Tag Archives: procurement value

Understanding value: to leverage or not to leverage, that is the question

Yesterday I read in a Bloomberg article by Christopher Jasper, Benjamin D Katz, and Julie Johnsson that “General Electric Co., the world’s biggest jet-engine maker, said it’s not prepared to enter a three-way race for turbine production on Boeing Co.’s planned mid-sized plane because a fragmented market wouldn’t justify the investment needed. Should Boeing opt for more than two suppliers, “we’re out,” David Joyce, head of GE’s aero-engines arm, said at the Paris Air Show, adding that his company still carries “scars” from being one of three engine providers on the Airbus SE A330 two decades ago.”

Often procurement professionals are quick to drive for cost reduction by leveraging competition among suppliers. When there’s more than one supplier, they go forward without thinking of the position of the category in the portfolio segmentation analysis. In an industry like aerospace where suppliers must deliver capacity, investment and innovation value, there is extreme risk in losing a strategic partner when procurement tries to leverage those suppliers. Yesterday Boeing revised its 20-year industry forecast to 41,030 jetliners; to send the capacity of a key supplier to a competitor could result in a costly failure to deliver.

It’s always important to assess the strategic nature of suppliers when adding competition. It’s especially important to understand the relationship and value that is received. In strategic procurement, it’s critical to assess the industry 5- 10 years into the future. If the supplier has built a strategic relationship and is delivering significant value, you could really undermine or kill the relationship by adding competition. The best rule of thumb is to maximize competition when you are confident you are dealing with a commodity.

Corporate memories are long! One client I worked with used competition incorrectly many years before and, when the industry consolidated to two suppliers, this company was stuck with a sole source (the wronged supplier would not do business with them) for 17 years until the management of the alternate supplier retired.

Do you threaten strategic suppliers with competition?

Value swapping or value creation?

Over the past two decades procurement teams have focused on price and cost reductions leading to improvement in their company’s shareholder value. We’ve done a good job perfecting our cost models and developing our skills to zero-in on should cost and have been successful using these models to strip supplier margins and lean out the supply chain. To combat the drive on price and cost, many industries have consolidated, matching capacity against demand. Are these price reduction and cost modelling efforts creating value?

We’re now in a new digital revolution; the world is changing rapidly with unlimited data, speed and computing capacity resulting in dynamic pricing models developed by bots and computers using artificial intelligence. These models can assess global capacity, demand, pricing and competition in fractions of a second. The old procurement tools need to be sharpened and greatly enhanced. The days of swapping value from supplier to customer, then back again are gone. Customers and suppliers will be required to create optimal value. Speed, velocity, shortened lifecycles, innovation, revenue generation and other value creation activity will need to be in the core skillset of the future buyer.

Savvy procurement professionals are working on value creation models and educating their corporate management teams that there’s a major shift from price reduction to value creation. One example of the principle of value creation is in homebuilding where labor is the critical resource. Homebuider Procurement must select the best crews and manage the relationship since it is critical to complete the unit on-time to get a return on capital. Another example is in industries using refractory bricks: the buyers are working with suppliers to extend the life of the bricks in furnaces to delay costly shutdowns when bricks need to be replaced.

How will you support value creation?

I’m presenting a webinar May 31, 2017 at 1:00 PM Eastern time
Webinar: Building a Strategy for Tomorrow- 10 Megatrends that will shape Procurement’s future
Registration Link: http://tiny.cc/billmichelswebinar
Please Join me!