I interviewed Francis Cherian who discussed Value Creation: Procurement's Role in Supply Chains.
Please provide a brief background of yourself?
My name is Francis Cherian and I am a co-founder of Innovatus based in Kuala Lumpur, Malaysia. Innovatus is a procurement consulting and industrial supply company active in Europe and Asia since 2009. Prior to this, I held procurement leadership positions at Fortune 500 companies in the pharmaceutical, consumer goods, medical devices, and oil and gas industries. I also share my skills and experience in Strategic Sourcing & Supply Management as adjunct faculty at the Georgia Institute of Technology.
What is Value Creation and what is Procurement's role in this?
There is no standard definition of the term “Value Creation”. However for the purpose of our discussion, I would define it as the process of utilizing inputs from business activities and interactions to produce outputs and outcomes that, over the short, medium andlong term, create business value for the organization, its stakeholders, society and the environment. The Procurement function has a significant role in the value creation process as it “de facto” touches on many different areas of an organization’s Value Chain such as research and development, product/service development, production, marketing and sales as well as distribution. Additionally, the Procurement function is uniquely placed between the buyer and the seller of products and services which enables value and/or synergies to be unlocked through collaborative efforts.
How does Procurement provide value in the supply chain?
Traditionally , the value that the Procurement function created was focused on more operational and tactical activities such as ensuring product/service delivery was on time as well as ensuring that the right quality/specifications was procured at the right total cost from an approved supplier. Additionally, the Procurement function also focused on reducing working capital through various programs and initiatives. These activities created value by ensuring that supply chains were cost effective and reliable.
Today, the Procurement function has evolved into a more strategic function that is capable of delivering significant value along the supply chain. For example, through Procurement’s involvement in the product development/ideation process; the function is perfectly positioned to harness the innovative capabilities of its supply base thus contributing to increased sales as a result of faster speed to market and increased customer value.
Similarly, the Procurement function is also able to create value through global sourcing activity which enables an organization to explore not just the cost benefits of procurement from lower cost countries but also to understand the potential market for its own products as well as to create distribution networks in emerging markets which may lead to sales growth in the mid-term.
Another good example is how Procurement is able to influence its key suppliers to comply with its Corporate Social Responsibility (CSR) policy through its involvement in the supplier selection and approval process. By actively managing its supplier relationships in relation to its CSR policy, Procurement is able to increase its brand equity and reputation which is increasingly demanded by today’s customer/consumer; and which is crucial for an organization’s long term success.
Where have you seen success?
That’s a great question! I have seen a wide range of success achieved across the value chain especially in product innovationas well as in manufacturing and distribution efficiencies. In my opinion, the level of success achieved by companies varies very much by industry and organizational maturity. However, there are 3key success factors that are common to all organizations:
i) Alignment with key business objectives. I have found that Procurement organizations that align themselves closely to key business objectives as opposed to having its own “Procurement Agenda” typically create more value for the organization as a whole. It is imperative that the Procurement function is seen as being fully integrated in achieving key business objectives. This may be achieved through the creation of procurement organizational structures that are specific to a given value chain, and may indeed be influenced by the nature of products and services purchased, the supplier base as well as internal stakeholder management. Clearly, a “one size fits all” Procurement organization structure would not be suitable in most companies.
ii) Talented Procurement Resources.With the focus on value creation, procurement professionals would require a wider range of business skills. Although traditional procurement skills are still very relevant, there is a need for procurement professionals to possess more expertise in strategy, marketing, operations and finance as they seek to spread their influence across the organization. In addition, sound communication and relationship building skills are also crucial for success. Therefore, it is necessary for organizations to have a strategy to hire and retain the right procurement talent moving forward.
Measurement of Performance.
We talked about how Value Creation can be achieved through many different methods across the organization. However, in many organizations there is still a very strong focus on cost savings. Don’t get me wrong, cost savings is still very important but it is not the only lever in achieving value creation. In my opinion, it is important for the Procurement organization to have performance measures that reflect key business objectives (e.g product/service development and launch, market growth, profitability, branding etc.) which in turn ensures the Procurement function delivers maximum value to the corporation.
About Francis Cherian
Global Purchasing and Supply Management Executive