Good procurement practices can increase a company’s profits by as much as 50%. And this profit growth comes without the added expense that expanding the firm’s market share would require.
“That’s one of the best illustrative examples I’ve ever seen to be able to talk to stakeholders about why it’s important to pay close attention to your procurement function,” said Denis Wolowiecki, managing director of CAPS Research, in a Dec. 8 lecture. Wolowiecki presented a talk on “Thinking Beyond Procurement” as part of CARISCA’s Distinguished Lecture Series.
The key to implementing good procurement practices and increasing profits is in understanding your spend, Wolowiecki said.
A company has many types of spend, or expenditures. Where the procurement team can have the most impact is in the “addressed spend” category. This category represents spending that is controlled by the supply management team and is actively sourced, re-bid or negotiated periodically.
“In almost every case that I have gone into a company where there’s a transformational opportunity and they’re struggling to make improvements around how they control their suppliers in their procurement program,” said Wolowiecki, “one of the things I typically find is there is not a good understanding of the spend. And that’s really where it starts.”
Wolowiecki advised supply chain managers to gather a list of all suppliers and rank order them according to how much is spent with each. Then plot out cumulative annual spending and number of suppliers in a curve graph.
“This is going to be a key to your visual understanding and the ability to communicate with your team and communicate with your stakeholders around what you’re trying to do,” said Wolowiecki.
The ideal curve graph will follow the 80/20 rule, where 80% of your spending is with only 20% of your suppliers. If your spending is spread out more evenly across many suppliers, Wolowiecki recommends consolidating suppliers to reduce administrative overhead and focus attention on the “strategic few.”
Properly managing your suppliers requires people, processes and technology, with an emphasis on people, said Wolowiecki.
CAPS Research benchmarks
CAPS Research has set benchmarks for how to size the supply chain staff. Companies with $100 million in addressable spend have an average of 3.2 FTEs dedicated to procurement. Among all the firms surveyed, the highest FTE count was 4.2 and the lowest was 0.5.
Wolowiecki also presented metrics on the amount of addressed spend per FTE, which indicates the workload for each employee. The average is $15.9 million per FTE, with a high of $20.7 million and a low of $11.9 million.
“Why are these important?” asked Wolowiecki. “Well, are you too low? Do you not have enough resources to do the job effectively?
“And not only that, if you’re too low, and the people you have are carrying more spend responsibility, they’ve got more workload. If they feel overworked and they can’t keep up with the pace, they’re going to go look for other things; you’re going to abuse your people.
“Or if you have too many people, then you’re not effectively managing it,” he added.
Another key is evaluating the skill mix of your procurement team, said Wolowiecki. According to CAPS Research data, over a third of staff at most companies are in transactional rather than strategic roles.
“There’s a large amount of FTEs devoted to the transactional act of just pushing the order through, making the phone call, completing the purchase order and submitting it,” said Wolowiecki. “That is not necessarily value-add. The work has to be done, but it’s interesting how much resources are devoted to it.
“The challenge for any team and any transformational opportunity is as much as possible to shift that focus from transactional to strategic to gain value,” he advised.
Risk management a high priority
Wolowiecki said CAPS Research did a recent study comparing procurement leaders’ priorities over the next 12 months and three years. Among the top three priorities in both periods is advancing supplier risk management. That’s an example of how the role of procurement is expanding to encompass a broader set of responsibilities, he said.
He defined risk as “exposure to danger, harm, disruption or loss. It’s a threat to the company in some way.”
“Supply leaders should be focusing more on avoidance and mitigation, so they don’t get into the problem, than focusing on resilience and recovery, or how to get out of the problem,” Wolowiecki said.
He gave an example of a business that relied on two suppliers for its top supply item. Both suppliers were in Puerto Rico and were wiped out when Hurricane Maria hit in 2017.
“Somebody a little bit more far-sighted thinking through the risk of storm disruption and hurricane paths might have said, ‘My alternate supply source needs to be on the mainland or Europe or something, but not both suppliers on the island of Puerto Rico,’” Wolowiecki noted.
He said risks can come in many forms. They can include fires, floods, bad weather, financial fraud, cyber attacks, business closures and material shortages.
According to a Risk Management Index survey that Wolowiecki shared, the top five increasing risks are economic, transportation disruption, supplier, cybersecurity and data, and government intervention.
“The message here is, you’re much better served to spend some time thinking it through and assessing the situation and trying to avoid the risk, than to deal with the problem when it happens,” Wolowiecki said.
How close are you to the C-suite?
He finds it troubling that risk may not be getting the attention from the C-suite that it warrants. According to CAPS Research surveys, only a small share (12%) of chief procurement officers report directly to the CEO. And that figure has barely changed over five years.
Two-thirds of CPOs are a level removed from the C-suite, and nearly a quarter of CPOs sit two or more levels below the CEO.
“So the question is,” asked Wolowiecki, “does the C suite and does the top executive really have a clear view of the risks in the business? Is there a real empowerment around dealing with those risks?”
Another recent CAPS Research survey adds further to this question. The nonprofit research center asked supply management leaders how much time their CEOs spend with suppliers. The answer, on average, was 6%.
“A company can easily spend 40% of its revenue with suppliers,” Wolowiecki pointed out. “And we’re in a world of high risk and disruption, inflation, natural disasters, supply discontinuity, material shortages. You’re disrupting businesses, you’re shutting down automotive production lines, you’re shutting down semiconductor production.
“And your CEO is only spending 6% of his time with suppliers? How much attention are you paying to the risk?”
Plan, do, check, act
For companies that do want to reduce and manage their supply chain risks, Wolowiecki offered a model. Consistent with other types of improvement programs, you should follow a “plan-do-check-act” framework, he said.
In other words, you first identify the risk. Then you assess and monitor the risk. Third, you respond to and mitigate the risk. Finally, you communicate about and learn from the risk. Also important is to continually measure your progress.
“How do you know you’re getting better?” asked Wolowiecki. “Unless you have a measurement, you can’t really understand whether it’s improving or diminishing.”
According to another CAPS Research study, nearly three-quarters of companies are carrying excess stock to help mitigate risk.
“There’s no more just-in-time inventory,” Wolowiecki said. “Now there’s the expression “just-in-case” inventory. Buffer it up, you know, lay in some extra, fill up that second warehouse with some stock just in case. It’s the easy, fast response.”
Wolowiecki said he is concerned about how much inventory companies are building up. He believes that with good inventory management strategy, it is possible to decrease inventory and reduce risk at the same time.
“I leave it as a challenge,” Wolowiecki concluded. “Good supply professionals and intelligent procurement people that put the diligence to the problem and think it through and work with their top suppliers, I’ve got to believe there are opportunities to mitigate some of this risk without incurring a bigger financial impact.
“You know, you can at least hold the ship steady at a minimum, if not find some greater opportunity to perhaps save. That’s a glimmer of hope for mitigating some of these risks.”
Denis M. Wolowiecki is executive managing director of CAPS Research, a nonprofit research center for supply management leaders. He has more than 25 years of cross-industry supply management experience as an executive, as well as the savvy of consultancies and a deep understanding of driving transformational improvements.
Prior to joining CAPS, Wolowiecki held executive supply chain and sourcing positions with Vitalant, Husqvarna Group, Aleris International, Inc., and Goodyear Tire & Rubber Co. He also offers more than a decade of supply chain consulting knowledge, having worked with Accenture and KPMG following initial career experiences as an aerospace systems engineer.
Wolowiecki holds an MBA focused in operations and international business from Kent State University and a B.S. in mechanical engineering from Ohio Northern University.