Is procurement adding value to your organization? Q&A with Gerard Chick & Robert Handfield

The role of the Chief Procurement Officer is becoming more strategic and even more important as procurement is affected by technological advances, changing demographics, geo-political and macro-economic change, and an increased focus on sustainability and Corporate Social Responsibility. In The Procurement Value Proposition, Gerard Chick and Robert Handfield consider how these global economic changes will alter purchasing strategies, organizational structure, role and responsibility, system development, and the skills required to work in the profession. I recently had a chance to speak with Chick and Handfield about their book. You can read an excerpt on SCMR.com.

SCMR: Gerard and Rob. Thanks for speaking with me. First, tell us a little about the book and how procurement is changing. It’s no longer just about purchasing, correct?

Handfield: We argue that there is an evolution of procurement as a true value added business function. For a long time, procurement was boxed into a corner. Its role was viewed within the organization as negotiating to get better prices. Even today, in many organizations procurement is still about leveraging the spend to get quantity discounts and lower costs. However, given sustainability mandates, supply chain risks, and the huge amount of volatility in business today, procurement has to be different now. One of the trends we’re seeing is that the real savings often occurs after the contract is signed by looking at the total cost of ownership, which can include the end-to-end supply chain costs. The question is: Who leads that? Is it supply chain management or is it supply management? It could be different depending on the organization, but you have to bring them together. We think there is an opportunity for procurement in that change. But, in order for procurement to lead and get a seat at the table, it has to demonstrate a business case. It has to be a value added function.

Chick: One of the things you’ll see in the book is a formula related to procurement and profit. I’ve had procurement people tell me that procurement isn’t strategic; they just go out and do deals. But, the cost of purchased goods impacts profit so it must be strategic because the business is there to make profit. Secondly, value is a word that people bandy about today. The way I approach it is that value is the utility you derive from a good or service. If procurement works well in an oil and gas company so that they don’t have rigs producing the wrong crude then procurement is adding value because it is ensuring that through its work, the company is creating the petrol people need for their cars, it’ll be the right quality, and they’ll be paying the right price. They’re valued by the effectiveness they bring to the company. They’re not just buyers cutting deals. They are aligned with what the company wants to achieve. That’s value.

SCMR: At the outset, the two of you referenced total cost of ownership, or TCO. What does that mean in the context of your work?

Chick: That’s certainly part of the evolution of procurement. If you think back 30 years, companies were managing costs out of the supply chain but putting risk in. By outsourcing their supply chains to the Far East, things got cheaper, but goods had to come much further and you had to deal with everything in between. An organization has to ask how much is that cheap price going to cost me. For instance, it can cost a company its reputation if you find out you have kids working in your factories, or you’re BP and you outsource production off the coast of the US and crude begins washing up on the shore. Procurement is far more impactful when you consider those total costs and you include the supply side in your corporate strategy.

Handfield: There is an illustration in the book that addresses procurement maturity. At the basic level, you have supply assurance. That’s the right part, right price, right place, right time, and so on. As you move up, you get to the TCO level, where you’re looking not just at the price of a good or service, but at the cost of managing that relationship. Then, you get at influencing demand and requirements and finally, at the highest level, you get to value management. You’re now developing new suppliers that allow you to develop new products or enter new markets.

SCMR: Was this idea of looking at suppliers strategically difficult during the recession?

Handfield: Absolutely. We did a survey that found that companies were like deer in the headlights. They were watching the economy unravel and they were doing things like pushing payments to suppliers out to 90 and 120 days. It was freezing up their supply chains. We were telling them that they needed to do the opposite, that they needed to nurture their supply chains because when they came out of the recession, they would be poised to win. Most just didn’t get that.

Chick: That hits the nail on the head. Assumptions were made about how suppliers would behave. People didn’t understand that when cash is scarce, you can’t mess around because the demise of your supply base will be your demise. You have to be close to the supply base and if you’re not, you won’t be around for awhile.

Handfield: I wrote an OpEd in the Wall Street Journal on that same idea. People said I was out of my mind.

SCMR: So, if procurement is still trapped in the past and believes that its role is to beat up on suppliers to get a better price, how do we flip that switch to get them thinking about value management?

Chick: That’s an interesting question. I would argue that the flipping of the switch has been happening for awhile. There are some companies that understand that their suppliers are an asset to the company. While CEO’s often don’t know what good procurement can do for their organizations, those that avail themselves of the information, understand that having a good end-to-end supply chain is going to impact the organization. The real issue is whether the wire is connected and the light goes on. That connection will happen for some shortly and some in a long time. It will be agile organizations that bring the whole team in the mix.

Handfield: A term you’ll hear is “trusted advisor.” In order for procurement to be seen as a trusted advisor, it needs reliable, predictive behavior to build credibility with internal stakeholders. To do that, you have to align yourselves with people in the business and gain their trust. Then, a procurement organization can go out to the marketplace and build the right supplier relationships that bring value to the business.

About the authors: Gerard Chick is Chief Knowledge Officer at Optimum Procurement Group, a procurement outsourcing and consulting company. He is a speaker and writer on business and procurement issues and has written for journals such as CPO Agenda, Supply Management and Procurement Professional. Chick is also a visiting Senior Research Fellow at Curtin University in Perth, Australia, a visiting Fellow at Cranfield School of Management and a member of the Logistics and Operations Management Board of Cardiff Business School. He can be reached at [email protected].

Robert Handfield is the Bank of America University Distinguished Professor of Supply Chain Management at the North Carolina State University Poole College of Management, and director of the Supply Chain Resource Cooperative. He has consulted with Fortune 500 companies, including Caterpillar, GlaxoSmithKline and FedEx, and he has published more than 100 articles in top management journals, including MIT Sloan Management Review, the Journal of Product Innovation Management, and the Journal of Operations Management. He can be reached at [email protected].

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