Abstract
A new face of procurement is emerging that is recognizing that a new set of value drivers must be developed in the face of massive environmental changes. Some of the emerging views on the “future of procurement” focus on the importance of being a strong internal consultant, the importance of building relationships, coaching suppliers, post-award contract management, and relational contracting. These topics are emerging in the context of the new view that procurement is about building value for the enterprise.
It is against this context that the two books in this review represent two anchors that exist in the procurement environment, both the old, traditional model of power-based, “red meat eating buyers,” and that of the procurement professional focused on driving relationship contracting and vested value to create mutual benefit for both parties. Each book represents a different perspective, and thus provides a representation of the current debate going on in procurement strategy meetings around the globe.
Andrew Cox’s new book Sourcing Portfolio Analysis represents the more traditional “power-based” view of procurement. The book is targeted for procurement executives tasked with building category sourcing strategies, and is meant to provide guidelines for building such strategies. The book relies on a series of prescriptive two-by-two matrices that are further segmented into eight-by-eight matrices that establish different typologies for supplier segmentation. The application of these frameworks to the universe of buyer–seller relationships is predicted to lead to better sourcing outcomes… for the buyer! The predominant perspective held by the author is that suppliers are parties that must be beaten down through the application of power-based negotiation. Such a perspective seems to assume that buyers have been exploited by suppliers for years, and the tables have now turned – suppliers are about to get their due!
This work builds on much of the prior strategic positions concepts introduced by Michael Porter’s Five Forces analysis in his book Competitive Strategy (1980), as well as Peter Kraljic’s Segmentation Matrix, published in the Harvard Business Review (1983), as well as Professor Cox’s own articles, working papers, and book chapters (which consume three pages of the reference section of the book). Unfortunately, the most up-to-date references, apart from his own that are cited, are from 2008, and it is clear that there is a major gap in Cox’s use of more modern research paradigms that are related to relational contracting and negotiation. In fact, the subtitle for the book, Power Positioning Tools for Category Management and Strategic Sourcing, gives it all away. This book essentially depicts how buyers can leverage their market positions to gain more power over suppliers in negotiating contracts. But in doing so, Cox has taken the tools of Porter and Kraljic and put them on steroids, without clearly articulating how doing so can provide us with a better understanding of how to deliver value in supply chain relationships. The author spends the entire book focused on building even more detailed segmentation matrices within segmentation matrices to define different types of sourcing environments. This results in several new terms that he is able to try to segment into relationship typologies. This results in a variety of different typologies that seem to be a compendium of different “buzzwords.” Take, for example, this one: Buyer Dominant – Supplier Development + Partial Supply Chain Management: full lean/agile/agilean supplier collaboration at the first tier + information-based collaboration only within the supply chain, in which the buyer maximizes their share of value from all suppliers in the chain (p. 166).
Without a strong set of definitions and a practical set of examples around such typologies, supported by reference to more recent academic research, these descriptions are difficult to follow. I found the typologies offered in the book confusing, and weak in intent and meaning. Professor Cox, who is a respected scholar and has a lengthy set of publications in refereed journals, could have significantly strengthened this aspect of the book: rather, it is a weakness in this edition.
What bothers me the most about this book is that it is entirely focused on leveraging power, and describing means through which buyers can reduce their dependence on suppliers, and therefore “receive better value for money deals.” Dependence can be effective, so long as it is governed by effective contractual mechanisms, identification of risks, incentivized performance measures, open exchange of information, and mutual benefits. While I am in agreement that driving competition in any type of supply chain relationship is a good thing, increasing dependence through long-term mutually beneficial relationships have time and again proven to be the most effective approach. My interviews with Honda and Toyota indicated they seek “suppliers for life” relationships built on robust should-cost models, target costing in product development, supplier development, and continuous improvement. In another industry, oil and gas, I have witnessed supplier relationships that span ten years or more that are based on complete open books cost plus strategies that seek to drive demand management and improvement strategies. These types of relationships do not exist in the world of Cox’s Sourcing Portfolio Analysis. But then again, not everything can be simply labeled in a two-by-two matrix.
The typologies in the book need a strong set of illustrative practical examples or case studies to make them useful. And that is a telling problem with this book – these are theoretical models that have worked well, but that cannot be readily identified in practice. The approaches are applicable primarily for organizations that are already in a position of strong market power. Cox’s work was used heavily in the 1990s by companies like IBM, a large buying company, which sought to leverage spend and move to touch-less procurement technologies that minimized face-to-face contact with suppliers. Typologies such as these work well in markets where procurement is embedded in a large and powerful buying organization, procuring an uncomplicated product or service from an acquiescent supply base. However, when boiled down to the category level, even large organizations may find themselves working with small suppliers that have strong IP or technology advantages, and collaboration is needed.
Interestingly enough, it seems that even large behemoths like IBM have also turned the corner on this antiquated view of procurement. I remember years ago at an IACCM conference seeing the senior director of procurement answer a question “how do you define strategic supplier relationships?” with the response “if they do a lot of business with IBM.” However, the most recent 2013 IBM CPO Institute for Business Value found quite a different result. The study suggests that companies with high performing procurement organizations have higher profit margins and three common procurement attributes: 1) they focus on improving enterprise success, not just procurement performance; 2) they engage with stakeholders to understand and anticipate their needs and values; and 3) they embrace progressive procurement practices and tools to drive results. These role models are also more likely to collaborate with suppliers to develop new technologies to introduce new ideas and innovative thinking.
The ecosystem depicted in the book assumes away many of the realities of the complex world that procurement professionals are faced with today. It takes for granted the assumption that buyers control their environment, and that price is the primary driver of value. And this simply is no longer the case, as IBM itself points out in their study.
If Cox’s book is anchored in the past, then the new book by Keith, Vitasek, Manrodt, and Kling is completely focused on the future. This book is a remarkable contrast, in that it adopts a diametrically opposite view to the notion that power is the basis for buyer–seller relationships. In fact, the book’s Introduction begins by acknowledging the contribution that Porter, Kraljic, and the firm A.T. Kearney have made to the field. (ATK first espoused the term “strategic sourcing” to focus on the practice of having buyers leveraging their purchase volume to reduce price across business lines). But then the authors go on to note that the time for leveraging power has indeed passed, and a new approach is needed for a different type of procurement strategy.
No one would debate that these pioneers have led an evolution in procurement that made a lasting impact. But times have changed. Today’s environment is more dynamic and is filled with greater uncertainty. The tried and true tools and tactics adopted over the last 30 years as the gold standard are not as effective as they once were. Organizations that historically have won by leveraging their power or by strategically maneuvering to shift power in their favor find those strategies are losing effectiveness.
Specifically, the authors adopt the acronym VUCA to describe the current business environment, standing for Volatility, Uncertainty, Complexity, and Ambiguity. Procurement must approach sourcing decisions in this environment, with the knowledge that incremental changes will not do. In a VUCA environment, traditional static models of leveraging power no longer work. Procurement must earn the trust of the business to fully succeed and, in doing so, it must embrace a vision that goes far beyond the thinking of today, leveraging creativity and know-how to change not just the function from within, but the overall business value that procurement can deliver.
The authors of the book set out to achieve this, in seeking to deliver on two key objectives: 1) to build awareness that reliance on conventional power and leverage approaches in sourcing relationships is limited; and 2) to invite procurement professionals to better understand the benefits of using relational contracting approaches through the use of Sourcing Business Models. Much of this work is grounded in the work by Kate Vitasek, the developer of the “Vested” outsourcing model. Vested is a Sourcing Business Model in which buyers and suppliers carefully craft highly collaborative relationships supported by true win-win economics. A win for buyers is a win for suppliers. Buyers and suppliers are vested in each other success.
The work is grounded in the work of Oliver Williamson, the Nobel Prize winning author of transaction cost economics. Williamson’s paradigm is one of the most highly cited theoretical frameworks in the supply management research literature, and posits that buyer–seller relationships range from highly competitive marketplaces to those that establish corporate hierarchies through insourcing. Williamson’s work is used as the foundation to construct the seven Sourcing Business Models identified in the book. The authors also provide a Business Model Mapping Toolkit that provides step-by-step instructions for determining which Sourcing Business Model is most appropriate for your situation. In the spirit of collaboration, the authors provide a link for readers to download all of the models through their Vested Outsourcing website, believing that use of the tools will propagate their use. In the remainder of the book the authors discuss other approaches that are required to fundamentally change the nature of the dialogue between buyers and seller, and the importance of building trust in relationships.
An important differentiator of their approach is the prominent discussion of the term “relational contract,” defined as a combination of written contract(s), interface protocols, and distinct social norms that enable a continuously efficient and effective commercial relationship. The relationship is efficient when the parties cooperate to minimize friction toward the commercial goals (i.e. when the transaction costs before and after the contract award are optimized). As the authors note, “the secret to make this happen is continual alignment of interests.”
The book is written in a format that is an easy read, without the use of buzzwords and plenty of examples and illustrations of the concepts. A number of case studies are written using unnamed individuals from the procurement world who have gone through different experiences and situations. I like this approach, as it provides a real-world feel and also emphasizes the importance of individual personality, capabilities, and mindset as a critical ingredient of buyer–seller relationships. These cases also clearly explain the aftermath that occurs after a “meat-eating buyer” has gone through and “beat up” a supplier on price. This often involves serious lapses in supplier performance, or post-contract markups and engineering change notices that wind up costing even more money than the supposed cost savings that occurred in the contracting stage. The alternative involves approaches to built trust, which requires explicitly choosing to be open, transparent, and credible in negotiations. The benefits of opening up relationships that could not occur otherwise are illustrated again and again throughout the book.
I also liked how the authors draw on a historical perspective of the sourcing function, including a description of the now-famous destruction of relational capital achieved by the “procurement pitbull” Dr Ignacio Lopez from General Motors. There are also references to other visionaries in the procurement world such as Gene Richter and Thomas Stallkamp.
In contrasting the two books, a comment from a former IBM procurement senior executive who helped me with my review is useful to consider. Overall procurement strategy development does need to continue to evolve. While I understand the notion behind VUCA, and there are certainly ever-present variables, I do not see these conditions necessarily being present 24/7 in the majority of commodities/relationships in which I have participated. Similarly, I do not see these elements as necessarily providing guidance as to how to build a supply chain team nor a supplier strategy. I tend to focus and tailor the solution to the operational variables of our business, the inherent flexibility of the products and processes to react to change, and the level of dependence on suppliers for technology, innovation, and risk mitigation. “Power” and “leverage” are the results of the strategy, not the starting points. Conversely, the idea that “spend” is not an inherent lever in driving the best financial results is equally mis-guided (IMHO).
In developing and deploying procurement’s true value proposition to the business, both of these books have something to add. However, procurement transformation, lessons from the past, and classic maturity model thinking must be put in context. Modest changes in capability and thinking can help but will not bring the value that modern business demands. There is also an emerging need for technologies that drive sourcing analytics, risk management, supplier life cycle management, and market intelligence, which will become critical in building effective procurement transformation components – yet the linkage to these approaches is not well described or understood in the procurement community. Procurement must progress and as George Bernard Shaw put it so eloquently, “Progress is impossible without change, and those who cannot change their minds cannot change anything.” (source unknown)