To beat odds, procurement officers should focus on value, not cost

Bill Michels, CEO and founder of Aripart Consulting, cautioned attendees at CPO Rising Summit in Boston on Tuesday that chief procurement officers (CPOs) have a very short window of time in which to make their mark at a company: The average tenure of a CPO, he said, is less than five years.  And the terms of engagement are brutal: Corporate mandates to reduce costs in the supply chain set up procurement officers for failure since costs can’t be reduced year over year indefinitely without a breakthrough change, which is hard to achieve.

The problem, he said, stems from the need to ensure that supplier margins are sustainable over the long term. “You don’t want to run the supplier out of business. We want suppliers to reinvest in the business and innovate, continue to give us improvements year over year and we need them to be healthy to be able to do it,” Michels said.

But, he said, CPOs still need to reduce costs. “Here’s where you’re most vulnerable as a CPO,” he said. “Unless you can come up with ways to come up with innovation, breakthrough, change the specs, change something, you’re not going to do it.”

By the third year of a CPO’s tenure, “if you haven’t changed out your team, your process or the way you’re going about it, or educated management on the value [of the procurement team], you’re in a danger zone,” Michels said.

Value can be demonstrated by protecting the supply chain as a whole and supporting business imperatives to make more money. One example: A biotech company that Michels worked with was less concerned about cost reduction and more concerned about making sure that its supply chain continued to function.

“[Management said], ‘Build me a risk management system that works,'” Michels said. “They built a predictive model of all their suppliers and their supply chain. They identified which suppliers were going [to fail].” As a result of that analysis, the biotech company’s board of directors made a decision to spend $100 million to protect its supply chain, since that supply chain was feeding a $7 billion business. That decision obviously resulted in money being spent rather than saved, but because the expenditure protected the company’s ability to continue making money, the board of directors quickly approved of the expense.

Michels predicts that value will trump price in the future. Citing a 2014 study from the Institute for Supply Management, he said that CEOs are looking for CPOs who can deliver shareholder value, integrate the company’s supply chain, capture innovation and speed the process of getting products to market. CPOs who focus on cost reduction at the expense of these other key requirements will be the first ones looking for a new job.

Beyond the need to deliver value to the company rather than simply cutting costs, chief procurement officers also need to prepare for digital disruption. Michels told the story of a client of his who’d envisioned using artificial intelligence to identify suppliers around the globe, help produce RFIs and RFPs, and then make sourcing recommendations. He said that much to his surprise he learned that there’s a project underway at Stanford University to deliver such a capability through artificial intelligence.

He also suggested that the Internet of Things will have a major impact on the supply chain. “We’re going to have connected suppliers who are going to be able to transfer demand all the way through the supply chain automatically, and we’re going to wind up having perfect inventories and perfect solutions. I think the IoT is going to change your life,” he said.