Part four of a six-part blog series based on 30+ years’ experience collaborating on innovation with complex, discrete machinery manufacturers.
In the third blog in this series, I discussed how Industry 4.0 and the Industrial Internet of Things (IIOT) have facilitated greater insight for manufacturing executives. Now I want to spend some time examining how procurement executives can gain greater insight into internal operations and partner with suppliers to achieve true innovation.
If you’ve been following this series (thank you!), you know that my motivation for writing these blogs was an article in the Harvard Business Review, “Why (and How) to Take a Plant Tour,” written by David M. Upton, professor of operations management at the University of Oxford’s Saïd Business School. I found it fascinating to see how much things have changed since the time he wrote the article in May 1997.
Professor Upton wrote:
“Plant visits allow managers to review a supplier’s qualifications, to share best practices with a partner, or to benchmark performance and practices …. The main purpose of assessment tours is not to acquire new knowledge. Rather, it is to use what visitors already know to evaluate a plant. There are a number of different types of assessment tours. Some aim to determine whether a plant can fill a particular role. For example, a customer may visit a potential supplier to assess quality, or a corporate planner may visit a plant to decide if it could develop the ability to fill orders quickly enough to support the company’s new strategy. Other assessment tours focus less on a plant’s existing capabilities and more on how that plant might be changed to perform better or differently in the future.”
During the earliest days of industry, manufacturers found comfort in doing business with the shop across town. They believed that doing business with a long-time, trusted local source was the way to ensure both quality and cost, as well as to build a stronger community. In time, however, it became not only possible but financially desirable to procure supplies from around the globe, which in turn required those plant tours that Professor Upton was talking about.
In 1997, the term “procurement” was virtually synonymous with “purchasing,” and procurement managers generally worked under the direction of manufacturing engineers, supply chain executives, and finance officers. At the time, the best way to evaluate a supplier, as Professor Upton noted, was probably boots on the ground.
By contrast, procurement today is a far more complex and dynamic process, and it’s corporate malfeasance to do business with someone just because they’re the shop across town, a fraternity brother, or a golfing buddy. Procurement managers now may have to work with hundreds of suppliers from around the world, adding the complexity of ever-shifting concerns of shipping, international law, tariffs, currency exchange, and more.
Procurement specialists no longer work at the direction of others, but rather with them to find the most suitable suppliers. It’s not uncommon for the procurement specialist to initiate an innovation and bring it to the attention of the engineers or supply chain executives.
Procurement managers are also crucial in a crisis. Whether it’s a product recall, a humanitarian crisis, civil unrest, or a natural disaster, it may be critical that procurement responds without flinching. It could be that a supplier is unexpectedly unable to fulfill orders, or there could be an unanticipated surge in demand that must be quickly accommodated. Procurement specialists may have to identify and contract with new suppliers urgently. Better yet, they can proactively identify the lowest risk suppliers, such as those with a resilient and sustainable infrastructure, to avoid a crisis in the first place. Being able to accommodate that level of procurement requires a truly connected intelligent enterprise, one that reaches out to engineering, supply chain, finance, manufacturing, legal, marketing, and the highest levels of management.
Another benefit of digital procurement is the ability to turn a profit. It’s ironic that a business division whose central purpose is to spend money could be profitable, but it’s true. Procurement can sell data back to suppliers, who could in turn use this additional information to create superior, cost-efficient products. While it’s intuitive that suppliers should seek the maximum amount of profit from their customers, smart suppliers understand that when their customers succeed, they succeed.
Without question, there are obvious risks and liabilities in sharing information with suppliers. Not only are there competitive concerns, but legal issues as well – for example, who actually owns the data? Nonetheless, most procurement executives agree that working closely with suppliers to share information and innovate may be well worth the risk.
However, as the old saying goes, if you want to have a good friend you need to be a good friend. According to the Deloitte Global Chief Procurement Officer Survey 2018:
“Last year, 86% of procurement leaders aspired to being ‘excellent’ as a strategic business partner in the future. In 2018, only 24% consider themselves as excellent: although this is a slight improvement from 2017, it highlights the need for further improvement in business partnering by procurement teams.”
Only the best-run businesses will be excellent strategic business partners, and the best way of winning the confidence of your suppliers is to have a thoroughly integrated procurement solution. It must have an efficient digital process for sourcing both indirect and direct materials, it must work for all spend categories, and it must manage the entire source-to-contract process from integrating new bills of materials from product lifecycle management systems through sourcing, contract management, and manufacturing execution integration. It is possible. To get a glimpse of how it works, take a look at this short video.
Back in 1997, Professor Upton could not have envisioned the strategic importance procurement plays today, but it’s remarkable that not long ago the most thorough way to assess a supplier was to take a quick tour of the plant. On the other hand, Professor Upton did foresee the challenge of hiring and retaining qualified industrial manufacturing talent, and that’s the topic of my next blog.
For more insight about plant tours in the 21st century, stay tuned to this six-part blog series based on my 30+ years’ experience collaborating on innovation with complex, discrete machinery manufacturers.