Procurement teams need to create a vision for how they are going to deal with digital transformation.
Chris Sawchuk, principal at Hackett Group, said a survey of buyers conducted by the group found 95% believed digital transformation would change the way the function worked over the next five years.
But the same survey found only 66% of procurement teams had a strategy, and just 48% felt they had the competencies or capabilities to cope with digitalisation.
To make matters worse, Sawchuk said he thought these numbers were inflated and fewer teams actually had strategies or the right capabilities. “I think they’re too high. I work with a lot of organisations around the world and I don’t see the visions out there,” he said.
“Procurement seemingly understands that we have to transform ourselves from a digital standpoint. That will fundamentally change the way that we do things. But creating a vision or strategy, as well as garnering the appropriate resources, is a challenge for us. We don’t feel as confident in our ability to do that.”
Speaking at the Procurious Big Ideas Summit in London, Sawchuk gave buyers his advice for managing digital transformation.
Five top tips for preparing for digital transformation:
1. Even if you are not ready for digital transformation, create an environment where you are aware of what digital changes are happening. “I deal with a lot [of organisations] that don’t even know how to spell ‘digital’ yet,” said Sawchuk. “Make your people aware, understand the potential of some of these digital technologies that are happening.”
2. Digital transformation is about talent. “It’s not just about the technology. We have to transform our talent, the skills because there are things that we are doing today that are going to go away.”
3. Focus on creating comprehensive skills coverage across your team, not just on each individual member’s skill set. “We can’t create supermen,” said Sawchuck. Ask yourself: “Where do I have this? How do I create the best balance in the organisation, understanding I probably can’t get it in any single individual?”
4. Create a failure-tolerant culture. “Don’t shoot your wild ducks. We [procurement] have a tendency to do that – and if you fail we’re definitely going to shoot you. We’ve got to change that.”
5. Don’t just paint your vision, also outline how you and your team will get there. “A lot of organisations, their leaders have great ideas and can paint the vision,” said Sawchuck. “John F Kennedy, ‘We’re going to go to the moon’. Well, how are we going to get there? Paint a path because sometimes a vision scares people, and as you show the path they feel much more secure.
Some say there is an inherent conflict between procurement and innovation, but it made Google’s lifesaving Project Loon a reality. The function has the potential to enable transformative ideas – if it learns how to operate in a shifting innovation ecosystem
When David Natoff was leading strategic sourcing at Google, an unusual request landed on his desk: to buy a $50,000 balloon. With an average project spend of $3m, it would have been easy to reject the request and say: “I’m not working on this, it’s too small,” he recalls. But he threw himself into sourcing the perfect balloon.
That one balloon became 2,000 balloons. It was the prototype of Google’s Project Loon, a research, and development project with the mission to provide internet access to remote areas. “It became a much bigger prospect – and we managed to reduce the costs,” says Natoff. Several years later, when storms battered Puerto Rico in October 2017, Google was able to use the balloons Natoff and his team had procured (above) to provide 4G internet access to areas that had been cut-off. In the wake of the storms, the balloons delivered basic connectivity to 100,000 people, helping them connect with emergency services and loved ones.
For Natoff, who now runs his own consulting firm Blue Sphere Consulting, the Project Loon anecdote neatly encapsulates how procurement can be a player in innovation. “Procurement can be innovative when it’s an enabler rather than a cost-savings blocker,” he says.
Frank Yiannas, VP food safety at Walmart, set a challenge for his staff.
He gave them a pack of mangoes and told them to find out where they had come from. Six days, 18 hours and 14 minutes later they came back with an answer.
The mangoes had also been tracked by blockchain as part of a pilot scheme, and by looking on the blockchain the point of origin took just 2.2 seconds to find.
Before Yiannas set the challenge to his staff, he had worked with Stephen Leng, supply chain solutions portfolio and blockchain leader at IBM, to create a blockchain system to shadow Walmart’s traditional monitoring processes.
The implications of blockchain on food safety are huge, said Leng, who was speaking at a CIPS Bedfordshire and Hertfordshire branch event. “Five percent of all product recalls in the US cost over $100m – that could kill a category.”
Case in point was a massive spinach salmonella outbreak that hit the US in 2015. It took weeks to resolve and spinach was cleared off shelves across the country, killing sales for that period. “When they found out where it came from, it came from one small supplier who had used the wrong process in one field,” said Leng.
Food safety was one of the first blockchain applications Leng worked on, despite the challenges. The easy option would have been to start something already semi-digitalised. Food safety, on the other hand, was “full of people, messy processes, waste, and products going off”, he said.
The first proof of concept IMB and Walmart worked together on was tracking a pork supply chain in China. “[We could see] it’s been cut, it’s been processed, it’s been despatched, it was at this temperature – all of those process steps were just uplifted to the blockchain and put onto a dashboard so anyone could see them,” he said.
The team then wanted to see if they could replicate the results with a completely different product, mangoes from South America.
In this pilot, Leng’s team uploaded all supplier certificates to the blockchain. Certificates can be a huge problem for retailers because they need to be up to date, the wording needs to be correct and they have to be audited – Walmart has more than 50 people checking certificates. The result: “We were able to display all the data around that movement of mangoes to the shelf in a very simple way,” said Leng.
IBM is not just working with Walmart on its food trust platform. There are a number of participants including Kroger, Wegmans, Doll Foods, Driskel, Nestlé, and Unilever, among others, and Leng predicts eventually suppliers will be told they need to be on a blockchain.
Blockchain for business has some key differences to the technology used for cryptocurrencies like Bitcoin, said Leng. It will be a closed environment where participants need to be invited to the service and where no one can be anonymous.
Also, while cryptos use algorithmic proofs to validate transactions and maintain anonymity, on blockchain for business the validation will be done by humans approving transactions.
“The validation of the transactions and the approvals of the transactions are done by the participants of the blockchain – they’re approving it because there’s a consensus around that blockchain,” said Leng.
“It’s like a social network more than anything else, because we all have to agree,” he said.
Procurement and supply chain remains a male-dominated profession. So I asked women holding mid-level to senior roles in this field for a few pieces of career advice for their fellow female procurement professionals. Here’s what they had to say.
“Make yourself heard! Don’t be afraid to speak up!” — Wendy L. Tate, associate professor of supply chain management at University of Tennessee
“Procurement professionals have heightened awareness about the power of transparency for ensuring a level playing field in the economics of contracting and purchasing. Why do we accept a lack of transparency in talent management practices? On this International Women’s Day let’s pledge to #BeBoldForChange and start speaking up about transparent and objective talent management practices in our companies. Companies win when 100% of the workforce competes on a level playing field.” — Elba Pareja-Gallagher, director of finance at UPS and founder of ShowMe50
“You do not need to hide your femininity. Use your female skills of empathy and emotion to become a leader. Don’t shake hands like a weak woman!” — Dawn Tiura, CEO of SIG
Network and Find Mentors
“Form relationships, seek mentors and offer yourself as a mentor to others. Build a broad spectrum of mentors by targeting both women and men, all levels of seniority, different job functions, internal and external. Mentors open the door to a tremendous amount of knowledge and multiply the size of your network.” — Christina Gill, manager of Eastern Hemisphere Global Supply Markets Group at Halliburton
“It’s all about the people. You can have the best ideas in the world, but if people don’t buy into them, nothing will materialize.” — Dawn Tiura
“Schedule time with others in the organization — you need mentors and sponsors that will help you be successful — go out and find them! Build a strong and highly connected network, particularly with other women in the field of supply chain. They will be very strong allies.” — Wendy Tate
“Share your learnings generously with all the women around you.” — Elba Pareja-Gallagher
Be a Voracious Learner
“Learn from your mistakes and move forward. Don’t beat yourself up on your mistakes, but rather use them as learning opportunities. Call everything a draft or a pilot. These two simple words open the door to helping you try new and innovative things. Something doesn’t work? Don’t sweat it — it was a pilot you were testing!” — Kate Vitasek, author and faculty member at University of Tennessee
“Like it or not, it’s still a man’s world. We need to get better at surviving and thriving. I recommend reading Shaunti Feldhahn’s book ‘The Male Factor.’ It is a well-researched book that examines the differences between men and women and how they play out in the workplace. Very insightful!” — Barbara Ardell, senior vice president at Paladin Associates
Dawn Tiura’s current reading list
“Never stop learning. Read a good business book at least once a month.” — Dawn Tiura
Last but Not Least, Work Hard
“As someone who has held various supply chain or STEM positions since 1979, I believe there has never been a better time for women in supply-chain to excel and be recognized for their achievements. My recommendation is to accept the challenging assignments that others may not want; work diligently toward achieving substantive business results; effectively communicate these results to demonstrate your contributions to the organization.” — Sue Purdum, senior instructor of supply chain management at Pennsylvania State University
“I’ve spent a lot of my career doing basic operational blocking and tackling. Don’t try to skip that part because it seems unexciting — it’s what clears your way to be able to think about grand supply chain innovations.” — Shoshanah Cohen, author, and advisor on Target’s Supply Chain Council
“As a procurement professional, there are plenty of opportunities to bend rules and/or compromise values in order to meet a more favorable result. However, when you consistently operate with integrity in your sourcing process as well as your interactions with suppliers and stakeholders, it becomes a part of your personal brand that lives far beyond that moment. It builds trust in you as a professional and enables greater success.” — Kanita H. Brown, managing partner at K.H. Brown Solutions
“Have a positive forward-thinking attitude and approach. Don’t think of your job as your ‘job.’ Rather, come to work each day with the mindset to not only get your work done but also challenge the status quo and seek a better way to do your job.” — Kate Vitasek
Building on mature strategic sourcing practices can transform organizations beyond corporate borders and capture value
Most people learn the value of co-operation in the home, the schoolyard or on the sports field. Most companies recognize the need to promote cooperative and collaborative working in their organizations too, and many have made strenuous efforts to break down internal barriers and foster closer working relationships. As an increasing fraction of the value of products and services moves out into the extended supply chain, however, companies are finding it much harder to extend their collaborative processes across corporate boundaries.
Some companies have tried supplier collaboration with only limited success. Others believe they have run out of room in their collaborations. We believe that most companies can get more from supplier collaboration if they start again from first principles—that is, if they rethink the nature of their strategic supplier relationships.
We define supplier collaboration as the joint development of capabilities for both the customer and supplier for the purposes of reduced cost, process improvements, and innovation in products or services. In 2012, McKinsey surveyed more than 100 large global companies on supplier collaboration practices. The survey distinguished traditional sourcing tools (such as clean-sheet cost models) from strategic investments and long-term projects with suppliers for co-development.
The results were fascinating. Although over a third of the respondents said they collaborated with suppliers, fewer than 10 percent could demonstrate systematic efforts on supplier collaboration. More importantly, among those who did collaborate, the EBIT growth rate was double that of their peers.
Do suppliers benefit from such relationships, too? Yes, they can. Their business is more stable, they become more cost-competitive, and they improve their core capabilities. The suppliers can then deploy these capabilities to win more business externally. In a 2010 survey of the auto industry, we found the suppliers that gave Toyota and BMW the highest cost reductions also rated the two OEMs as their best customers. That is the mutual benefit of long-term collaboration.
Our experience shows there are three keys to developing profitable supplier collaboration.
1. Build a foundation of internal collaboration before external collaboration
Before embarking on a new program that demands a significant amount of time and resources, it’s important to know if the company has the internal capabilities and strategy alignment to make the external collaboration a success. Under-investing in these internal activities is one of the top reasons supplier collaborations fail.
So how do you assess or determine whether your organization has the capabilities to make this kind of collaboration a success? First, consider the skills required for the particular type of collaboration desired (described in more detail in the next section). For example, do your buyers have a solid foundation in clean-sheet modeling and sourcing strategy development? Do you have access to internal expertise in lean, supply-chain management, and product development on what would become the supplier collaboration team? Only after you’ve addressed these needs would your organization be ready for supplier collaboration.
As an example, take a procurement function that is comprised primarily of tactical buyers who spend much of their day fulfilling orders. They may not have the expertise to identify joint cost-reduction opportunities or to work with suppliers to improve the product development processes. Organizations in this position are better served by investing in traditional sourcing and leadership capabilities first. Until this happens, suppliers have little incentive to try anything more ambitious.
But companies that have the fundamentals in place need to focus on more advanced, collaboration-specific skills, such as value-sharing mechanisms and developmental agreements. Value-sharing models need to be simple, and properly incentivize performance for both the customer and the supplier. Common incentives for suppliers range from extending contract length to splitting cost savings 50/50, negotiating a pre-determined benefit to the buyer (e.g., 5 percent cost reduction per year) with the rest going to the supplier, or to joint investment in capital projects for further capacity. Joint Developmental Agreements (JDAs), recommended in cases where IP (Intellectual Property) might be created, must clearly define the scope of the work, confidentiality obligations, intellectual property rights, exclusivity terms, and release criteria, to name a few.
Building momentum with small wins is important. Ultimately, though, supplier collaboration teams should work on large and ambitious projects for the maximum impact. To do so, the collaborating companies must align on which suppliers, products or service lines to invest in, and it’s important to do this with the input of relevant cross-functional leaders internally such as manufacturing, R&D, engineering, and product line leadership.
Together, you need to answer the following questions:
What business units, product or service lines should be prioritized based on factors that include potential profitability, urgency, risk, and crossfunctional leadership support?
Which suppliers are providing critical components or services?
Is the spending for prioritized products or service lines growing?
Is it specific to a particular geography?
Is the opportunity to reduce cost, improve performance, or conduct product innovation big enough to justify the resources required?
Will this help to gain a competitive advantage?
A large North American industrial equipment manufacturer wanted to unlock the potential of supplier collaboration. To determine which suppliers to invest in, it took a three-point approach.
First, the manufacturer ranked their suppliers’ strategic value, by mapping the importance of the products they supplied versus the ability to obtain them. Second, it reviewed each supplier’s performance versus expected capabilities. This helped the company to define what the supplier could bring to a developmental program. Finally, the manufacturer evaluated these results to determine which suppliers to partner with to increase collaboration (see Exhibit 2). A side benefit of this exercise was a clear understanding of the relative value (or lack thereof) of their different suppliers, leading to insights on which ones needed to be replaced, motivated, or rewarded.
In this formative phase, you must clearly outline the goals of the program as well as the roles, responsibilities and time commitment of the teams. Business and functional leaders will need to provide support from the outset, and cross-functional leadership teams must be committed for the long haul.
2. Design the program to meet a specific business imperative
We have identified three types of supplier collaboration programs. Each meets different business objectives and requires varying levels of expertise to execute.
Collaboration for cost reduction focuses on cutting costs for both sides beyond traditional sourcing levers. Suppliers are treated as partners, not as cost centers, necessitating the development of long-term, trusting relationships. Some examples of how interactions change: negotiations are based on full transparency into costs, with healthy margins and growth guaranteed; specifications are jointly optimized to eliminate unnecessary features; and demand transparency is created based on production patterns to optimize inventories. This kind of cost-based program requires mature procurement competencies, but is also the least complex compared to other collaboration options. A company with no or minimal experience in supplier collaboration programs may choose to begin here and work its way up.
Collaboration for value beyond cost: this could be the right program for companies that want to improve safety or the quality of products, develop additional sources of supply for a new or capacity-constrained component, or work with a supplier on lean improvements. While these changes can and will reduce costs, the work is focused on value beyond purchase price, and requires a greater degree of cross-functional expertise to execute. One example would be an oil major company collaborating with an upstream drilling services provider to contain the cost and time of capital projects.In another case, a leading freight railroad had outsourced the repair of its railcars to a sole supplier. Despite high rates of idle time and waste, the supplier continued to win the annual contract. The railroad company wanted to partner with a competitive supplier who would also work with it to reduce the operational and capital costs that would eventually be charged back. The railroad approached multiple companies, including the incumbent, with the carrot being a long-term contract in exchange for competitive pricing as well as a collaboration program to improve the supplier’s operations. The result was a significantly more competitive bid price from the incumbent, and identification of 15 percent additional savings through joint lean initiatives focused on operational efficiency and capital cost reduction. Once the railroad mastered the basics of supplier collaboration, it embarked on supplier innovation, a more complex lever.
Collaboration for innovation is the practice of working with suppliers to improve the pace and quality of product or process innovation. It creates value in areas like design, speed-to-market, and consumer insights. This form of collaboration requires the most time, money, and trust; it also carries the most risk because of the experimental nature of developmental work and the need for more two-way trust than ever before. The two partners may have to negotiate sophisticated agreements on IP rights, licensing agreements, and warranties. The payoff, however, can be significant in the form of a better, more timely and competitive product (see example in Exhibit 3).
In the case of the railroad, a new program was started to de-specify head-hardened rail steel with an existing supplier and design a new rail steel specification. The end result was tens of millions of dollars in value creation per year through better TCO (Total Cost of Ownership). In order to embark upon the project, the railroad company needed advanced skills.
3. Build transparency and trust
Transparency and trust are essential for sustained success. A survey of 35 strategic suppliers to a large, global medical device company dealing with quality and cost issues found the majority did not trust that their innovative solutions were consistently and seriously considered by the customer. They considered this a primary reason for poor collaboration. The survey signaled to the company that it needed to restart its relationships on the basis of transparency (e.g., more clear, two-way feedback), with the expectation that greater trust would follow.
Successfully creating transparency and trust, however, can deliver remarkable value. One company in the financial services used just this approach to address persistent poor performance by its network of litigation service providers. It did this by first changing the way it interacted with vendors, simplifying lines of communication and establishing regular weekly calls with them. Then it introduced a transparent vendor performance management system, tracking results and error rates, and discussing them with each vendor in monthly reviews. The company supported these efforts with changes in its own organization through the creation of dedicated teams for vendor performance management and collaboration.
Finally, the company modified its working processes in ways that addressed key pain points and allowed both it and its vendors to benefit. For example, it gave vendors power of attorney to sign documents on its behalf, reducing frustrating delays as documents were sent back and forth. It also changed the way work was allocated, so higher performing vendors got more, and it collaborated with its vendors to identify and eliminate unprofitable lines of work. The result of this effort was a startling shift in vendor performance. The cash recovered by litigation rose by nearly 80 percent, while the company found that it needed a third fewer staff to manage its vendors, and saved even more in filing fees and expenses. Even more importantly, the relationship between the company’s line teams and vendors was transformed, with free, open communication and a constant exchange of ideas.
Creating successful partnerships like this one is complicated, with a number of requirements. Some are preconditions that must be in place before the collaboration kicks off; others follow through the collaboration itself.
Preconditions: Write them down
Spell out the parties’ different commitments, including, at a minimum, capital expenditure and personnel (on both a leadership and working level)
Align to standard contract terms on the length of the agreement, renewal terms, and volume and price ranges
Specify the product range covered and the scope of the development effort. Options and agreements on the use of alternative suppliers and use of the capabilities developed by the supplier with any other customers must be explicit.
A value-sharing model must detail the targets of cooperation, defining the benefits and agreeing on how to share those benefits. Too many times the customer proposes a model that does not offer enough value, or the right value, to its suppliers, stalling the program before it even begins.
As an example, lithography equipment manufacturers for the semiconductor industry deal with extremely short product lifecycles, new technologies, and wildly fluctuating demand patterns. To incentivize suppliers to partner up with them, a leading lithography system manufacturer offered high margins (as a volatility buffer), equipment financing, and purchase guarantees with narrowing windows from systems to components. This value-sharing mechanism sustained the supply chain through the cycle, jointly reduced costs, dealt with wild swings in demand, and stabilized throughput and delivery. Both the customer and suppliers benefited.
Ongoing work through collaboration
These are matters that need to be co-developed and refreshed throughout the collaboration. For instance, supply chain management and operations teams must work out how to deal with exceptions to the agreement, such as through a joint review board. Similarly, for the collaboration to grow and sustain, there needs to be a mechanism to generate, evaluate and prioritize new ideas. If there is a foundation of trust and transparency, the collaboration will continue to grow.
* * *
The expression “win-win” is often overused. But highly effective collaborations between suppliers and purchasers are just that. The best result in competitive advantage for all players, and drive innovation and growth.
The authors would like to thank Frédéric Lefort, a principal in McKinsey’s Gothenburg office, and Lissy John, a consultant in the Washington DC office, for their contributions to our research efforts and to this article.
About the authors: JehanZeb Noor is an associate principal in McKinsey’s Chicago office, where Aurobind Satpathy is a director, Jeff Shulman is a principal in the Dallas office, and Jan Wüllenweber is a director in the Cologne office