Procurement comes out of the shadows
We’ll send you a myFT Daily Digest email rounding up the latest Industrials news every morning.
When Christian Holzer joined ThyssenKrupp as chief procurement officer in 2012, he knew he faced a big challenge. Shortly before he joined, the German steel conglomerate, whose history went back hundreds of years, had nearly gone bankrupt. Holzer was tasked with the seemingly paradoxical goals of cutting costs while maintaining innovation and good relations with the unions.
Procurement departments are an unlikely place to start a revolution. If anything, they have a reputation for being humdrum places, graveyards for underperforming employees. In the consumer world, buying is exciting: people flock to flashy malls, peruse high-street shops, or buy online with a single click; innovation is rife. But for industrial goods, procurement has often been seen more as a drain on a company’s resources than as a strategic driver.
“In the past, people were moved to procurement so they couldn’t do harm any more,” Holzer says. “There was a complete mismatch between people’s responsibility and capability — they were just the wrong people in charge of this great expense.”
Hal Watts is chief executive of Unmade, a software company in the fashion industry. “It’s this shitty job where every conversation you had over the past 50 years was phoning suppliers and saying, ‘Make it cheaper’,” he says.
In the past decade, however, a radical shift has taken place as companies such as ThyssenKrupp have deployed digital tools to make procurement a central driver, not only to cut costs and ethically source supplies, but to simplify operations and, in some cases, find new sources of revenue.
Holzer says it took five years to overcome resistance, restaff his team and embrace digitalisation. The group now works directly with suppliers on innovation and contributes to design. “This is a different approach. We’re able to change the design with our colleagues from engineering,” he says. “Every euro of our spend is a value contribution. That is our mindset.”
Alex Saric, chief marketing officer at Ivalua, a platform for digitalising procurement, says technology has changed the very definition of procurement from “buying goods and services” to “driving value”. The process starts by going digital, so new suppliers can be found and contracts can be managed with automation tools. Once goods and contracts can be seen in real time by everyone across the organisation, it is possible to take better decisions. “Ten years ago the primary function [for procurement teams] was beating up suppliers to get the lowest possible price. No one much appreciated it. People cared about costs but didn’t view it as strategic. That has changed massively,” says Saric.
Skilled procurement teams can reduce a company’s purchasing cost base by 8-12 per cent — enough for big companies to save billions of euros — but “most companies” only scratch the surface, says Klaus Neuhaus, a partner at Bain, the management consultancy. He believes procurement is now “the biggest lever” companies have for optimising costs.
Industrial goods companies spend on average nearly half of their revenue on raw materials, components and other supplies. At ThyssenKrupp the figure is 65 per cent, or about €25bn a year. But most companies tend to prioritise marketing and sales — the big contributor to the top line — and spend less time streamlining procurement. “For classic goods companies, sales is an obvious thing to do,” Neuhaus adds. “It’s respected. It’s driving the growth of the company. In procurement, nobody really takes care of it. They are not as trained; they don’t have the same incentives in place.”
Companies such as SAP Ariba are trying to change this. Based in Palo Alto, the company has a typically Californian slogan: “Make Procurement Awesome.” The company may be little known among consumers, but more than 3.4m companies across 190 countries use the Ariba Network to process $2.1tn worth of transactions each year — more than Amazon, Alibaba and eBay combined. “It’s this sleeping giant that no one has heard about,” says Barry Padgett, president of SAP Ariba.
Ariba was purchased for $4.3bn by German software group SAP in 2012, back when it was processing $350bn in commerce. Its rapid growth since then — annual transactions have sextupled — reflects a boom in how digital tools are being deployed to manage complexity that humans relying on paper and spreadsheets cannot comprehend. Instead of making buying decisions just on price, companies can now look at everything from speed and capability to ethics.
SAP Ariba’s goal, says Padgett, is to take the “back-office, after-the-fact process” of procurement and push it to the forefront of strategy. “The stuff that you buy, then assemble and sell, or the people that you contract with — who then perform services that you sell — is largely where the value comes in for your business,” he says, adding that actively managing this makes sense.
The greater the complexity of a supply chain, the more digital tools help. Matthias Dohrn, senior vice-president of procurement controlling and governance at BASF, the German chemical company, uses Ariba and IBM’s Watson artificial intelligence system to catalogue more than 80,000 suppliers, which he can then evaluate and hold accountable. If BASF wants to complete a project, it puts out an e-auction to let suppliers bid on it, potentially bringing in new partners and avoiding a complacent “stickiness” of dealing with the same base of suppliers.
“In the past, a relationship might smooth over a miss,” says Kevin Sterneckert, innovation strategist at JDA, a US software company employing machine learning across the supply chain. “Now it’s more based on performance. The one that thrives is the one that delivers.”
The benefits go far beyond cost saving. Earlier this year Larry Fink, chief executive of BlackRock, the asset manager, told companies they needed to move beyond fiduciary duties and find a “sense of purpose” to show they are helping the communities they live in.
Procurement teams, Padgett says, can play a big role in making businesses more ethical because they can use filters to select only suppliers that are certified to use conflict-free materials or that promote social goals related to ethnicity, gender or LGBT principles. One company that understands the consequences of getting this wrong is Nike. In the 1990s, after pictures emerged of a child stitching the sportswear company’s Swoosh logo on a pair of shoes, Nike founder Phil Knight acknowledged that the brand had become “synonymous with slave wages”.
“Ask any chief procurement officer, ‘What keeps you up at night?’. It’s a Google alert about their supply chain,” says Nick Lardner, commercial manager at banking group Westpac in New Zealand.
At Swiss chemicals group Clariant, digital tools allow strategic performance manager Natalie Cueni to score suppliers on dozens of key performance indicators. She can monitor them daily to make sure Clariant only works with financially stable companies that avoid child labour and push sustainable production. “We are centrally monitoring our whole spend,” she says. “These are abilities, through digitalisation, that we didn’t have three years ago.”
Richard Bistrong, an anti-bribery and compliance consultant, says these tools also play a role in clamping down on fraud, because each transaction leaves a digital footprint. “The more manual paperwork there is going into the system, the more opportunities there are for individuals to conspire with suppliers and circumvent controls, because no one can look holistically at the data,” he says. With digitalisation, “there are more opportunities for people to flag anomalies”.
For ThyssenKrupp, which has been struggling for eight years to restructure itself, procurement has been an unsung hero. With SAP Ariba it created Pronet, a digital platform for handling its large but piecemeal spending function, resulting in more efficient operations, a lower carbon footprint and substantial cost reduction, even as its employee base has grown. Since 2012, the group has saved more than €5bn in fixed costs, exceeding its targets.
Half of those savings came from procurement, says Guido Kerkhoff, ThyssenKrupp’s chief executive. “When I joined [in 2012], we didn’t even know how much we [purchased], for example, from Siemens. We now have that [information], and have more digitalised and automated [procurement], and we can better control it.”
Still, industry commentators say procurement continues to be underappreciated. They complain that MBA graduates typically know next to nothing about the field, and that procurement teams are still staffed by people who learnt on the job rather than trained for it.
Ivalua’s Saric predicts significant change but says it could be five to 10 years before procurement sheds its dull image. “When you’re really going to see this accelerate is when some of the best chief procurement officers start becoming chief executives,” he says. “They are really well suited for many top jobs, but we haven’t seen that happen yet. We lack those success stories. But I think it’s coming.”
The Financial Times features 100 European companies, individuals and organisations that are using technology to change their businesses and tackle social challenges
With support from Google