Reimagining the supply chain: Exclusive interview with Barry Padgett, SAP Ariba President
As the recently appointed President of SAP Ariba, Barry Padgett knows all too well that the changing demands of customers and the effect that has on the supply chain are all crucial elements that need to be met and supported as we head deeper into 2018 and beyond.
Following on from its recent SAP Ariba live event in Las Vegas earlier this year, there are some clear and stark expectations regarding the role of procurement and beyond that Padgett refers to throughout our conversation. At the top of the list is transparency, efficiency and innovation.
“Not only are our customers looking for transparency in terms of their supply chain, but their customers are also asking for the same thing,” explains Padgett. “As consumers we’re more and more interested in sustainable ethical supply chains, ethical sourcing and trying to figure out who we spend our money with, where are our goods are made and what things are going into our foods etc. So, our customers are feeling it too from their buyers: whether it’s trad B2B buyers who are working towards business with a purpose and making sure they have sustainable business practices, or if they are a direct-to-consumer company and their customers are getting loud and demanding with respect to understanding the supply chain,” he continues.
Elsewhere, driving efficiency is going to remain key, says Padgett. “There’s no getting around it, we’re still a software company, we’re still helping our customers create a more efficient business and drive costs out,” Padgett explains. “Throughout the week at our event we heard a lot of success stories. There was also some discussion around this idea that the best projects are the ones that start with internal house cleaning and looking at current business practices before bringing in a tech vendor or partner,” he reveals. “If you take bad existing manual processes and add in technology or automation, you end up with a bad automated process. So, a lot of the stuff that came out of the conference around efficiency was about taking a real deep look at our businesses to work out what our best practices are and then we layer in the tech to really drive efficiency.”
At the Las Vegas live show, cognitive technology was another facet that was explored, including using IBM Watson to go through the Ariba system, as well as looking at blockchain and deep neural networks. “Once you get through the basic blocking and tackling then you really start to propel your business forward. And that’s not just for the individual CPO driving value through their office, but also pushing competitor differentiations for their company.”
All of this begs the question: where does SAP Ariba fit into this landscape? “One of the stats we don’t talk about a lot at SAP is that there are more than 3.3mn buyers and sellers on our network, and there’s a new one added every 60 seconds. Looking at the volume that goes through the network today it’s just over $1.6trn which, if you add up the volume globally of Alibaba, eBay and Amazon, the Ariba network is significantly bigger than all three of them combined,” says Padgett.
As part of SAP’s march into the future one of the key things it has done recently is to open access to insights on its supplier risk solution. In Padgett’s own words this forms part of ‘the key to the future of the company’. So, in a nutshell, you’re bringing increased sophistication to people’s programmes and putting the customer in control? “Yes, the customer gets to be the dreamer instead of waiting for Ariba to come up the next great thing. Maybe it’s risk, maybe it’s environmental or a sophisticated piece of specific IP. Or maybe it’s an oil and gas company that has some really complex procedures with their suppliers to get their things onto its rig, or whatever it happens to be; it can then go to its existing partners and work with them hand in hand.”
As we glance ahead, what does the future of procurement look like to Padgett? “I think you’ll see two things: one, a lot of cognitive technology being applied and I think we’ll talk less and less about the technology and more about the business impact and how we drive transparency in the supply chain. I think this will be in the next couple of years and there’ll be huge changes in these challenges that have traditionally been related to scale.
“Secondly, we’ll see a lot of interesting things in innovation that relate specifically to purpose. A lot of companies are weaving a ‘business with a purpose’ story into everything they do. It will no longer be a case of ‘we just procure tech and we go fix a problem’ and more ‘we want to do that, but we want it to have some sort of impact on our ethical and sustainable diversity goals’. How does that relate directly to the role of procurement? “A lot of companies are talking about making the world a better place and the impact they have in their communities. Procurement could have a transformative effect on how they interact in their communications and how they drive transparency in the supply chain. I think we’ll see great advances on both these fronts. We’ll solve a bunch of problems through the cognitive platforms that are becoming widely available to us today.”
Procurement Outsourcing: Partnering with Outside Experts
In coming years, supply and demand will fluctuate, new technology will change the way procurement teams operate, and skilled workers will be in short supply. Outsourcing procurement is now a priority. Explained John Piatek, GEP Vice President and Thought Leadership Council Chairman: “In the face of wild swings in consumer demand, trade wars, tariffs, and lockdowns...supply chains bent and frequently broke.” Therefore, companies need to know how to recover.
The Rise of Strategic Procurement
The pandemic placed procurement on a higher level within business operations. Executive boards that previously overlooked or undersold the value of procurement started to sit procurement managers around the table with strategic advisors to mitigate risks, optimise costs, and drive growth. ‘‘This year has demonstrated the importance of bringing CPOs into C-suite conversations”, explained Jennifer Brown, Principal, Deloitte Consulting. “They bring significant value to the table.”
Procurement teams now race to find skilled, third-party vendors to provide services they can neither afford nor prioritise. “Outsourcing of S2C can give companies access to expertise, capabilities, and scale they may not have in-house,” said Iliana Filyanova, Partner for McKinsey’s Manufacturing & Supply Chain. For example, expert outside firms can analyse market conditions, supply specialised goods such as semiconductors or uniquely designed parts, and help develop a strong IT infrastructure.
To be clear, if your team can skillfully outsource, a whole new world opens up: you can rapidly adjust to market conditions, scale up when demand spikes, and scale down when dips hit.
First, you can cut costs. Suppliers in Southeast Asia and other low-cost countries can provide large amounts of materials and products at excellent prices without the political backlash that often accompanies offshoring. But outsourcing has several advantages. When you get specialists on board, you can shorten development times, hire additional staff without having to train them, and digitise your procurement systems thanks to IT experts.
- Increases focus on core tasks
- Provides staff more time to fulfil their priorities
- Supplies next-gen technology expertise
- Reduces operational costs
- Helps prevent duplicate payments
These benefits only accrue, however, if your team carefully defines the scope of the operation. When you try to hit the bull’s-eye on a dartboard, you aim directly at the centre. It takes a certain angle, force, and skill. Likewise, procurement teams must figure out what and how much to outsource. Outsourcing still requires spending, and teams will want to get good data before they sign a final contract. In addition, staff members should be on board with the rationale and objectives of the outsourcing project—otherwise, your darts will miss their target.
How To Successfully Outsource Procurement
According to McKinsey, teams should focus on three main steps.
- Determine which categories to outsource. Focus on non-core business areas. These are any services that support your core product, such as freight and shipping, facilities, and IT infrastructure.
- Select the right metrics. Build supplier scorecards, in which your team decides upon two to three key criteria such as low unit prices, supply chain resilience, and quality of product.
- Partner with the appropriate people. Ask potential firms questions to assess their domain expertise; diversify your search to take in a variety of global organisations, and consider their technical skills—even if you’re not hiring the vendor for IT.
If these focus areas seem too broad, Deloitte recommends a phase-by-phase process.
Deloitte: The Seven Stages of Outsourcing
Starting the Search
First, companies should Assess and Prepare. These steps include defining vendor requirements and starting to engage. In these phases, you may do some background research but not engage with them directly. Web searches can yield initial results, and consultants can also help—especially those who know the strengths and weaknesses of your industry. After you have your list narrowed down, you can produce a strong, detailed RFP.
Naturally, your RFP will attract the relevant suppliers, and you’ll be able to move to Evaluate. If you’ve chosen strong metrics, two to three top vendor proposals should stand out. Be forewarned, Deloitte said: the next part is tricky. Committing, or negotiating your final contracts, will lock you into a potentially multi-year collaboration with a vendor. Take your time: you can deliberate over competing offers, as well as request that additional support be built into the contract.
Negotiating the Best Deal
Advocate for your best interests! “I moved forward to negotiate with a current contract manufacturer with whom we had an important volume commitment with high prices,” said Elodie Cramer, Associate Director of Biogen. “We were in a single-source situation, with no active alternatives.” She opted to pursue dual sourcing, as well as insist on open vendor discussions. At the conclusion of the talks, she had bartered better terms: 29% lower costs, 75% less volume commitment, and improved vendor quality and service.
Additionally, teams should discuss details such as how to optimise taxes, meet regulatory compliance, and protect ESG standards. Safety-catch measures like these may seem to extend the outsourcing process, but they’ll ensure that you don’t end up spending more over the long term. Compliance, after all, can drive 30% to 50% of savings, and talking about it upfront is for the best for all concerned.
Closing the Case
Once you’ve reached acceptable terms, you can Transition, handing the project work and resources over to your vendor, and Optimise, following up to manage and improve the relationship. Don’t forget to dot your i’s and cross your t’s—Deloitte even recommends an end checklist. Sign the contract; create a people transition plan; complete consultations with any oversight committees. After signing the paper with a flourish, you can then rest easily, confident that you’ve followed a strategic outsourcing system.
Companies To Emulate
Procter & Gamble, Unilever, Slack, Alibaba, Acer: even major multinational companies seek to outsource specific systems, technical skills, or materials. When Unilever integrated its ERP platforms into a single system, outsourcing saved the company an annual €700 million. Slack outsourced its universally-known colourful design label to MetaLab. Alibaba outsourced to US firms to compete with eBay. Acer outsourced manufacturing to maintain a small, agile team. As a result, these companies improved their international reputations, offset their internal weaknesses, and built strong vendor partnerships.
As executives increasingly turn to procurement to make their global operations less costly and more resilient, teams that strategically outsource work will stand a better chance of bringing good news to the next management meeting. Said Ryan Flynn, Principal, Deloitte Consulting: “CPOs are uniquely positioned to help their organizations navigate a historically disruptive time and build the agility required to thrive.”
Yet to do so, they must act with intent. “Successful outsourcing—outsourcing that drives transformation and helps achieve broad strategic goals—requires companies to follow a disciplined process,” wrote Deloitte. In short: Outsourcing initiatives succeed not by luck, but by design.