When I started working, the head of purchasing had a job until he retired and then next person-in-waiting usually took the helm. Today it seems that our Chief Procurement Officers have about the same longevity as a coach in the NFL or MLB. In the past year or so at least seven of my friends and colleagues holding the position of Chief Procurement Officer experienced unplanned exits from their organizations. Many of these CPOs had a very big public profiles, they all made a large contributions to the organizations they served, all were actively engaged on the Management Executive Committee in their firms and in some cases were driving key projects with Board of Directors visibility. I’ve discussed the short lifespan with industry experts and other consultants who have seen the same trend for the CPO. It’s been researched and reported by CAPS Research whose study of CPOs in 2014 reported that the more than half of the CPOs in Fortune 500 companies had been there for less than 4 years and that only 10.6% were promoted to the position from within. The study also found that very few CPOs were promoted to higher executive positions. What can be done to prolong the lifecycle of the Chief Procurement Officer?
The Chief Procurement Officer may be more vulnerable than the Chief Executive Officer with an average life cycle of about 5 years. There are ever increasing expectations that CPOs will deliver continuous deliver cost and value improvement, align with multiple business units and objectives, service the business in a matrix organization structure, manage myriad stakeholder demands, work globally across borders, accelerate speed to market, integrate the supply chain and manage merger and divestiture activity.
The longer the CPO is in place on the job, the more difficult it is to rejuvenate and create new strategies to continue the generation of continuous cost reduction, which is still the primary measurement in many businesses. As new initiatives become increasingly important, the organization expects the CPO to be proactively ahead of the curve on programs like risk management, sustainability, re-shoring, big data strategies, best country sourcing and leaning out the supply chain.
How can CPOs increase their lifespan? Here are 3 key strategies for survival:
1. Talent Management
To be effective in the organization, the CPO requires a top team to execute the global strategies, align and support the business, architect the supply chain, and drive the metrics that will change management focus from cost to value delivery. Talent is scarce and there is a lot of competition between CPOs to recruit, develop, and build a team capable of executing a world class results based global strategy. The inability to develop a world-class team as a prime objective is one factor in shortened longevity on the job.
2. Total Cost Focus
It is critical that the CPO educate management on the Total Cost of Ownership and value extraction from the supply chain. A CPO with a sole focus on continued price reduction is destined to fail. While everyone likes reductions, we know that suppliers are not a source of incremental margin for the buying company. All suppliers need a healthy margin to reinvest, innovate and drive industry changes. With the ability to conduct cost analysis, there is little doubt about the transparency of cost. If a CPO with a strong emphasis on price reduction will soon run out of runway and require new suppliers and additional sources to drive margins down forcing industry consolidation.
The real opportunity is value enhancement and true cost reduction through specification change, redesign, capital investment with faster cycle times and least cost sourcing. In addition reduced warranty, risk mitigation, speed to market, target costing and innovation will play a role of increasing importance in future CPOs. Ignoring these will be a sure way of sealing the fate of the CPO.
3. Get a Seat at the Table
In the future, the CPO will play an increasing role in business success. It is essential that they play a key role in the executive management of the company, report to the CEO and have some accountability to the Board.
Currently, purchasing expenditure accounts for about 50% of a business’ cost. I see this increasing with global sourcing, outsourcing, industry consolidation, and value maximization. The ability to integrate suppliers in the supply chain, drive for least cost production, and increased levels of value and supplier relationship management will ultimately drive the lifespan of the Chief Procurement Officer.
Time to take inventory and assess your phase in the company lifespan.
Change or be changed.