Consider The Supplier

"Profit From the Source

By Christian Schuh, Wolfgang Schnellbächer, Alenka Triplat and Daniel Weise

(Harvard Business Review, 262 pages, $32)

Long before the Covid-19 pandemic, trade in manufactured goods was losing steam. The shift to giant container ships, perpetually running behind schedule, had made freight transport less reliable. Natural disasters in one country forced factories to close in another. Trade disputes blocked the flow of imports. When such risks were priced in, complex international supply chains often failed to deliver the bargains sought by corporate bean counters whose main concern was cutting costs.

In "Profit From the Source," four Europe-based partners at Boston Consulting Group -- Christian Schuh, Wolfgang Schnellbacher, Alenka Triplat and Daniel Weise -- make the case for drastic change. Procurement, they assert, has been badly neglected: "When the boss offers someone a job in procurement, they know they're on the fast track to nowhere." Top executives, they claim, spend far too little time with suppliers, even though purchasing swallows more than half of the average company's budget. "That's a mismatch with potentially existential consequences," they write. Instead, they insist, companies should put procurement at the center of corporate strategy.

This volume, it should be said up front, is not an engrossing nonfiction narrative. It reads like the consultant study that it is; each chapter concludes with a "Key Takeaway" and "Key Tactics" for the chief executive who is the imagined reader. As is often the case with consultant lit, the authors amplify worthwhile insights into an urgent demand for action. Unfortunately, "Profit From the Source" is a bit overwrought and may be of limited use to its audience.

According to the authors, one of a new CEO's first moves should be naming a CPO -- a chief procurement officer -- with the authority to "retool the procurement function" across the corporation. "The CPO," they write, "should have all the hallmarks of a future CEO: the strategic vision to run a business that must be transformed by new technology and new people, the dynamism and leadership skills to drive through challenging transformation programs, the collaborative working style to influence the executives heading other business functions, and the thick skin to make decisions that may be unpopular."

This talented individual should be nestled alongside the other top executives in an increasingly crowded C-suite. There, the authors say, the CPO should be a close adviser to the CEO, who should spend about a quarter of her time thinking about procurement or cultivating the 20 to 40 firms that account for a typical company's purchases.

Their exemplar is Jose Ignacio Lopez de Arriortua, the Spanish engineer whose intimidating team of procurement "warriors" helped bring General Motors back from disastrous losses in the early 1990s. Lopez's tenure, the authors assert, "marked the beginning of modern corporate procurement." Yet the sorts of collaborative strategies they recommend -- "treat your suppliers as friends," "tap the R&D resources of your suppliers" -- seem to have little in common with Lopez's slash-and-burn cost cutting, which antagonized many of GM's longtime vendors. The Lopez approach undoubtedly brought down the cost of auto parts, but there is scant evidence that it built long-term relationships that made GM more innovative or helped it gain market share.

Make no mistake: The authors expect the chief procurement officer to polish the bottom line. "Every CPO must put cost savings at the top of their agenda," they intone. They are right that better management of supply-chain risk is urgent. But will the CPO have time to do that while also cultivating suppliers; achieving breakthrough innovations; improving product quality; helping meet environmental, social and governance goals; and doing several other things as well?

While they purport to advise business executives in general, the authors are primarily concerned with supply chains for factory inputs. Almost every anecdote in their book pertains to manufacturing, which accounts for only 12% of economic activity in the U.S. and a similarly small share in most other wealthy countries. For a bank boss or a hospital executive, "Profit From the Source" doesn't seem terribly relevant.

Moreover, a great deal of corporate purchasing has nothing to do with manufactured goods. Many U.S. companies likely spend more on energy, information technology and employee health insurance than on nuts and bolts. Is there any benefit to directing the executive who oversees engine procurement to procure electricity as well? That's a question the authors don't touch on.

Even within the manufacturing universe, their vision is limited to well-known companies that orchestrate complex flows of components and raw materials. These giants should dangle the prospect of higher profits and industry expertise before key suppliers. But their idea of "an enduring reciprocal relationship" doesn't place supplier and customer on an equal footing. The customer is to call the shots, taking a "trust and verify" approach to everything suppliers do. How should a supplier respond when facing a take-it-or-leave-it demand to commit itself to a major customer, even to the point of guaranteeing priority access in the event of a crisis? The supplier, obviously, is not the book's intended reader.

Serving up familiar stories about the likes of Apple and Tesla, the authors write admiringly: "The world's most successful companies . . . make virtually nothing themselves. They are, in effect, the consumer-facing, brand-owning centripetal force at the core of a business ecosystem." But many companies have been moving in the opposite direction. In recent years, Facebook (now Meta) began designing chips for the servers in its data centers; Costco built a slaughterhouse to ensure its stores' supply of chickens; and Cleveland-Cliffs bought steel mills to supply from its iron mines. Much of the business world seems to think that outsourcing has gone too far. Should the chief procurement officer help identify ways to bring parts of the supply chain back in house? The authors don't say.

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Mr. Levinson's most recent book is "Outside the Box: How Globalization Changed From Moving Stuff to Spreading Ideas."" [1]

1. Consider The Supplier
Levinson, Marc. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 29 July 2022: A.13.