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(originally published by Booz & Company)


Saving Procurement from Itself

Manage cross-functional trade-offs. CPOs must also measure the efficiency of the organization as a whole and enforce cross-functional decisions. They must ensure that the interests of the whole enterprise are taken into account when deciding to invest in inventory, and manage the inevitable trade-offs that arise from tensions among the company’s key functions.

The Spanish clothing company Inditex is a perfect example of how procurement trade-offs within the value chain have led to success. Its most famous brand, Zara, competes with other mass clothing brands, but rather than inducing customers to buy a lot at once, Zara gets them to buy often. Whereas most fashion brands launch new collections no more than four times a year, Zara rolls out 16 new collections annually. Reducing costs through large-scale purchases would undermine its strategy. Instead, procurement contributes to the brand’s success by ensuring supply network flexibility; it is the kind of feverish pace that requires speedy decisions and strong cross-functional teamwork among procurement, design, manufacturing, logistics, and sales. Having a procurement department with the ability to step up and synthesize cross-functional requirements in an aligned operating model is key to Zara’s success.

By casting procurement in a major role and ensuring it is highly integrated with all of the other functions, Zara has created a strategic advantage that has proved exceptionally difficult for others to replicate. The traditional model of retail procurement is a back-end service function that merely sources fixed designs at the lowest cost, usually irrespective of the delivery lead time. To copy Zara would require top management to recognize purchasing as a strategic function that supports the company’s competitive objectives. Because this operating model is embedded in the company’s culture, the best way to copy such a strategy is to start from scratch.

Collaborate on the joint supplier–customer value chain. Through sharing data down the chain and forecasting methodology up the chain, preferred suppliers and retailers for some large categories can create a win-win. Procurement can play an important role in facilitating this flexible working partnership.

The procurement function at a major northern European food retailer, realizing that both retailers and suppliers incur costs and lose revenue opportunities in an effort to optimize margins, decided to think outside the box to identify joint improvement opportunities with its supplier. The company understood consumer behavior at the retail level, but it lacked its supplier’s in-depth, product-specific knowledge and a true end-to-end understanding of costs. Together, they took steps to find mutually beneficial areas of improvement: establishing a common value chain that clearly detailed all costs and revenues for both players, highlighting joint strategic areas to focus on options for improvement, analyzing opportunities to improve profitability and enhance revenue, and establishing implementation plans and benefits sharing.

Procurement’s role in this process was to bring economic insights to the table to help build a picture of the joint value chain and to facilitate the necessary decisions internally. They moved from looking at price, to total internal costs, to value chain costs. Not only did this help the retailer and its supplier to identify areas of revenue enhancement, but it enabled them to eliminate costs.

Gain preferential access to innovation. The supplier network can generate many sources of competitive advantages. Procurement needs to find ways to facilitate, not hinder, such advantages. Translating the company’s vision into an end product is the domain of innovation, production, and business development, but procurement can play a critical role in evolving the supply base to deliver that vision and evaluating the trade-offs when considering new ideas or suppliers.

Jeff Hawkins, inventor of the Palm personal digital assistant (PDA), saw this potential. Most competitors attacked Palm’s market leadership in the late 1990s with extra features and memory, but Hawkins, rather than using his in-house innovation team to compete head-to-head on functionality, asked procurement to engage the supplier base on innovation. Procurement adapted its role to become a channel for great ideas coming from suppliers. One of these, IDEO, helped Palm understand that simplicity and aesthetic appeal would win out in the marketplace over improvement in functionality alone. The supplier and the Palm team worked for almost three years to develop the next-generation PDA, launching the Palm V in 1999. Consumers were so enthusiastic that they paid a much higher price for the sleek, lightweight Palm V than for rival gadgets.

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  1. Hugh Baker and Fabrice Saporito, “Avoiding the Procurement Rabbit Hole,” CPO Agenda, June 2007: The study on which this article was based goes into more detail for industry experts. PDF Download.
  2. Doug Hardman, Simon Harper, and Ashok Notaney, “Keeping Inventory — and Profits — Off the Discount Rack,” Booz Allen Hamilton white paper, February 2007: An in-depth look at Zara’s highly successful collaboration-based operating model. PDF Download.
  3. Bill Jackson and Michael Pfitzmann, “Win-Win Sourcing,” s+b, Summer 2007: Toyota’s knowledge-based sourcing consistently outperforms more traditional procurement models. Click here.
  4. Geraint John, “CFOs Less Than Happy with Procurement’s Performance,” CPO Agenda, May 25, 2007: Procurement and finance should be working together, but in many cases aren’t. Click here.
  5. Keith Oliver, Edouard Samakh, and Peter Heckmann, “Rebuilding Lego, Brick by Brick,” s+b, Autumn 2007: How a supply chain transformation helped put the toymaker back together again. Click here.
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