Over the past 20 years, the Sourcing function has evolved from Cost Reduction To Total Cost Management To Risk Management gaining more and more strategic impact. However, Sourcing initiatives are still contained to bottom line impact. In this article, we will share real cases coming from various industry sectors (automotive, pharmaceutical, aerospace…), where Sourcing Organizations have generated Revenue Impact through specific initiatives or organization design.
This paper describes our 9 tips for Procurement to Generate Revenue Impact. They are broken into 3 categories...
How Procurement can generate revenue by influencing the new products that your company will launch
By influencing processes that can exist today in your company how procurement can generate revenue
Procurement can make profit by influencing, and participating in the dynamic nature of how the business world is likely to change, but how?
Click/Tap on each tip to read more
Tip #1: Design to Value
Sourcing organizations use more and more complex levers to generate savings opportunities, such as supply-chain optimization, supplier development or value engineering. These structural levers usually bring tremendous savings (> 15%). However, these initiatives are usually based on « Product Tear down » approaches which consist of removing all the over specified elements of a product or a service, such as: raw material change, specs tolerance adjustment, manufacturing process change, weight optimization, etc.… By doing this you optimize the cost of the product but you don’t impact the value for customers.
When adopting the “Design to Value” approach, you think in terms of functions and you constantly try to match the cost with the client perceived value. This is a 3-step cross-functional work (marketing, R&D, Sourcing…):
- Select your value drivers (strategic positioning)
- Map your functional (not technical) costs against specific functions
- Optimize cost vs. value
The Design to Value methodology aims to design or (re-design) products / services with optimized cost to value and consequently generate higher revenue and profit thanks to increased customer satisfaction.
Tip #2: Engineered Procurement Organization for Speed to Market
Capturing and executing a fast implementation of supplier innovations is key for companies. However, in most companies Sourcing not involved early i in the advanced technology process. Consequently, Sourcing lacks visibility to the innovation roadmap and is not able to properly connect with the supplier innovation roadmap.
A leading Automotive Tier 1 supplier has recently set-up an Engineered Procurement Organization which combined R&D and Sourcing/Supplier Development & Quality resources with the following objectives:
- COMBINE supplier’s know-how with Company’s skills, resources and development processes
- JOINTLY develop Differentiated Components through Closed-Loop Product | Process Design Optimization
- JOINTLY implement multi-year Supplier Technology Roadmaps
This organization has been implemented for nearly 1 year and is starting delivering joined technology roadmaps on 3 main technology segments for increased value creation and value retention.
Tip #3: Innovation Ecosystem
Traditional SRM (Supplier Relationship Management) models are not adapted to manage innovation with suppliers for many reasons.
- They tend to promote big suppliers which are not always the most proactive in terms of innovations
- Those big suppliers are selected based on highly demanding criteria and usually large market share. This often creates an unbalanced relationship with the client which put at risk the value sharing and value retention coming from proposed innovations
- Many innovation opportunities are related to the digital revolution and evolution of the company’s business models. Such innovations cannot be managed in a traditional dual relationship (client – supplier) but need to activate and manage a much more complex ecosystem.
The Sourcing function has an important role to play in the mapping and management of this innovation ecosystem, since it has a strong expertise in managing relationships with external stakeholders
Tip #4: Lean Bidding through Parametrical Costing
The Business acquisition process usually contains a lot of waste for companies acting in the BtoB sector. Very few lessons learned and multiple resources are involved in the elaboration of the proposal: R&D, Finance, Manufacturing, Purchasing…and even suppliers who are requested to provide numerous quotations which are sometimes based on incomplete specifications. This process generates lots of rework (spec change, RFQ change…), over processing (to many drawings, suppliers RFQ…), over-engineered quality (non optimized specifications), waiting (for supplier answers). This waste strongly impacts the quality and reactivity of the proposal for the customer and, consequently the business win rate.
Best in class companies (especially in automotive business) have implemented sophisticated parametrical costing solutions which utilize existing data (technical & economical) to drastically reduce the time & resources to cost new product and drive design proposals towards best practices. New statistical methods like Random Forrest have created new horizons for parametrical cost estimation bringing more accuracy and consistency in comparison to traditional regression methods. EasyKost software (www.easy-kost.com) is a collaborative software that combines this new algorithm method with a unique graphic & dynamic interface.
A leading Automotive Tier1 supplier saved 15% resources and reduced response time by 50%to their customers by implementing this solution.
Utilize the richness of your data to increase your new business win rate!
Tip #5: Success in Growth Markets
Sourcing organizations are often involved too late in the company's international development, though they play an important role in the success of the new market penetration. Here are 3 examples where Sourcing can bring a strong added value:
- Support and advise on the industrial strategy by identifying the right zones and scenarios for industrial implantations, thanks to their strong knowledge of suppliers markets and capacity to elaborate competitive pricing scenarios with several make vs. buy option. The Macro-Study tool is a powerful tool to model the different scenario according to different criteria (competitiveness level, product access, risk, opportunities…)
- Insure the success of the industrial project by qualifying the right suppliers and achieving the targeted localization ratio
- Secure the operational expansion by developing, or identifying the right suppliers that that bring the expected levels of capacity and capabilities. The supplier development initiatives in the growth region also help develop awareness towards suppliers and create differentiation against competitors
Sourcing is a cornerstone for the success in growth markets.
Tip #6: M&A
Sourcing can drive a lot of value in M&A projects. Traditionally, Sourcing is mainly asked to deliver the sourcing synergies that are part of the deal equation, which is already a lot.
But Sourcing's role can go beyond that. In companies with intensive M&A activities (ex: pharmaceutical or Medical devices companies), Sourcing is involved very early in the identification and pre-assessment process of potential acquisition targets. An M&A Procurement Manager exists in some organizations. They represent Procurement in the M&A teams and liaise with the different organizations involved.
- Sourcing can identify potential targets through their advanced understanding of supplier markets and other players in the ecosystems
- Sourcing is qualified to assess capabilities of potential targets
Procurement Organizations are fully part of the M&A process to generate and secure external growth opportunities.
Tip #7 to 9: Procurement 4.0
The digital revolution will be characterized by:
- Connected Ecosystems
- New Business Models meeting customer needs
- New business Tools
- New working patterns
This new landscape directly impacts Procurement but also creates new opportunities to generate revenue. Here are 3 of them:
Leverage the supplier base to create new products and/or services. Using the technology to develop better collaboration with suppliers leading to reinventing the way business is done
Develop new value sharing partnerships with suppliers. Number of different models exists which form the basis of a win-win relationship like co-branding, revenue sharing agreements, pay-as-you-grow etc
Generate additional revenue opportunities by leveraging existing ecosystem. Look for opportunities to create additional or new revenue streams from existing operations
Procurement 4.0 will place Procurement as a Business Partner!
Conclusion: What does it mean for the future of Procurement?
We see Procurement evolving toward an increased synchronization with the overall business and a closer collaboration with the Sales organization. Traditional Category Management is expected to evolve toward a more value stream organized function allowing for breakthrough solutions to be quickly implemented Procurement will be more of a Business Partner contributing to the business model evolution by identifying and matching the internal and external opportunities. This will also impact the required skills of Sourcing professional: soft skills will take more importance than traditional functional skills.