Strategic procurement: the key to value growth for companies in China

(November 8, 2019, Shanghai) In the past ten years, as the global economy has undergone major changes, the global supply chain has become more complex and turbulent. This is especially true for Chinese companies. As labor costs continue to rise, the traditional concept of China as a low-cost area has been subverted. Under the influence of multiple factors such as the slowdown in GDP growth, the devaluation of the renminbi, and Sino-US trade frictions, both multinational companies and local Chinese companies urgently need to change their supply chain strategies and re-examine the role and value of the procurement department from a strategic level.

Bain & Company previously interviewed more than 60 chief procurement officers in the Asia-Pacific region and discovered eight major structural challenges faced by procurement (see “Where are the procurement problems in Asia?”). This year, we once again interviewed the chief procurement officers of more than 100 companies in China and discovered three major trends in the procurement department: First, in the Asia-Pacific and China regions, under the influence of macroeconomic and geopolitical factors, cost pressures continued rise. Second, the purchasing department is more mature overall, but there is still much room for improvement. Third, the procurement departments that perform well in different fields already have some best practices that are worth learning.

Strategic procurement: the key to value growth for companies in China

Zeng Weimin, Global Partner of Bain & Company, Chairman of Performance Improvement Business in Asia Pacific and Chairman of Manufacturing Business in Greater China, said: “Five years ago, most procurement departments of companies in China were still playing the role of a’smart buyer’. Now they have become In the next few years, the procurement department has huge growth potential. For example, by developing more mature cross-departmental category management, it will become the “integrator of the value chain”; it will change its role and position and eventually become a company. The creator of strategic value’ makes purchasing a strategic advantage for the company.”

During the survey, Bain found that the procurement department still faces many difficulties and challenges, and the main challenges can be summarized in five aspects.

1. Strategic positioning: In many companies, procurement is still regarded as a support function rather than a strategic function. The survey found that only 17% of CPOs stated that the purchasing department has strategic decision-making power, and many purchasing departments still remain at the implementation and operation levels. Although cost saving is still the main KPI of the procurement department, the procurement department of leading companies has begun to focus on value creation beyond cost, such as setting strategic goals to facilitate corporate innovation and digital transformation. Take a leading domestic car company as an example. The company cooperated with a major supplier to jointly research steel plate solutions at the beginning of the development of a new product. In the end, the cost of steel is reduced by about 20-30%, fuel consumption is reduced by about 10%, and truck weight is reduced by about 5-10%. This not only improves the performance of the target product, but also saves production costs for the company.

2. Value delivery: At present, strategic procurement is still the focus of the procurement department, but its importance will become less and less. Leading companies use diversified savings levers to improve performance. Take a domestic appliance manufacturer as an example. By adopting an online MRO platform, one-stop management of the originally dispersed upstream and downstream links has reduced the total cost by 21%, including inventory costs, unit purchase costs and management costs. In addition, through the new system, the manufacturer centrally manages the supply chain, improving customer service and product quality, while making purchasing information more transparent.

3. Supplier management: The relationship between most purchasing departments and suppliers is still at the transaction level, and there is still much room for improvement in cultivating and retaining suppliers. At the same time, the leading procurement department is able to tap the potential capabilities of suppliers and save costs better through innovation and cooperation. Take a global automobile manufacturer as an example. It once faced the problem of high prices and long logistics cycles of certain auto parts due to market monopoly. Therefore, it supported a local supplier to build a laboratory for the development of this part and assisted it in quality testing. , And was eventually used first in India. Since then, the automaker’s cooperation with this local supplier has been further expanded globally to provide services for its production in Asia and Europe, and the two parties have further established a strategic partnership.

4. Risk management: More than half of China’s purchasing departments only manage first-tier suppliers and lack an overall risk control strategy. And leading companies have begun to participate in the supplier ecosystem to help reduce risks. For example, a high-tech product company directly purchases from secondary and tertiary suppliers, and uses a digital platform to supervise the supplier’s production, improve procurement efficiency, and effectively reduce potential risks.

5. Digital transformation: About 60% of the interviewed companies are still in the early stages of digital transformation, and mature procurement departments have greater decision-making power in digital transformation, and can think about digital transformation initiatives more comprehensively outside of their core business. The overall impact on the organization. For example, a global clothing manufacturer has successfully created a digital ecosystem that integrates cutting-edge technologies such as AI, automation, and radio frequency identification into product design, production, distribution, and sales, thereby reducing overall operating costs by 30 -40%, the supply chain lead time is shortened from 35 days to 20 days, and the logistics efficiency is increased by 50%.

Dominik Nogic, a global partner of Bain & Company, believes, “In the future, corporate procurement activities will undergo tremendous changes. Today’s procurement is not limited to purchasing materials and services at the lowest price, but value-oriented. In the future, we will focus on the foundation of value. Purchasing should have a more strategic perspective, especially in terms of global strategic procurement, focusing on long-term value driving and innovation.”

So, how should companies upgrade their procurement management? Bain & Company recommends that the Chief Procurement Officer should think about the procurement strategy from a more comprehensive perspective. First, set clear strategic procurement goals, including aligning with the organization’s vision, in-depth research on procurement categories, and formulating strategic procurement plans. Based on the digitally empowered procurement process, the procurement potential is gradually stimulated from three dimensions to help the organization’s development. .

System optimization: Cost reduction is still a key element to measure the value of purchases. But the purchasing department can’t just focus on controlling costs, but from the perspective of category management, spend money on the blade.For example, make procurement more transparent, conduct strategic category management, develop strategic suppliers, improve supplier coordination efficiency, etc.

Closed-loop tracking: do a good job in the cost budget of the procurement process and decision-making, and track it, and promote the behavioral changes of employees at all levels and departments in the organization through methods such as evaluation and incentives

Continuous empowerment: From the perspective of capacity building, improve the organization’s operating model and organizational structure, re-examine the responsibilities of each position and the capabilities required by talents, and help the organization achieve sustainable development through capability design.

Finally, Ye Zhen, Global Associate Director of Bain & Company, said: “With the development of technologies such as automation, digitization, advanced analytics, and the Internet of Things, digital procurement solutions can bring significant cost savings to enterprises. Procurement departments must actively embrace technology. Change, change their role in thinking, help companies find cost-saving opportunities, and play a core role in the process of cooperating with suppliers, such as adopting innovative business cooperation models, so that procurement becomes the key to the company’s value growth.

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