Consumer choice

A recent report by KPMG called Me, My Life, My Wallet provides insight into changes in customer behaviour which procurement professionals will find interesting.

Procurement has two customers: the end customer who consumes the products that their organisation provides and internal stakeholders responsible for budgets. In my experience the end customer leads on new trends with organisations trailing behind. This is based largely on technology adoption – compare the experience of Amazon to SAP or Oracle; or smart watches to spend analytics.

Perhaps unsurprisingly, KPMG found that technology is the biggest single driver of change. Demographics and geography play a part but mostly in the context of technology adoption.

In its relatively young lifespan, the smartphone has grown at a staggering pace, with China becoming a distant leader. The first smart phones appeared in 1995. Today there are more than two billion active devices around the world.  Almost 90% of smartphone users say their device never leaves their side. And more that 70% of Chinese would rather lose their wallets than their mobile phones (probably because their phone is their wallet). The message is clear – if you want your consumer to do something then you have to ensure that it’s mobile enabled.

Homer Simpson once observed that “Every time I learn something new, it pushes old stuff out of my brain.” 4 out of 10 consumers surveyed feel totally overwhelmed with information and avoid it if they can. So if you want to avoid alienating a significant proportion of your customers then think hard about how you engage them and what you say to them.

The report says that “Most businesses have built their operating model based on life event norms, and those are primarily based on the boomer generation that created the mould.” These norms do not apply to generation X or millennials who, for example, don’t regard their first car as a milestone in the way that boomers did. On average, KPMG estimate, millennials are 10 years older than boomers when they buy their first home – and 10 years older than boomers when they have their first child. Even boomers are affected – although they are the first generation to retire on defined contribution pension plans and are living longer, they are haunted by what KPMG calls FROOM (Fear of Running Out Of Money). Millennials are putting an unexpected strain on family finances: 22% identify their parents as a source of income. Is your operating model fit for an era when millennials have the most spending power?

Very few procurement professionals will have been told that their buying process is simple and easy to use. Far more familiar is the compliant that it’s difficult to find the right vendors, that items are wrongly categorised and payment takes too long. Most consumer experiences are no better: over two out of three online shopping carts are abandoned before purchases are completed. Procurement organisations and organisation that can make their ordering process frictionless stand will be favoured by their internal stakeholders and customers.

Best practise in procurement

This is for all those people who haven’t worked in procurement or have worked for organisations where procurement feels more like a barrier rather than an enabler.

Before describing some examples of best practise, it’s worth looking at the reasons for creating a procurement function in the first place. If you’ve worked in large organisations then these problems will be familiar:

  • Suppliers aren’t paid on time and they refuse to deliver until payment is made
  • A supplier is no longer able to provide a critical item. There are a number of possible reasons for this, for example, products like software reach end-of-life and support is withdrawn, a supplier is acquired and the new owner replaces the item with a more expensive one or the supplier goes into administration
  • Someone, like a finance manager or an internal auditor, starts to ask questions about what’s being spent, how is it being controlled and whether they’re getting value for money. A profit warning or suspicion of fraud may have sparked these questions.

So what is best practise in procurement? Below are some examples of the three key areas: policy, people and systems.

  • It sounds a bit dull but a clearly defined policy and set of procedures and processes is essential. Everyone in an organisation has a stake in procurement because they’re either responsible for ordering items or managing the budget that pays for them or use the items during their day to day work. The only way to avoid chaos with so many people involved is to agree on the rules that govern the main processes. The policy should be drafted in such a way as to help people do the right thing and not to catch them out
  • Once the policy is agreed then a team is needed to work with the business to implement it. The individuals in the team should have good relationship management skills, enjoy analysis, whether that’s numbers (spend reports) or words (contracts), and be commercially minded
  • Procurement involves two main processes, source to contract (S2C) and purchase to pay (P2P). The only way to ensure compliance to the policy where there are a high volume of transactions is to use systems with the rules built in. IT systems generate high quality data which enables the procurement team to look for opportunities to improve the price and reduce the risk.

By implementing best practise procurement, organisations will avoid the problems that often arise when they work with others and generate greater value for everyone involved.

Step down from your ivory tower

Academic and consultancy research seems to be pre-occupied by the question of whether procurement’s success within a company is a function of organisational status or strategic alignment. Some of it offers interesting insights into changes in procurement but a lot of it is irrelevant.

Some research argues that procurement should work towards getting greater recognition by the business. This feels a bit like asking for respect without having earned it. Furthermore, there is no evidence that procurement performance is related to status.

Strategic alignment is the term used when the procurement strategy is derived from and aligned to the company strategy. This assumes that the company strategy is clear and that everyone is executing it properly. In practice, there are many factors to consider when developing sourcing strategies and some categories of spend are simply not strategically important for the company.

The article called Procurement at a Crossroads – Disrupt or be Disrupted by Soren Vammen, CEO of The Danish Purchasing & Logistics Forum and Lars Bjerregaard Mikkelsen, Professor at Aarhus University, is a case in point. Ironically they argue that procurement should be “more relevant to their organisations”. At no point do they consider factors that limit procurement’s effectiveness such as poor data or inadequate systems. It’s almost as if they’ve never run a sourcing process.

If this type of research is going to have any value then it must be based on a genuine understanding of the challenges facing procurement professionals and good empirical data. Many academics in this field would be well served by adopting Peter Drucker’s approach when he admitted that “My greatest strength as a consultant is to be ignorant and ask a few questions.”

Poacher turned game keeper

Reading about the careers of different people in marketing in CMO’s Developing your skill set on the other side of the tracks made me wonder how many procurement professionals have moved from industry to consultancy or vice versa.

Deloitte’s global outsourcing survey suggests that more are doing so. Respondents said that they planned to double outsourcing from 15% in 2014 to 29% in 2016. Furthermore, supplier relationship management has become an increasing important source of savings suggesting that CPOs are placing greater value on softer skills.

Anything that broadens your experience is a good thing. Having an in-depth understanding of your business partner’s position makes the relationship more constructive by reducing unnecessary friction and enabling a win-win outcome to be reached more quickly.

Not seeing eye to eye

I often work with Finance, partly because Chief Procurement Officers usually report to Finance Directors, but also because my role requires me to facilitate better ways of working between those doing the deals, those using the deals and those trying to report on them.

It came as no surprise that a recent survey found that Procurement’s “rosy” view of what the function contributes to an organisation’s bottom line is often not shared by their colleagues in finance. According to a study called Bridging the Gap between Finance and Procurement, nearly half of finance leaders claim that a fifth or less of procurement savings wind up contributing to their companies’ bottom line.

Perceived shortcomings in the way procurement functions track and communicate savings, how they collaborate with finance departments and how they work with the wider business were responsible for the disconnect.

In my opinion, too many organisation rely too heavily on spreadsheets. Effective systems drive compliance to policy. System generated reports provide accurate data which help decision making.

British Prime Minister Benjamin Disraeli said that “There are three kinds of lies: lies, damned lies, and statistics.” It’s time for more organisations to invest in the systems that properly support their business.

Brexit continues

Theresa May’s gamble failed – the Conservatives lost their parliamentary majority in the general election on 8 June and have turned to the DUP to support them in forming a new government.

In March I examined the constraints facing the British government and the EU to provide some indication of the impact of Brexit on prices in a blog called Brexit Begins. Although the general election results have cast doubt over the government’s plans, it is still possible to draw three broad conclusions.

Firstly, Mrs May’s priorities must change to put the economy and jobs first. This suggests that the single-market and customs-union will remain options.

Secondly, the vast quantity of Brexit-related legislation will be harder to process in a hung parliament. This means that Mrs May must compromise and consider the demands of Remainers.

Finally, far more time is needed than is available so Mrs May must accept the EU’s sequencing plan, which means dealing with the Article 50 divorce before discussing new trade arrangements. That makes a case for more generosity from the British side, particularly over EU citizens in Britain and the sums needed to pay the “Brexit bill”.

Many consider a hung parliament to be a bad thing. It the case of Brexit, however, it may deliver a better economic outcome which will be good for buyers.

The promise of blockchain

Introduction

On 24 May, bitcoin hit an all-time high of $2.791. But by 28 May nearly $4 billion or almost 20% was wiped off the value.

Bitcoin is an example of a technology called blockchain. Although the idea of blockchain has been around since 1991 it was only in 2008 when Satoshi Nakamoto published a paper called “Bitcoin: A Peer-to-Peer Electronic Cash System” that blockchain found a commercial application.

Blockchain started in the software industry but its notoriety has spread to other industries with almost $1bn invested in it in 2016. Procurement is no exception: blockchain was one of the main topics of discussion at SAP Ariba LIVE in Las Vegas in March 2017.

So what is blockchain? The most accurate description is that of a secure digital ledger on which transactions can be made and recorded. Digital ledgers are not a new concept, but the difference with blockchain technology is that it is not based on a single or central ledger but decentralised ones in which stakeholders on all sides of a transaction can make and record transactions.

If you want a more detailed explanation of blockchain then it’s worth watching Shai Rubin’s video called What is blockchain.

How could blockchain be used in procurement?

Although blockchain is still in its infancy, it could have an enormous impact. And it could have wide-ranging uses for procurement teams up and down the source-to-settle process.

  • For sourcing teams, it could be a new due diligence and “track-and-trace” tool that allows them to quickly determine a commodity’s or good’s point of origin, which would help drive visibility, control, and risk management into the supply chain and achieve enterprise or regulatory compliance;
  • For legal and procurement teams, it could be a “smart contract” between two trading partners – a digital, automated record of what goods were bought, sold, and delivered, that is updated in real-time by end users across the line-of-business;
  • For human resources and procurement teams, blockchain would allow an organisation to perfectly map business requirements to external workers and create an untouchable system of record that captures payment, project, and contract
  • For accounts payable (AP) departments, blockchain could be an all-in-one purchase order (PO), requisition, and invoice that links upstream sourcing and procurement processes with downstream payment remittance; and it can create an auditable report;
  • For suppliers, it could be a work order and a track-and-trace tool, in addition to a contract and invoice, and allow suppliers to conduct their own due diligence further down the supply chain.

Conclusion

Blockchain is one of the most exciting and potentially disrupting technologies to emerge recently. It has significant potential for procurement. Up and down the source-to-settle process, blockchain could increase efficiencies, visibility and agility for end users and deliver greater fidelity, value and performance. However, as bitcoin’s value demonstrates, there is still a long way to go.

Do you consider only the least-bad option?

Earlier this month I attended an event where the Procurement Salary Guide and Insights 2017 Report was presented. There were some great presentation from Dr John Glen, Andrew Coulcher FCIPS and Scott Dance which highlighted the current economic and political uncertainty but also demonstrated that salaries are increasing and there are more jobs being registered. Good news for anyone looking for a pay rise or a new job!

As is often the case, the most thought provoking comment came from the audience.

Best practise is created not by single individuals but by groups of people coming up with lots of ideas, testing and refining them. This means that certain organisations take the lead in specialist areas.

Why, therefore, do some organisations demand experience of their sector even when none of the organisations in that sector lead in the specialist area? For example, why does an exploration company demand experience of the oil and gas sector when recruiting for a supplier relationship manager; why does a bank require financial services experience when recruiting for an IT category manager; why does the NHS require experience of, well, the NHS when recruiting for a commercial manager?

The inevitable consequence is that these sectors continue to underperform in the areas where they are recruiting.

It’s time to acknowledge that sector experience is both a good and bad thing. Rather than limiting choice to only the least-bad option, it’s time for organisations to consider for the best-best option.

Brexit begins

Tomorrow Prime Minister Theresa May will trigger Article 50 which will formally start the process of Britain leaving the European Union. No country has triggered Article 50 before and there remains a lot of uncertainty about its impact. As Ahsoka Tano said in Star Wars: “This is a new day, a new beginning.”

Many budget holders and buyers are looking for answers to 3 key questions: will Article 50 lead suppliers to request price increases, are these increases justified and is there an alternative?

Brexit, like any negotiation, won’t take place in isolation. Each party, in this case the UK and EU, face political and economic constraints. By examining these constraints, we can start to provide some answers.

Exchange rate

Brexit has caused uncertainty and consequently the pound has fallen by over 10% against the euro and dollar since the referendum in June. Triggering Article 50 will do nothing to alleviate the uncertainty so the pound is likely to remain under pressure.

While the pound remains low the price of imported goods and services will be high. For many buyers it is too late to hedge against the weak pound. Where possible, buyers should consider switching sourcing to the UK.

The weak pound is driving higher inflation. In June last year the retail price index (RPI) was 1.6% and last month it was 3.2%. Many suppliers will see this as an opportunity to raise prices. Only those whose products are affected by the value of the pound will have reasonable justification.

Industrial policy

The move towards populism in Britain has resulted in Theresa May publishing the green paper is called  Building our industrial strategy which states the UK government will favour growth in local markets. A similar approach is seen in the US with Donald Trump’s policy of America First.

The industrial policy will help some UK suppliers, for example, those in sectors where Britain already does well, such as the creative industries and life sciences, and align with others that everyone believes will be big in the future like low-emission vehicles and robotics. Unfortunately, it will take a long time before buyers see the positive effects of the industrial policy in supplier’s pricing.

Another aspect of the industrial policy will be increasing trade tariffs on certain imported goods and services. Theresa May has promised new trade agreements, however, little is known about which countries will be included and how tariffs will be affected.

Increasing trade tariffs will compound the effect of exchange rates on some goods and services. Items that are imported and those that comprise a high proportion that are imported, that is, goods that rely on global supply chains, will see prices increase as suppliers pass on the cost of the tariffs. Although it’s easier said than done, particularly in industries like vehicle manufacturing, buyers should consider switching sourcing to the UK.

Investment

Brexit has created uncertainty and the lack of transparency from the UK government has compounded the situation. Many organisations will delay investment until the outcome is clearer. This will weaken buyer’s negotiation position in the short run as some of the benefits of economies of scales are missed.

Laws and regulations

Many hope that leaving the EU will result in a reduction in regulations. They further hope that this will enable suppliers to produce goods and services at lower cost which will be passed on to customers in lower prices. Unfortunately for these people, Article 50 provides two years to reach an agreement so tomorrow’s event merely marks the start of a long negotiation process. Buyers will see little change in regulation the short and medium term.

Nearly half of Britain’s exports go to the EU so if Britain wants to continue to trade with EU countries then its exporters will have to continue to follow their rules. Through the process of “flow-down” buyers will have include elements of EU regulations in their specifications if they want to sell these items in the EU.

The UK government intends to import all existing EU rules into British law via a (misleadingly named) Great Repeal Bill. Any unwanted regulations will be abolished only gradually.

Industries that are heavily reliant on trade with EU nations, such as food, will see little change for the foreseeable future.

Public procurement

Public procurement is worth about £240bn pa or about 20% of GDP. It is governed by the EU procurement rules, for example, all government bodies have to competitively tender any contract worth over €135,000.

Many procurement professionals in the public sector do not like these rules because they ignore key factors such as the size of the organisation’s supplier spend, the category of spend and existing supplier relationships.

It’s reasonable to expect some of these rules will be abandoned and for public procurement to take a more commercial, less rules based, approach.

Competition

The EU’s Competition Commission has been active in challenging multi-nationals that have tried to exploit a dominant market position such as Microsoft and General Electric.

The EU’s economy is more than 6 times bigger than the UK economy and therefore has a stronger negotiating position. It is reasonable to assume that the UK alone will not be as effective and therefore prices from certain dominant suppliers will increase.

Conclusion

Triggering Article 50 is an important milestone for Britain leaving the EU, however, Brexit is already having an effect on procurement through the weak pound. Once the formal process to leave the EU begins tomorrow the impact will be felt in different ways and at different times in different parts of the economy.

On the one hand, the price of some locally made goods and services will reduce in the long term as regulation is loosened and the industrial policy encourages growth of local suppliers. Furthermore, the public sector will benefit from a more commercial approach.

On the other hand, the price of some goods and services from the EU will rise as the UK government imposes import tariffs and global suppliers take advantage of their dominant position. Both private and public sector organisations will delay or cancel investments whilst uncertainty about Brexit remains.

The final word goes to Carrie Fisher, another cast member from Star Wars and who died recently: “Everything is negotiable. Whether or not the negotiation is easy is another thing.”

Building our industrial strategy

Theresa May announced her industrial strategy last week. The green paper is called  Building our industrial strategy is a response to Brexit that “will help to deliver a stronger economy and a fairer society”. We have already seen signs of the government encouraging development and growth through the approval last year of £18bn for Hinkley Point C and the more recent approval of £31bn for the manufacture of four replacement submarines for Trident.

Governments have a mixed record on industrial strategies. Success of Japanese colonies such as South Korea have been attributed to the centralised state development that it had used to develop itself. Many of these domestic policy choices, however, are now seen as detrimental to free trade and are limited by various international agreements such as WTO, TRIM and TRIPS.

The government’s strategy is built around 10 pillars and suggests a greater willingness to use public money for investment in infrastructure, research and development alongside a commitment to regional development through devolution of powers to city authorities. It also includes that perennial problem child of public sector procurement which the strategy will ensure “drives innovative new products and services, strengthen skills, develops UK supply chains and increases competition by creating more opportunities for SMEs”.

So what does this mean for procurement in UK?

Like Brexit (see my blog last month called 2016 and Brexit), the effects of the industrial strategy will be mixed. It may help sectors where Britain already does well, such as the creative industries and life sciences, and align with others that everyone believes will be big in the future like  low-emission vehicles and robotics.

Brexit will be used to relax the much-disliked public sector procurement rules and the strategy will further encourage a more commercial approach.

But, alas, most procurement professional in the private sector will not be touched by the industrial strategy and will have to manage the effects of Brexit without government support.

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