Changing Landscape: Procurement’s need to expand beyond cost reduction

Need to expand beyond cost reduction

How procurement organizations must expand beyond the traditional role of a cost reducer.

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Excerpts from Tim Tolhurst


Procurement organizations must shift from short-term wins to thinking about the supply markets of the future

For me, I think the big dilemma, of course, at the moment is, not only procurement organizations are being relied upon in a very traditional way to support the profit targets of their business, drive down costs, drive down prices, get short term wins from suppliers, but at the same time, they’re thinking about, how do we develop a game plan, a strategy, scenarios, and sort of predictive models which enable us to think about the supply markets of the future.

In the changing global environment, we need to do more with what we have. But if you take the long term, and you think about what’s happening in the world in the long term, if you take some of the sort of macroeconomic indicators, I mean, we anticipate that the population of the world is going to increase to 9 billion by the time 2050 comes along, you see the rise of the middle classes in China and India and other of the high growth economies, you see that there’s competition for what the world can give up is becoming more and more intense, and I think we’ve arrived at a stage in our lives, if you listen to Feike Sijbesma, our CEO, where we as individuals and as companies need to arrive at a stage where we do more with what we have, and we do more with less.

What will you do when the markets shift to the seller?

If you take the combination of those things together with the boom that’s going to take place in the U.S. around shale gas and the reinvestments in their chemical industry, look at all the money that’s going into Africa, look at the fact that biosciences, the bio-based industry is now competing with the feed system.  The markets ultimately are going to come under tremendous pressure.  I mean, at this moment, I think there’s huge uncertainty, there’s huge volatility, and I think there’s, it’s very difficult to navigate and predict what’s taking place, but if you take a longer term view, I think ultimately, as those macroeconomic factors kick in, then I think the markets are really going to shift towards the seller, and I think at that moment, you have to have a different approach.  You have to have different game plans, different thinking, different scenarios, different models, which help you to secure transparency and continuity in your supply side, so that you can understand how to develop the kind of relationships you need with customers.

How do you create value drivers beyond cost savings?

We developed a strategy in DSM which is called “Beyond Savings,” which I think was a good name, because it really captured the spirit of what we were trying to do.  How do we create value drivers or value contributors which go beyond the traditional type of benefits and focus that procurement had had?  And so we started that in 2010, and we had this idea that by the end of our strategic plan period, 2015, that we would have made this transformation, the innovation from supplier sustainability, from suppliers [ph 00:03:19] asset light type, relationships with suppliers, was going to be firmly embedded in the business, and so we’re now, 2013, and I think we’ve made some progress.

You have to get a grip on the way suppliers operate

JOHN TROS:  If I look at what is happening around me, and what I see other companies, they have the same challenges at this moment.  They’re used to playing a leveraged buy game.  They’re used to focus on getting lower prices, and management has been really distanced from this decision taking, and now they start to notice that these changes in market, and going from a buyer’s market to a seller’s market is impacting their profit line, and they still think that, by pushing on cost, you can get these profits down, but in the end, it doesn’t work.  In the end, you have to find ways to get grip on supply, change it, get a grip on supply, get a grip on how your suppliers operate, and get a grip on this innovation, and I think Tim, with DSM, is moving in the right way of doing that.

Procurement transformation is a journey that must start now

You need to start now. I think that’s important. I think if you don’t get ahead of the curve, I think that you could get some very tough surprises in the future. But I think it’s a journey. I don’t think there’s any silver bullet. I think it’s at least a 2-3 year journey to get yourself traction and to anchor that, and then probably more so, it’s a sort of 5-6 year journey before you can really say that you’ve made that kind of transformation.

About Tim Tolhurst, DSM

Tim Tolhurst has been the Chief Purchasing Officer of Royal DSM since January 2010. Tolhurst joined DSM in November 2009 from Firmenich Group, where he was Global Vice President Purchasing and Logistics. Tim is highly experienced in the area of Purchasing and has held several senior positions in this field with previous employers including Thorn EMI, Mars, SmithKline Beechamand Quest International.

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