Former Novartis Executives Discuss Strategies for Achieving Value Creation at DCAT Week ‘14By
Procurement is increasingly being asked to drive productivity and generate value. Top executives share their experience on key strategies.
As the pharmaceutical industry faces challenges in improving R&D productivity, augmenting sales, and reducing costs, there are greater expectations from management for Procurement professionals to develop and implement approaches that can assist companies in addressing those challenges and to help their companies realize value. These expectations and options for value creation were examined in a DCAT educational program, “Beyond Procurement: Co-Creating Value Through Strategic Alignment,” which was held during DCAT Week ‘14.
“A broad theme is emerging, one in which Procurement is moving from category management to value co-creation,” said Sammy Rashed, principal and co-founder of The Beyond Group AG and former global head of productivity and procurement strategy at Novartis Pharma AG. “In its more traditional role, Procurement was focused on basic purchasing and sought to secure stable supply at the right price while ensuring compliance,” said Rashed. In this environment, the emphasis is on centralizing processes and making transactions more efficient. Typically, buying is local, and there is little or no category management.
“In the next phase, strategic procurement, the focus is on generating savings,” said Rashed, explaining that strategic procurement involves applying category management, aggregating global/regional volume, long-term agreements, and automated tendering as tools to generate those savings. In the third phase, spend optimization, Procurement is focused on generating higher returns per dollar by focusing on demand management (what companies buy and how much) and process management (how materials and services are bought). Organizations are seeking to move beyond this toward the fourth phase of finding ways to optimize costs and generate value across businesses. “We are now in the phase of going beyond procurement to drive company-wide productivity, which involves new options to achieve that goal,” noted Rashed.
Ten options for driving productivity
Rashed shared the results from a global study conducted through workshops, focus groups, discussions, and chief procurement officer (CPO) conferences through 2011 and 2012 and a global survey conducted by the Institute for Supply Chain Management, Procurement and Logistics at the European Business School in Wiesbaden, Germany, to identify 10 options that were indicated as the most promising for Procurement to drive company-wide productivity. Over 100 participants from various industries and functions (procurement, finance, and other business stakeholders) participated in Europe, North America, and Asia. These 10 options were categorized based on the benefit received (innovation, productivity, and growth) and by whom can deliver the benefit (supplier, buyer, and customer). Rashed examined the 10 options to drive company-wide productivity as outlined below (1):
— Top-line Contributor. In this option, companies leverage Procurement’s skills, capabilities, and process expertise to drive sales growth. Examples include training the sales team in negotiations, contract management in business development or licensing, and applying best practices in supplier relationship management to better manage relations with key customers.
— Innovation Sourcing. In this option, systems are developed by which suppliers drive product and process innovation.
— Total Cost Base Management. In this option, Procurement applies various approaches, such as demand management, lean management, Six Sigma, and outsourcing to benefit internal stakeholders.
— Global Business Services. This option seeks to reduce costs and free up time and resources by streamlining non-customer-facing activities, such as human resources, finance, information technology, facilities, and legal services, and aggregates them into an internal unit to serve the rest of businesses.
— Comprehensive Risk Management. This option involves ensuring compliance and mitigating risk for the company.
— Take Over Operational Activities. This option adds a service delivery function to Procurement’s activities to support internal stakeholders, such as Procurement taking responsibility when a function is reduced or outsourced.
— Next Level Collaborative Buying. This option recognizes risk in consortium buying, so it entails Procurement’s role to apply joint-buying arrangements while limiting risk through the creation of individual joint ventures focused on narrow categories of spend.
— Internal Consultant/Project Manager. In this option, Procurement applies its skills, such as building cross-functional teams and stakeholder engagement, and offers this expertise internally, thereby obviating the need for external consultants.
— Extended Supplier Relationship Management. This option involves a clear focus on the voice of the customer and removes non-valued activities.
— Embed Function into Business. This option evaluates areas of spend to manage centrally and infrastructure-related activities (guidelines, training, and talent development) and considers embedding procurement resources for more customer-focused categories directly in line functions.
Rashed noted that four options were most noteworthy. Both innovation sourcing and total cost-base management ranked among the highest in terms of implementation priority as well as actual/expected return (ranging from 4 to 5%). Another option that fared well was global business services, in which participants still value with returns of approximately 5%, but which Rashed noted that further implementation efforts were not widely expected from respondents. The option with the highest increase in importance overall and in the pharmaceutical industry specifically was extended supplier relationship management with an average return of approximately 5% expected from this option.
In offering these options, the next task is to evaluate the feasibility of implementation in terms of organizational readiness and capability proficiency. In making that assessment, Rashed compared the results of the 2012 global survey and results from a 2013 survey of pharmaceutical companies to evaluate which options were most feasible. Three options were deemed more feasible: innovation sourcing, total cost base management, and supplier relationship management as value creation.
Barriers to value creation and resolution
| Giles Breault
The Beyond Group AG
To examine supplier relationship management for value creation, Giles Breault, C.P.M., MCIPS, principal and co-founder of The Beyond Group AG and former CPO of Novartis Pharma AG, shared the feedback from a small group of invited senior Procurement leaders from large, medium, and small pharmaceutical companies that participated in a series of three one-day workshops focused on the challenges and opportunities in effectively leveraging their supply base. From a Big Pharma perspective, four reasons were identified as barriers to developing value-based relationships with suppliers: focus on cost savings, metrics management, control versus collaboration, and a lack of prioritization/time. Breault explained that companies “can’t escape price pressure” and are focused on lowering prices rather than the larger, more important goal of finding routes to lower costs. With respect to metrics, although measuring supplier performance is critical, this often “crowds out more important dialogue,” for value-creating activities, he added. He also noted that pharmaceutical companies noted that their systems are not flexible enough to support supplier innovation. “My experience is that mechanisms, such as a vendor innovation day, can produce hundreds of good ideas, but these ideas are typically not implemented,” Breault added. A further barrier, he added, was that buyers often do not have the knowledge or time to have more in-depth discussions with suppliers to identify opportunities for value creation or innovation.
To address this problem, Breault explained that the commodity-like nature of a linear relationship between suppliers and buyers needs to be transformed so that both the supplier and buyer (i.e., pharmaceutical company) are working collaboratively to meet the needs of the ultimate customer (i.e., patient). “The supplier needs to create a set of services that increases the buyer’s and ultimate customer’s perception of value,” he said. From a buyer’s perspective, he pointed out that this can be achieved through trading relationship management (TRM), which consists of six main steps involving suppliers, buyers, and customers: seek and share, translate, understand, assess, select and implement, and communicate as a tool for value creation.
Step 1 of the TRM canvas provides practitioners with a visual guide to start with teams that are responsible for supplier development to join forces with other company functions and understand exactly what the external environment and customers demand, explained Rashed. “In Step 2, we need to ensure there is a correct translation of the external need to an internal requirement, ideally in the form of a function specification. Once this is done, Step 3 is for sourcing teams to effectively scan the market, understanding available capabilities and seeking out the best possible solutions.”
He explains that Step 4 is the critical step of wresting new ideas and capabilities from the supplier base in a way that not only adds a significant value enhancement to the items purchased, but ensures that innovations and new intellectual property are protected in the process. It introduces new ideas into an organization and offers a way of filtering and elevating the most promising ones. Step 5 is where breakdowns usually occur: once a new idea has been identified or a new capability discovered, the real challenge is to ensure that the ideas are not lost in endless rounds of evaluation or die simply because there was no process to take them forward. Senior leadership sponsorship is critical here. And finally in Step 6, the created value becomes visible to the end customer, addressing the unmet need identified at the beginning, and closes the loop by directly connecting marketplace needs with supplier capabilities.
1. Matthias Kaesser, Sammy Rashed, Giles Breault, Michael Henke, Daniel Hollos, “Beyond Procurement: Options for Procurement to Drive Company-wide Productivity Survey Report (Institute for Supply Chain Management-Procurement and Logistics, Wiesbaden, Germany, 2013).