Businesses must prioritise suppliers and procurement in the midst of a global supply chain crisis, rampant inflation, and energy shortages and also in the future, said BCG recently when announcing a new book titled Profit from the Source: Transforming Your Business by Putting Suppliers at the Core.
In their book, published by Harvard Business Review Press, Christian Schuh, Wolfgang Schnellbächer, Alenka Triplat, and Daniel Weise seek to overturn the traditional view of business leaders that suppliers are peripheral contributors to corporate success and that procurement is largely an administrative capability that focuses narrowly on delivering cost savings, BCG noted.
To make their case for radical change, the BCG authors point to research from Harvard Business School, which shows that prior to the current global supply chain crisis, business leaders spent an average of just 1% of their time with suppliers.
According to the authors, this lack of attention makes no sense.
“Given that spending on suppliers—the job of procurement—accounts for more than half of a typical company’s total budget, it means that CEOs spend next to no time either thinking about or being actively involved in how their companies spend more than half of their budgets. That’s a mismatch with potentially existential consequences for companies,” the authors said.
In addition, the limited time CEOs spend with suppliers means that their companies risk missing out on the enormous potential opportunities that these vendors offer for achieving profitable growth, the authors observed.
Suppliers are not only a source of cost savings but also a source of resilience through their provision of mission-critical components, parts, and raw materials, as well as vital services such as manufacturing, the authors pointed out.
Suppliers are also a scalable source of competitive advantage, helping companies deliver world-beating products that are of high quality, innovative, sustainable, and fast to market, BCG said.
Companies that prioritise suppliers and procurement outperform rivals that don’t
In the book, the authors feature BCG analysis showing that only 35% of the top 150 companies in the S&P 500 put the chief procurement officer (or equivalent) on the leadership team.
Yet, those companies outperformed the market by 134% from 2000 through 2020—a turbulent 20-year period that saw the tech boom and bust, the global financial crisis, the US-China trade war, and the start of the global pandemic, the book states.
“This clearly demonstrates that CEOs really can steer their companies through challenging times and extract enormous value from their suppliers if they give their CPO a seat at the table and empower their procurement function,” said the authors.
“It’s no coincidence that Apple, the first public company to reach a market capitalisation that exceeds $3 trillion, is run by a CEO who was previously senior vice president of worldwide operations with responsibility for procurement: Tim Cook,” the authors noted.
A blueprint for radical change: How to put suppliers at the heart of business
The authors present a blueprint for radical change that comprises proven practical ways that business leaders can get all the potential benefits from their suppliers, BCG said.
In doing so, the authors draw on proprietary BCG research, as well as their firsthand experience and that of their colleagues of working with some of the world’s leading companies, the firm added.
The blueprint features the following three building blocks.
How the CEO needs to change. Recommendations include:
- Spend 25% of their time on supplier and procurement issues.
- Build 1-to-1 relationships with the CEOs of the top suppliers—the 20 to 40 companies that account for half of the supplier budget.
- Give the CPO a new mandate that focuses on profitable growth rather than just cost reduction.
How the company needs to change. Recommendations include:
- Give the procurement team a central role in the product life cycle—from start to finish.
- Automate routine administrative procurement tasks.
- Give procurement managers artificial intelligence technology to improve their decision making.
How the company’s ecosystem or network of suppliers needs to change. Recommendations include:
- Demand upfront commitments to double savings from suppliers in return for a wraparound package of business support to counter rampant inflation.
- Develop just-in-case, rather than a just-in-time, relationships with suppliers to boost resilience.
- Work with suppliers to cut their carbon emissions and accelerate the company’s own journey to net zero.
- Get the procurement function to tap suppliers as a source of R&D investment and innovation.