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Repositioning procurement

Previously, pharma companies have devoted most attention to direct procurement, but now there are cost pressures to improve the indirect side of the business

In the past, pharma, along with a few other industries such as oil and banking that had equally deep coffers, was said to suffer from 'marble hall' syndrome, where high margins meant that they did not have to worry too much about indirect costs. As a result, pharma companies devoted most attention to direct procurement – that relating to manufacturing inputs – and have mature processes in these areas. Now, though, there is pressure to improve the indirect side of the business.

The last two to three years have presented huge cost challenges for the industry and the 'marble hall' has vanished. As a result, the industry now needs to find all the additional value that it can and has quite rightly begun to do this via indirect procurement. However, as other industries have discovered previously, squeezing suppliers on price is not enough.

In the industries that are further along the journey, procurement has seen a shift in focus away from being viewed as a pure cost-driver. Increasingly, they are recognising that the procurement function needs to play a leading role not only in cost reduction but also in supporting growth.

In its Global Chief Procurement Officer (CPO) survey, Capgemini interviewed more than 150 senior procurement executives to assess current thinking. Most of those interviewed placed a strong emphasis on delivering growth and innovation, with procurement generally recognised by the CEO's agenda as driving a leadership position.

Therefore, the results provide several useful lessons for pharma companies that see themselves as being behind the curve in this area, and that want to adopt a more strategic approach to procurement.

The findings show that, in many companies, procurement is better positioned than it was in the past to play a strategic role. From the reporting structure perspective, around 70 per cent of respondents said that they now reported to the boardroom within their organisations and one out of four of them reported directly to the CEO or head of the business (Figure 1).

Figure 1: To whom procurement reports


The last few years have seen a subtle trend where procurement is maintaining its support of the chief finance officer's (CFO) objectives, while shifting its alignment to the CEO. This signals a focus on more strategic objectives.

Procurement functions also show awareness that their organisation's expectations may be changing. Asked about their current strategies (Figure 2), almost 80 per cent of participants responded that top management expected them to improve the overall value contribution of procurement.

Figure 2: Procurement strategies during tough economic conditions
(click to enlarge)

To do so, procurement will need to shift the focus from short-term cost-cutting to long-term value-based relationships with suppliers. In this way, it can drive deeper savings throughout the supply chain and bring true innovation into the company, as well as maintaining bottom-line reduction.

New skill sets
This change will require new skill sets, such as an ability to understand market mechanisms and the macro- and micro-economic influences in the end-to-end product supply chain. Procurement can then translate this understanding into opportunities to cut risks and to contribute to other corporate objectives, such as growth and corporate responsibility.

For now, however, too many procurement organisations remain fixated on cost reduction through negotiations on price, and observations suggest this is particularly true of indirect procurement in pharma. In reality, it can be argued, the most important key performance indicators are related to control and savings, eg spend under control, supplier performance, procurement return on investment and compliance.

The need for a shift from cost to value is particularly pressing if, as a majority of the respondents believe, the market is on an upward trajectory. If so, procurement must ready itself for two key changes. One is that prices will not be so easy to slash and simple negotiations will not yield the quick savings of the past. The other change is that procurement organisations will not find every business stakeholder clamouring for procurement's services. When budgets are healthier, cost savings are less of an issue for the business stakeholders that procurement serves.

The need for a shift from cost to value is pressing if, as a majority of the respondents believe, the market is on an upward trajectory

Commodity pricing
More innovative solutions are required, therefore. The impact of changing commodity prices on the sourced product needs to be assessed early in the sourcing cycle in order to get ahead of the volatility and use it to procurement's advantage.

Commodities like oil have always been subject to external factors. The price of a barrel has fluctuated significantly owing to the increased demand over recent years, as well as the impact of the recession, the growing economies in China and India and several conflicts in the world. Bad weather has caused the price of soya beans and potatoes to rise, causing the price of beef and chips to increase. Simple as these examples are, they demonstrate that fluctuation can present both opportunity and risk.

These external drivers demand a completely different way of looking at a commodity. The procurement professional should look all the way down the supply chain to understand which commodities are part of the 'bill of material' of the product to be sourced, to understand how the external factors affect the price, and how procurement can be proactive to mitigate the financial consequences. This requires different skills and in-depth market knowledge. For example, a change in the price of oil will have an effect on the price of downstream products such as plastic and energy. Understanding these commodity interlinkages and mechanisms can not only reduce the risk of volatility but also provide opportunities, since benefits can be obtained when commodity prices fluctuate in either direction.

Facing a difficult economic environment and challenging targets, nearly 65 per cent of the CPOs questioned utilised management's attention, plus the targets, to initiate a review of the procurement operating model and the way of working with functional interface partners. Consequently, the move to central procurement functions has continued, with more than 70 per cent of participants managing their spend centrally. Looking back on the past two years, most CPOs stated that it had been a tough environment consisting of increased pressure on procurement, but as a positive result, over 60 per cent confirmed that economic crisis has left procurement a winner on balance.

A new-found position at the boardroom table and the need for immediate action have changed the role and recognition of procurement and its performance capability in most companies. At the same time, a high number of procurement managers exploited the given opportunity and initiated the improvement of organisational set-up to manage their spend efficiently.

Now that recent shifts in the pharma industry have forced cost reduction and control on to the agenda, its need for an effective approach to procurement is as pressing as that of any other sector; perhaps more so, given the continued downward pressure on pharma's margins in contrast to a potential upturn in the rest of the market. All pharma companies would do well to learn from other industries' pioneering work in adopting a more rounded, and more strategic, approach to procurement, indirect as well as direct.

The Authors
Based on the Chief Procurement Officer survey report by the life sciences team at Capgemini

To comment on this article, please use the commenting feature below

24th October 2011


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