CPO Confidential

The need for stronger leadership in commodity risk management

Despite a series of events over the past few years - volatile commodity prices, supplier bankruptcies and natural disasters such as the Icelandic volcanic ash cloud - the perception that procurement professionals still aren't taking supply chain risk management seriously enough lingers. One reason, of course, is that during difficult economic times many organisations have concentrated on short-term cost-cutting and cash flow - righting the ship, as it were, rather than worrying about its future direction and factors that might throw it off course.

So it's always encouraging to witness minds and energies being channelled to manage risk more effectively and proactively. Last week I attended (and helped to facilitate) a very interesting one-day conference in Copenhagen on strategic commodity risk management organised by the Danish Purchasing and Logistics Forum (DILF) and Kairos Commodities, a specialist research and analyst unit. Although the audience was quite small  - about 40 people from Scandinavia, Germany and the UK - their interest in learning about some of the key methodologies now being applied in the commodity buying arena (some of them quite mathematically orientated) was commendable.

However, the results of a new survey among 300 European companies presented at the start of the conference showed that there is still some way to go before techniques such as "Value at Risk" (VaR) are applied in practice to enable well-informed decision-making to take place across major commodity spend areas. Almost two-thirds of companies did not have an enterprise-wide risk strategy, while 45% of purchasing departments did not have a strategy for tackling commodity risk.

The study's authors concluded that:

• Too much commodity risk is handled at the category, rather than portfolio, level.
• There is insufficient communication and co-ordination between procurement, finance and sales.
• Only a minority of companies hedge risk through the financial markets.
• Procurement departments generally lead on commodity risk, but they are understaffed.
• There is a limited understanding of the cost drivers behind major categories.
• Even when this knowledge exists, fact-based negotiations are not used sufficiently.
• Only half of companies have quantified the effect of commodity price fluctuations on their bottom lines.
• Renegotiations of commodity contracts typically take place at fixed intervals, rather than being driven by market analysis.

Overall, the message was that although commodity prices are likely to remain volatile, "commodity risk is not hot - yet".

Some companies are pushing ahead on commodity risk management - Diageo, the drinks giant, and Danfoss, a Danish industrial group, were two that shared details of their approaches at the conference. But the evidence suggests that there's a lot more work to be done over the next few years if procurement is to play a truly strategic role in this area.

Wanted: more CPOs who can cut it around the boardroom table

In 10 years as an editor covering the procurement world, I've attended my fair share of conferences and sat through hundreds of practitioner presentations. Many of these were basic and/or superficial, some downright dull, while others were simply unfathomable. But when listening to any CPO of a major company, the question in my mind was always this: "Can I imagine this guy (or this woman) sitting around a boardroom table engaging in an intelligent business conversation - not just a procurement one - with their CEO, CFO or other C-level executive AND walking out the door with their reputation enhanced?"

Sadly, in the majority of cases, well before the individual sat down again my answer was a resounding "No"! Perhaps it's unfair to judge people on the basis of a one-off performance like this, but then again how many chances do you get to impress a CEO these days? The problem was not simply a lack of charisma or leadership flair (though, by god, those things are in short supply in the upper echelons of the procurement community) but the feeling that they really weren't that tuned in (read "aligned") to the business agenda. To my mind, if a presenter can't explain clearly and simply at the outset why their internal colleagues give a fig about the project, initiative or programme they are about to describe, it's probably because they don't!

None of this would matter, of course, if procurement heads were happy just to do the stuff that procurement has always done - find suppliers, squeeze their prices, make them sign punitive contracts, and then shuffle purchase orders until it's time for the next deal. But that's not the case - most really believe they should be around that boardroom table on the basis that procurement's really, really important! Well, sorry, but that isn't enough - I recall one CEO telling me matter of factly that she didn't want her procurement director in the room if he was only capable of talking about procurement!

The upside of this state of affairs is that when I have been fortunate to hear a really smart and business-focused CPO give a presentation, I've not only woken up but also felt a kind of warm feeling inside. It's that sense of relief that comes from knowing that the next time somebody asks "What do you do?" at a social event, you can actually sound enthusiastic and proud, and perhaps even convince them that procurement is really quite interesting after all. 

(Note: It doesn't always work - cue this conversation I once had with one of London's famous black cab drivers on my way home from an overseas conference:

Cabbie: What do you do then, guv'nor?

Me: I'm a business journalist.

Cabbie: What do you write about?

Me: It's called procurement.

Cabbie: What's that then?

Me: Well, my readers buy all the things that go into this cab you're driving - the engine, the steel, the seats, the electronics, and so on.

Cabbie: Christ, that sounds boring!)

On Tuesday at the Ariba Live event in London, I listened to a presentation from Jon Kirby, CPO of AstraZeneca, the British-Swedish pharmaceutical company. I first met Jon a couple of years ago when he held the same job at Barclays Bank - in fact, he took part in a roundtable on world-class procurement I chaired that, by coincidence, also included his predecessor at AZ, John Taylor (you can read the write-up here). It wasn't so much that he was pushing the boundaries, in terms of the function's reach and vision (although he did say that it was now embarking on a few supplier development programmes); it was more his dynamism and clear focus on meeting the changing business requirements of Big Pharma (ie, more cost orientated).

While contract renegotiation and demand management were two levers that could, and were, being pulled to reduce costs, Jon stressed that "most of our future savings" would come from what he termed "strategic change" - new suppliers and processes, outsourcing and offshoring, hedging, and so on. High-impact results in these areas could only be achieved if procurement and the rest of the business worked together hand in hand. "It's not a procurement initiative, it's a business initiative," he said.

This, I'll admit, didn't excite me in the way that collaborative supplier relationship management and the innovation agenda does (see my previous post), but at least I could picture Jon around that boardroom table, holding his own and contributing to the wider discussion. That's not something, unfortunately, I can say about too many CPOs.

Why this may NOT be such a good time to be in procurement!

Is this a good time to be in procurement? I've lost count of the number of times I've heard this question asked (and then swiftly answered in the affirmative) in recent months. The latest occasion was the Ariba Live event in London this week, where around 150 practitioners gathered at the posh Landmark Hotel opposite Marylebone train station to get an update on the tech company's latest offerings and exchange "war stories", as one speaker described them.

Kevin Costello, Ariba's president, kicked off his keynote with a bold statement about procurement: "I don't think you'll ever see another time like this to help make your organisations successful." With cost reduction and working capital at the top of businesses' agendas and commodity prices well down on a year ago, it was "the best sourcing environment we have seen for decades", he declared.

If only the Forbes Global 2000 firms were able to do a better job of procurement, Costello claimed, they could collectively save themselves £411 billion (a devilishly satisfying $666 billion). Naturally, Ariba's customers in this group were doing way better than the rest, he added. Their profits in 2008 had risen by 30%, whereas those of their peers had plunged by 31%.

"It's a great time to be a procurement professional and to accelerate your career," he concluded. "Get your piece of the £411 billion!"

Now, I don't dispute that CPOs are under immense pressure to reduce costs at the moment (indeed, a survey of 133 of them by CPO Agenda that's just closed found that 93% were). Nor would I dispute Costello's view that the need to deliver savings faster than before is an imperative and that smart use of the latest technology - whether from Ariba or other vendors - is essential. However, I'm less convinced that the things many procurement groups are doing today are going to improve the function's status and value contribution longer term.

Why do I say that? Well, to be blunt, if all you are pursuing is tactical and aggressive margin transfer in the form of price cuts, then that simply isn't sustainable, particularly if (as many are now predicting) deflation turns to inflation in the next 12-18 months. And if prices rise and supply becomes more constrained as a result of increased demand and reduced capacity, which customers do you think suppliers will prioritise - those that tried to shaft them or those that were tough but fair? Equally, the people inside your business who are clamouring for your help at the moment (because, let's face it, they don't have much choice) are likely to disappear as quickly as they came once the financial screws are relaxed if they regard procurement as little more than "supplier bashers".  

As in the past, there's a real danger that the spotlight that's currently on the function will move elsewhere as the business agenda refocuses on growth and innovation. So the question I would pose is not "Is this a good time to be in procurement?" but rather "What are you doing to impress people so they are inclined to let procurement do more interesting things than save money when the recession passes?" 

To me, managing supply costs and the process by which suppliers are selected, reviewed and incentivised to perform effectively is the bottom line. And it's something that few companies have fully mastered yet. But, in the future, true competitive advantage is going to come less from having a tight cost base (although that will always be necessary) and more from the strength and depth of a company's collaborative relationships in global supply networks.

The best CPOs, of course, don't need me to tell them this. They instinctively know it. However, many others in business don't yet fully understand or appreciate the value that can be derived from a different way of working with (an admittedly small number of) strategic suppliers. It's up to procurement's leaders to educate and convince them, and to use the current opportunity to build both credibility and the personal relationships that will serve them well going forward.

As Tim Cummins, CEO of the IACCM, put it so well at Ariba Live: procurement organisations can't hope to collaborate externally unless they are also able to collaborate internally.  

Event organisers get creative

At a time when many companies have travel restrictions in place, event organisers are having to work extra hard to get practitioners to their conferences. Corporate United, the US group purchasing organisation, for example, did a great job with its Synergy 2009 event in Chicago last month - doing everything in its power to make the experience useful for attendees, telling them how much it would cost to travel from different cities, and so on.

Another company that has used the recession to experiment and innovate is Ariba. It made an early call to cancel its planned three-day extravaganza in Nashville at the end of April and instead set up a two-day virtual event online followed by a series of one-day city roadshows - three in the US (New York, Chicago, San Francisco) and three in Europe (London, Paris and Stockholm).

Ahead of the London leg, I met up with Tim Minahan, Ariba's chief marketing officer, earlier today. He told me that 1,500 people had "attended" the virtual event (a mixture of keynotes, breakout sessions, exhibition booths and networking). Now, you'd expect a technology company to be making the most of the latest web platforms to interact with its customers and promote its latest products and services, but this was a first for Ariba. Tim seemed happy with the way the event had gone, although he acknowledged that it was unlikely to replace the traditional physical conference just yet (after all, playing golf and drinking beer isn't quite the same online, what with the lack of a nice vacation location and a bunch of old pals you haven't seen for a while).  

At its peak, Ariba's annual shindig was attracting over 1,200 attendees. Tim told me the biggest of the one-day roadshows had been around 180. Even multiplying that by six doesn't add up to the same size of audience, but I'd be surprised if anyone is getting the numbers they used to get right now. So hats off to Ariba for trying something different.

I'll be attending the Live event tomorrow, so watch up for blog and Twitter updates as the day unfolds.

Starbucks' ex-CEO puts people front and centre

After numerous presentations littered with tools, processes, models, charts and data, it's always refreshing - not to say a relief - to hear a genuine business leader go back to basics. Many in the corporate world have a tendency to overcomplicate and overengineer what they do, relying on endless PowerPoint slides as a crutch rather than telling a compelling story that their audience can identify with. So once in a while it's good to sit and listen to a CEO talk about the things that really matter in business - great customer service, product and service innovation, and treating your employees with respect, to name but a few.

At the Synergy 2009 conference in Chicago, organised by group purchasing organisation Corporate United, Jim Donald, former CEO of Starbucks, gave just such a presentation. Speaking for an hour mostly without notes and with not a slide in sight, he explained the five principles he has picked up from a long career in the retail sector (which included a spell at the beginning of the 1990s working for the legendary and late Sam Walton, founder of Wal-Mart):

1. Never be bigger than the frontline - just because you are in the corner office doesn't mean you always know better than your shopfloor staff.

2. Go where you've never been before - whether it be stores, offices, suppliers or whatever.

3. Communicate with people daily - let them know what's going on in the organisation and in their language (including the partners of key managers whose home life is likely to be disrupted!)

4. Know your fish story - in other words, what's the "hook" to get people onboard with your plans? 

5. Celebrate success - and in doing so enthuse people to perform. "We don't do it enough," he declared.

I won't attempt to recount Donald's many stories of how he learnt and/or sought to implement these principles, but there were plenty, particularly from his time running the struggling US supermarket chain Pathmark prior to his six-year tenure at Starbucks (from which he was fired by founder and chairman Howard Schulz in 2008 - an incident that he explained to the audience as "shit happens!"). But one involved taking 16 female bakery counter workers for a slap-up dinner after they increased sales by 75% in one week at their own initiative; another, giving a fish counter guy called Nelson the right to circumvent central purchasing and buy several hundred pounds of rockfish, which he believed would sell better locally (it did).

Interestingly, Donald revealed that he spent almost four years in charge of indirect procurement earlier in his career, and that he loved the job. He also told the audience of around 150 sourcing professionals that being open and honest with suppliers was essential, and that CPOs and CEOs ought to have a close relationship in good economic times as well as bad. But what impressed me most about him was that rather than turn up 10 minutes before he was due to go on, as most senior executives would, Donald actually spent the previous day sitting in on conference sessions, making notes and talking to attendees. He clearly needs work (he mentioned during his presentation that he'd called the Corp Utd folk several times asking to speak, rather than the other way around). Nevertheless, voluntarily listening to several hours of presentations and looking at hundreds of slides on topics outside of one's usual area of interest has to be commended.

SIG's Dawn Tiura Evans leads by example

In Chicago to speak at Corporate United's Synergy 2009 event, I finally got a chance to meet Dawn Tiura Evans, president and CEO of the Sourcing Interests Group (SIG), who was presenting a morning session entitled "Balancing relationships and the need to renegotiate". I've heard good things about SIG - a sourcing and outsourcing membership organisation - from quite a few of my US-based contacts in the past couple of years, but hadn't connected with them or attended any of their twice-yearly summits.

Dawn, who took over at SIG's helm 18 months ago after running supply chain consultancy Denali, gave a warm, passionate and insightful presentation in which she urged CPOs and procurement professionals to be "visionaries, not sceptics" and to embrace and lead change. The world was "very small, very exciting but also very scary", which meant there was a greater need than ever before to keep pace with market movements and have real-time information about what was going on. (As a qualified CFA, she got in a nice dig at finance here, saying that it mostly looked at what had happened in the past, rather than what was set to happen in the future.)

CPOs had a chance to get invited back into the boardroom, she argued, having been disinvited in the early part of the decade after the e-procurement revolution failed to deliver its promised results. It was their rightful place, "because they stand at 40,000ft and can see across the organisation - all the spend and all the stupidity..."! But she warned that "we can't rest on our laurels" and - using a phrase she'd picked up in Texas - "we need to be shooting ahead of the duck".

Good stuff indeed. And with smart, ambitious, enthusiastic (and dare I say glamorous?) people like Dawn on the team, procurement's credibility and influence with those at the top of the executive ladder can only be enhanced.

Kux plays the role of leading lady (and CPO)

It isn’t every day that the CPO of a major company sits alongside its CEO and CFO at a press conference to announce its latest financial results. But that’s exactly what happened at Siemens in Berlin this morning. Barbara Kux – one of the top 50 most powerful women in world business, according to Fortune magazine – did a double act with her CEO and boss Peter Loscher in front of the assembled media, giving a brief overview of the procurement strategy she has been pursuing since the start of the year. (For full details, see my story and exclusive interview comments on the CPO Agenda website.)

Loscher, as you might expect, had the starring role and did most of the talking (entirely in German), but fellow managing board member Kux was very much the leading lady. Indeed, CFO Joe Kaeser was reduced to the role of supporting actor, speaking only briefly a couple of times later in the hour-long event to answer journalists’ questions. Now there’s something else you don’t see every day – especially when the main purpose was to present results and give a half-year update on the company’s business performance.

Kux, like Loscher, gave a carefully scripted presentation and seemed relaxed and confident performing in front of the cameras. But she was uber careful not to give much away in terms of specific details (like how much her team is being tasked to deliver in cost savings to help prop up Siemens’ declining profits – although analysts reckon it’s probably in the order of €2 billion, or 5 per cent of total purchasing spend). This caution carried through to our brief interview afterwards, when she glanced frequently at her press minder before giving me fairly bland answers to pretty specific questions.

Still, I can’t say I blame her. With procurement under the spotlight and in the media glare to this degree, an ill-advised comment could have a direct and negative effect on Siemens’ languishing share price. Kux is media shy at the best of times and I doubt very much she’ll be giving too many more interviews until she’s got concrete results to talk about. But it will be interesting to see if she again takes centre stage at the company’s next major press conference in the autumn.

J&J’s Ralf Garczorz shows admirable ambition

Regular readers of CPO Agenda and this blog will know that I passionately believe procurement’s future lies in delivering value above and beyond cost cutting. Areas such as supplier collaboration, innovation and sustainable development are where companies will derive more of their competitive advantage in the years ahead – and it is here, rather than the short-term, tactical stuff that we are seeing lots of right now, where procurement can make a significant strategic contribution.

Sadly, I hear all too few CPOs articulating such an ambition in public. So I take my hat off (or at least I would if I wore one) to Ralf Garczorz, CPO of Johnson & Johnson’s EMEA consumer division, who did exactly that at the ProcureCon Indirect conference in Amsterdam earlier today. A German based in Switzerland, Ralf isn’t one of the more flamboyant procurement leaders on the European scene. His presentational style is softer and more quietly spoken, but his message was immensely powerful and leading-edge nonetheless.

His vision for procurement at J&J in 2012 was largely about top-line and organisational improvement contributions – collaborating with other functions and business colleagues, building a strong centre of market insights and competitive intelligence, and developing high-potential talent in the procurement function that could quickly move into business leadership roles around what is a big, sprawling and decentralised company.

Ralf admitted that “it’s not an easy sell, because we are still seen as a cost-cutting function”. But he is determined to do more of these things, because he believes that “we are doing a better job for our company” that way. “Procurement can do so much more than the classic role of cost reduction,” he told his audience.

In the future, a company’s fortunes would be determined partly by the strength of its “competitive clusters” of suppliers and customers, he said. The recession would accelerate this trend, but procurement leaders had to have the passion to develop their functions and convince colleagues that it could make a “broader value contribution”. Despite the temptation, he urged his peers not to “fall back on short term only, cost reduction only” in the current economic climate.

Good stuff indeed. I hope to hear many more CPOs joining Ralf and showing similar aspirations. But, as I say, it’s still all too rare in my experience.

Two little words that all buyers relish

In my experience there are two words that procurement people love most in this world - "buyer's market". I've heard plenty of them uttering this phrase in recent months, usually with a gleeful look on their faces (but perhaps also a sense of relief, given the rapid loss of supplier power since the middle of last year).

The latest example came during a panel discussion at the FT Global Outsourcing and Offshoring conference in London, which I attended earlier today. Asked to make some introductory comments, Lisa Coles, procurement director for IT services and BPO at BT, Britain's biggest telecoms firm, noted that India was still its dominant global sourcing location. "Is it turning into a buyer's market? Yes, absolutely!" she remarked with a grin.

Hit by the financial crisis, local outsourcing providers had "surplus people" available and were willing to strike lower-cost deals to companies able to give them greater volumes, she said. Oh, and naturally this meant that their margins were under real pressure. That's another phrase that gives procurement types a warm feeling inside - especially when used in the same sentence as the word "leverage".

Steve Turpie, CEO of Aviva Global Services - an arm of the UK's largest insurance company - noted that its staff turnover rates in India had come down "significantly" in recent months, from as high as 60 per cent to 20-30 per cent. And in Sri Lanka, where Aviva taps into a well-qualified pool of management accountants, it was just 5-6 per cent, he said.

All very different from recent history then. But how long will buyers hold the upper hand? At the Emptoris Empower event in the UK last week a couple of CPOs of big European companies raised the spectre of inflation in late 2010 and early 2011. This may hit commodity markets first, but the advice to smart procurement leaders must surely be to use their current power advantage wisely. 

The Mercedes of CPO event marketing

A weighty envelope lands on my desk, courtesy of Der Bundesverband Materialwirtschaft, Einkauf und Logistik (BME) – Germany's purchasing institute. It contains what must be the most upmarket and professional looking brochure for a procurement conference I've seen in 10 years of covering this field. Sleekly designed in charcoal grey, with black and white portraits of keynote speakers and plenty of white space, its 34 glossy pages couldn't be more different to the pile 'em high flyers churned out by the more commercial event organisers. Indeed, it feels like a brochure for a new model of car – and we're talking Mercedes rather than Opel. 

The brochure invites me to attend the BME's European Procurement Excellence event, to be held in Munich on 18-19 June. Inside there's a welcome message from Hans-Gert Pöttering, president of the European Parliament and a page each on the main presenters, who include a former director of the European Central Bank, the CFO of Novartis and a senior executive responsible for innovation at Unilever. The prestigious feel is continued in the choice of venue - the 5-star luxury of the Bayerischer Hof hotel - and the matching design of an accompanying website.

This is all a far cry from the utilitarian brochures and hotels employed by the BME for this event in the previous three years. And none of it can have come cheap (particularly since they were generous enough to send me two identical packs addressed only slightly differently). Ironically, the theme of the conference is "Managing in the downturn" and one early section is headlined "In a recession cash is king". And in a year when CPOs' travel budgets have been cut and the economic viability of many such events is in doubt, one could easily argue that the BME has made a huge miscalculation.

I take the opposite view, however. In a market dominated by relatively expensive but frugally run events, why not attempt to stand out from the crowd by going upmarket (although, at €1,650 excluding VAT but including one night's accommodation, the fee is comparable)? And if CPOs really believe they are getting closer to the corridors of power in their organisations, then surely it's only fitting that the branding and presentation afforded to them oozes a bit of sex appeal.

Based on my previous experiences, I would expect the quality of this event to be only slightly better than average, but hats off to the BME for taking a gamble in a challenging market and seeking to give a CPO event a C-level feel.