Can procurement learn from Private equity? Surely yes!…
In the high-stakes world of Private Equity (PE), every efficiency gain and strategic advantage can significantly impact the bottom line. It’s a realm where procurement, often overlooked, emerges as a game-changer in driving value and enhancing operational efficiencies.
Over the past five years, we have worked with countless PortCos and with amazing Private Equity firms, from Craftory to Platinum, L Catterton, Coefficient, Bansk, Camino, PAI and so many others. Private equity’s reputation is slightly misleading; yes, they are laser focused but PE firms are also full of clever individuals who are extremely supportive of the management team and are true leaders. They know precisely what they want and how to effectively leverage their ecosystem.
We will not share here how they improve the top line or what marketing magic they have developed to triple the size of their business; I wish I could share that with you! What I can share is that procurement is their “new frontier”. Below are some of the baby steps they are taking in their assessment and course-correction approach to procurement.
1)You wouldn’t buy a business with one client – mono-source vendors don’t make sense either!
This is the major weakness of fast-growing top brands: their reliance on a single source that has been whispering for years that “they are unique, and nobody comes close to their performance”. This long-lasting relationship is built of many undocumented processes and quirks that maintain this dependency. Breaking it is the healthiest thing you can do for your PortCos to gain control of your production and create a dynamic competitive market.
2)You wouldn’t buy a business if you didn’t understand what they produce, but do you understand what they buy?
Linked to the point developed above, we find countless businesses that, at their core, have proprietary components controlled by vendors. If you can’t, or don’t, have the appetite for buying the vendor, this is an absolute “no-no” as far as we are concerned. It’s already destroying your margin, but in DD, this will destroy the multiplier.
3)The procurement team does market consultation, of course. Are they spending more than one hour talking to alternative vendors and “selling/marketing” the opportunity?
You own this business, and you ask the procurement team the above question; Their reply: “Yes we do market consultations. Every year we send the SKU list to several suppliers. Every time the incumbent wins, or if not, it’s very close and we ask it to match”. Cost of entry is huge for you to change suppliers but the same is true of the vendor: acquiring a new client in B2B is extremely costly. New vendors will want assurance that there is a true strategy behind your market consultations; change is difficult, but change is healthy. Changing vendors is also a huge undertaking, and if your procurement team is not doing it, it is most likely not because they don’t have the skill to do it but because they don’t have the time to do it properly. Any change of core vendor done professionally will take between 100 to 300 hours over 4 months to a year.
Vendors are a source of expertise and a true motor for growth and innovation, but if you fall asleep at the wheel, they will take over the agenda. So during “tenant ship” of the PortCos, the PE’s we are working with implement the following steps.
A) Make a plan!
The benefit of procurement versus other functions of the business is that there are easy KPIs to measure. These KPIs are not sufficient to drive the right positive collaboration behaviour but they are an easy metric to follow and a good indicator of your future value creation. Yes, ask for the saving plan. With no other info available, 3% cost reduction is a very standard ask, but the plan should be more than a simple cost reduction. Increased supply chain resilience is a must, starting with a two-source strategy. Of course, some turnover of the main suppliers is also a key KPI. There are many more basic elements that need to be covered depending on procurement maturity but let’s walk before we run. These will improve margins but also increase quality and control of the supply chain.
B) Translate the plan and get finance to monitor it.
This plan will need to be translated into proper finance language. For example, raw materials increase by 10%; the incumbent vendor therefore requests a 5% increase. Procurement works for months with the vendor to reformulate the product to get rid of the increase. Procurement is delighted they “saved” 5%, but finance sees zero impact: it’s business as usual. Both are right. Saving in one case reflects operational value added where the other saving means impact GM in P&L. Every time we engage in a transformation program, the first thing we ask the PortCo management to mobilise is Finance. Procurement should not mark their own homework.
C) 3% procurement improvement will have the same impact on operating income as a 20% increase in sale
This is a tricky one, but see model below (from https://shorturl.at/ikwHY)
It is tricky for two reasons:
1) Channelling money towards the strategic sourcing part of procurement is difficult.
2) Realising the value procurement can generate is challenging (mostly due to not doing B above).
Procurement is doing so much more than simply the competitive market consultation. I can tell you that when I was a CPO, the multi-tasking these guys did was incredible. Running day-to-day procurement is a huge responsibility if only keeping production/sales flowing through. Dedicate money to more firefighting, if necessary, but dedicating money to looking forward, taking a two or three-year view, building the next generation of core vendors is rarely top of the agenda. How much will the business spend trying to get Walmart as a client? How much will they dedicate to getting Cargill as a vendor? Having the resources to tackle strategic sourcing requires achieving critical mass to keep them occupied all year long. This will usually happen around $500M turnover. Before that any forward-looking person (let’s call him or her “sourcing”) will also have to manage day-to-day. In this case, give your CPO a budget to hire sourcing support. It does not need to be expensive consultant like us, simple contractors correctly managed with the correct question – “find me a new supplier for next year” – will do just fine.
If reading this leads you to make one single change in your view of procurement, let it be not to believe people who claim procurement is all about downgrading your product. We support procurement transformation on the fastest growing brands you eat everyday, the high-end products you put on your body and ultra-premium pet foods. In all cases they have improved their margins and reduced supply chain risks, but most importantly improved quality and took control of their future ability to grow. Smart PEs use procurement to increase the multiplier.
