CEOs Need To Spend More Time On Procurement

Most CEOs spend next to no time strategizing about how their companies spend more than half of their budgets—a mismatch with potentially existential consequences.

In many companies, if not most, procurement is an unglamorous, un­loved part of the business. When the boss offers someone a job in procurement, they know they’re on the fast track to nowhere. It’s the corporate equivalent of being sent to Siberia—there’s no way back.

By our calculation, CEOs devote only a fraction of their mindshare (the amount of time they spend thinking about different tasks) to suppliers and, by extension, the procurement function. They rarely mention the work of the CPO in shareholder meetings or on earnings calls with analysts. Indeed, according to research by Harvard Business School’s Michael Porter and Nitin Nohria, CEOs spend just one percent of their time with suppliers. Given that spending on suppliers—the job of procurement—accounts for more than half of a typical company’s total budget, this makes no sense. In effect, it means that CEOs spend next to no time either thinking about or being actively involved in how their companies spend more than half of their budgets. That’s a mismatch with potentially existential consequences for companies.

The CPO and the procurement function are marginalized because procurement is a deeply misunderstood corporate capability. In most companies, the principal task of the CPO and their team is to purchase goods and services from suppliers for the lowest price. Over the years, CEOs trying to save money and drive both increased profits and total shareholder returns have instructed their CPOs to find less expensive vendors for raw materials, core components, and other production inputs as well as for services such as IT maintenance, accounting, and  legal advice. As a result, procurement has become associated with a narrow, restricted interpretation that has left CEOs blind to its phe­nomenal potential.

In our view, however, the CPO and the procurement function, by virtue of the fact that they “own” the corporate relationship with suppliers, should be positioned at the heart of a company. They are the CEO’s secret keys to success in troubled times—and long after, too. Even before the global crisis triggered by Covid-19, the job of leading a company was challenging: globalization was stalling; new digital technologies were disrupting business practices; and seismic but slow-moving social and political changes, including aging popu­lations, increasing inequality, the rise of China, and the development of Africa, were beginning to have a far-reaching impact.

Now the job is tougher than ever. In the first quarter of 2020, as governments imposed pandemic-related lockdowns and companies were forced to close factories, the Economist opined that “the epi­demic will put the question of supply chain management squarely on the desks of . . . CEOs.”

In subsequent months, however, the situation worsened. Companies had to deal with volatile swings in consumer demand. The global airline industry was all but grounded. Shipping was severely disrupted as labor shortages left container vessels un­able to unload their cargo. And the automotive industry was halted by a semiconductor “famine” caused by factory shutdowns in Asia (manufacturers were obliged to cancel their plans to build ten million cars during the course of 2021). Indeed, in its “Briefing Room” blog, the White House noted that the paucity of semiconductors was not only affecting the automotive industry but also “dragging down the US economy” and “could cut nearly a percentage point from GDP growth.”

That a shortage of so ordinarily commonplace a piece of technology could have such a devastating effect alarmed politicians and policymakers. So great was the fear that supply issues could leave a permanent scar on America’s future that President Joe Biden ordered a one-hundred-day review of the resilience of the country’s supply chains for select critical products—not only semiconductors but also batteries for electric vehicles, active ingredients for pharmaceuticals, and critical minerals and specialty packaging. Announcing the mea­sure, Biden said: “The American people should never face shortages in the goods and services they rely on, whether that’s their car or their prescription medicines or the food at the local grocery store.”

Amid this turmoil, CEOs and their leadership teams have been expected to do the seemingly impossible: cut costs while improving the quality of their companies’ goods and services and while mak­ing their businesses faster, more innovative, and more sustainable. They will come under increasing pressure not only to build back as things were before but to build back better. As the New Yorker noted, “Supply-chain trouble suggests that something is off with the way we’re operating in the world,” adding that short-term fixes will be neither satisfactory nor sufficient. “The real challenge, when it comes to thinking about supply chains, isn’t making sure that a container ship is unloaded. It is deciding how we want to live.”

In the years ahead, companies, as motors of the global economy and major participants in global society, will necessarily have to play a big part in solving the manifold and complex issues arising from the Covid-19 pandemic. But where are CEOs and their leadership teams going to find solutions?

The answer, as we explain in Profit from the Source, is their suppli­ers and their procurement function.

Why do we say this?

Typically, the procurement function not only controls more than half of a company’s costs, it also determines the quality and sustain­ability of a company’s products and services. It affects the speed of a company’s operations. It has the potential to transform (or quash) a company’s innovative spirit. And it can protect a company from as-yet-unknown risks in the supply chain. In other words, if CEOs use their procurement capability wisely, they can do much more than simply contain costs. They can tap five mission-critical sources of competitive advantage: innovation, quality, sustainability, speed and risk reduction. More than this, they can realize their dreams for their company.

Even in the best of times, CEOs all too often fail to fulfill the lofty ambitions that they set for themselves when they took the top job. The urgent gets in the way of the important, short-term firefighting trumps long-term thinking, and quarterly financial pressures take priority. But since the outbreak of the Covid-19 pandemic, business leaders have been experiencing the worst of times. Many of them have told us that if they could find a way to get back on track and beat market expectations, they could buy themselves some time and the room to maneuver that would allow them to pursue their dreams for their company. In our experience, time and the room to maneuver are exactly what a sophisticated approach to suppliers and procurement can offer.

One of the counterarguments we hear is that as soon as some kind of normality returns, all the anxiety over supply chains—and the associated need for an expanded role for procurement as the vital link with suppliers—will fade. In other words, with a little patience, CEOs and leadership teams will be able to ride out today’s storms, and they won’t have to reorient their companies for a different future. We argue that this is a forlorn hope. Right now, there is an ongoing, fast-evolving, once-in-a-generation transformation occurring in the way companies operate, and it will reward those CEOs who put sup­pliers at the heart of their organizations and empower those procure­ment executives responsible for working with the suppliers.

As we have said, procurement accounts for more than half of a company’s revenue, on average. In some companies—notably some of the world’s most successful technology companies—the percentage is significantly higher. We think this trend, which began long before the pandemic, will continue long after the pandemic has passed, as companies are forced to become ever more outward-facing and to re­organize themselves in new ways to capitalize on the rise of business ecosystems: loose networks of companies that come together with suppliers, distributors, government agencies, and other participants to deliver products and services in a frictionless way to customers.

This is why there is no time to lose. CEOs and their leadership teams need to take swift, radical action. Specifically, they need to put suppliers at the core of their businesses and empower their CPOs and procurement executives to extract the maximum value from those relationships.

 

Reprinted by permission of Harvard Business Review Press. Adapted from Profit from the Source by Christian Schuh, Wolfgang Schnellbächer, Alenka Triplat, and Daniel Weise. Copyright 2022 by The Boston Consulting Group Inc. All rights reserved.

Christian Schuh is senior partner and managing director based in BCG’s Vienna office, in Austria. He has led procurement projects for companies in the Automotive, Construction-Equipment, Defense, High-Tech, Packaging, and Steel sectors in Asia, Europe, and the United States. Wolfgang Schnellbächer is partner and managing director based in BCG’s Stuttgart office, in Germany. He leads BCG's procurement activities in Europe, and he advises global leaders in the Industrial Goods and Consumer Goods sectors. Alenka Triplat is partner and managing director based in BCG’s Vienna office, in Austria. She advises global leaders in the High-Tech, Defense, and Industrial Goods sectors. Daniel Weise is partner and managing director based in BCG’s Dusseldorf office, in Germany. He leads BCG’s procurement activities globally, and he advises global leaders in the Industrial Goods, Energy, and Consumer Goods sectors.