2

Strategic procurement and

supply chain management

Introduction
Much of our discussion in Chapter 1 was concerned with how procurement has
evolved towards becoming a strategic function. Accordingly, we must now discuss
the concept of strategic management and how procurement must be aligned and
integrated with corporate strategy. All organisations need to plan for the future;
this requires the development of frameworks to allow the process to take place.
Once strategic objectives have been agreed, the strategies themselves can be
formulated. It is essential that all business functions, including procurement, are
involved in this process.
We shall demonstrate how procurement is becoming a key contributor in the
business planning process, especially with regard to planning supply chain sus-
tainability and resilience in the aftermath of supply chain disruptions such as that
caused by the Covid-19 pandemic. In this chapter we will also provide an overview
of the latest strategies for the future of procurement.

Objectives of this chapter

■ To explain the growth in the strategic role of procurement and supply
■ To explain the concept of strategic management
■ To identify various forms of procurement strategy aimed at gaining competitive
advantage and to examine influences on strategic choice
■ To identify the supply chain concept and to consider alternative ‘supply chain’
models
■ To follow the supply chain concept, investigating events from the primary supplier
to the ultimate user
■ To highlight the need for supply chain sustainability and resilience following the
Covid-19 supply chain disruption
■ To provide an overview of the future of procurement

43
Chapter 2 • Strategic procurement and supply chain management

Strategic procurement
As we have found in Chapter 1, a proactive strategic procurement operation can
give the organisation it represents a competitive advantage by reducing waste
(i.e. non-value-adding activities) in the value chain. Procurement strategies, how-
ever, cannot be developed in isolation; they need to be integrated with corporate
strategy to succeed. Figure 2.1 shows the involvement of procurement at strate-
gic, tactical and operational levels.

Case study – UNICEF

UNICEF has revealed it achieved over $363 million in savings over a range of
medical supplies. Strategic procurement, price and information transparency,
special contracting terms, multi-year arrangements and partner collaborations,
such as joint forecasting and coordinated procurement, were critical to
achieving these savings. Other projects have included a mobile phone app that
uses real-time data to facilitate faster delivery and improved management of
supplies.
(Hart, 2020)

■ Growth in the strategic role of procurement, purchasing and supply

The main reasons for the growth in procurement involvement in strategic deci-
sion making are as follows:

■ Procurement is seen as an area for adding value, not simply reducing costs.

Figure 2.1
The scope of the STRATEGIC LEVEL
purchase function Purchasing research
Long-range planning TACTICAL/MANAGERIAL LEVEL
Predicting availability Buying methods
Policy determination Negotiation
– Single sourcing Budgeting OPERATIONAL LEVEL
– Reciprocal trading Interface development Expediting
– Ethics Sta development Records and systems
– Post-tender negotiation Contracting maintenance
etc. Cost-reduction techniques Invoice clearance
etc. Requisition handling
Enquiries/quotations
Price determination
Returns
etc.

Note: The examples are for the purpose of illustration only. A complete statement of the scope would be very lengthy, and would
vary greatly between one organisation and another.

44
 Strategic procurement

■ Rapid product innovation requires a more integrated management team,

involving all functions, and adopting a process rather than functional
approach to management.
■ There has been a move to holistic views concerning the integration of
material and information flows, both internally and externally, such as
materials requirements planning (MRP), manufacturing resource planning
(MRP2), distribution resource planning (DRP), enterprise resource planning
(ERP) and integrated information systems associated with e-commerce,
supply chain concepts such as value streams, lean and agile supply, and
pipeline management.
■ There is an awareness that active supplier involvement can increase efficiency
and effectiveness.
■ Recognition is developing that concern with strategic costs of supply and total
cost of ownership, rather than short-term price, is important.
■ There is an increased recognition of the profit potential in procurement.
■ The positive contribution of procurement in mitigating the supply disruptions
caused by the Covid-19 pandemic has given procurement enormous visibility
globally.

■ Problems associated with activities and value

One of the major problems historically facing the traditional organisation has
been the tendency to allocate and organise much of the work on a functional
basis – procurement, finance, production. Nowadays, it is the norm for activities
to be organised more on a process basis, which involves a team approach to prob-
lem solving and concern with getting the job done. This in turn requires a more
integrated management approach than a segmental one.
Figure 2.2 illustrates how the structure of organisations may be forced to
change in an attempt to provide a more streamlined approach to the flow of

Figure 2.2
Organisation
structure and the ORGANISATION
flow of goods

ACTIVITIES
FROM OUTPUT TO
INVOLVED OPERATIONS
SUPPLIER ACTIVITIES CUSTOMER
WITH INPUTS

45
Chapter 2 • Strategic procurement and supply chain management

goods into, through and out of the organisation with the aim of maximising
added value and minimising costs. Such logistical structures are more concerned
with overall efficiency than functional efficiency, and give organisations a much
better chance of integrating strategies successfully at all levels.

The concept of strategy

■ Definitions
One generally accepted definition of strategy is:
Strategy is the pattern or plan that integrates an organisation’s major goals, policies and
action sequences into a cohesive whole. A well formulated strategy helps to marshal and
allocate an organisation’s resources into a unique and viable posture based on its relative
internal competencies and shortcomings, anticipated changes in the environment and
contingent moves by intelligent opponents. (Lampel et al., 2013)

■ Developing a strategy
In developing a strategy, the following need to be considered:

■ What are target objectives?

■ How are target objectives to be achieved?

Strategy covers:

■ moves and approaches that are ongoing;

■ new actions in the process of being mapped out;
■ innovation, risk taking;
■ choosing among alternatives;
■ doing the right things at the right times.

Recipe/paradigm From Figure 2.3 it can be seen that if the recipe/paradigm is incorrect, the organi-
change sation is likely to experience strategic drift. Typical symptoms of strategic drift are:

■ poor performance;
■ current culture/paradigm overly subscribed to;
■ resistance to change;
■ poor external focus.

The mission statement

This involves management’s vision of what the business is, or should be. Once
established, this vision serves to:

■ shape the future direction the organisation should follow;

46
 Levels of strategy

Figure 2.3
A managerial recipe
Adoption of
undergoing change recipe or
Development
Implementation
Corporate
of strategy performance
paradigm

If unsatisfactory

Step 1
Tighter
controls

Step 2
Reconstruct or
develop new
strategy

Step 3
Abandon
old recipe/
paradigm and
adopt new one

(Source: Adapted from P. Grinyer and J.-C. Spender, Turnaround: Managerial Recipes for Strategic Success, Associated
Business Press, 1979, p. 203)

■ establish a strong organisational profile; and

■ identify core business.

Levels of strategy
Strategies may be determined for various levels in the organisation, as illustrated
in Figure 2.4. If an organisation has successfully determined strategies at various
levels, those strategies should operate together harmoniously. This, of course,
requires total involvement and commitment by all concerned. Operational strat-
egies are often reflected in vision statements, such as this example from IBM (UK)
Manufacturing:

Purchasing vision
To be the best of breed procurement organisation benchmarked within and
without IBM, and to support our customers with a World Class supplier base.

47
Chapter 2 • Strategic procurement and supply chain management

Figure 2.4
Levels of strategy
within an
organisation
CORPORATE
All-embracing,
linking the business
together

BUSINESS
Concerned with broad issues, such
as how to compete in di erent
markets, e.g. home or overseas

OPERATIONAL
Concerned with functional activities such as
marketing, purchasing, production or finance

Practice note
Some companies are introducing strategic improvement plans with their suppliers. Such
schemes identify several areas where buying organisations would like to see considerable
improvements leading to the elimination of problems. Such a vision might include:
■ nil defects;
■ nil delivery times;
■ nil administration errors;
■ nil transaction costs;
■ nil set-up costs;
■ nil disputes.
Members of the supply chain would work together to achieve such objectives.

Category management (CM)

Many procurement organisations are now implementing category management,
which we define as:
continual monitoring of expenditures and supplier performance in specific buy-
ing categories with the intent of driving ongoing cost or supplier performance
improvements.

An alternative definition is that it is a strategic process-based approach that:

focuses on the vast majority of an organisation’s spend on goods and services with
third-party suppliers. (O’Brien, 2019)

In the context of procurement and supply management (P&SM), category man-

agement refers to organising the resources of the procurement team to focus on
48
 Category management (CM)

the organisation’s supply market (as opposed to internal customers or depart-

mental functions) in order to fully leverage purchasing decisions (CIPS: category
management).
Categories consist of items of:

■ similar supplier sources;

■ similar production processes;
■ similar internal use;
■ similar material content/complexity;
■ similar specifications;
■ similar underlying technology.

Categories must be market facing in terms of being sensibly segmented accord-

ing to the specific market from which the categories are sourced.
Categorisation looks at the inherent properties of categories. Once this has
been carried out, staff can develop strategies for each category in order to max-
imise value for each particular category.
Using this segmentation, organisations work cross-functionally on individual
categories, examining the entire category spend, how the organisation uses the
products or services within the category, the marketplace and individual suppliers.

■ Steps to successful application

■ For each category or segment, develop an understanding of third-party spend
and forecast demand. This can be done internally, or via commissioning mar-
ket research agencies.
■ Segment any spend into market sectors by deciding what the category should
include.
■ Develop market-sector sourcing strategies.
■ Select and segment suppliers that best fit with the business and that are able
to deliver strategically.
■ Manage supplier performance and consider strategic partnering.

■ Typical tools and templates for category management

■ Stage 1 – Identify opportunities
Opportunity analysis
Stakeholder mapping
■ Stage 2 – Create sourcing teams
Roles and responsibilities of a category sourcing team
Team charter
■ Stage 3 – Identify and promote existing deals
■ Stage 4 – Strategic analysis
Portfolio analysis
Supplier relationship mapping
Supplier preferencing
Porter’s five forces
49
Chapter 2 • Strategic procurement and supply chain management

STEEPLED analysis
SWOT analysis
Option generation
Option evaluation
Risk and vulnerability analysis
Category plan generation
■ Stage 5 – Create new solutions
■ Stage 6 – Promote and manage
■ Stage 7 – Review and close

Skills for category management

The fundamental premise of CM is to make a step change. CM roles require a
more strategic and holistic approach and, as the emphasis is far more on creative
thinking, influencing and innovation, category managers must have the follow-
ing skills (Snell, 2011):

■ Leadership: running cross-functional teams.

■ Persuasion: to influence and convince stakeholders of different ideas.
■ Communication: to build relationships with diverse groups of people (inter-
nal and external stakeholders).
■ Change management: convincing people of the need for change.
■ Strategic vision: understanding how the category management strategy aligns
with overall business goals.
■ Commercial awareness: understanding the business’ drivers, and how pro-
curement activity impacts upon them.
■ Market intelligence: providing category expertise and deep market knowledge.

Traditional procurement skills that remain important are:

■ Flexibility: adapting processes and working methods to the needs of

stakeholders.
■ Creativity: suggesting alternatives to provide new ways to add value.
■ Tenacity: ensuring obstacles are overcome and projects get completed.

A useful contribution to understanding CM is the rainbow aide-memoire of Jack-

son (2018), which, in order to help secure all the possible benefits, focuses on
some key category management basic principles (see Figure 2.5):

1 Reduced costs and consolidation: a focus on total cost rather than upfront costs.
2 Organisational needs: CM offers many internal benefits, such as improving
profitability and stakeholder satisfaction by a better understanding of con-
tracts, risk, suppliers and own status.
3 You and the team: encouraging opportunities for the team’s skills and per-
sonal development.
4 Green initiatives: CM offers an opportunity to check that sources are sustain-
able, emissions minimised and waste recycled.

50
 Strategic analysis

Figure 2.5
Jackson’s category O S TS A N D C O N S
CED C O LI
DU DA
management RE N I S ATI ONA L NE E T IO
G A D S N
rainbow OR
A N D T H E T E A
YOU M
E E N INI TI ATIV E S
GR
T HE C U S
R F OR TO
YE ME
R
BU D S E R VIC E R E
Q
A N U IR
D
T
O N AN TECH
I N

EM
AT

DU
E L ATI O
RR

EN
NS

O
OV
PRO
O

LO P S

TS
IN N

GY
HI
VEN
(Source: Jackson, P (2018), ‘Get the best out of category management’, Supply Management, January)

5 Buyer for the customer: a clear appreciation of internal and external customer
requirements.
6 Product and service requirements: a detailed focus on goods and services at
a technical, quality and operational level while also studying service, mainte-
nance and warranty provisions.
7 Innovation and technology: the collection and analysis of data, to drive
advantage through innovation.
8 Vendor relationship: CM argues for fewer suppliers – focused and strategically
aligned to give customers a better service – therefore it is vital to maintain and
develop these relationships.

Strategic management
Strategic management can be divided into three major areas:

1 Strategic analysis: position facing the organisation.

2 Strategic choice: formulation of alternative courses of action.
3 Strategic implementation: planning how the choice of strategy can be put
into effect.

Figure 2.6 indicates how these three areas interact, depending on whether
one sees strategy as a formalised prescriptive approach (i.e. planned), or emer-
gent (i.e. evolving, incremental and continuous). Analysis is of particular
importance.

Strategic analysis
Strategic analysis is to do with understanding the relationship between different
factors affecting the organisation and its choice of strategies.

51
Chapter 2 • Strategic procurement and supply chain management

(a) The prescriptive approach

Strategic
Strategic development
analysis Options
Environment Rational selection Strategic
Resources Finding strategic implementation
Vision, mission route forward
and objectives Considering strategy,
structure and style

(b) The emergent approach

Strategic
Strategic development
analysis Options
Environment Rational selection Strategic
Resources Finding strategic implementation
Vision, mission route forward
and objectives Considering strategy,
structure and style

Figure 2.6 Prescriptive and emergent approaches to the three core elements
(Source: Adapted from Lynch, R. (2002), Corporate Strategy, Harlow: Prentice Hall, with permission from Pearson Education Ltd)

Some of the tools used in strategic analysis are shown in Table 2.1.
Table 2.1 Analysis Methodologies
Examples of tools of
Environmental analysis STEEPLED (social, technological, economic, environmental,
analysis ●
political, legislative, ethical and demographic) analysis
● SWOT (strengths, weaknesses, opportunities, threats) analysis
● Porter’s five forces
● Competitor analysis
Competitive position ● Strategic group analysis
● Competitor analysis
Resource analysis, ● Value chain analysis
competencies and ● Resource audit
strategic capabilities
● Core business
Comparative analysis ● Historical and financial analysis
● Benchmarking
Organisational analysis ● SWOT analysis
● BCG (Boston Consulting Group) analysis
● Critical success factors (CSFs)
Stakeholders’ ● Ethical considerations
perceptions ● Stakeholder mapping
● Mission statements
● Culture
● Paradigms
52
 Strategic analysis

The three main areas for analysis are:

■ the environment;
■ internal resources, competencies and strategic capabilities;
■ stakeholders’ expectations.

We are essentially thinking in terms of a STEEPLED analysis, and this is illus-

trated in Figure 2.7, which shows the many factors – under the headings Social,
Technological, Economic, Environmental, Political, Legal, Ethical and Demo-
graphic – likely to affect an organisation. (The environment can also be analysed
using Porter’s five forces model; see Figure 2.9.) This can provide a checklist for eval-
uating different influences and makes it possible to pinpoint key factors currently
affecting the organisation, as well as longer-term areas for concern. Organisations
concerned with a more global approach will identify key drivers such as market
convergence, cost advantage, government influences and global competition.

■ Product life-cycle analysis

Product life cycle (PLC) analysis attempts to identify the stage that a product or
service has reached in its life cycle, and to predict what is likely to happen in the
future. An example of a product life cycle is shown in Figure 2.8.

■ Porter’s five forces

Porter’s five forces model helps to identify an organisation’s competitive advan-
tage by pointing up those forces affecting the organisation in the environment

Figure 2.7
STEEPLED analysis
Technological

Social Economic

Business,
Demographic market or Environmental
strategy

Ethical Political

Legal

53
Chapter 2 • Strategic procurement and supply chain management

Figure 2.8
Product life cycle

SALES
VALUE
AND
VOLUME

0
DEVELOPMENT INTRODUCTION GROWTH SATURATION DECLINE

TIME AND STAGE OF DEVELOPMENT

in which it operates. Figure 2.9 illustrates the factors that come out of these five
forces, which are:

■ bargaining power of suppliers;

■ bargaining power of buyers;

Figure 2.9
Strategic Number and Technological
management size of suppliers opportunities
competitive factors Buyer
Power of concentration
complementary
providers Entry barriers

Structural conditions
and competitor
positioning

Asset accumulation, Factors

replicability and
inimitability

(Source: Based on Porter, M (1990), Teece, D J, Pisano, G and Shuen, A (1998) and
Hill, C and Jones, G (2012))

54
 Strategic analysis

■ potential new entrants;

■ substitutes;
■ industry competition.

■ The power of suppliers and buyers

Supplier power is likely to be high when:

■ there is a concentration of suppliers rather than a fragmented source of supply;

■ the ‘switching costs’ from one supplier to another in the industry are high;
■ the supplier’s customers and their long-term future are of little importance to
the supplier.

Buyer power is likely to be high:

■ when there is a concentration of buyers, particularly if the volume purchases

of the buyers is high;
■ when there are alternative sources of supply;
■ if the component or material cost is a high percentage of their total cost, as
buyers will be likely to spot-buy to get the best price.

■ Threat of substitutes
If a market can be segmented, it may be possible to avoid threats from substitutes,
competition etc.

■ Resource appraisal
It could well be that an organisation is failing to utilise effectively the resources
available to it, for all sorts of reasons. The question then becomes, ‘What is our
core business and should we sell off some of these under-utilised resources?’.
Some of the methods available for analysis are:

■ resource audit – quality and quantity;

■ resource utilisation;
■ historical analysis of resources and their returns.

■ Portfolio analysis
In a large and diverse organisation, a prime concern at the corporate level is
achieving a balanced range or portfolio of business activities. The Boston Con-
sulting Group (BCG) suggested a matrix analysis.
The BCG suggested the model of the product portfolio or the growth
share matrix as a tool by which to consider product strategy. This product portfo-
lio matrix is shown in Figure 2.10. The matrix combines market growth rate and
market share and thus directly relates to the idea of the experience curve.
A star is a product (or business) that has a high market share in a growing mar-
ket. As such, the company may be spending heavily to gain that share, but the

55
Chapter 2 • Strategic procurement and supply chain management

Figure 2.10
The Boston Relative market share
Consulting Group high low
product portfolio
matrix Question
mark
high Star
(or Problem
child)
Market
growth
rate

Cash
low Dog
cow

(Source: Adapted from The BCG Portfolio Matrix from the Product Portfolio Matrix, ©1970, The Boston Consulting Group)

experience curve effect will mean that costs are reducing over time, and hopefully
at a faster rate than the competition.
The question mark (or problem child) is also in a growing market, but does not
have a high market share. The cash cow is a product (or business) with high mar-
ket share in a mature market. Because growth is low and market conditions more
stable, the need for heavy marketing investment is less. High market share means
that experience in relation to low share competition continues to grow and rel-
ative costs reduce. The cash cow is thus a cash provider.
Dogs have low share in static or declining markets and are thus the worst of all
combinations. They are often a cash drain and use up a disproportionate amount
of company time and resources.

■ Competition within the industry

This can best be assessed with a SWOT analysis. SWOT is made up of the first
letters in strengths, weaknesses, opportunities and threats. It:
■ involves assessing a company’s internal strengths and weaknesses, and its
external opportunities and threats;
■ is an easy-to-use tool for quickly coming up with an overview of a company’s
strategic situation;
■ introduces the point that strategy must produce a strong fit between a compa-
ny’s internal capability and its external situation.
It is normal to produce a ‘cruciform’, as shown in Figure 2.11. The various
strengths, weaknesses, opportunities and threats can be listed under the appro-
priate headings, and a general appraisal made. After this initial analysis, fur-
ther analysis can be undertaken to identify likely strategies the organisation
might implement. Thus, if an organisation on balance has substantial internal

56
 Strategic analysis

strengths and numerous environmental opportunities, this would suggest it

supports an aggressive strategy in Cell 1. If, on the other hand, it has substan-
tial internal strengths and major environmental threats, a diversification policy
might be the order of the day. Similar analysis/strategy implications would be
confirmed in Cells 3 or 4. An example of the cruciform strategy analysis is shown
in Figure 2.12.

Figure 2.11
The basic SWOT
‘cruciform’

STRENGTHS WEAKNESSES

OPPORTUNITIES THREATS

Figure 2.12
Developing the Numerous
SWOT cruciform environmental
opportunities

Cell 3: Supports a Cell 1: Supports an

strategy oriented aggressive strategy
towards turnaround

Critical Substantial
internal internal
weaknesses strengths

Cell 4: Supports a Cell 2: Supports

defensive strategy a diversification
strategy

Major
environmental
threats

57
Chapter 2 • Strategic procurement and supply chain management

Strategic development
Once strategies have been developed, they need to be delivered.

■ Generic strategies
Porter’s model for strategic choice looks at three generic strategies:
■ cost leadership;
■ differentiation;
■ focus.
It is also necessary to identify clearly the basis for a strategy – which direction
should be taken and why. The Ansoff Matrix indicates directions for strategic
development (see Figure 2.13).

■ Strategic evaluation and selection

There are a number of criteria that any strategic option needs to satisfy to stay in
the running for adoption implementation:
■ Suitability: When assessing the suitability for a particular business, the cho-
sen direction will need to reflect the circumstances currently in operation in
the business.

Figure 2.13
Directions
for strategy
development from COMPETENCE
Ansoff PRODUCTS
Existing New

A. B.
PROTECT/BUILD PRODUCT DEVELOPMENT

Existing – Withdrawal – On existing competencies

– Consolidation – With new competencies
– Market penetration

MARKETS
C. D.
MARKET DIVERSIFICATION
DEVELOPMENT
New
– On existing competencies
– New segments – With new competencies
– New territories – Related backward/forward
– New uses – Unrelated

DEVELOPMENT

58
 Objectives for purchasing/procurement

■ Feasibility: This is concerned with assessing whether or not the organisation

has the resources to deliver the chosen strategy. Typical tools used are:
– funds flow analysis;
– break-even analysis;
■ Acceptability: concerned with the expectation of performance of the business
against the expectations of the various stakeholders.

Strategy implementation
Having decided the strategic option, we need to implement the strategy. This
involves resource allocation, planning and control, organisational aspects,
human resource issues and management of change. A time-scale and action plan
will need to be prepared.

Objectives for purchasing/procurement

It might be useful at this stage to consider purchasing objectives in the form of a
‘hierarchy’. Figure 2.14 suggests the way in which this might be done, though of
course the chart will differ from one organisation to another.

Increase profit or
e ciency

Reduce
purchasing costs

Pay less Reduce costs

Negotiate Have Increase

Merge Buy Improve
better fewer sta
orders more systems
deals suppliers e ciency

O er Adopt
Share Implement Implement Implement
long-term mutual
information TQM JIT EDI
contracts approach

Figure 2.14 Analysis of cost reductions

59
60
LOGISTICAL CONSIDERATIONS

Supply market considerations: Basic Internal considerations

Supply market size decisions
Level of competition (existing sellers in
market) Inventory facilities Component design
Legal considerations Handling facilities Component range
Technological considerations Logistical facilities Component flexibility
Social considerations
Industrial relations considerations
Make
General economic conditions
or buy
Level of competition from other buyers
Level of inflation Payment policies
Level of materials
Comparative currency levels Cash-flow
(e.g. semi-processed)
Number of potential sources Stage of considerations
(after development) purchase
upstream
Purchasing strength
Chapter 2 • Strategic procurement and supply chain management

Specific supplier considerations:

Existing Pricing information
Quality of relationships source(s) Cost information Production technology
Level of trust Production facilities
Performance record Schedule stability
Production technology Accuracy and Industrial relations
Home or considerations
Production facilities topicality of supply
overseas Volume and frequency
Level of flexibility market information
Quality level of supply needs
Quality record Quality requirements
Accuracy and speed Level of technology
IR record One or of management
Financial stability more information
Pricing approach
Credit policies
Distance from buyer’s plant
Inventory facilities
Handling facilities
Logistical facilities
Proportion of sales to buyer

Figure 2.15 A framework for strategy development

 Selecting a strategy

Selecting a strategy
Figure 2.15 illustrates some of the many factors that influence the selection and
development of a strategy. Among these are:

■ the position of the business in its supply chain (for example, is it a supplier of
raw materials, components or finished product, and how many competitors
does it have in its supply and end markets?);
■ the number of effective sources in the company’s supply market;
■ the pace of technological development in the supply and end markets;
■ the volatility of the supply and/or end markets;
■ the degree of government involvement in the marketplace (e.g. the defence
market);
■ the ability of the buying company to manage a strategy.
whether the supply strategies currently being applied in other industries might
be adaptable in the company’s circumstances (see Figure 2.16);

Figure 2.16
Some influences on
Other corporate
strategy decisions
strategies
(balance)

Information
SWOT*
system
analysis
development

Supplier
Make-or-buy
development
implications
issues

Sta /organisational
Forecasted
Strategy development
changes
implications

Product
Strategies
development
used in other
implications
industries
Own/key suppliers

Competitors’ Supply market

supply cost trends e.g.
strategies manufacturing, logistical

Supply-chain
implications

Note: * Strengths, Weaknesses, Opportunities, Threats

61
Chapter 2 • Strategic procurement and supply chain management

■ whether the company has developed its IT capabilities, particularly in the area
of e-commerce;
■ how integrated the supply chains are.

Effective supply market strategies

■ Agile procurement organisation
Rapid changes in competition, demand, technology and regulations make it vital
for procurement to be able to respond and adapt quickly. Agility – the ability to
quickly reconfigure strategy, structure, processes, people and technology towards
value-creating and value-protecting opportunities – is still a challenge for most.
Agile organisations are 1.5 times more likely than others to outperform on
financial performance relative to peers, and 1.7 times more likely to outperform
on non-financial performance.
Companies can benefit from having less hierarchical organising and leader-
ship models, as seen in the following examples.

Research
US cigarette producer Phillip Morris International reinvented its supply chain model recently,
and now uses a strategy with the aim to ‘operate as agile and fast as a startup’ in order to
work with new distribution channels and the decline in tobacco demand (Patchett, 2021).

Research
Electronics manufacturer Ericsson was used as an example of a supply chain that changed
its structure to allow procurement teams to have more control over decision making and
new ideas ‘without central coordination’ (Patchett, 2021).

Figure 2.17 is a representative summary of the characteristics of an agile pro-

curement organisation.

■ Bureaucratic units
In contrast to the majority of agile units, which have a shared vision and pur-
pose and entrepreneurial procurement (i.e. proactively identifying and pursuing
opportunities to develop), bureaucratic units are low in dynamism and are char-
acterised by risk aversion, silos, efficiency but a lack of effectiveness in the form
of slow response times.
For bureaucratic procurement, the first need is to address the characteristics
listed in Figure 2.17. Indeed, the largest gap between bureaucratic and agile pro-
curement is the ability to roll out suitable technology, systems and tools that
support agile ways of working.
62
 Integrated approaches

Figure 2.17 Advanced analytics and

Characteristics digitalisation
of agile
organisations
Flexible resource
Information
allocation and
transparency
role mobility

Agile
Rapid new product
Performance
development (NPD)
orientation
and innovation

Active collaboration with internal and

external partners

■ Decentralisation
Dependency on a single source increases vulnerability. Decentralised or regional
supply chains can lead to lower costs, shorter lead times, more control and a
reduced risk of disruptions.

Case study – FLSmidth

In the mining and cement supply chains, disruptions are the norm. So, when
China went into lockdown in 2020 in response to the Covid-19 pandemic,
FLSmidth was able to switch to Egypt and Turkey because decentralisation was
already part of its business model. This is enabled by technology that is driving
down costs, and by more nearshoring. However, the decentralised supply chain
must be part of a centralised system, which is responsible for standards, data,
knowledge sharing, guidelines and controls to ensure overall sustainability and
resilience.

Integrated approaches
Several references have been made in this chapter to systems approaches. In
broad terms, these differ from conventional functional organisation systems in
that they seek to avoid functional sub-optimisation while pursuing system-wide
effectiveness. As implied previously, this always involves trade-off decisions
being made between departmental objectives. ‘Materials management’, ‘logistics
management’, ‘physical distribution management’ and ‘materials administra-
tion’ are examples of such approaches.
Figure 2.18 illustrates what are generally regarded as the spheres of activity for
each of these approaches. However, it is important to recognise that some advo-
cates of, for example, ‘materials management’ and ‘physical distribution man-
agement’ define their scope of influence as being that of ‘logistics management’
or ‘supply chain management’.
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Chapter 2 • Strategic procurement and supply chain management

Figure 2.18
A model of a
manufacturing Materials management Physical distribution
company’s management
materials systems
Suppliers Company Customers

Raw
Work Finished
materials and
in goods
components
progress stocks
stock

Logistics management

The supply chain

In a world of supply chain disruptions caused by natural disasters and the
Covid-19 pandemic, it is essential to plan for sustainability and resilience in
supply chains. Before we consider this, we must explain the concept of the supply
chain.
Supply chain management is concerned with the coordinated flow of materi-
als and services from origins through suppliers into and through the organisation
and on to the ultimate consumer in such a way as to maximise value added and
minimise cost. Associated flows of information and funds are also included.
The supply chain includes all those involved in organising and converting
materials through the input stages (raw materials), conversion phase (work in
progress) and outputs (finished products). The cycle is often repeated several
times in the journey from the initial producer to the ultimate customer, as one
organisation’s finished good is another’s input.
The structural entity of the supply chain is concerned with activities such as
make, transform, move and store. Capacity location also needs to be considered.
Further decisions will need to be taken with regard to internal/external transport.
The supply chain could be local, national or international. The supply chain may
be complex, and will affect everyone involved in it.

■ Primary and support supply chains

Primary supply chains are those that ultimately provide the goods/services to the
customer, for example:
Raw materials → components → sub-assemblies → finished product → customer

64
 Supply chain resilience

■ Supply chains and ‘value-added’ ideas

It is desirable that developing good practices and concepts is implemented
throughout the supply chain by migrating these ideas both upstream and down-
stream. Such developments will reduce costs and add value throughout the
supply chain. This requires a review of the concepts of cost and value, with an
emphasis on total cost of acquisition and use of strategic acquisition cost, with
less emphasis on traditional price-based approaches.
Some ideas that are pursued by those concerned with supply chain manage-
ment are:

■ reverse engineering;
■ value engineering;
■ value-adding relationships and negotiations;
■ supplier integration;
■ tiering of suppliers;
■ value-added chains;
■ lean supply;
■ agile supply;
■ supply pipeline management;
■ value streams;
■ network sourcing;
■ sustainability and resilience;
■ diversity and social value.

Supply chain resilience

A definition of supply chain resilience is the adaptive capability of the supply
chain to:

■ prepare for unexpected events;

■ respond to the disruption;
■ recover from the disruption by maintaining continuity of operations at the
desired level.

The legacy of the Covid-19 pandemic is a greater awareness of resilience, as pro-

curement rethinks global supply chains to reduce supply chain disruption risks,
with a move towards increased onshoring of production, using automation to
keep costs down. Procurement is planning shorter supply chains, which are more
resilient, and switching to an agile approach.
Procurement must map supply chains to identify risks and the location of
their suppliers and suppliers’ suppliers and review alternative sourcing locations,
which although often more costly, can protect from disruptive events. Mapping
the supply chain past tier one is essential.

65
Chapter 2 • Strategic procurement and supply chain management

Covid-19 highlighted the biggest technology challenges, which prevented

many from meeting rapid changes in demand due to:

■ lack of real-time visibility of data;

■ issues with flexibility of processes;
■ problems performing analytics.

Procurement often uses up to seven software products to manage its end-to-end sup-
ply chains. Such disparate systems have been highlighted as a likely factor in causing
fragmented supply chains, creating data silos and impeding access to real-time data.
Accordingly, it is essential to ensure a more agile and cohesive digital infrastructure
that allows the integration of data from across the supply chain in real time.
Digital technology will improve resilience in the following ways:

■ ensuring new efficiencies;

■ increasing end-to-end visibility;
■ improving flexibility and responsiveness;
■ lowering supply chain costs and reducing risk of shortages;
■ enabling advanced analytics in order to streamline product portfolios, focus-
ing supply chains on a few key, profitable products.

Many organisations fail to perform the correct due diligence at the tender stage
to determine the location of their suppliers at tier two and beyond – a step that
could prevent overreliance on a particular region.
Risk management can be improved by the following:

■ Visibility: it is absolutely critical to have complete visibility across all data at

multiple tiers of the supply chain.
■ Real-time collaboration: Covid-19 proved that contingency plans in isolation
from key suppliers fail. In the event of large-scale shutdowns, such as those
caused by the Covid-19 pandemic, the ability to know sooner and collaborate
in real time will enable procurement to switch among alternate suppliers to
allow for supply continuity.

While many risks are unavoidable, they can be intelligently identified, evaluated
and mitigated with the help of digital technologies, information systems and
analytics. Many procurement organisations are now incorporating both sustain-
able procurement and supplier diversity into their strategies.
Figure 2.19 depicts some of the emerging trends in supply chains, particularly
following supply chain disruptions such as natural disasters and Covid-19.
Procurement needs to address three supply chain concerns:

1 Resilience: a balance is key as resilience can be improved, but there are trade-
offs as increased resilience often means a supply chain that is less lean, with
increased inventory.
2 Digital capabilities: such capabilities identify risks and opportunities, ena-
bling real-time action.
3 Workforce upskilling: employees must be trained to work in a digital environ-
ment. (Companies believe that the Covid-19 pandemic has spurred innovation,
66
 Supply chain resilience

Figure 2.19
Emerging trends Increased agility
in future supply throughout
chains
Improved risk Increased
visibility Supply chain onshoring/closer
through tiers trends inventory

Increased deployment
Increased push for
of digital tools and
sustainability
automation

as businesses increasingly adopted digital procurement tools to enable remote

working. Procurement noted that remote working had a positive impact by
improving communication with both its team and its suppliers to manage the
impact of the virus.)

With the rising complexity of supply chains and the increasing number of
disruptions (epitomised by Covid-19), a clear strategy for supply chain resilience
to mitigate future disruptions is needed by:

■ creating autonomy through measures such as automation and increased

inventory;
■ developing adaptive and flexible systems, including geographical diversifica-
tion and agile working processes;
■ increasing visibility, with stronger supplier relationships and increased mon-
itoring beyond tier one;
■ access to flexible capacity and assets in order to achieve target lead times.

Each step of the supply chain must take risk into consideration if procurement
is to run successfully. Figure 2.20 highlights the key attributes of supply chain
resilience.

Figure 2.20
Supply chain
resilience
Agility for
prerequisites flexibility
n

Tr

Digital
tio

an
ra

connectivity
sp
bo

ar

Risk management
lla

en
Co

culture
cy

Supply chain mapping

Considering the source of materials

used in new product designs

67
Chapter 2 • Strategic procurement and supply chain management

Research
Business Continuity Institute’s (BCI) 2019 ‘Supply Chain Resilience’ report showed that
12.2 per cent of supply chain disruptions occur among tier three suppliers and beyond – yet
more than two-thirds of organisations (67.7 per cent) fail to question the business continuity
arrangements of suppliers within those tiers.
In contrast, companies that had performed sufficient due diligence before Covid-19 took
hold typically had alternative suppliers from other nations and regions waiting in the wings,
in preparation for such an occasion (Elliott, 2020).

Case study – Bose

Audio company Bose developed supply resiliency tools in the aftermath of the
2011 Japanese earthquake, which had highlighted difficulties due to manual
processes.
The programme was built around five pillars: supply chain mapping, finan-
cial analysis, business continuity planning, social responsibility and crisis
management.
Supply chain mapping involved identifying single points of failure and high-
risk locations. Bose has now mapped down to tier-three suppliers – visibility it did
not have in 2011. It has worked with suppliers to understand the maturity of its
business continuity plans, to work out where its weaknesses are and to help with
a plan to improve, which it used to tackle the Covid-19 pandemic (Green, 2020).

The Covid-19 pandemic highlighted a great deal of vulnerabilities across sup-

ply chains, which have been addressed by the following initiatives:

■ increased digital connectivity – Internet of Things (IoT), robotics, data analyt-

ics. scenario planning and blockchain (see Chapter 18 for explanation of these
concepts);
■ localisation and regionalisation as procurement sources nearer to home;
■ objectives moving from low cost to improved resilience and deeper
collaboration.

Such developments are likely to lead to supply chains becoming shorter and
closer to the customer, giving more flexibility, agility and traceability and lead-
ing procurement to locate alternative suppliers and increase the overall number
to reduce the risk of supply. However, there are some difficulties associated with
reducing vulnerabilities, such as:

■ loss of control and visibility beyond tier two in the extended supply chain;
■ unpredictability;
■ extended supply chain and a significant international dependency on the sup-
ply of critical components.

68
 The supply chain concept in action

The supply chain concept in action

Supply chain management sees the various buyers and sellers as being part of a
continuum, and recognises the benefit to be derived from attempting to take a
strategic and integrated view of the chain, rather than focusing on the individ-
ual links and thereby sub-optimising. In other words, the focus of managerial
attention is not just the individual company or organisation, but the interactions
between the series of organisations that constitute the chain. It might be helpful
to visualise the firms in the chain and the flows of goods or services and informa-
tion passing between them as links. Figure 2.21 may help in this respect.
Figure 2.22 shows some of the major steps in the production of an automobile
component in the form of a steel pressing. Iron ore is mined and converted into
steel, which is rolled into strip form; the component is pressed from the strip
and then it is assembled, with others, to form the automobile. In practice, there
would almost certainly be many more steps – for example, the steel component
would be rather likely to become part of a sub-assembly prior to being incorpo-
rated into the car.
As work proceeds, value is added to the material (for the purpose of this illustra-
tion value is represented as the amount that the next ‘customer’ in the chain from
iron mine to driver pays for the material, less any costs of process or conversion).
The various conversion or production operations begin with stocks of incoming
material, and end with inventories of goods ready for the next operation. Trans-
portation links the programmes.
The diagram shows that cost is being added during storage and movement, but
not value, and that if storage and movement can be minimised, value increases
more steeply. In addition to the costs that are apparent between the main stages,
there are also, of course, intra-organisational costs (costs within the main stages).
For example, if the steelmaker can become more efficient through the reduction
of wastes associated with the steelmaking process, the value-added slope will be
a steeper one for that part of the chain. Value will be added more quickly.

Information
(orders and
schedules)

Goods or Supplier’s Supplier Firm Customer Customer’s

services suppliers customers

Payment

The supply chain responds to customer demand by supplying appropriate goods and services in the
quantities and at the time required. The flow of cash is from ultimate consumer to original supplier.

Figure 2.21 Supply chains and the principal ‘flows’

69
Chapter 2 • Strategic procurement and supply chain management

= Value.

mine steel- rolling press sub- final customer

maker mill shop assembly assembly

Value accumulates as materials flow through operations, but diminishes when non-productive costs
of storage and handling are arising.
Also, the less waste there is within organisations, the more steeply value rises.

Figure 2.22 A simplified supply chain or value stream

Womack and Jones (1996) described the value stream for a soft drink can (see
Figure 2.23), recognising that the most difficult component of a can of cola to
produce is the can itself. They highlight the stark contrast between the actual
value-adding process time and the storage and movement time. They report that
around 11 months elapse between the extraction of bauxite (aluminium ore)
and the consumption of the contents of the can, leading to disposal. Of these
11 months, only approximately 3 hours are spent on conversion of the product.
In other words, for more than 99 per cent of the time the value stream is not
flowing; the muda (waste) of waiting and queuing is being funded.

Improving the efficiency of the supply chain

■ Convergence and divergence in the supply chain
If we follow a supply chain from the upstream or producer’s end, we are likely to
see a great deal of divergence. In other words, the material can find its way into
a range, sometimes a huge range, of different products. Many different supply
chains converge at this product. While each individual component might, at
least in some cases, have its own supply chain, once we begin assembly, or sub-
assembly, we have convergence.

70
 Extract ore Transport ore Reduction mill Load

Smelter Unload

Hot rolling mill Cold rolling mill Can factory

Distribution centre Bottlers

SCRAP
May be recycled
Retailer

71
Improving the efficiency of the supply chain

Figure 2.23 The value stream of a soft drink can

Chapter 2 • Strategic procurement and supply chain management

Figure 2.24
Convergent and Case
divergent elements
in a supply chain Motherboard
Personal
computer
Drives

Keyboard

VDU A convergent
and other supply chain
components

Petrol

Diesel fuel
Crude oil
Lube oil

A divergent Aviation fuel

supply chain
Plastics

Crude oil

Plastics

Case

Personal
Convergent and divergent computer
elements in a supply chain

Most materials diverge from their source, and converge on the finished
product. Figure 2.24 shows the ideas of convergence and divergence and their
combination.

■ Types of supply chain

Hughes, Ralf and Michels (1999) suggest that there are several types of supply
chain, and that relations between different types of chain may be either
collaborative or competitive. Figure 2.25 shows diagrams adapted from their
work that illustrate this point.

72
 Improving the efficiency of the supply chain

Arm’s length: open competition Commodity trading Partnering for customer delight
A sells to B or C, B sells to A or C,
C sells to A or B

Seller Buyer
A B C
Seller Buyer Customer

Competitive bids, tenders and Independent trading driven by the deal. Openness, trust and shared
market testing. Emphasis on need to manage volatility deliverables
Emphasise rigour and tough bargaining with commodities

From supplier’s suppliers Lean supply chains and Competing constellations

to customer’s customers systems integration of linked companies

Co 1 Co 2 Co 3 Co 4

Co 5 Co 6 Co 7 Co 8

Link up all the players in a horizontal

supply chain. War on waste and step change cost First movers link up with the best
Emphasise seamless delivery, transformation. players.
optimisation and integration Emphasise lean as in fit, not starving Emphasise capability, competence
and cultural compatibility

Interlocking supply between Asset control supply: Virtual supply: no production,

competitors dominate or die only customers

Control Ownership

Gain control of the assets and leverage Low fixed costs and subcontracted
Link up for incremental business. them. production.
Emphasise an association where little Emphasise staying the right side of Emphasis on marketing skills and
competitive advantage arises monopoly abuse superb distribution

Figure 2.25 Types of supply chain

(Source: Based on Hughes et al., 1999)

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Chapter 2 • Strategic procurement and supply chain management

■ Strategic input supply chain management

Clearly, if procurement is to be actively involved in improving and developing
the input part of the supply chain, it will need to be sufficiently well developed
itself and proactive. And if the supplier base is to be reduced to make it more
efficient, it is vital that those suppliers remaining are able to meet procurement’s
future requirements, and are prepared to improve on a continuous basis the
quality and delivery of the goods and services they provide. Safeguards must be
established to make sure that the remaining key suppliers, i.e. strategic suppliers,
do not exploit their new single-supplier status. One way of overcoming some of
these problems is to enter into a partnership or collaborative agreement with
those suppliers. In exchange for preferred status, the supplier and buyer organi-
sations would have to agree to such considerations as:

■ looking on a continuous basis at ways of reducing costs and improving

performances;
■ being prepared to grow together, in terms of both size and direction – it would
be expected that the supplier and buyer might invest in complementary
technology;
■ the disclosure or exchange of costs and financial information so that unnec-
essarily expensive operations could be reduced;
■ conducting negotiations between the two sides on a win–win basis, with the
emphasis on joint pursuit of efficiencies;
■ joint mapping of the supply chain to identify bottlenecks and non-compliance.

For this type of commitment to be entered into, there needs to be considerable

trust between the two sides. The relationship must be mutual, in that costs and
benefits are shared by both sides. By reducing unnecessary costs and activities in
the supply chain, lead times and prices can be reduced, making both supplier and
buying organisations more competitive.
Once the supplier base has been reduced, the remaining strategic suppliers
might agree to strategic improvement targets in relation to such considera-
tions as:

■ quality;
■ delivery;
■ operations;
■ systems;
■ development of innovative concepts;
■ corporate social Responsibility, sustainability and diversity.

■ VRIN analysis
Procurement must ensure that it acquires the necessary resources and compe-
tences from its supply base and, as mentioned earlier, this may require sourcing
from more suppliers rather than less.

74
 Hierarchy of objectives

Figure 2.26
VALUE RARITY
VRIN analysis
Providing competitive Those capabilities
advantage at a cost that possessed uniquely by
allows the organisation to one organisation or by
realise acceptable levels only a few others
of return

INIMITABILITY NON-SUBSTITUTABILITY
Capabilities that Providing products and
competitors find di cult services that are valued
to imitate or obtain by customers but are
di cult to usurp

Distinctive resources

Certain resources give the supply chain a competitive advantage and these
have the VRIN characteristics, which can be discovered by focusing on four essen-
tial qualities, as shown in Figure 2.26.

Hierarchy of objectives
As discussed previously, much of the academic literature about the changing
nature of procurement takes the view that procurement can move away from a
narrow focus on purchasing resources, in order to integrate strategic planning,
improve inter-organisation relations (cross-functional teams) and invest more
time in identifying market opportunities. In this sense, procurement has the
potential to become an important contributor to organisation-wide goals and
firms’ strategic direction.

■ Supply and procurement as strategic

Alignment In order to be able to maximise the effectiveness of the procurement operation,

it is important for procurement professionals to understand the links between
procurement and supply strategy and overall corporate strategy.
Procurement is now increasingly being viewed as a powerful competitive
weapon for improving profitability and strengthening competitive advantage.
However, this competitive potential critically depends on whether its decisions
and activities are aligned with the organisation’s overall strategic objectives.
Two concepts of alignment come into view:

■ strategic alignment, i.e. fit between business strategy and procurement; and
■ strategy, purchasing efficacy, i.e. fit between procurement strategy and
practices.

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Chapter 2 • Strategic procurement and supply chain management

Figure 2.27
Hierarchy of All Mission statement
objectives in an embracing Mission Purpose, business
area, key values in
organisation qualitative terms

Goals
General Goals Desired future
state – where we
want to get to

Specific Objectives Objectives

Specific targets –
what we need to do

Detailed Strategic Plans

targets Strategy Whole organisation
Broad direction
Long term (3–5 years)

Implementation Tactical Plans

targets Tactics E.g. Procurement
Medium term (1–2 years)

Active Operational Plans

Operational Departments’/units’
targets plans detailed activity/
targets/sources
over short term (1 year)

We propose that procurement’s contribution to business performance depends

on the degree to which procurement capabilities fit and support the business
strategy. The general objectives of the organisation cascade down to the more spe-
cific objectives of the business units, functions and individuals, which is clearly
depicted in Figure 2.27.

■ Corporate objectives and strategy

Business strategy is concerned with deciding which markets and activities the
business should be involved in, where it wants to be, and how it is going to get
there. Strategy is about making high-level decisions and forms the management
game plan for:

■ satisfying customers (meeting customer needs);

■ running the business (organising resources in the most efficient and effective
way);
■ beating the competition (strategies and tactics to gain competitive advantage);
■ achieving corporate objectives.

76
 Hierarchy of objectives

Corporate objectives are set at the high level and are quite distinct from any more
detailed functional objectives set for the functional areas of a business. Examples
of corporate objectives would include:

■ Sales revenue: a traditional measure of the size and strength of a business.

■ Profit: both the absolute level of profit and the profit margin, i.e. return on sales.
■ Return on investment: e.g. return on capital employed (ROCE), ROI.
■ Growth: sales volume, revenue, profit, earnings per share.
■ Market share: the proportion of markets and industries owned by the business
or its products.
■ Cash flow: with the focus on maximising the net cash inflow of the business.
■ Shareholder value.
■ Corporate image and reputation: increasingly important; links with corpo-
rate social responsibility, product and customer service quality and business
ethics.
■ Sustainability, social value and diversity.

The above objectives must be SMART: specific, measurable, achievable, relevant

and time-bound.

■ Procurement strategies
Particular procurement strategy priorities most often cited include:

■ reducing price and availability risks in the supply chain;

■ improving the alignment between procurement strategy and enterprise busi-
ness strategy;
■ leveraging supplier relationship management to get more value from the sup-
ply base;
■ better managing knowledge and information in order to support procurement
transformation by the application of Industry 4.0;
■ benchmarking top-performing procurement;
■ encouraging sustainability throughout the supply chain;
■ promoting diversity and pursuing social value.

■ Procurement benefits
The benefits of strategic, proactive, value-added procurement include:

■ security of supply;
■ lower total cost;
■ reduced risk;
■ improved quality;
■ more added value – improved customer service levels;
■ greater efficiency;
■ new innovations;

77
Chapter 2 • Strategic procurement and supply chain management

■ improved lead times;

■ improved sustainability and resilience;
■ improved diversity in the supply chain.

■ Critical success factors for procurement added value

Enablers of this added value are:

■ cross-functional teams (CFTs);

■ alignment of procurement and corporate strategy;
■ all stakeholders buying in to the agreed objectives and values;
■ digital skill sets;
■ application of Industry 4.0;
■ managing change skills;
■ sharing risk management with partners;
■ adaptive, flexible and agile organisation;
■ continuous market engagement and benchmarking;
■ flexible capacity planning;
■ collaboration, internally and externally.

Procurement should be able to take the corporate plan and dissect it so as to gen-
erate its own objectives. Figure 2.28 depicts the linkage and strategic alignment
between corporate strategies and the procurement and supply chain strategies.
Other procurement strategies for achieving competitive advantage can be sum-
marised as shown in Figure 2.29.
Whether or not procurement is significantly aligned with overall business
requirements appears to be the critical factor for procurement future progress
and development.

Figure 2.28 Corporate objectives Procurement and supply chain objectives

Functional
objectives Maintain and increase market Provide supplies to match customer needs; assure
share quality; reduce delivery lead time; reduce cost

Improve profits, cash flow and Reduce stocks; improve reliability; more frequent
return on capital deliveries (lean and agile supply)

Shorten time to market Early supplier involvement; simultaneous engineering

and collaboration; reshoring

Eliminate non-core activities Develop effective make-or-buy policy; supply chain

mapping; procurement and capacity planning

Introduce continuous Rationalise the supplier base; collaborative

improvement approaches; reduce product complexity; increase
accuracy and reliability with TQM

Become world-class supplier Work with suppliers to establish world-class

standards; improve flexibility of response to market
conditions; improve technology (digitalisation)

78
 Hierarchy of objectives

Figure 2.29
Procurement Global/local
strategies for approach
competitive Build agile TCO
capabilities approach
advantage
Strategic
issues for Innovation
Digitalisation procurement
Analytics Sustainability
Diversity

Alignment with
corporate
strategy

■ Procurement implications of Covid-19

In a disruptive world (floods, earthquakes, pandemics), where step change is nec-
essary, strategic procurement plays a vital role in creating the agility required
to ensure success. Indeed, the disruption to global supply chains caused by the
Covid-19 pandemic has demonstrated the function’s critical business role, and
just how central the procurement function is to achieving corporate objectives
is finally being recognised:

■ infrastructure and property strategy must be reviewed as remote working using

advanced digital tools is increasing;
■ agile organisations must engage with internal and external staff;
■ multisourcing, nearshoring and multishoring are on the increase;
■ there is more advanced collaboration in order to increase innovation, capacity
planning and improvement;
■ online cross-functional team working is being utilised.

Accelerated savings, which were made possible in the medical sector during the
Covid pandemic, are being used in other sectors, as indicated in the following
case study.

Case study – oil and gas company

This major oil and gas company recognised that to have an impact on
the cost of its pressure vessels and holding tanks, it would need to engage
design engineers early in the process. A team of engineers was assigned to
procurement. Initially, the team hoped to drive down the cost of tanks by
20 per cent through improved sourcing methodologies. However, by engaging
with the design team and influencing the specifications, the cost of the tanks
was reduced by 40 per cent.

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Chapter 2 • Strategic procurement and supply chain management

Procurement must be aligned to the corporate objectives, thus enabling an

effective contribution to corporate strategy, but only if everybody has a detailed
understanding of the strategy.

The future of procurement and supply management

As we have seen, procurement has taken on a broader set of strategic responsibil-
ities, and future procurement will need to evolve to enable a seamless digital sup-
ply chain, ensuring the best suppliers bring innovations, resulting in improved
and value-added collaboration.
Procurement is starting to fill more ‘hybrid roles’ that combine procurement
and technology skill sets, and companies are looking for traditional procurement
experience and ‘pockets of technology skills’ in the same people.
Procurement is required to increase the speed of decision making, while
improving productivity, using technology and data in new ways, and accelerat-
ing the scope and scale of innovation. Inflexibility and siloed technology have
been barriers to collaboration and innovation in the past.

■ Connectivity
A minority of procurement teams currently have a formal digital strategy in place and
are still considering how to connect ‘islands of technology’, as integration is vital.
Industry 4.0 – namely, AI, Big Data, analytics and digital systems – provides
methods to achieve this change (see Chapter 18 for more on these tools).

Research
Artificial intelligence (AI), bots and predictive analytics are all transforming procurement and
can help to automate end-to-end processes, save time and improve accuracy. In a recent survey,
digital technology provider Jaggaer found that 20 per cent of companies worldwide still relied
on paper, while only 50 per cent had digital knowledge, despite the fact that companies with
automated digital processes can have 30 per cent fewer full-time staff costs (Hogg, 2019).

Research
A ‘Strategic Procurement Benchmark’ survey found that 62 per cent of CPOs (chief pro-
curement officers) have a completely integrated strategic vision for procurement. The
research again draws a link between the level of a procurement’s strategic business align-
ment and stakeholder penetration, claiming that this is the key indicator of performance
and how much value it creates.
Digitisation is also perceived as key, but is not without its challenges: 83 per cent of
CPOs have implemented digital tools but, of these, 43 per cent are not seeing added value
(Small, 2020).

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 The future of procurement and supply management

Procurement is on the edge of a technology-led revolution, according to energy

giant BP, which states that it is moving towards all transactional processes being
overseen by category managers with relationship skills and deep market exper-
tise. This will result in fewer, more senior people, totally reliant on technology
and having data-led decisions.
The function would be based around three cores:

1 category managers;
2 technology-led procurement operations;
3 independent data teams analysing supply chain risks and demand spikes.

The future is likely to involve chatbots (a software application used to conduct an

online chat conversation via text or text-to-speech) and voice assistants helping
stakeholders. Procurement will allow users to build specifications with the help
of artificial intelligence.

Research
The ‘Hackett Group Report’ records that world-class procurement using digital technology
is receiving twice as much payback.
Using digital technology such as artificial intelligence (AI) and analytics is further
increasing effectiveness in monitoring suppliers and managing supplier relationships
throughout the life cycle.
Jaguar Land Rover, GlaxoSmithKline and Vodafone have been experimenting with AI
and analytics, but smaller organisations are also set to benefit from such advances in a
‘trickle-down effect’ (Daniel, 2018).

■ Best practice
It has been widely accepted that excellence in procurement is a source of compet-
itive advantage for most companies, although historically it can be quite a chal-
lenge to achieve this, given limitations in system support and data transparency.
Procurement must continue to benefit from recent advances in technology and
analytics, such as the capabilities described in Chapter 18.
We provide the following advice for the advancement of procurement:

■ Risk mitigation and adding shareholder value make procurement value

adding.
■ Innovation involves driving closer collaboration and exchange of information
with partners. The opportunities that digitalisation and analytics bring in free-
ing-up time to develop relationships with suppliers increase to the value added.
■ Added value gains are obtained from improved data capabilities that cut out
manual processes, stop duplicating effort and allow people to move to more
strategic roles.
■ Productivity is driven by automation in areas such as managing contracts.
■ Transparent end-to-end data ensures an accurate picture of the supply chain
and enables marginal gains to be identified more easily (Patchett, 2020).

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Chapter 2 • Strategic procurement and supply chain management

Figure 2.30
Impact of Eliminates non-value-
technology such added processes
as AI on
procurement
Automates the Uses rich and
procurement E ects on deeper data in
cycle procurement supply chains

Risk analytics and Visibility into

spend optimisation supplier performance
and sustainability

■ Designing supply chains with flexibility to circumvent natural disasters/pan-

demics or to quickly reconfigure to manage shifts in costs or material availabil-
ity in order to maintain high service levels is a necessity.
■ Smart procurement systems will allow for a continual review of risk.
■ AI will help to automate tasks such as ordering and invoice processing and
create fast access to information for stakeholders via chatbots. Very soon at
least 50 per cent of large global companies will be using AI, advanced analytics
and the Internet of Things (IoT) in supply chain operations (Green, 2019).

As mentioned, technology such as artificial intelligence (AI) can dramatically

change how procurement and sourcing are carried out (see Figure 2.30).
These digital tools help to generate greater returns over the longer term by
shifting resources to higher-value activities, enabling a stronger procurement
capability in years to come.
Figure 2.31 identifies key trends that will shape procurement, enabling it to
become even more of an integrated and value-added function.

Figure 2.31
Key trends in
procurement Procurement more strategic in
analysing new technologies to
maximise trade-o s

Blockchain and bot software

Robotic process automation to

add value
Integrated data systems enabling
real-time visibility

Smaller agile function embedded

in the business

Procurement a major contribution

to strategy and innovation

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 The future of procurement and supply management

Figure 2.32
A compendium of Digitalisation/AI/ SRM-enhanced
current thinking analytics – real-time collaboration and
for key factors for data transparency supplier development
future procurement
Enhanced
Driving innovation
rationalisation of
continuously
suppliers

Agile supply chains –

Collaborative risk
driving continuous
mitigation using
improvement and value
advanced analytics
added

Sustainability, social
Customer centric – greater
value and diversity
adherence to the ‘voice of
throughout the supply
the customer’
chain

As we can see, there appears to be a consensus forming around the key issues,
challenges and opportunities for procurement. Figure 2.32 provides a useful sum-
mary of the current thinking on the subject of the key factors for successful future
procurement.

Research
An Oxford Economics study found that 70 per cent of procurement staff collaborate more
effectively with internal stakeholders and external partners as a result of digitisation. In
addition, 65 per cent stated procurement data is being used company-wide to drive strategic
decision making (Robinson, 2020).

■ Supply chain disruptions

The shift towards automation and AI is allowing companies to manage uncer-
tainty and continuity while building new capabilities and processes that deliver
increased value.
Furthermore, by utilising digital technologies, supply chain resilience is vastly
improved by building transparency into the supply chain beyond tier-one sup-
pliers, which has previously been notoriously difficult. (See, again, Figure 2.21
‘Supply chain resilience prerequisites’ earlier in the chapter.)
Through a combination of secure, cloud-powered technology solutions and
the introduction of artificial intelligence and automation, manual and time-con-
suming activities can be streamlined and procurement can continue to transform
its role from transactional to strategic.
The above-mentioned technologies and procurement transformations are
driving sustainability and resilience. Moreover, the success of procurement’s

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Chapter 2 • Strategic procurement and supply chain management

sustainability strategy will depend upon how well employees, suppliers and cus-
tomers are empowered to deliver the change (see Chapter 17 for extensive cover-
age of sustainability, social value and diversity).
In conclusion, future procurement must embrace:

1 building a highly agile and responsive operating process;

2 digitalising procurement to deliver value aligned to strategy and more effec-
tive and efficient services to stakeholders through improved visibility and
collaboration;
3 resilience, although there are trade-offs, with increased resiliency and sus-
tainability often resulting in a supply chain that is less lean and holding
more inventory, so there is a need to manage lean and agile, with a focus on
agility;
4 workforce training to ensure that staff can work effectively in a digital
environment;
5 diverse supply chains – engaging suppliers from ethnic, racial and gender
minorities;
6 whether to reshore, nearshore, stay offshore, multisource or multishore in
order to reduce risk.

A report by CIPS Supply Management highlighted the guide to smart procure-

ment shown in Figure 2.33, which supports the foregoing discussions.
It appears, therefore, that:

■ the future of procurement must include a greater focus on sustainabil-

ity and resilience facilitated by digitalisation and agility, which will enable
faster responses to supply chain disruptions such as natural disasters and the
Covid-19 pandemic;
■ long, lean supply chains relying on just-in-time delivery have proved to be far
less viable and, where they do remain, will be alongside a localisation/decen-
tralised strategy to spread supply risk and increase control; and
■ procurement focus must be recalibrated towards risk and resilience, with a stra-
tegic trade-off against cost.

Figure 2.33
Smart procurement
prerequisites
Industry 4.0
ga ho d

Adaptability/
m er
en ke ove

In
t
ge ld
en

no

agility/transparency
st mpr

va

Robust
tio
I
a

collaboration
Nearshoring and
multishoring
Mapping the supply chain beyond
tier one – diversity and sustainability

84
 Self-assessment tasks

Summary
1 The chapter considers growth in the strategic role of procurement, purchasing
and supply and how an organisation’s view of its business profile develops its
mission statement, which, in turn, determines its strategies.

2 Viewing procurement objectives as a hierarchy, world-class concepts and

co-makership principles are at the foundation level, leading up to the ultimate
objectives of increasing efficiency and profits.

3 The external environment influences strategy selection.

4 It is vital that procurement be well informed on the external environment and its
influences in order that it can provide effective input as part of the organisation’s
integrated planning activity.

5 We have considered the implications of the term ‘supply chain’, the role of pro-
curement in upstream and downstream management, and identified different
types of supply chains.

6 Supply chain sustainability and resilience are considered in the aftermath of the
Covid-19 pandemic.

7 Systems approaches can be used to explain the development of organisation struc-

ture. The more integrated the system, the better the chance of success.

8 The adoption of leading-edge concepts means that procurement has to extend

its involvement down to the levels of supply and up to the final customer, i.e.
buyers must become familiar with the total supply chain in order to reduce costs
and waste.

9 ‘Hierarchy of objectives’ is outlined in detail, emphasising strategic alignment

and integration.

10 The impact of disruptions such as the Covid-19 pandemic are outlined and rem-
edies suggested.

11 The future of procurement is examined, emphasising the role of digitalisation

and analytics.

Self-assessment tasks
1 Outline relevant models for assessing the external environment.

2 Detail key prerequisites for sustainable supply chains.

3 Highlight three characteristics of future procurement.

85