How to tackle frequent procurement challenges

Fabian | 00:01.45
Hello, everyone here to Procurement Unplugged, another episode and the first one in English. We are very happy to welcome today James Meads. And as you may hear, also with new and professional equipment. So we improve episode by episode. Welcome, James.

James | 00:20.16
Fabian, thank you for inviting me. It's a pleasure to be on your podcast.

Fabian | 00:25.54
So James has a wide range of experiences within the field of procurement. Over the last two decades, he has been consulting a magnitude of large enterprises. And predominantly, he started in manufacturing. But also, he has a wide knowledge about BPOs, where we will also talk about the taste band of services.

We touched upon that topic in our last episode with Marcel Vollmer. And we are really happy to continue the conversation here with another true expert. So, James, how did you end up in procurement? And maybe you can tell us a bit more about your last two decades in the field.

James | 01:07.24
Sure. Everyone's always got a funny story about how they end up in procurement, right? Because nobody really goes through university saying, when I leave, I want to be a buyer. So my story was, I spent... Just before my final year at university, I spent a summer working in a purchasing department of a local automotive gearbox manufacturing company. And they needed someone to help them for two months for a new contract that they had won with Ford to get all of the new suppliers and all of the new customers set up for this contract that they'd won.

And I, up until then, had no idea what purchasing or procurement was. It was something that was completely unknown to me. Through that summer job, you know, I was just grateful for not having to do some crappy job working in a factory or on a production line all summer. Instead, I could, you know, go and do an office job, something that required a bit of thought. So, from that, really, that gave me the curiosity to think, well, I wasn't really sure—you know, I was 21 at the time—I wasn't really sure what I wanted to do career-wise, and that gave me some food for thought. Purchasing would be quite an interesting thing to try out.

And then, after I graduated, I worked a couple of jobs and then applied to go on the graduate training scheme at Jaguar Land Rover. That’s where, ultimately, I started my career in procurement, in the automotive industry. After working for JLR, I worked for a couple of tier-one suppliers in the auto industry until the big recession came at the end of 2008 with the financial crisis. That made me realize that I would quite like to be in an industry that’s a little bit more recession-proof.

So when the economy picked up again, I went to go and work for a company that makes toilet paper. And we all know from 2020 how important a commodity toilet paper can be, given all of the capacity in the supply chain that we experienced last year. So, yeah, so the last sort of eight years of my career before I set myself up with my own business was in the consumer goods industry. which is very fast-paced, a lot of change, and also very multidisciplinary in terms of, you've got spend on pretty much everything in that environment from both production through to things like professional services.

Biggest Changes in Procurement Over the Last Decade

Fabian | 04:03.44
Very interesting. I mean, you just mentioned the buzzword change. We hear that from various experts that a lot of things have been changing over the last 10 years, especially in procurement. What do you think are the three biggest changes you've encountered over the last years or maybe over the last decade?

James | 04:25.24
The first one would be the emergence of talent pools in emerging markets. When I started my career, procurement as a profession was pretty much the domain of North America and Western Europe. It was around 2006, 2007, in the automotive industry when we started hiring low-cost country sourcing experts in places like China, Eastern Europe, and Mexico. The professional buyers in the US and Europe really had to train those guys.

And now it's pretty much if a company wants to hire a category manager from a perspective of experience, it doesn't really matter whether they're located in Asia, in the Middle East, in Latin America, in Europe or in North America. You've got that pool of talent right across the board now. I think the second one is procurement has definitely moved from being more of a reactionary function to more of a strategic function.

I mean, that certainly was already in play sort of 15 years ago, but it's gathered a lot more pace, certainly over the past five to 10 years. And the third one, which I guess we'll talk a little bit about today, given what Merkinis does is just the emergence and the increasing importance of software, both from an automation perspective of repetitive tasks, but also in terms of being able to improve and... and really take to the next level the data and the interface and the way that you can manage suppliers and put together a negotiation or a sourcing event and manage a category that just weren't available to us when we were really reliant on just SAP and Oracle and Microsoft Excel.

Fabian | 06:24.75
Yeah, makes totally sense. So basically, over the last 10 years, you're saying that the talent pool has become more widespread across regions and borders and markets. And then also the pace, but along with the pace, the importance of procurement as a strategic function player has emerged because back then, as you were saying, it was rather an administrative function to a certain degree.

And of course, software and automation has come and are playing a huge role in the current day scenario. I mean, another topic we've been observing over the last decades is kind of the change from materials and goods towards services.

If you look now on a European Union GDP level, two thirds of the European Union GDP are services. I think you started your career at, I think you mentioned Land Rover in the UK, which was, I think, back then quite a material and product driven procurement. So how did you observe certain changes with regards to service procurement over the last years?

James | 07:46.25
Yeah, I first experienced it when I moved into the FMCG industry, actually. And. there was a lot of spend in the services area that was not under management and really didn't have any kind of process around how it was purchased. And if you think about something...

Challenges in Service Procurement & COVID-19's Impact

Fabian | 08:10.16
If I may interrupt you, I mean, that's a very interesting topic because I hear that from so many companies. The service spend is not under management. We may have a 50-50 ratio or 60-40 ratio between materials and goods on one side, and services on the other, but it's not under management because, I think, in services, the mentality to look beyond budget has not arrived. Do you think it is changing? And the second question will be: do you think COVID-19 is driving a bigger change here to get more procurement mentality into the service spend?

James | 08:48.30
I mean I think Fabian to answer the question it's definitely changing And that's probably stating the obvious, but I guess in what way is it changing is probably the better way to approach this. And if you go on LinkedIn and do a job search for procurement category managers, I mean, I don't have the statistics, but I would guess just from looking at it with the naked eye that probably two thirds of those job descriptions will be for marketing. and IT procurement managers. And that's an area, both of those areas of spend that traditionally procurement just haven't touched.

And I think from a marketing perspective, you know, a good contact of mine, a lady called Sarah Scudder, based in the US, talked about this on my podcast a year ago when I interviewed her. What she said is that marketing leaders generally don't want anything to do with procurement. because they see procurement as being an organization that just goes after the lowest price. And marketing, perhaps unlike factory operations, marketing have a very close ear of the CEO.

Because it's such an important function for a bit, especially a consumer goods business, which is all about advertising and reaching customers in a very competitive market. You know, if you're thinking detergent or toilet paper or baby diapers or something like that, there's lots of competition out there. I think with IT, on the other hand, there just haven't been the procurement skills historically, because there's such a lot of technical knowledge required. You know, technical people typically, it's a bit of a... maybe a little bit of a stereotype, but technical people, IT people generally tend to be more introverted and less sort of confident in the negotiation scenario.

Whereas procurement people generally obviously very commercially astute, but wouldn't necessarily have the technical skills to understand, you know, how can we negotiate software? Because we don't, well, A, we don't understand what the software does.

And B, you know, we’re not lawyers, and we don’t have the complexity from a contract management perspective to be able to tackle that. Someone like SAP, Microsoft, or Google, you know, they’ve got an army of lawyers who can write a contract that’s very much one-sided on their terms because they, in some cases, effectively have monopolies. So, I think those are probably the two biggest areas where I’ve seen changes. I mean, that’s a very...

Fabian | 11:29.39
Very interesting point what you're making. So do you think the challenges and the in-transparency in service procurement comes from one certain reason? Because what you're explaining, I see a multitude of different layers. I think on one side you mentioned that, I mean, the marketing leaders or IT leaders are not necessarily welcoming you as a procurement person. So I think it's to a certain degree, in my eyes, a bit of a cultural transformation.

The other thing I see is that, unlike in material procurement, you need to be an even greater domain expert in the service procurement categories. And last but not least, I also feel like current software has historically been more shaped around materials and products, and not necessarily for the field of service procurement, where you need to interact a lot with the stakeholders in order to have a successful sourcing case.

So what is it really, in your opinion, what makes it so difficult? Or is it really that multitude of different challenges? Or is there like one reason more striking out?

The Complexity of Service Procurement & Supplier Management

James | 12:47.15
I think if we're looking at software to manage how we procure services, it's fundamentally different to how you would go out and... and procure raw materials because, I mean, let's take three things. You've got raw materials purchasing, you've got services purchasing or procurement, and then you've got buying all of the other goods that are not raw materials but are sort of non-production materials that go into the manufacturing process or into the process of managing a company.

You know, things like office stationery, for example, is is probably the first one that you would think of. There are three different strategies for those. So if you're buying raw material, essentially your strategy is pretty straightforward. You want to beat the market in terms of commodity pricing or at least not do worse than the market.

And you need to make sure that you have security of supply. And now, obviously, as modern procurement evolves, we're looking now more into things like... supply chain traceability and ESG and diversity, all of that type of thing. But 10 years ago, that wasn't really there. With non-production materials, that's essentially tailspin. So you've got a very high volume of purchase orders for what is a relatively low spend product. So that's the classic, make it easy for the end user to be able to buy it themselves according to a strategy or to a preferred supplier. put it on a catalog, give them a nice user interface to purchase it through rather than an ERP system, which has an interface from the 1990s.

And in most cases, you can offload a lot of that day-to-day requisitioning and purchasing onto the stakeholder. And he or she is, in most cases, pretty happy because it means that they can do what they want to do without having to call someone in purchasing or procurement to go out and buy something for them. With With services, the focus is more on two things. A, if it's a one-time spend for a big... service or project that you need to buy something for, you're probably not going to know the providers out there.

So, there’s an element of being able to scout the market and figure out who’s out there and who can provide it, which I guess you would also have for materials in some instances if you’re a company making build-to-order products. But the big issue with services is around lifetime contract cycle management and how you go about managing that. Because the classic thing that happens in services procurement is that someone in a corporate procurement department talks to a vendor, negotiates, does a deal, and then says, "They’re our global vendor."

There you go. All of our satellite locations go out and execute the terms of that contract. And what happens, I would say, seven or eight times out of ten in companies that don't have a very top-down hierarchy and organizational structure, is that the contract gets shoved in a drawer or put onto SharePoint. Nobody in locations outside of the head office knows that it exists or understands the real terms of the contract. More importantly, they don’t measure the performance of that vendor.

So, having software that can handle lifecycle performance management and measure the performance of service providers over the lifetime of the agreement is crucial. It's a bit like having supplier relationship management for raw materials suppliers, focusing on innovations, KPIs, and, um, what's it called—order fill rate. I forget the acronym, but it's a similar sort of concept. That is vital to a long-term strategic relationship with a vendor. And if we look at services vendors, particularly now, if we're looking at software—I will caveat this with I am not an IT procurement expert.

I've never bought IT. But in a lot of cases, I wouldn’t say they’re in a monopolistic position, but they’re in a very strong position in the sense that it would take you a lot of time, pain, and effort to move from one provider to the next. Once SAP sells you their software, realistically, you’re never going to move away from it.

Or if you are, it’s going to be like a three- or four-year IT project with an army of consultants. So, I think managing that supplier performance is critical, bearing in mind that you have very little influence over price. And to some extent, depending on how powerful the vendor is, you have relatively little influence over the terms and conditions that you sign up to.

Fabian | 17:56.46
I mean, you would think that SRM is a topic we’ve been talking about for 20 years, so it shouldn’t be that new when it comes to vendors and service providers. But I feel like what you’re saying is that the point is it hasn’t really reached its full potential. There hasn’t been a software solution that can integrate stakeholders and end users to drive it holistically, as you were saying with the SharePoints and documents being lost in a central point or somewhere. Is that kind of the reason?

James | 18:33.90
Yeah, I think so. I think just the accessibility of the data and the performance metrics in one space that is easy to access is certainly a factor. I mean, if I cast my mind back to around 2012, when I was trying to put together a pan-European strategy and KPIs for measuring the performance of a fleet of forklift trucks in 37 different plants across Europe, it took me six months to get the data. And when I got the data, half of it was rubbish.

So, having one central point of reference, where a single source of truth, where that data can be uploaded to, I mean, that forklift truck fleet probably isn't classic service in the sense of what Mecanis does, but it's... It's the same example of accessibility of data and having data in somewhere that's trusted and measuring things, that everyone is aligned upon. If you can get to that point, then in the words of the great philosopher, John Bon Jovi, we're halfway there.

Fabian | 19:46.09
Yeah, I mean, regarding another halfway thing, I mean, I feel like on... Like one side, the truth is really in that holistic supplier management, because you're talking about a huge umbrella contract and very strategic suppliers. And on the other side, within a department, with the end user, a lot of tailspin is happening, what you also mentioned. And in the pre-chat we had, you also mentioned the concept of BPO's.

Maybe you can quickly explain to the listeners the concept of BPO's and how BPO's are still heavily involved in huge organizations to drive service tailspin, given that these days a lot of the tailspin and materials and products is managed through catalogs.

James | 20:34.84
Yes, a BPO stands for business process outsourcing, just to clear up the acronym. So a BPO essentially can be used in a multitude of different ways. But my experience of working with a BPO provider in one of my previous employers was that they were responsible from doing the purchase requisition to purchase order creation. And then they were also responsible for, in the case of goods, expediting any of the goods that were non-production material.

So anything that was not a raw material that was used in the production process. Part of that, or a big part of that, involved purchasing, as you mentioned, a lot of tailspin. And the characteristics of tailspin typically are... very high transaction volumes, a very high number of purchase orders, but a relatively low average value of the order. So there's a lot of spade work involved in doing it. But the added value that that process drives compared to strategic procurement and top 20% of vendors is relatively low. So what we did, what the policy there was, was that anything that was under... 20,000 US dollars.

So someone in corporate procurement would not typically get involved in unless there was a legal or a commercial issue, if there was a price increase or something like that, or contract terms or payment terms issue, we would get involved. But generally speaking, our external buying departments, who were located in Eastern Europe at the time, were responsible for doing the day-to-day transactional procurement. and had responsibility if they wanted to go out and negotiate it to try and negotiate a better price.

But they didn't have to go out and get the typical three bids and a buy for anything under that threshold of spend. What happened was that, you know, for goods, it's quite easy to benchmark them. If you want to buy an off-the-shelf spare part, then you can go out and get three quotes quite easily.

But... If you're trying to buy services for a factory or for a corporate office, it's very difficult for a business process outsourcing company to challenge why a certain stakeholder wants to buy that service from a supplier.

Fabian | 23:13.77
Yeah, it makes totally sense because I mean, it's so tough to compare. But like, since you also wanted to talk about the future of procurement, Do you think in future years BPO's can be disrupted to a certain degree with approaches like self-service procurement or even like autonomous procurement?

So do you see even like in the taste band like a certain area for disruption? Because also we talked about in our past conversations a lot that procurement like will move more and more from transactions to to strategic procurement. So how's your thoughts about that?

The Future of Procurement: From Cost Savings to Value Creation

James | 23:57.85
Yeah, well, I mean, I think this will affect both BPOs and native procurement departments within within corporations. But I think that the general trend and in you know, I don't think it takes a genius to work this out. But the general trend will be that there will be less and less operational or tactical transactional procurement roles in the future. because a lot of that work will be, or a lot of the processes in that work will be automated, you will still need people to manage the workflow.

You'll still need people to watch over it. And you'll still need humans to make decisions when something goes wrong in that process. So, I mean, if the supplier comes back and says that they want to change payment terms, or if the... if there's a quality problem with a material or something like that there will always need to be human intervention but a lot of these administrative repetitive processes now that yes, BPOs do a lot of it.

But shockingly, there are still a lot of businesses in places like Germany and the UK that are paying people in those countries to do what is essentially a 15 to 20 euro an hour admin task that you could go on Upwork and hire someone to do if you train them for a couple of days. So I do think that those roles are going to diminish. Will that have a big impact on BPOs?

I think it will have an impact on the type of work that they do. I think somebody like an Infosys or a Genpact are that big that it's not going to destroy them. You know, assuming that they've got some strategic foresight and they're not going to behave like Kodak or Nokia, then I think they will survive it. But certainly the work that they will do in the future, I think, will be vastly different to what they're doing now.

Fabian | 25:59.42
I mean, apart from BPOs and the taste band, what's your vision for the future of procurement in the grand scheme of things?

James | 26:09.69
I think procurement is going to move more away from being measured on year-on-year annual savings, because if you take that to its logical conclusion, then at some point you'll be buying materials for free. Because if... If procurement... So it sounds stupid, but if procurement is targeted each year to get a 5% cost down on everything that they buy, there's only a certain amount that they can get before the supplier starts making a loss.

So I think in reality, a lot of procurement teams have fudged those numbers for a lot of years because they know and we all know, any smart mathematician knows that it's impossible to do that year on year and for the supplier to still make a profit in something that's... largely commodity driven, if we're talking materials, I think there will be a much more, there'll be much more of a drive and much more of a shift towards procurement as being a total contributor towards added value.

And certainly some of the smarter businesses have already been doing that for a number of years. I mean, certainly casting my mind back to my corporate days, procurement would be credited for helping. manufacturing excellence with energy saving projects, for example. I think especially now with climate change and the push for organizations to spend more time on reducing CO2, I think the procurement will be more and more involved in sustainability initiatives that also happen to drive the bottom line as well.

The classic win-win, because while it may not be a material cost saving or a supplier negotiation saving, it impacts the P&L. I think the one where it's more difficult to measure, but where it's definitely an area that procurement spends a lot of time on and drives a lot of value is on cost avoidance and on crisis management. And I think that's very difficult to measure. And we're probably still, it's still going to take a while before procurement really gets the recognition for the work that they do in that area.

Fabian | 28:21.23
Talking about savings, that's probably the one where you can do the biggest savings, especially in services. It's probably the one where you have the biggest lever. That's an interesting one. Yeah,

James | 28:35.66
especially if you're looking at any service that involves labor. If you're looking at facilities management, then typically, especially in a country like Germany where the unions are very strong, the price of labor goes up every year.

So... If you're managing a contract for catering or cleaning, one of the strongest ways that you can impact that is by minimizing or eliminating the pass-through that the supplier gives you each year for rising wages. But yet the average CFO would not recognize that as a saving because he can't see it on his P&L. So I do think there needs to be a mindset shift in the way that finance professionals view contribution from...

Fabian | 29:18.68
Procurement in that sense and we're not there yet but it is slowly starting to change yeah very very exciting vision like procurement moving from a savings driver to a value driver and yeah one of the levers could be definitely cost avoidance but also of course sustainability. Yeah, James thanks a lot for the very interesting conversation it was a pleasure to have you here And we are looking forward to more episodes in the coming weeks. So thanks a lot for your time.

James | 29:54.98
Thank you, Fabian. Great to be part of it.