Foster innovation

Dr Thorsten Makowski is an international thought leader for procurement and supply chain management (SCM) and an experienced consultant

In 17 years, Dr Thorsten Makowski helped organisations across the world to achieve substantial cost reductions and optimise relations with suppliers, helping to foster innovation, minimise risks, increase quality, reliability and flexibility and implement sustainability. “Most companies,” he says, “have significant potentials in procurement, independent of sector or size.” Thorsten also has significant academic experience. He teaches at 21 International Business Schools, including Mannheim Business School (Germany), Cass London (UK), IIM Ahmedabad (India), EDHEC (France) and Rutgers (US). He is also the creator of the Global Procurement and SCM Study Series, the biggest procurement and SCM series ever, with five editions, 4,000 participants from 101 countries, covering 300 different aspects and 5 times published in the Harvard Business Manager.

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“Procurement is in most companies by far the largest cost bloc,” he adds. “A cost decrease within procurement will significantly affect the profitability, but procurement is highly neglected within top-management and academia. It is complex and international. You need a lot of data to identify global best practices. For our clients, our study data is a unique and very valuable tool to understand how their procurement compares to their main competitors.”

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We spoke to Thorsten to see how that data is applied and implemented, and to get his thoughts on the profession’s future.

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What is the Global Procurement and SCM Study Services you pioneered? Who is it for?

We started the Global Procurement and SCM Study Series in 2008, because we found that practitioners from the field have very interesting ideas, but typically they cannot prove them with data. Conversely, academia is excellent at answering questions, but typically focuses on unrealistic and unimportant scenarios. So with the study, we have tried to answer the major questions in procurement and SCM.

We have recently started the sixth edition of the study, and to date it has almost 5,000 participants from 113 countries covering around 400 questions. The study’s aim is to support decision-making of senior executives like CFOs, COOs and managers regarding procurement and SCM. The study series was constructed to answer the big questions and prove them with data.

Some of the questions, which we could answer, are: How can procurement/SCM deliver value to a company and how does it depend on positioning? Which infrastructure is necessary to have a good procurement/SCM and in which order should it be built? How large are potentials? Is there an ideal profile of a Chief Procurement Officer? Do procurement departments that care about ethical issues perform better or worse? What does sustainability mean for procurement and SCM? How can procurement support innovation?

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As a consultant, you have worked with some big organisations. What consideration do you give to cost reduction, sustainability and sourcing?

• Cost reduction: The typical cost reduction potential of companies are 1-4 EBIT points depending on their performance. Because large companies have, typically, an above average performance, for them the cost reduction potential is typically 1-2 EBIT points. An average company of 1 billion EUR turnover typically has 3,400 suppliers and around 40,000 potential suppliers, while having only around 10 FTEs working in strategic procurement. The first thing that companies have to understand is that they do not have the best suppliers, and that it is difficult to identify them, so finding and selecting suppliers for A and B categories is the biggest lever.
• Sustainability: The first thing companies must answer is whether they truly want to become better at sustainability or whether it is more a mixture of external and internal marketing. The typical test is whether your customers are willing to pay a premium for sustainability or not. If yes, companies should invest time and money into that area. As sustainability means a lot of different things and companies have lots of suppliers, it is important to focus. Audits, bonus and malus systems and sustainability awards are some mechanisms that work.
• Global sourcing: Sourcing from low cost countries can deliver significant value for some categories. One thing that we currently see is that China, which was the main profiteer of global sourcing, is becoming less attractive. As a result, companies need to test new countries and regions. In the short term, this should be a mixture of Southeast Asia and countries like Mexico or Eastern Europe but, long term, I expect a significant boom from Africa.

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Procurement is becoming increasingly digitised. Do you think the profession as we know it is changing for the better? How do you think procurement will look 10 years from now?

The spread between good and bad performers is increasing. For the vast majority of companies there will be a significant but not disruptive change in the coming years, which mainly implies that easier operational tasks get more automated, and smarter, more complex decisions can be made. That will lead to a situation where a significant amount of operational procurement employees will lose their job, while more strategic jobs will be created. On the whole, we can expect that four times more operational people will get laid off and then hired in strategic roles.

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What role does data play? How are you using it to gain competitive advantage for your clients?

Data is important, but the most important aspects are insights. Companies need to understand how procurement and suppliers currently create value for the company, how big the current opportunities are, and which additional changes or disruptions can be expected in the future. One of the problems of data is that, many times, the ones who get and analyse the data have their own interests and, therefore, there is a bias in how data is interpreted. There are incentives to overstate potentials and challenges from outside the company to accelerate change, while internally people and organisations tend to delay change. Another problem is that companies have internal blind spots, which implies that companies often don’t ask what their potentials are and what they should change or if something might be biased or even wrong. Our role is always to go for the truth.

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Finally, in your experience and opinion, which industry leads the way with its procurement practices? What could other industries learn from this approach?

There are three industries which have a significantly better than average performance: retail, consumer goods and automotive. Retail is best in bridging the very different perspectives of selling and buying. Consumer goods companies are good at creating innovations and using suppliers for them. Automotive companies are good at delivering on quality and reliability.

While companies from other industries can surely learn from those sectors, there is a danger of the idea of copying best practices: every company has limited resources and is dependent on the individual positioning and situation every company should focus on the 2-5 core aspects that are really important and value-creating for them. The difficult question to answer is what constitutes value for the individual company. The easy question is how to improve the aspect once it is identified.

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This article was originally published in the Marine Trader, IMPA’s official journal for maritime procurement and supply chain management, in issue 03 of 2018. Head over to www.impa.net to find out more or simply read new issues on the go with the MT Journal app.