Make Your Own Luck

Michael Jones: With such market volatility, how much is commodity price risk an issue in AstraZeneca's procurement strategy and how does procurement at AstraZeneca interact with the treasury department to mitigate risks?

Jon Kirby: In all areas we are establishing a far greater understanding of true cost incurred and implementing appropriate strategies to manage and develop total cost. We work closely with treasury and our suppliers to implement appropriate commodity strategies including hedging, raw material/ inventory management and ongoing alternative specification assessments. We are also implementing a formal supplier development programme that will drive greater collaboration and accountability for managing cost across the entire value stream.

How much is price a factor in supplier selection? Is it more important for a supplier to contribute to AstraZeneca's brand equity?

Every category is slightly different but evaluation of suppliers will always be against a set of value criteria, of which cost is a part. However, it will also cover risk, quality, reputation, and capability. Additionally, there are some clear ‘go/no go’ criteria in any supplier evaluation, such as the need for all our suppliers to comply to our Responsible Procurement standards.

Which locations are you sourcing from and what are the global challenges you are facing?

We are sourcing from suppliers across the globe. Additionally, we have established sourcing centres in Bangalore and Shanghai supporting the ongoing development of our emerging supply base, with responsibility for supplier identification, validation, management and development.

How much of your time is consumed with direct procurement issues versus indirect procurement issues?

Direct procurement, as defined for us within Pharma, would include R&D, operations and sales and marketing with my time split approximately 65% by 35%.

In the procurement cycle, CFOs are particularly interested in the ‘payment stage’ and the invoice lifecycle. How automated is procure to pay and the invoice lifecycle at AstraZeneca?

We have automation across a high percentage of our spend but are continuing to develop P2P processes in both the mature and emerging geographies. We work closely with transactional finance to incorporate payment metrics into our supplier performance management processes.

How do you track spending, particularly maverick spend, from indirect procurement?

We have spent a great deal of time improving our spend visibility and analytics capability. We now have visibility of over 90% of our spend with the ability to segment as appropriate. For example, aggregate group, business unit, cost centre, supplier, category, etc.

How does AstraZeneca categorise suppliers and what sort of supplier strategy are you adopting?

Our suppliers are segmented into three categories: strategic, core and commodity. Each of the categories has a set of appropriate supplier management and development activities for the respective procurement and business stakeholders. Our supplier strategies will differ based on a category/business basis including multi-source for risk management/business continuity purposes along with an appropriate supply base at a local, regional or global level. However, at a high level we are working to rationalise our existing supply base to drive significant improvements against our core value deliverables of cost, quality, service, innovation and risk.

Why is it so important to lead your procurement strategy with value rather than just cost?

Cost will always be an important deliverable for procurement; clearly the core expectation of any board is for procurement to effectively manage the third party cost base. However, the role of procurement is to optimise the value that can be delivered from third party relationships and that runs across areas such as quality, service, risk, innovation, time to market and exclusivity. Procurement cannot engage with their internal customers on cost alone – we have to demonstrate how we can contribute to sales growth, new product development, emerging market expansion and improving customer satisfaction.

How do you effectively manage several thousand cost centres? How can the three streams of cost reduction – renegotiation, demand challenge and strategic change – help?

We have structured our organisation so that our procurement teams are close to the customers and dedicated to particular business areas, such as R&D. This structure, along with our analytics expertise, enables the team to prioritise and engage appropriately with the budget holders and requisitioners. In addition we have implemented procurement governance across the business areas, which creates far greater control. The three activity streams provide the customers with a clear, consistent and simple understanding of how we will work with them to drive cost reductions. We have seen this dramatically improve interactions between the budget holders and procurement as it’s easy to prioritise and create a simple and common language.

You previously stated that the ‘only way to get real engagement of experience with the customer is through data’. How does this preparation drive value?

You cannot drive change in any business or relationship without a common understanding of the current baseline and a clear articulation of the ‘to be’ state. This applies to relationships with customers and with our suppliers. Very often the existing behaviours, preferences or perceptions of ‘value’ are as a result of a lack of knowledge of what is possible or why a current situationis sub-optimal. From experience, sharing clear facts and data with customers to explain the current situation, what improvements can be made and why, very quickly opens up the opportunity to drive change – as the whole decision making process is far more objective. In many instances a clear understanding can actually lead to the creation of far greater value. A good example is where you have high product complexity and the supplier has resorted to ‘average pricing’. Marketing then sees the cost of a ‘high specification’ product the same as a ‘low specification product’ resulting in an increase in selection of the high spec products, which is actually more expensive to manufacture, therefore leading to an increase in overall costs. Once the true cost to manufacture has been shared with marketing they decide on a lower and more appropriate specification using the money saved to create greater value elsewhere.