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Robert Tevelson, senior partner & MD, and Rohit Vohra, partner & director, BCG, tell Masoom Gupte that procurement's role has changed from being the cost optimiser to being the system integrator
What exactly are the skill sets required by a chief procurement officer in today's global business environment? Has the function advanced beyond the focus-on-minimising-cost brief?
Robert Tevelson: There are two categories of skill sets that are needed. One is the basic procurement/functional skills and the other is interpersonal skills. What we are seeing across the board, whether it is North America, Europe or India, is that the expectations from both these buckets have increased. Procurement needs to take a different tack to develop these capabilities. The reason for seeking an advancement of skill sets is that the easy savings have been removed. And there is an expectation that even though the low hanging fruit has been picked, one needs to get a larger ladder. The larger ladder analogy is about better skill sets and applying different tools and techniques. It is about higher level analytics: the issue of getting into a greater understanding of supplier's costs, the should-cost modelling (the process of determining what a product should cost based on its component raw material costs, manufacturing costs, production overheads, and reasonable profit margins) and taking the data from the many different items that are purchased and doing linear parameter modelling to understand why there is variation in a particular part based on the specification. This is an example of the higher end of the skill sets.
Rohit Vohra: To build on this, look at the steel sector. Earlier, steel mills used to set their prices with the iron ore mines on an annual basis. Today, the prices have moved from annual to quarterly contracts to spot prices. On the front end, they had long-term contracts with, say, the auto firms or appliances makers. These days they don't have that flexibility. The volatility has crept in both on the front end and the back end in terms of pricing, demand etc. Procurement's role is that of being a system integrator and, hence, the intellectual horsepower of people who are required in the role has risen.
Companies are sourcing a lot of their raw material from geographies where the economic or political environment may not be very stable. How is the balance between the cost advantage and the concerns pertaining to the stability of the supply chain managed?
Vohra: Traditionally, the supply chain teams have looked at total cost of ownership (TCO), representing the combination of the cost at which one is buying, the cost of logistics and landed cost. Now, a part of your supply chain may be coming from places like the Congo region or the western parts of Africa, which have high political risk. Companies are, therefore, moving away from TCO to total impact of ownership (TIO) to factor in the various risks, quantifying them and adding them to the TCO to arrive at the TIO. The TIO, thus arrived at, could be, depending on the industry, 5-10 per cent more than the TCO. The TIO will determine whether it is worthwhile to go to Congo or maybe one is better off sourcing from, let's say, South Africa.
Tevelson: The fundamental issue is that you identify what the total cost of ownership would be along with the impact and then the decision is based on fact with an expectation of what the risk impact could be.
Are any new destinations gaining popularity for sourcing?
Vohra: For the past decade or so, there has been only one solution for sourcing requirements: China. Over the past five-six years though, two fundamental changes have taken place in the country. One, the labour cost has increased. Two, the emphasis laid by the Chinese government on environmental compliance has increased manifold as compared to the limited emphasis from about a decade ago. The cost of doing business in China is going to go up. When you then start asking the question, where next, the likely solution comes in the form of Southeast Asian economies like Vietnam or Thailand, or maybe Central Africa or Eastern Europe. The challenge there is that the scale you get in China cannot be replicated in a Vietnam.
How has technology changed the procurement process?
Tevelson: IT is allowing companies to shift more of the transactions to automated options. The auction point (e-procurement) is really about speed. The auction allows real-time information, transparency and market prices. The supply market can be segmented. To the far left is the purely competitive market with many suppliers, supplying the standardised, easy-to-define goods. To the right side is the intellectual property, which is innovation-driven with unique supplies. In the competitive market, it is very easy to apply the auction. On the right side, where the supplies are complicated, you are seeking a close partnership and more trust. Therefore, the auction technology doesn't work in all categories.
Vohra: The big change that is happening is in terms of procurement being able to get real-time information on what is happening in the market. So if demand for stainless steel is going down and if you have a long supply chain of say 30-45 days, you are able to react better to the slowdown. The second thing is productivity within the procurement team itself. A lot of the processes that were manual earlier are now online.
Apart from minimising costs, procurement's role extends to eliminating waste. Are there any emerging best practices in that area?
Vohra: There are lots of examples of companies trying to minimise usage and eliminate waste. For example, there is the recent case of Heinz, the ketchup manufacturer. In the US, the cover of the bottle used to be 0.2 mm thick. Based on some development with the supplier, it managed to reduce it to 0.18 mm, which is actually reducing the steel consumption for the component by about 1,400 tonnes per annum. Similarly look at Aquafina, better known as Ecofina these days. The reason being that a certain amount of plastic was needed previously. It worked with suppliers to give strength and sturdiness to the bottle without adding extra plastic to the design.
Tevelson: This is a classic example of collaboration with external suppliers and working internally with the marketing teams. The procurement team has worked to enhance the product, making it attractive to the consumer. It has, thus, minimised the material needed, taking us right back to the conversation on the level of sophistication needed in the procurement role today.
