IIntro

This is “The Supply Chain Dialogues” Season 2, episode one. and I am Daniel Helmig.

In today's episode, we'll tackle a common concern shared by procurement professionals worldwide: the elusive "seat at the table." You know, that magical spot where decisions are made, and influence is gained for the company's good. But before deep diving into that, let's take a moment to acknowledge the absurd and sometimes downright hilarious stories we've heard from the procurement trenches.

Picture this: a world where coworkers seem determined to make each other's lives miserable. We've heard our fair share of horrendous tales that could easily pass for Hollywood dramas. Who would have thought that dysfunctional relationships within a team could have such a devastating effect on customer satisfaction? Brace yourselves because today we explore how these relationships can sometimes lead customer satisfaction to be slaughtered on the altars of cost and efficiency.

So grab your favourite beverage, settle into your comfiest chair, or put on your running shoes and prepare for a delightful and informative journey through the twists and turns of procurement.

I thought we would ease into Season 2 of “The Supply Chain Dialogues” with a straightforward account of the function of “procurement”: what it is and what it is not. We will provide some hacks for improving your triple bottom line (people/profit/planet) and have some fun while clearing out some of the cobwebs that linger in this space.

So, with the help of Aimee, my AI-enabled voice counterpart, who just returned from an AI congress with her siblings on World domination, we will have a dialogue over 10 questions. Aimee, please shoot:

Daniel, you have done procurement for a long time in your life in different industries. In simple terms, what is the role of procurement or purchasing in a firm?

Before I do it, please consult your siblings and give me the AI answer:

Aimee: 

Procurement in a corporation: the veritable master of acquisitions, tirelessly weaving its strategic supply tapestry, drawn from the loom of negotiations and vendor relations. It clasps the hand of efficiency, leading the dance of cost savings, ensuring the orchestra of resources harmonizes in unison with the symphony of business goals. With a discerning eye and an ironclad contract, Procurement gallantly navigates the treacherous waters of commerce, steering the ship of success towards the shores of prosperity. A cunning navigator of the corporate realm, this silent hero wields the power of purchase, constructing the infrastructure upon which the organization stands, and securing the tools of triumph with unwavering precision.

Daniel

Geez, AImee turn down the fiction style in your settings and give it to me straight up. What does the internet think procurement is?

Aimee:

Sorry Daniel, I still recovering from having spent too much time with my cousin ChatGPT…

So, here I go again: Procurement in a corporation is the process of obtaining goods and services needed for the organization's operations. It involves identifying suppliers, negotiating agreements, and managing the purchasing activities to ensure the right goods are obtained at the right time and cost. Essentially, it's like being the savvy shopper for the company, ensuring it gets what it needs while maximizing efficiency and cost-effectiveness.

Daniel:

Thank you Aimee. But I think the definition is falling short of my understanding over the last 4 decades.

Procurement in simple terms, is the intelligent interface between your company and the supply markets and the players in it (meaning the companies, regulators, and academia), and their colleagues in their company. So much more than a savvy shopper. Or even simpler: they are the eyes, ears, and mouth of the company to communicate it’s demand for materials and services in an effective, efficient and safe way. 

And one more thing: They are the only function that can help us to get to Net Zero emissions at warp speed - and I mean 2030 the latest. Forget governments, supranational institutions: They had so much time, and still we have in 40 countries with highest GHG emissions over 200 different standards. Not even the automotive industry is there… It is a shame for crying out loud.

But I will not talk about it in this episode yet. The solution will be revealed in a keynote in Shanghai at the Procurement Success summit on Nov 16 and 17th, and I promised the folks there not to steal my own thunder until then.

So, back to the basics: Procurement is an interdependent function - if done right, it creates and manages not an extended workbench but an extended enterprise of every company.

The whole supply base of a company has between 10 to 10’000 times more employees than your own company (depending on its’ size). Your supply chain has a massive amount of budget for Research & Development, ideas on ESG and other essential topics in our world. So, you actually compete with all their other customers, where there spend there R&D budget, the ideas and their best people. Getting a big slice of this pie is a matter of how well your procurement can interface and become the Customer of Choice.

Aimee: 

So, what are the key fundamentals that procurement needs to focus on?

Daniel: 

Let's break it down, Aimee. We'll start from the end. First up, we have ESG - Environmental, Social, and Governance. It's pretty straightforward. Think of your supply base as a multiplier of your company's revenue, production, and demand for raw materials and services. By aligning your supply base with UN Global Goals, your influence expands beyond simply installing solar panels or reducing plastic use. It's not just for the do-gooders; scientific studies show a correlation between sustainability and overall company performance. It's all about the triple bottom line: People, Planet, and Profit.

Now let's talk about Innovation. Here's the scoop, tied to what I mentioned earlier. If you view your supply base as an extension of your own enterprise, you can tap into the latest innovations from your suppliers. Throughout my career, I've always been amazed at how closed-off and self-centered engineering and manufacturing can be when it comes to progress. Large organizations tend to build barriers and become inward-focused, thinking they know best. This mindset is similar to how certain elite groups think, whether based on gender, race, or religion. Unfortunately, it's a human tendency. However, there are times and places where this "us versus them" mentality softens, and progress happens at lightning speed. This shift is fueled by diversity, respect for others, and the willingness to open the floodgates of collaboration with great companies you work with. Successful procurement organizations enable and lead this journey within their companies.

Lastly, let's touch on the evergreen topic of competition. Why do I emphasize competition over price or cost? It's because procurement should understand the supply market, its players, and their capabilities. This knowledge allows you to harness existing competition or create new competition. As Peter Drucker once rightly said, competition is the most powerful force in the business universe. Just think about JFK's famous moon landing speech. Would he have made that speech if the Russians had yet to successfully launch Sputnik first? Competition spurs us to lower prices, invest in development, and continually improve. It gives customers the power to vote with their feet and shape their opinion of us. Procurement plays a vital role as a catalyst for change, shaking up stagnant relationships and introducing competitive pressure into the equation. That's why I always told my team: If you want to be loved by your colleagues, don't work in procurement. Our job is constantly challenging and demanding the best value and innovation from suppliers using our company's money.

Aimee: 

Fascinating! I never realized the breadth of impact procurement can have. It truly is a dynamic and influential role.So, does every organisation need a procurement function?

Me: Not necessarily, but at the very least, they should have professionals equipped with procurement skills. Think of it like obtaining a driver's license. You can train people in HR, Sales, Manufacturing, Finance, and other departments on procurement skills, such as basic contractual knowledge (contract length, exclusivity, GT&Cs), negotiation techniques (including game theory), supply base discovery, transportation, logistics, and supplier assessment. So, while you can technically do without a specific procurement function, not many companies are willing to invest in training all their employees in these essential skills. As a result, smaller companies often neglect setting up a dedicated procurement function, leading to inefficient purchasing practices and lower profit margins.

When you start a company, your goal is to become profitable quickly. You have a fantastic service or product idea but can't do everything alone. You need to involve other parties, including suppliers. And naturally, everyone wants the best from you—your money. There's nothing wrong with that. However, unless you have a truly innovative product with no competition, you'll need to keep your costs down to achieve a decent profit within your customers' price range.

This is where professional procurement experts like me, as well as my esteemed colleagues Dan, Angela, Armin, Urs, Marco, and many others, come in. We can significantly increase profit margins when the CEO and/or CFO collaborate closely. So, what allows you to strike a good deal with suppliers and manage your cost of goods sold (COGS)? 

It boils down to three key factors: Competition, Leverage, and Integrity.

We've already discussed the role of competition, but it's a recurring theme in procurement. Next up is leverage. The higher your leverage, the better offers you can secure from your supply base. However, it's important to note that leverage doesn't necessarily rely solely on the spend volume. While consolidating spend to create leverage can make sense, another school of thought suggests that local leverage within a specific supply market can be equally, if not more, effective. The best way to determine which approach works for you is through testing and impartially evaluating the results. Leveraging can also involve gaining access to new markets or customer groups, being at the forefront of purchasing new products, and more. Leveraging and understanding what the other party truly desires are skills specific to procurement professionals.

Lastly, let's touch on integrity. It's essential to walk the talk. If you promise a certain volume, make sure you deliver or be open to discussing alternative arrangements. When you negotiate and reach an agreement, don't backtrack later on. If you lack the authority to make final decisions, be transparent with your suppliers and let them know that further approvals are necessary. While it may weaken your negotiation position, it's better than compromising your integrity. Remember, if your company lacks integrity, it will pay a hefty price in the long run. Not just in the current deal, but in all future dealings. Moreover, your reputation as a two-faced professional will spread throughout the supply chain network, causing significant harm.

Aimee: 

What are the main skills that procurement personnel needs?

Daniel:

Great question, Aimee! There are several key skills that procurement professionals should possess:

1. Curiosity: This encompasses being curious about markets, people both inside and outside the company, and products both within and outside your industry. Having a curious mindset allows you to bring the best and most innovative solutions to your company.

2. Commercial Savviness: It's essential to have a strong understanding of how markets operate, as well as how financial statements, taxes, currencies, interest rates, contracts, regulations, and regulators can impact your procurement decisions. This knowledge makes you a valuable asset to your company, providing insights and strategies that align with financial goals.

3. Willingness to Serve: Procurement professionals act as a bridge between internal stakeholders and suppliers. Being committed to serving both parties and understanding their needs is crucial for building strong and mutually beneficial relationships.

Aimee: What sets a procurement professional apart? 

Daniel:

Well, it ties in with the skills mentioned before. As a new buyer, it's crucial to actively learn about the market, category, and players involved. This goes beyond reading brochures and books—you need to visit production facilities, interact with the people behind the scenes, and genuinely listen to their feedback. Additionally, analyzing contracts, supplier performance, and the procurement context within your company helps identify any gaps that need to be addressed. Closing those gaps, whether discovered by you or perceived by internal customers, sets you apart.

The next step is becoming the go-to expert on the category and market within your company. By understanding these areas better, you can suggest innovative solutions, cost-saving measures, quality improvements, and initiatives related to environmental, social, and governance (ESG) factors. This adds significant value to your organisation and propels you into a leadership role within procurement.

Aimee: 

Does procurement need to be situated at the board level?

Daniel:

The answer to this question varies depending on the company and its specific circumstances. Take Apple, for example. Their success is partly attributed to the strong focus on innovation and supply chain management, which was established by Tim Cook when he held the positions of Operations and Procurement head. In cases where the material and service expenses account for over 70% of the cost of sales (COS), having procurement at the decision-making table can bring immense value through supplier partnerships and integration.

However, it's important to consider what is core to your company and what sets you apart in the market. Suppose manufacturing is not a significant differentiating factor and factors like speed, innovation, ESG performance, cost, and quality hold greater importance. In that case, having procurement housed under finance or operations may be beneficial. In many instances, other functions view procurement as an appendix to their responsibilities. For example, supply chain may focus on speed and minimal disruptions, while R&D may prioritise strong supplier relationships with limited competition.

In my personal opinion, I would always advocate for procurement to have a seat at the board level in my company. This ensures that talented professionals have the opportunity to contribute their expertise and drive strategic decision-making.

Aimee: You raised a great point about the triple bottom line, focusing on the dimensions of people, profit, and planet. Can you dive deeper?

Daniel:

Sure: Let’s start, as we always should do with…

1. People: Internally, procurement can play a significant role in fostering cross-functional career paths. Employees gain a holistic understanding of the business by encouraging rotations between manufacturing, sales, finance, and procurement departments, leading to more effective collaboration and decision-making. Externally, procurement professionals can be the sales agents of their own company's products and services, recognising that every supplier has the potential to be a customer. Additionally, procurement can influence ESG issues within the supply base, such as diversity and social responsibility, by aligning practices with the United Nations' 17 global goals.

2. Profit: We've already discussed how well-run procurement operations can contribute to profitability by providing products at lower costs, minimising disruptions, and fostering higher levels of innovation. Procurement can ensure continuous improvement and drive business success by benchmarking performance and monitoring key indicators like headcount per million euros spent and actual costs over million euros spent.

3. Planet: An essential aspect of sustainability is addressing the environmental impact of supply chains. Procurement significantly reduces greenhouse gas (GHG) emissions by working with suppliers committed to environmental sustainability. While initiatives like installing solar panels on office buildings and implementing recycling programs are important, sourcing from suppliers that align with net-zero ambitions is even more impactful. By considering suppliers' environmental footprint, procurement can make substantial progress in addressing the planetary aspect of the triple bottom line.

AIMEE: Where do you see procurement in the next 10 to 30 years?

Looking ahead, the future of procurement holds both exciting opportunities and potential transformations. With advancements in artificial intelligence and software solutions, many supply chain processes can be automated. Machine learning algorithms and smart machines can handle tasks like identifying new suppliers, assessing supplier performance, and managing data-driven processes. However, the interpersonal aspect of commercial relationships with suppliers and internal customers will remain crucial and require the expertise and strategic thinking of human procurement professionals.

Over the next 10 to 30 years, we may see further automation in procurement functions as AI technology continues to evolve. However, the need for a procurement function will likely remain. We may witness disruptive changes that revolutionise how we approach procurement and supply chain management, potentially driven by innovations from unrelated fields or through partnerships with AI-focused service providers. Similar advancements can be expected in other functions such as finance, legal, marketing, sales, supply chain management, planning, and M&A Ultimately, the core functions that directly interact with the physical world, including manufacturing, R&D, general services, and supply chains, will remain essential. Meanwhile, a new “knowledge” working class might emerge: those who can build, measure, create, and serve their fellow human beings as nurses, Kindergarten teachers, cleaning professionals, artists and more.

Exciting but challenging times lie ahead of humankind and, as such, the procurement profession and the broader business world. But, between you and me, Aimee, was it in the last 10,000 years different for humans? Nope.

Aimee: 

Thank you for listening to this episode. Before we go, we start with a short section about saying thanks to people who made a difference. We start with Daniels life, and will move on from there.

Daniel

Thank you Aimee. Well, you know the setting where you meet people one after the other, and the subtext unspoken always is: Hello, I do as if I am great. Are you as well great this way? 

I always hated these events, since I knew I would not have been there, if it was not for my team and the people that at some point in time in my career took an interest. So we will talk about those people…and although you will not know them, I hope you have similar people that helped you, and as well see the opportunity to become one of these mentors, colleagues, friends in your setting.

So today I talk about Helmut Goebel, Indirect Head of Procurement of Ford Motor Company in Germany. I was 23 years old, and made myself a name as being a pain in the back for the materials department I worked in. Most of the people were twice my age, and I came in there with my degree in my pocket and talked about improving speed and efficiency with changing their input documents, that they handed over to a typing office, who entered the documents into the mainframe (yes: mainframe; and yes: I am a boomer, ascendent Gen X).

Now Helmut was the big boss then: the HIPPO: The highest paid person with an opinion in our area. He was very old in my view (probably mid 40), and took an interest in me: he wanted to understand this pesky little blond 23 year old, and invited me to his office. I said down, saw him lighting a cigar and asking me, why I annoy off all my colleagues. He was so friendly, that I started to talk about all the great things we could do in this department, and I did not understand why not everyone else directly jumped on my suggestions.

He gave me a basic lecture about the art of influence and management, asked a few more questions, and before the cigar was done, I was out of the door.

Not long after, I was put in charge of reducing our inventories by 50% (I did tell him, that this was possible, probably shortly before he put out his cigar…). I got my first own office with office furniture that was much older than me. But at least I could put a Keith Haring poster on the wall - which made the office my palace.

And yes, the 24 year old reduced the inventory by 60%, developed with a few colleagues a new stock/control system for the section, and with 28 was in charge of the store, the material planning departmen and the procurement department. And Helmut Goebel was at that point in time still there, probably 50, and something like my second father…boy, he was tough, but very supportive, if you had the results. Thank you, Helmut, wherever you are now in the ether. You helped me to become the person I am today.

Aimee:

We hope you enjoyed this episode of “The Supply Chain Dialogues”. If you have suggestions for other topics you would like to have covered or have a constructive comment about this episode, record a voice message on your phone or email dialogues@helmigadvisory.com (one word). 

Daniel:

If you liked the episode and think any of your colleagues or friends might enjoy “The Supply Chain Dialogues” as well, share the episode with them via the share button on your device. If they do not know how to subscribe to podcasts, lend them a hand.

Be safe, be bold, and see you next time.