GRA Partner James Allt-Graham and GRA Director Craig Millis presented Integrating Procurement & Supply Chain Strategy - The next frontier of competitive advantage to the audience at the Finance and Procurement Sit-Down at the Sofitel in Sydney.
About the presentation:
Today organisations are experiencing increased sourcing complexity with extended global supply chains, increased product and supplier proliferation; longer lead times and increased supply risk. At the same time there’s an expectation to lower costs and increase service levels, while improving supply chain visibility and predictability and ensuring that supply chains meet ethical and environmental standards.
When developed independently, Procurement and Supply Chain Strategies can have different goals (typically optimising gross margin versus net margin). This can inadvertently lead to conflict, incurring additional net cost, quality and / or service levels issues. By integrating Procurement and Supply Chain strategies there is a real opportunity to increase both gross and net margins – and ultimately deliver a competitive advantage.
Focus Areas covered:
- Key competitive capabilities for the new world
- Common objectives and joint ownership of business outcomes
- Co-creating strategic sourcing & supply chain strategies to increase gross & net margin
- Collaborative activities that will lead to improved supplier performance and value for money
- Joint efforts towards building ethical and sustainable supply chains
James Allt-Graham: Thank you, thanks very much for that introduction, and on behalf of all of us at GRA, it's fantastic to be sponsoring today's event, the lineup looks really interesting. So we're certainly looking forward to the conversation. Today what we would like to do is just share with you some insights around some of the opportunities that we see, in particular around the integration of the supply chain strategy and the procurement strategy and the value that that can unlock. When we advice clients, we talk about working with them on their strategy, their planning, and their execution. It's really fun to be standing here today because one of my key clients is the Australian Electoral Commission. There's a large amount at what you'd call the executional end about to occur this weekend.
So, anyone who's familiar with that activity, there's about 10,000 polling places that are about to be stood up with cardboard material, consumables, and of course, the ballot papers. There's then a really important secure transport move on Saturday night with all of our votes, and then they'll go through the count centres, and there's about 80 of those across the country that we've helped set up. So some of the things that we'll talk about today in terms of the integration of that supply chain strategy, but also the procurement is actually going to be in action on Saturday night, so I've certainly got my fingers crossed everything goes well! But, be interested in, certainly the wash up at the end of this, very real end to the sort of work that we do and advise on.
As James mentioned in his intro, Craig and I'll just sort of be covering bits and pieces of the presentation today. We thought that would just keep it a little more interesting with a couple of speakers. So, just to share with you a couple of perspectives, it's a really interesting time for those of us who are in supply chain and procurement, because there is so much change going on. Ken mentioned in his introduction, really around the focus on the customer. And there's not too many organisations at the minute who don't have some sort of transformation programme. That program's usually being governed by a drive to improve the value and the relationship with customers.
What's that mean? From a practical sense, it's driving a lot more innovation in terms of the product offering. It's driving proliferation in terms of the different customization that is available. And, really, when you look at a lot of supply chains, it's not now just the flow of the physical good to the consumer, but it's the services and the support that go with that to make that a unique experience for the customer.
And from a supply chain perspective, those additional SKUs or stock keeping units, those additional channels when we look at the online offering, omni-channel, click and collect, to all of those sorts of things, add a huge amount of complexity into the supply chain. And so one of the things that, obviously, we're always looking to do is how can we drive efficiency through that process?
Craig Millis: Thank you, James, good morning, everyone. So against that backdrop of evolving evolution in the supply chain what we see is that the expectations of procurement are higher than ever before at unprecedented levels. And what we do here is group those under four key themes, the expectations, first of all, of value.
Now the expectation of procurement to deliver value is not new, that's been a constant since ever procurement was involved, since procurement was established as a function. But what is different is that the traditional sources of value are largely being tapped out. And the expectation of procurement today is to find new and created ways to find and deliver value to the business.
Further to that, and as a related point with the mass of data that's available these days is how do you leverage that data for insights? And that goes beyond the traditional spend analysis, rearward looking, "What did we spend yesterday?" To look to the future to say, "How can we predict the future?" "What sort of predictive analytics capabilities do we need to be able to look forward and deliver value through surety of our supply?" And as related to that is the adoption of proactive risk management.
So looking forward to what could possibly go wrong, managing those risks effectively through the better use of data and technology.
The second key theme is transparency. In this theme, there's an emerging role and an ever greater role for procurement to enable organisations to deliver on their objectives for social and environmental outcomes. Customers, social advocates, the media, even government have an ever-increasing demand for transparency into procurement and supply chain to ensure there is real action towards achieving those social and environmental outcomes.
Recent legislation, I'm sure you're aware of, regarding the Australian Modern Slavery Act of 2018, only raises the bar further, and procurement will have a key role in managing, reporting, and ensuring action to achieve those objectives. And we'll hear more about that in the latest session during the procurements sit-down.
The third theme is around responsiveness and there's an ever increasing expectation for procurement to be responsive to stakeholder needs even as those needs continue to change against that evolving supply chain, market dynamics, and evolution of technology as well. So the expectation is for procurement to make better and faster decisions, to increase the speed to value through sourcing and contracting processes.
There's an expectation of simplicity and efficiency in lower value sourcing and transactional procurement to the extent of even self-service, providing stakeholders and customers with a way to get through that procurement process much more quickly and for better outcomes.
Finally, and a key theme for this discussion today is around the alignment. So there's an expectation that procurement has a much deeper understanding of the business and can align with the corporate objectives and goals and can really step up and take a seat at the table in driving the business forward. But the quid pro quo is that there's an expectation that procurement has that deep understanding of commercial and operational aspects for the business and can contribute beyond the traditional role.
That requires new capabilities in procurement, a range of hard and soft skills required to step up to that. In the hard skills, the business analytics, the data modelling are key requirements in terms of technical capabilities.
But more than that, soft skills around business acumen, around strategic thinking, relationship management are evermore important to procurement organisations going forward.
So with those key themes as the broad expectations of procurement in the current age, question is, what are procurement organisations doing about that?
And so I've got here the results of the Hackett insight study for 2019. This is a survey of global mid-size and large enterprises to identify what is their focus for developing new capabilities in 2019 and beyond?
On the right hand side you see the graph. There are many, many things that procurement organisations are intending to do in 2019.
Draw your attention to the bottom right-hand of that graph on the right-hand side, which is what Hackett identifies as the critical development zone. So these are the critical priorities for development of new capability in procurement. They're identified as critical because of the limited ability of procurement to address those capabilities, at least in isolation.
The A, B, C, D, E on the left-hand side, these are the capabilities that Hackett has identified from this survey as the key focus for procurement in 2019 where procurement has a limited ability to address those issues.
Firstly, to improve analytical capabilities, and this goes back to the key theme I spoke about of value. So, improvement of analytical capabilities to deliver insights, to deliver value to the business.
The second one, to align skills and talents with business needs. Again, this is an alignment issue, making sure that procurement today and in the future is aligned with business needs with capable staff.
The third one, to leverage supply relationship management, linked to the theme of value. Traditional sources of value, strategic sourcing, other things, may have been tapped out, so we're looking for new and creative ways to deliver value to the business. Fourth one, to improve procurement function agility.
Again, alignment to the business needs, making sure that procurement is aligned to what the business needs can deliver on that, can respond to changing conditions and changing business needs. And finally, to improve customer centricity. This goes to responsiveness, making sure that customer first, making sure that procurement is delivering solutions beyond products and services that meet the need for customised solutions for what your stakeholders are looking for. So then, what is procurement to do against the backdrop of evolving supply chains, the unprecedented expectations on procurement, the critical priorities for capability development that cannot be addressed? We need a plan, we need a way forward. And that leads us to the theme of strategy, which is a key discussion point for today.
James Allt-Graham: So just building on that theme around strategy, we use a model to help us work through with clients, the alignment, really, of everything from the business strategy that you'll see at the very top, through to what's our customer value proposition, so how is it that we're going to meet the customer in a delivery sense, is that same day, next day, all of those sorts of key decisions.
Importantly, then, what's the associated supply chain and procurement strategy that needs to go with that? We see a real opportunity for the alignment of those pieces. It makes common sense that we're looking at the flow of goods, services, and information from supply right through to final consumption.
In terms of getting that alignment and driving that, we see there's a real opportunity. The strategy piece is really important. There's obviously been a whole series of layers in terms of the processes, the physical infrastructure, the technology data, et cetera, that underpins the delivery of that strategy.
So it's important that all of those pieces are aligned and there's a coherent approach to driving that strategy/transformation agenda. So you might find that model quite useful when you start to look at, perhaps, where some of the gaps and challenges might be. Just to simplify the messaging a little bit around some of the causes of misalignment that we see regularly between supply chain and procurement.
The first is, that, quite obviously, often supply chain and procurement don't sit together. So we've got, within an organisation, we start with the org structure in silos. That always creates gaps, and in terms of ensuring that they're aligned, that their strategies are aligned requires extra focus and there's certainly value to be unlocked in doing so.
Again, Ken, in his earlier presentation touched on the topic around culture. It's interesting when you deal with finance functions, and we've obviously got a lot from finance here, they're often quite closely aligned with procurement. And so there's often a very strong financial skill-set within procurement, which is essential, as Craig indicated, for analytics, et cetera. But what you often have in supply chain is a very strong operational focus. Those are quite different skill sets. There're often quite different cultures of the people. And so, again, in terms of getting people to work together to have a coherent strategy that they're trying to drive in lock step, there's extra effort required and there can be some real misalignment in that space.
Craig touched on the issue around engagement between the business and key stakeholders and procurement. One of the other areas which we quite regularly see, and I'll touch on this in a bit more detail, is the focus often in procurement on savings, if you like, and that is an important part of doing business.
We obviously need to procure as cheaply as we can so we can pass value to our customers. That focus in a procurement sense, though, is sometimes disconnected to the total cost-to-serve from a supply chain perspective. And I'll build a couple of examples just to bring that to a sharper focus for you.
Sometimes there are decisions made where we've saved money from a procurement sense but we've actually potentially added cost into our operating environment. And we regularly see that, for example, in transition from one supplier to another. Our old supplier was doing a whole heap of things in terms of labelling, presenting the product, quality assurance, et cetera, that didn't really appear in the item unit cost.
We've changed to a new supplier who's not doing that in the same way and suddenly we discover our warehouse isn't able to receive properly, we've got a whole heap of issues. So an understanding of the total cost- to-serve is really important, rather than just a sole focus on unit cost.
And underpinning all of these is often a different set of incentives for the supply chain practitioners and operators versus those that are sitting in procurement. So understanding that some of these gaps often do occur, when you're looking at having a coherent strategy, which is optimising that end-to-end in some of these areas where encourage, I guess, a bit more focus.
Just to put a couple of points on those comments. This is a very simplistic model, for the finance people in the room. But if we think about gross margin, revenue minus cost of goods sold, really procurement has a lot of the key levers in that space in terms of being able to negotiate deals, aggregate spend, all of those good things. When we look at the supply chain, there's more focus, typically on net margin, so the cost of good sold, revenue piece are done, largely, for us, but it's the operating expenses that the supply chain is usually looking to optimise.
You'll hear a lot about the cost-to-serve being a key indicator for the supply chain. That might be cost per pallet, et cetera, all of those things. What we're seeing is the opportunity's actually to put those together, and in some instances we might incur a slightly higher unit cost in our cost of good sold, but that might be a saving in operating cost, and vice versa.
So the opportunity to get a much better overall outcome for our business by the integration of these functions is really the opportunity that we want to focus on. And I'll just give you a couple of examples. So, been doing some work for one of the retailers. One of the key strategies is, obviously, around meeting the customer and providing an exciting customer experience. And so what they're looking at is changing their store formats.
What that meant is a significant increase in the different number of SKUs, or the different products and shelving, et cetera, that goes into those stores. From a procurement perspective, we're onboarding a whole heap of new supplies to provide all of those innovative pieces.
But in terms of then getting that together and being able to run an efficient store refurbishment programme, it was becoming really complicated and expensive. And so the alignment decision that was made by management is that our supply chain in terms of our store reconfigures will be developed to only have about 10% of highly customised pieces within those stores, the rest need to be standard. So we went from a procurement approach which was starting to fragment, quite an expensive approach in terms of the roll out of those stores to a very clear set of decisions made by management to focus in this way.
So that was a great example of where strategy came together. Home services, going to be a massive growth in, obviously, home services, especially for the elderly and aged. We've been working with a number of organisations in that space, and one of our clients decided that it was really important that they know their customers and that they had a relationship with their customers.
So that means the same person who serves, that person goes there on a regular basis. That was very disconnected from their strategy around the procurement of labour, which was largely using labour hire agencies, and so that was a very transactional set of, I guess, people coming in to deliver that service. So the strategic decision was right, we need to align those. Two things happened, one was we wanted to onboard more of our own people, and have our own labour force to deliver that consistent quality, but where we use labour hire, we actually stipulated through the contracts that we wanted the same person as much as possible to deliver that service. Slightly higher cost, because that limited the flexibility of the supply, but that certainly achieved the strategic goal. So, again, slightly different take.
Government agency, you might relate to this one, so this is the Electoral Commission rolling out at the minute, procurement in the past bought all the pens and pencils, I use them as a simple example. They all came into the electoral commission where they were pick-packed to everyone one of the 10,000 polling places by casual labour. The opportunity's obviously to push that back to the supplier and say, "Right, we'd like you to do that pick-pack operation." and rather than having lots and lots and lots of suppliers, what we'll look to do is to aggregate our spend so that you've got a much bigger proportion and can undertake that activity.
Drives significant efficiency in terms of the way the supply chain operates but added some complexity to the procurement processes that really enabled much greater efficiency from an end-to-end perspective.
And those have gone out largely to the polling places and they've gone out well, which is good news!
The final one I just wanted to touch on is a retail example. Obviously, most of our products are coming from China for the majority of retail, but there's still opportunities to improve efficiency. And so one retailer we worked with, we were using, wanting to implement consolidation centres, so much more of getting product ready for direct store delivery. What that meant from a procurement perspective, though, was we had all those supplies scattered throughout China and we needed to centralise them in terms of their locations to where our consolidation centres were located. So, again, a really important piece of aligning the procurement strategy and the supply chain strategy to deliver the overall business strategy of reducing costs to the customers. So just a couple of examples there to hopefully make some of those alignment points real.
Craig Millis: We didn't want to leave the stage until we touched on one of the key conference themes, which is digital technology as an enabler for the achievement of strategy. Referring back to the same Hackett study, the key insight study for 2019, this is a representation of expectations of adoption of technology in procurement, and across the different aspects or different solutions of procurement technology. The data visualisation, cloud-based applications, mobile computing, master data, advanced analytics, robotics. What's striking about this for me is not so much where we are today, but where we're going in the next couple of years. So on average across there you can see that from a average 50s, 50% of organisations have adopted these technologies, of the survey respondents. They're going to 70s and 80s in the next couple of years. Which says there's a rapid adoption of technology. So the question may be, why? What is that technology? Why are we doing that? Why that rapid growth rate? What I would do is refer back to those development priorities that were identified in the survey and look at how digital technology can enable those capabilities. So, remember, from left to right, the improvement of analytical capabilities as a way to meet the expectation of value delivery to the organisation, alignment of skills and capabilities, again, alignment, leveraging SRM and other new and innovative ways of delivering value to the business, improving agility of the procurement function, and improving the customer centricity responsiveness to the business.
The key here is how these improved capabilities enabled by technology can help meet those heightened expectations that the business has on procurement today. In the interest of time, I'm not going to go through this in a lot of detail, but I just wanted to build out this slide, which talks to the role of digital technologies in enabling some of these capabilities with a view to delivering against those expectations. So you can see in each area, whether it be big data or data analytics, whether it be automation robotics, whether it be improved capability through technology for collaboration and relationship management with suppliers, improving the agility and responsiveness of procurement function to the business, and improving the offer to our customers and stakeholders, technology has a key role in supporting the business, enabling the development of capabilities in alignment with the strategy of the business and delivering to the expectations that the business has of procurement today.
James Allt-Graham: So thank you very much for your time this morning. I hope there's a couple of take-aways for you. In summary, I guess the proposition we've wanted to put forward was there's fundamental shifts going on within the supply chain and within procurement in terms of being able to align with those changing customer demands and expectations, and the rate of change in that space is really significant. Technology, as Craig has touched on, really opens up, especially in the procurement space, a lot of opportunities that it's important to be aware of and identify where that can add value to your business and bring in those capabilities. The integration we see between procurement and the supply chain and the ability for that alignment to unlock value, both in a financial sense as well as delivering on the customer offer, is really important, and there are some barriers that are in place in many organisation to that occurring naturally. So understanding those and resolving them is really important, and that there's a real source of competitive advantage for those who are able to do this well, and the time's right, given everything that's going on. So thank you very much for your time. I think the rest of the conference is going to be fantastic and so looking forward to sharing it with you. Happy to take questions, James, if you like, thank you.
Audience question: I'm just wondering, as they become more and more prevalent and organisations want to now start selling via B2B technologies as opposed to some of the old traditional methods, how do you think this is going to impact this merging of procurement and supply chain function? Is it going to be a massive disruption to even some of the existing supply chain theories and processes at the moment?
Craig Millis: I think the emergence of technologies is a key disruptor, and it is going to change the nature of the relationship between supply chain and procurement internally within the business, but also, then, obviously, externally through the supply chain through suppliers and suppliers' suppliers, and so on. So as evidenced, I think, by the number of technology partners that are here today, it's a key emerging opportunity for businesses and I think it's a key opportunity for disruption through alignment of that strategy to deliver competitive advantage.
James Allt-Graham: Yeah, I totally agree, and I think the opportunity for the alignment around visibility, for example, of stock movement, stock issues across the supply chain, enabled by some of that B2B technology actually enhances some of the opportunities as well for some of the optimisation and inventory optimisation in particular. So we're very excited about the opportunities that are there, and certainly, a lot of the clients that we're working with at the minute are looking for much greater integration, whether it's upstream or downstream, to provide some of those benefits. So, yeah, really interesting space.
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