For many years procurement has been primarily cost-based with a focus on reducing spend through more efficient buying processes such as category management. Cost reduction will always be a critical priority in business – particularly when margins are under pressure. However in recent times there has been a growing recognition that enduring competitive advantage rarely comes from cost reduction alone. Instead the focus has to shift to understanding the ways in which procurement can enable the business to deliver more value in the marketplace.
Previously the marketing and procurement functions within the organisation have not always worked closely together and often there has been no strategic alignment between the two. Now, because of a fundamental change in the market from product-based to service-based offers, there needs to be a re-evaluation of the procurement/marketing interface.
The main driver for this transition in the market is the increasing tendency amongst customers to buy performance or experience rather than a physical product. Many years ago Professor Theodore Levitt, then Professor of Marketing at Harvard Business School, observed that “people don’t buy products, they seek benefits”. This idea has now become widely accepted and and has been developed further by academics such as Robert Lusch and Stephen Vargo who created the concept of the Service Dominant Logic (SDL). The essence underpinning the philosophy of SDL is that products are merely vehicles for delivering a service. Other commentators have picked up this idea and have introduced the notion of servitization – a focus on how products can be transformed into services particularly with the emphasis on using rather than owning.
As companies seek to embrace the principles of servitization by augmenting and enhancing the product/service offer it will be inevitable that new partnerships will need to be forged with vendors who have the necessary skills and capabilities to complement those that exist within the business. This trend will be further reinforced by the growing requirement of customers for tailored solutions. As we move away from the ‘one-size-fits-all’ approach to marketing so the challenges facing the procurement function will increase.
It can be argued that the focus of procurement will need to switch from sourcing products and services to sourcing outcomes. Outcomes are measured in terms of performance, particularly in the way in which they add value to the organisation’s customers.
This idea is at the heart of what might be termed value-based procurement, the objective of which is the identification of those sources of supply that can deliver the desired outcome against the lowest cost of ownership i.e to maximise the ratio:
Outcome/Total Cost of Ownership
As organisations make the transition from cost-based to value-based procurement the need for much higher levels of supplier relationship management will become apparent. In many cases the business will become more dependent on its network of suppliers to provide the innovation and knowledge necessary to enable the delivery of a wider range of solutions to its customers. Hence the focus of supplier relationship must be on the establishment of a climate and culture which will encourage and sustain this transfer of knowledge.
Previously it was more often the case that organisations were structured and managed with the objective of optimising their own operations with little regard for the way in which they interfaced with suppliers. The business model was essentially ‘transactional’, meaning that products and services were bought on an arm’s length basis and that there was little enthusiasm for developing longer-term, mutually dependent relationships.
The new competitive paradigm is in stark contrast to the conventional model. It suggests that in today’s challenging market place the route to sustainable advantage lies in managing the complex web of relationships that link highly focused providers of specific elements of the final offer in a cost-effective, value-creating network.
The key to success in this new competitive framework, it can be argued, is the way in which this network of alliances, suppliers, intermediaries – and sometimes competitors – are welded together in partnership to achieve mutually beneficial goals. This vital task of orchestrating the supply network is at the heart of value-based procurement and it reflects the fundamental principles that it is the network that is the competitive vehicle today – not the individual company.
In competing as a network it becomes apparent that the aim should be to maximise collaborative advantage rather than competitive advantage in its traditional, single firm meaning. To achieve collaborative advantage and to leverage the collective competencies and skills across the network means that knowledge must be shared and harnessed. It is this realisation – that the organisation no longer stands alone – that is prompting organisations to re-examine their approach to supplier relationship management. In this new world the role of procurement is to seek out opportunities for the co-creation of value across the network of which the organisation is a part.