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How Procurement grades Marketing expenditure strategically

This post is by ‘THE BUYER’ – an anonymous former senior manager in the procurement profession who offers an occasional perspective to the world from a procurement driven point-of-view.

The rise and rise of professional procurement

Many of those beavering away in corporate marketing departments, as well as in agencies, will have noticed the inexorable rise of professional procurement. Since the national Census in August 2011, Procurement is now the fastest growing profession in Australia … and probably throughout the business world as well.

Many on the Agency side of the marketing profession have already felt the rise of procurement and its direct consequences.

Corporate marketers have perhaps also experienced the input of their colleagues from the Procurement side already?

It is fairly typical to find most major companies spend between 30-70% of their revenues on third party goods & services – on their supplies. How that spend is redeployed back into the marketplace is a strategic choice.

Saving just a few percentage points on this aggregate expenditure can save millions on the bottom line, and (when multiplied by the average EPS ratio of twelve times earnings) can add real value to market capitalisation. In fact, much easier than growing revenues to deliver the same increase in value of the firm.

‘Procurement’ purchase everything from the stationery supplies to raw materials, from IT kit to, well, yes, marketing services. The searchlight of procurement attention is inexorably sweeping around to Marketing expenditure.

But why, just to save a few shekels?

Well, yes. But more than that, to challenge the might of large marketing budgets and the often sloppy process through which marketing spend is deployed into the market.

As a vast area of investment for many companies, who have for so long wondered aloud at is efficacy (never mind its effectiveness), the marketing budget is at last being gradually brought to account – the reason those people that unleash the Procurement professionals on hitherto un-addressable spend areas like marketing.

Often it is the CEO or CFO who commission the spend-analysis. Which half of our marketing spend is wasted they openly ask?

But there are other goals as well. Most of the ASX100 firms have well developed, busy and expanding procurement teams. In fact, most of the top 1,000 organisations in the country employ some form of professional procurement effort – yet not all are myopically focussed on reducing price or even cost.

More and more organisations are recognising not just the potential value to extract from the supply side, but are also increasingly seeking to manage what (since the GFC) has become the biggest issue in business – RISK.

The eight strategic benefits of professional procurement today

Anyone remember the Sherrin example? From way back in September 2012. They were outed for paying child labourers who worked for their principal supplier for just 12c per hour to stitch their footballs. Stakeholders in the iconic Aussie brand were outraged, and their brand reputation took a pounding.

Almost unbelievably, the world’s largest sports brand, Nike, had a virtually identical experience a decade ago. Yet Sherrin fell into the same trap.

Today, even Apple CEO Tim Cook is taking lessons from Nike on supplier management, after Apple were accused of condoning poor supplier labour practices at Foxconn.

Protecting BRAND reputation is a major driver for procurement teams sanitising the supply chain. Other major brands have fallen into this trap – Zara found their major supplier using a number of slaves in 2011 for instance, and were again in the spotlight for slave labour conditions in April.

Stakeholders (including consumers and shareholders as well as the Board, the boss, the Governments and the regulators) have a larger conscience today. They want a greater say in the governance of delivery to the consumer. They want a sanitised supply chain. They also want the bestest/fastest/ cheapest option. They increasingly want the greenest option, the most socially responsible.

The previous Federal Government wanted their buyers to buy cheapest, buy local, buy indigenous and to buy from the firms with the most women on the board – all through their procurement connected policies (PCPs). There were 25 PCPs in total; bizarrely some were mutually exclusive. They are no longer on the DoF website and must have been quickly abolished since the 7th September election?

But the Federal Government are no different to a consumer. We all want a lot from our suppliers. Because everybody wants more. Our customers want more, we want more, our suppliers want more. The value chain has many mouths to feed.

Delivering MORE for LESS is often the standing brief for your average procurement manager.

Nevertheless, Procurement is usually asked to deliver a growing laundry list of other benefits for organisations too. The peak body for procurement in Australia, CIPSA, published a list of the EIGHT of the new ‘strategic’ benefits of professional procurement input in October 2012:

The 8 benefits of strategic procurement

1. A certain cost base
2. Secured supply lines, with improved time to serve
3. Responsible and sustainable supply solutions
4. Goals aligned with policy
5. Driving beyond compliance
6. Brand reputation protected
7. Added value commercially
8. Competitive advantage

Increasingly, CMOs will find it more and more difficult to successfully defend their turf (their budget) from the advances of professional procurement efforts. Because they represent the interests of the organisation, its governance, the consumer and the supply chain. A powerful set of stakeholders.

Enlightened organisations have recognised along the way that real and lasting savings are available on the supply side, together with a widening range of other potential benefits. And, now that much of the less strategic expenditure lines within organisations have been addressed, it is the turn of the Marketing budget which is, ultimately, no exception.

The AANA are establishing a new Marketing Procurement Forum (with help and support from the Trinity P3 bloggers) where marketers and procurement professionals can meet in a neutral environment to share understanding, experiences and to network.

How to prioritise expenditure strategically

So, how do they do it, these procurement people? Where do they start?

The foundation of all modern strategic procurement work was founded in only 1983 by Peter Kraljic, a Polish economist at McKinsey. His work moved procurement from the commercial agenda to the proactive strategic agenda.

He established the idea that all spend by the firm could be rated most accurately by risk vs profit impact, and mapped onto a two-by-two model:

Kraljic's supply matrix

This matrix measures RISK against profit impact … or better still, EXPENDITURE. Each quadrant tells a story:

HIGH RISK and HIGH SPEND items which a customer buys are the most important – the strategic items. Vital to the company and its prospects. Without the supply line their own business would be threatened. Suppliers of raw materials often fit into this box.

The best example might be BEEF for McDonald’s. Imagine Macca’s without beef tomorrow? “Fillet-o-fish burger sir?” This is where the procurement team want to secure supply, build strategic partnerships and to innovate together.

It is hard to think of a marketing supplier which would truly fit into this box? A major agency perhaps, with ongoing creative being used repeatedly ad infinitum – as the core message of a leading brand maybe – such as QANTAS’ lead creative agency perhaps?

McDonalds beef procurement example

The bottom righthand box on our spend matrix is HIGH SPEND but LOW RISK – the leveraged items. This area is where spend is high but risk to the business is low.

A good example is IT hardware. Large firms spend much on laptops and PCs. But the actual model, spec or brand doesn’t matter so much. If you buy DELL and they don’t supply, it is easy to call up an alternative supplier and buy elsewhere quickly without damaging your business.

The aim in this box is to LEVERAGE your spend. To always get the best deal, play the market and effectively commoditise the supply line. Most marketing agencies would fit into this category – HIGH spend, but hardly unique.

IT hardware - low spend and low risk

The bottom-left box is the carefree one. LOW SPEND & LOW RISK are the non-critical items you buy. Usually this area includes all the low value consumables, the indirect spend which does not affect how you do business. But it is expenditure every business incurs. It is the costs of being in business, not the cost of doing business.

The best example is the office stationery. Who cares that the cupboard is a bit light on pencils? If you run out and your supplier is nil stock, just buy elsewhere.

Low value consumables

The buyer’s job in this box is not to build strategic relationships with your supplier nor really play-the-market, but to do the job ONCE and get a result. In stationery, for example, that means a quick deal with one of the major suppliers like Corporate Express (Staples) or COS or OfficeMax, get the corporate -67% discount with same day delivery and an online ordering code, and move on to more important things. If they don’t deliver and it is that urgent, send the office junior down to Officeworks.

A marketing example might be the corporate merchandise supplier; the supplier of the corporate logo pens is dead; never mind, get someone else to do it eh?

The interesting box is the top left-hand box – the HIGH RISK but LOW SPEND box. This is the box where the bottlenecks can be created. Where the entire operation can be compromised for the want of a widget.

Jet engines, for example, need a tiny carbon washer worth 20 cents to operate properly and efficiently. Take the little washer away and you compromise a $40m wonder of physics that is the jet propulsion engine implementing Newton’s laws of motion.

This area of expenditure makes production lines vulnerable. The FORD mantra of “don’t stop the line” was invented to describe the materials purchased that were low cost but high risk to production.

High risk low spend

The objective in this box is to SECURE supply no matter what. To ensure that the line doesn’t stop and bottle necks do not happen. You buy a million 20c washers and fill a room with them next to the production line.

So, what is the Marketing equivalent of such tricky spend today? Might it be the supplier with granny’s secret formula? Or the supplier with the magic know-how? Or your digital agency? The ones that have learnt your corporate memory for you? The ones that make click-throughs happen, get tweets re-tweeted or maximise LIKES. This is the supplier you don’t want to stop, the one you don’t want to lose, the one you pay more to, not less.

Executive summary

How Procurement approach a supplier depends upon the strategic objective – to secure supply first, then leverage the market? Or, perhaps to just get a quick deal, or maybe to build a strategic relationship with a true business partner?

DIRECT spend lines such as raw materials, or tricky widgets to feed a production line, anything in fact for resale, usually fits into the top half of the Kraljic matrix. These DIRECT areas of spend need careful management and secure supply lines. The most important demand strong strategic relationships and the benefits they bring – like INNOVATION.

But buying marketing services is often not so different to buying other categories of INDIRECT spend. There are 14 major categories of INDIRECT spend ranging from stationery to utilities, fuel to travel, office furniture to, well, marketing services. Every business has to buy these things to function. They are a cost of doing business. They are often in the bottom half of the Kraljic matrix – so minimising their costs builds profitability and raises competitive advantage.

Ensuring a fast service level and security of supply in the bottom half of our matrix also reduces ‘corporate noise’ … it stops people derailing strategic procurement efforts for the want of filling the stationery cupboard today; or demanding that their brother-in-law gets to bid as he could surely do a better deal (honestly).

The trick for MARKETING is to ensure that they are managing the segments of their spend in the most appropriate way. The way that the strategy demands. To honestly appraise supply lines strategically, so that expenditure can be best managed in the widest interests of the business.

If CMOs want to protect their favourite suppliers and agencies, they need to be mapped into the top half of the Kraljic matrix first; and for good reason, not just because you like their stuff.

Interested to hear your thoughts.

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    THE BUYER is an anonymous former senior manager in the procurement profession who offers an occasional perspective to the world from a procurement driven point-of-view. Formerly, The Buyer posted weekly blogs on the premier news site for the procurement profession throughout Australasia at PP Online Over 400 postings of ‘The Buyer’s Blog’ are still listed online covering all sorts of procurement related topics and opinions on matters related to professional procurement.

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