. Be involved in the strategic planning process and be measured in line with these goals.
  3. Be visible, supported, and viewed as an important function in the decision-making process.

Deloitte’s (2018) ‘Global Chief Procurement Officer Survey’ finds that procurement leaders are expanding the role of procurement in the wider supply chain by improving alignment between procurement and business strategies and priorities. Yet, only one in four procurement leaders consider themselves excellent business partners contributing significant strategic value.

The journal of Strategic Change (2016) finds that strategic misalignment results in reduced market share, missed opportunities (often seized by competitors), and lower profit margins.

By including the bargaining power of suppliers as one of his five forces, Porter (1979) laid the foundations for procurement’s strategic role as the key function responsible for conducting market research, identifying supplier opportunities, leveraging negotiations, and correctly managing suppliers.

For long-term strategic goals to be achieved, the procurement function must be included in companies strategic planning processes.

Procurement skills support strategy

Changing perceptions can be a slow and difficult task. The advent of Covid-19 has awakened the world to vulnerabilities inherent within global supply chains, displaying the key strategic role procurement plays in combatting such risks. However, some companies still adhere to the traditional view of procurement as a passive, administrative, cost savings function.

Top management support is vital in driving procurement’s ability to enhance overall company strategy. As procurement operates in a dynamic business environment, management must accommodate for upskilling to allow procurement teams adapt to this rapidly changing landscape.

Yet, Deloitte (2018) finds that 51 % of procurement leaders believe that their current teams do not have sufficient levels of skills and capabilities to deliver on their procurement strategy, with an alarming 72 % of leaders spending less than 2 % of their budgets on training and development.

Companies must change their structures and perceptions to facilitate strategic procurement, otherwise its ability to achieve competitive advantage will never be realised.

 

Written by; Marie Muckley

 

 

Top tips for attending one of the world’s largest private label trade shows; PLMA

Private Label has grown over the past 25 years, with grocery chains experiencing a significant rise in private label of up to 60% (Oracle, 2019). The objective required of procurement professionals in the retail industry is to ‘buy better’ and compete with discounters. With the uncertainties of post-Brexit, trade tariffs need to be taken into consideration to combat future costs whilst maintaining quality for the consumer. This rapid movement to alternative suppliers will put pressure on food retailers across Ireland to react, as supply base options narrow for the demand on EU suppliers. German discounters like Aldi & Lidl have dramatically improved their offering since first arriving in 1999. With the focus now on local produce and Irish origin the larger retailers are lowering price points as the discounters compete on quality.

 

Last year I flew to Amsterdam to attend one of the largest private label trade shows, PLMA, for my third time. In my role I focus on sourcing private label products for Irish retailers. PLMA is a two-day event, with over 4,000 global exhibitors, from suppliers to manufacturers. It is one of the largest trade shows in Europe after Anuga in Cologne. It caters for both food (fresh, frozen and refrigerated foods, dry grocery and beverages) and non-food products (cosmetics, health & beauty, household and kitchen, auto aftercare, garden and household DIY) and includes suppliers for major retailers and discounters across the world.

 

Over 5,000 visitors and buyers descended on the conference to find new and existing products to compete within the retail industry and engage with potential suppliers. The annual event is important to attend as manufacturers are investing in their companies to be able to provide larger ranges. Teams of product developers and technologists are present, seeking to bring new lines to life to compete in this heavily saturated industry. The opportunities to bring value to your company are plentiful.

 

With the aforementioned rise of discounters in Ireland, neighbouring retailers across the EU have subsequently lowered prices of product to compete but have also expanded their range to include non-food goods. The non-food section increases year on year at PLMA, as there is more of a demand from consumers on retailers to provide a ‘one stop shop’ to include an array of products from clothing, garden and DIY products.

 

Amongst many others, I met Dry-Lock, one of the most impressive stands in the 2019 trade show. Large digital screens were used as walls to display video adverts of the products and how the new ‘magic tube’ technology works. Dry-Lock supply private label nappies to major retailers and have developed a new technology to compete with branded Pampers magic tube technology for more absorption than leading brands. With a very impressive resume of fast tracking to success in just 5 years from first opening their doors they have already established themselves to be serious competitors within private label.

 

 

Health is a major topic with many confectionary and cereal companies making claims of using little or no sugar, only naturally occurring. Alternatives to salt-heavy snacks were substituted for trendy ingredients such as quinoa and kale. Gluten free was also a hot topic in recent years and is in high demand along with the need of multiple allergens to be omitted from factory lines. Ireland’s population has a higher than average percentage of coeliac affected people due the high existence of wheat in the diet.

 

My 5 top tips for PLMA visitors:

  1. Have ideas on what products you are looking to target. There is a room filled with thousands of experts with innovative ideas to assist retailers and businesses to grow their current range.
  2. Navigation is key in PLMA. With over 14 halls the new app is a must for a user-friendly experience. The halls are organised into regions so that each pavilion consists of relevant products of that origin (e.g. Italian includes pasta and sauces etc.).
  3. In preparation for PLMA, once registered it is wise to communicate with current suppliers/agents that may also be in attendance on the day to catch-up and arrange a meeting to discuss product ranges etc.
  4. The majority of exhibitors included products belonging to UK and EU retailers that they cater for. This is a great benchmarking exercise to see how your products measures up across the market.
  5. Preparation is key but keeping an open mind to products is vital. Buyers may identify gaps in your product range increasing your competitive advantage over other retailers

Every year PLMA is held in the month of May. Due to the Covid19 pandemic PLMA has been postponed to December 2020.

 

Maybe I will see you then?

 

Follow the link here to discover more about PLMA: https://www.plmainternational.com/

 

Written by; Suzie Lynch