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Toyota Incidents Raise Questions About The Future Of Procurement

February 4, 2010

Yesterday I featured a discussion that I had with auto industry expert John Henke, in which he highlighted the decline in supplier relations between providers and the non-US OEMs, such as Honda and Toyota. He observed  that relationships have become ‘more adversarial’ and that one cause  was a growing number of new staff who were not versed in ‘the Toyota way’.

There are of course key questions that must be asked regarding why this happened. The most obvious answer appears to be that Toyota has joined the cost-cutting frenzy that appears to have overwhelmed good judgment in a number of industries in recent years, especially many consumer-facing companies. And then we must ask, to what extent are Procurement groups the culprits or the victims in this story?

Of course input costs have always been a subject of focus for senior management and the consolidation of Procurement – and its emergence as a ‘core discipline’ – reflected that  focus. However, has the discipline now moved out of control, or become too singularly focused? Driven by external consultants, there appears to be a belief that whatever we pay, it is too  much. The advent of globalization, spend management tools, e-auctions, ‘commoditization’ techniques all led to more and more aggressive behavior towards suppliers, where the only value seemed to be low cost.

Recent developments in ‘supplier relationship management’ do not appear to have made things much better. I remember one CPO of a Fortune 50 company telling me that ‘The closer we get to our suppliers, the more we tell them that we value partnership, the more their margins fall’. This is just one of many stories I can recount where the pressure on price – often accompanied by thoughtless allocation of  business risk – has undermined loyalty and prevented collaboration. Supplier relationship management is meant to fix this, but in general the way it is being implemented does not drive improvement. Firstly, it is far too narrow. Anyone who believes that just a handful of suppliers are important is fooling themselves. And even this handful are frequently subjected to the same on-going pressures on price .

The result of this focus on input cost is that everyone has been forced to cut back. Suppliers cannot afford to support the numbers of staff or the extent of the customer interfaces that would allow more integrated teams or more collaborative product development. Trust has eroded and ‘partners’ have become more secretive and protective. In an era when communication tools are proliferating, communication quality is declining. Cost cutting has resulted in many relationships becoming virtual – and none of us has yet discovered how to replicate the loyalty that results from personal interactions.  Procurement has added to these changes by draconian controls over travel and meetings, by interjecting itself between suppliers and users, by eliminating even basic interactions through the use of e-auctions and similar techniques.

On one level, Procurement has been doing what it was asked to do – cutting input costs and delivering savings. On another, that unrelenting focus and the techniques that accompanied it have perhaps destroyed fundamental value and left business reputations exposed. 

Any group that positions itself as ‘professional’ is surely responsible for analyzing the consequences of its own actions. Executive management may ultimately be accountable, but the Procurement community (and its professional associations) must surely have responsibility to alert management to the consequences of those actions.

It is time for Procurement to hold itself to account and ask some tough questions about the broader role it plays in corporate success. It must learn the fundamental value and techniques of collaborative behavior, as well as analyzing more thoroughly the performance impacts of some of the tools and techniques that are now commonly used.  It is a great opportunity; and the Toyota experience indicates that this evaluation is urgent.

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