For manufacturing companies, competing and surviving is hard.
Not only do you have to worry about the competition in your industry, but you also have to be concerned with a world that’s in constant state of change. With so much volatility in the world — economic, political, environmental — it’s easy for your business to be disrupted by something you probably never saw coming.
But manufacturers have a secret weapon they can rely on to help them reduce and mitigate the risk that comes with that volatility, and even take advantage of it to create a competitive advantage. That secret weapon is their procurement department.
Quick Thinking, and Moving
Traditionally, procurement organizations within manufacturing companies have been focused on cost reduction. It made sense, as external purchasing is the largest expense category for many companies. Over the years, procurement organizations showed their value in helping to control costs while still obtaining the materials, supplies and services companies needed.
Today, manufacturers are beginning to implement an agile procurement approach in their businesses, and are realizing benefits far beyond cost reduction.
Agility, by definition, means the ability to think, understand and move quickly. When applied to procurement, it means being able to understand changing market conditions, predicting what may happen in the future, and making adjustments if those predictions are correct.
By employing agile procurement, companies can reduce or even avoid the risk that comes with an ever-changing world, and even leverage volatility to gain a competitive advantage.
Agile procurement is allowing some manufacturers to take procurement to new heights. Sometimes literally.
An article provided by McKinsey & Co. in IndustryWeek noted a global aircraft manufacturer who had a key supplier near the Fukushima nuclear power plant in Japan. When the earthquake and tsunami caused the disaster at the plant, it took the supplier offline for a significant amount of time.
Ordinarily, losing an important supplier this would cause significant disruption and cost for a manufacturer. However, the aircraft manufacturer’s agile procurement approach limited their exposure and all but eliminated any disruption.
No one could have predicted the disaster would occur, but the aircraft company was prepared. By routinely monitoring to tier three and four suppliers, and dual sourcing all key components, they knew their exposure and were able to adjust accordingly.
Staying Ahead of the Competition
In addition to mitigating risk, agile procurement can also be employed to respond to less dramatic market changes to gain a competitive advantage. This approach is illustrated by a global chewing gum manufacturer, also cited in the IndustryWeek article.
The company’s procurement organization, responsible for obtaining raw materials to produce the gum, has a deep understanding of the factors that affected raw material pricing. That alone isn’t especially noteworthy, as it is their job to help keep costs low.
It’s what they do with the information that’s interesting. The procurement organization partners with the marketing department to develop product promotions, based in part by raw material price inputs. Aligning raw material costs with product pricing and promotion helps the manufacturer maintain profit margins and puts them a few steps ahead of the competition.
Knowledge is Not Enough
In both of the examples above, the procurement organization in each company is tasked with understanding important market dynamics that can affect their production capabilities and costs. They each undoubtedly have people on staff who are well-versed on specific topics. They know their suppliers and stakeholders well, and are experts on their categories.
But even that is not enough.
For a procurement organization to be considered agile, simply having the information is only half the battle. The other half lies in being able to collaborate with suppliers as well as internal stakeholders like marketing, product management, and even R&D, and use the information to the company’s advantage.
Proactively utilizing business intelligence to make key business decisions, to collaborate cross-functionally, and to identify and exploit profitable opportunities is where agile procurement can show its value. Companies that take this approach can limit their exposure to disruptions caused by unforeseen economic, political and environmental changes, and even turn them into a competitive advantage.
To show their value to leadership, procurement organizations should commit to being agile. That requires having the right people in place — people who are forward-thinking, collaborative, and driven to deliver results.
It also means having the right technology and tools to help teams acquire and process data. Embracing agility is a journey, and one that procurement organizations need not go it alone. With a variety of tools, technologies and services offered, there is plenty of help available.
Agile procurement represents a tremendous opportunity for manufacturers, as it’s a concept that only a few select companies have embraced. Companies that embrace it are well-positioned to compete for the customer’s dollar.
It’s also a way for procurement organizations to realize their potential to have an impact on manufacturers’ top and bottom lines. So in a world of constant change and volatility, companies don’t simply survive, but thrive and grow.
Brett Cornell is Vice President of Value Consulting at JAGGAER.