Cost Leadership and the role of Procurement

 Cost Leadership and the role of Procurement

 

 

Driving successful Cost Leadership is in many places a necessity and Procurement and Contract Management plays an important role to achieve this. Procurement need to step up and use its skills and competences to influence the organization and the suppliers in ways to improve safety, efficiency, quality and cost performance.

In many companies, it is a prerequisite to use Cost Leadership as an integrated part of the business strategy. Within Oil and Gas, a very volatile oil price has in recent years made successful Cost Leadership execution a factor that decide if you as a company live or die. Within Wind Power the Cost of Energy has been a driving factor for competitiveness in a business regime where subsidiaries have diapered much fast than expected just a few years ago.

 

The role of Procurement in modern times will require skills and approaches that wasn’t in focus in a more traditional Procurement set-up, which had focus on driving the last 5-10% price reduction out of the cost of a service or product. 

 

The role of Procurement  

To be able to achieve Cost Leadership the organization as a whole, need to be involved and take ownership of it. The exercise will cover issues such as spend patterns and behaviors, cultural and operational challenges. Strong leadership and change management should be an integrated part of this. 

Procurement has a leading role to play and should be the driving factor in ensuring that the required changes towards Cost Leadership happens. Procurement and Supply Chain have a potential for influencing the value chain from demand, through suppliers and operational execution.

To be able to execute this role, Procurement need to have the fundamentals in place, which requires a mature and professional Procurement organization with a strong mandate. My article “Next generation Procurement organizations – from Procurement Management to Business Management” covers how to achieve this. The following will focus on the more hands-on activities, which should be used to achieve Cost Leadership. 

Safety comes first  

Safety should be first on the agenda. Procurement professional need to take the lead and influence behaviors, mind-sets and execution. This includes the whole value chain. A well-integrated safety culture has a substantial positive impact on cost, mitigating accidents, lost time incidents, shut down of the operation and production, bad reputation etc     

The Procurement safety mission statement

• We will take ownership of the supplier and contractor with the aim of influence safety and quality performance
• We will continuously engage with suppliers and contractors identifying and implementing safe and healthy ways to do the job
• We will maintain safety and health as a value that drives overall performance.
• We will hold each other accountable for taking the lead in improving our own safety performance but also to show leadership towards suppliers and contractors improving their performance

Cost patterns and spend behaviors  

Organizational behaviors have a substantial impact on cost. Budgets are not always transparent, assumptions missing. Savings are not deducted from budgets but used for more of the same. KPI’s are driving the wrong behavior. Maintenance and operational strategies are based on obsolete assumptions. Money is spent because this is what we nomally do, timing is wrong. The list is long.

To overcome the barriers and change behaviors, will require substantial effort by all parties. It is a cultural change and will require change management, change of “delegation of authority”, new approval processes, assumptions and strategies to be questioned and in general “why?” need to be a guiding word. 

One should though be aware that there is a close link between the above-mentioned activities and the chance of demotivating staff and efficiency deterioration, which will have a negative effect on the Cost Leadership results. This need to be treated with careful considerations.

Sourcing and Contract Management  

Driving professional and efficient sourcing processes and execution of contract management are fundamentals for driving cost down. Proper planning of the sourcing process engaging stakeholders and establishing value adding KPI’s that drives the process, are an integrated part of this. But it can’t stand alone.

Savings  

Generated savings need to be real savings, not artificial procurement savings. Savings need to be measured and booked to the accounts. This need to be done in cooperation Finance and the Contract Owners. Focus on this will create transparency in cost, procurement credibility and trust in the organization.

Contract management  

Contract management and proper utilization of contracts across the organization including Supplier Relationship and Performance Management, will in general give a commercial uplift to the operational performance and drive cost down. 

Category management  

Category management as a concept is well known to all industries and can be used to professionalize procurement activities across the organization and towards the suppliers. The services need though to have a complexity and a saving potential that justify allocation of resources. It is depending on the business in question. 

Cost push backs  

Well-coordinated Cost Leadership projects or cost push backs can be established having a structured dialog with suppliers and contract owners within all categories. The key is communication, follow-up, implementation and documentation of achievements. To be able to execute this with success, there need to be access to reliable spend data and cost performance figures.

New business models  

Other important tasks are the responsibility for creating new business models such as strategic partnerships with industry partners or suppliers, vessel pool arrangements, bundling of services and products, and optimization of access to the same. Finding alternative supplies will also drive cost down.

Procure to pay  

Implementation of Procure to Pay (P2P) processes will help getting spend under control, create organizational discipline with regards how money is spent and substantiate financial performance.

IT and data requirements  

Access to reliable spend data is vital for knowing what to focus on and for prioritization. Access to Procurement IT tools that improves data quality and efficiency in sourcing and contract management are very beneficial. The set-up should give value and give access to reliable data,which should be easy accessible.

Learning is vital  

As a basis for all activities mentioned above, active learnings need to be incorporated into all business process i.e. safety, operation, procurement, reporting etc. Experience shows that the ability to capture learnings and implement changes are key competitive differentiators from a business point of view. The ability to capture learnings requires a organization that understands the importance of this and a culture that embrace it. All this supported by the right IT tools.

Closing remark  

It should be mentioned that the needed skills of procurement professional are many. The importance of proper sourcing and contract management is now recognized as being a very important factor to reach Cost Leadership. Finding the right people with the right mind-set, commercial and technical skills are not necessary easy but they are vital for taking the lead toward Cost Leadership.

The Author: Johnny Mikkelsen

                                              

About:

During an extensive domestic and international career working as operator, contractor and consultant, I have obtained knowledge and developed competences within a number of business areas.  Functional leadership positions: Procurement/Supply Chain, Operation, Engineering and Business Development

Business sector experience: Energy (offshore), Infrastructure, Process and Pharmaceutical  Procurement transformation and cost leadership experiences covers full lifecycle procurement and contract management, cost leadership transformation processes, negotiation strategy and tactics and advisory related to cost-out exercises

Capital project strategies and contract managemen experiences covers contract strategies combining company risk profile and market conditions. Strategic partnership arrangements and performance-based cooperation, procurement activities related to outsourcing of operation and tail-end production

Leadership and management competences covers management and leadership based on empowerment and motivation. Strategic and tactical functional development and planning, operational due diligence and carve-out activities. Business process management.

Project Management competences covers project management of multidisciplinary projects, teambuilding and organizational development creating performance excellence, learning processes capturing past experiences, optimization of business processes and work flows. 

Business Development experiences covers domestic and International business development establishing business abroad, hiring local staff and development of business process and infrastructure. Tendering process support and contract negotiations, development of value propositions and new services 

Personal profile: I’m an extrovert person motivated by developing business and people, and by working in an international business environment. I have a strong achievement drive and is entrepreneurial by nature.