The Power & Potential of Procurement

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One of the biggest challenges—and opportunities—for OEMs and suppliers alike is purchasing. Procurement of parts, systems, and services can have a substantial effect not only on profitability but, as OEMs are learning on a regular basis, given the number of recalls that are occurring related to all manner of items from hoses to switches that they buy from suppliers, on product quality and reliability, as well.

What’s more, as OEMs are doing more of their production in emerging markets, understanding how to develop and source products for those areas is going to be financially critical.

McKinsey & Company recently concluded a seven-year Global Purchasing Excellence survey of more than 700 companies. The lessons learned from that study are the basis of Procurement 20/20: Supply Entrepreneurship in a Changing World by Spiller, Reinecke, Ungerman, and Teixeira (Wiley; $40.00).

One of the industries examined in the survey is automotive, and the authors point out, “Even in the automotive and assembly industry, long considered a model of advanced procurement performance, only 51 percent were ranked as procurement leaders.” Which means, of course, that there are 49% that can achieve some serious gains. (It is nice to see, however, that automotive does rank first in the industry groups, ahead of high-tech and telecom, packaged goods, and other industries.)

According to the authors, “To create value through cost reduction and innovation, companies must establish an integrated, end-to-end value chain that comprise best-in-class internal functions and external providers.” In other words, it is important not only for there to be an efficient and effective external purchasing function, but the company must know what it is that is best performed in-house.

While OEMs have to protect some aspects of their business because as the authors point out, otherwise they risk “losing the internal capabilities to challenge functional specialists [a.k.a., suppliers], and the external providers [again, suppliers] may move beyond their specialization to become competitors.”

Procurement 20/20 is both useful and interesting, even if you don’t have “procurement” or “purchasing” in your title.