Procurement Intelligence Unit

In times of economic uncertainty, market intelligence gathering and forecasting are essential to formulate effective, future-proof buying strategies. Without them, procurement executives and their companies could be taking an unnecessary gamble.

No one could have predicted the seismic shocks that have rocked the business world since the onset of the global credit crunch. Oil prices have yo-yoed to unprecedented highs, and unimaginable lows, while the price of other key commodities have rocketed by, in some cases, a barely conceivable 1,000%. Stock markets, meanwhile, have plunged massively before a sustained recovery finally kicked in after one of the most miserable starts to a year imaginable.

Hedging strategies, a traditional safety-valve in more stable times, were rendered virtually redundant as procurement, and even suppliers, struggled to keep pace with the breath-taking speed at which events unfolded.

But while some companies took the hit – and others simply went to the wall – a small minority were left relieved that they had ploughed their resources into the kind of market intelligence operations that helped them learn from the past, deal with the present and look to the future with a far greater degree of hope than most.

As a CPO of one of the world's largest oil firms, Christina De Luca has witnessed at first hand the economic carnage of the past 18 months, and few people are better-placed to acknowledge the role that market intelligence has played in helping BP weather the storm.

"At one point it was safe to assume that inflation would be around 2% or 3% a year – that was our planning assumption," said De Luca. "Around 2004, however, things changed drastically, which fundamentally affected the business decisions we were making.

"In our business we're making a decision to invest billions of dollars drilling holes in the ground and building infrastructure assuming that it was going to cost 'x' amount and, all of sudden, we were seeing double-digit, triple-digit inflation and the cost of what we were buying was coming in at two times the original figure."

As prices continued to spiral, the need for procurement to gain greater insight into a far more volatile world grew.

"There was a realisation that all of our experience and all our history, and all the experience and history of our engineers, technicians, designers and procurement people was worthless because the world was a fundamentally different place," said De Luca.

"Procurement needed to take steps to help our business better plan for the future. It wasn't that we were going to start supplying poorly without our intelligence gathering, but if we didn't start to think about the future, and forecasting, then we were going to make the wrong decisions, which would have a material impact on our business."

The company set up its procurement intelligence operation in August 2006, and the initial focus of inflation forecasting has been greatly expanded, as this crucial area of the business has established itself at the forefront of BP's long-term strategy planning.

And although the economic crisis has posed a unique set of problems, it has stood up to the most rigorous market conditions imaginable.

"It [BP's market intelligence work] has enabled us to stay abreast of current conditions," says Greg Dyer, market intelligence manager, BP. "Rather than being behind on our news information we're actually ahead of the game in our current and future forecasts in the markets that we do business in."

Time to learn

Not that this kind of intelligence gathering is anything new. Despite procurement intelligence being viewed primarily as a very modern phenomenon – and perhaps a further indication of procurement's growing confidence and place at the heart of many of the world's largest companies – Hans Elmsheuser, head of global procurement, Syngenta, believes that many firms are turning back the clock to gain a competitive advantage.

"In a sense we're going back to the future," he says. "Companies such as ICI (which demerged its pharmaceutical bioscience businesses in 1993 to a company that ultimately merged to form Syngenta in 2000) were collecting this kind of information many years ago, but over time this can sometimes be lost."

Syngenta itself has an active market intelligence operation and Elmsheuser has no doubt of its importance during volatile times.

"It's crucial,” he says. "There's no doubt that it has put us in a good position to capitalise on changing conditions. The key is to capture the intelligence in the most efficient way possible and use it to maintain a competitive advantage. Obviously, confidentiality is an issue, but this adds to the layers of risk management that we already employ."

Immediate returns

Of course, in procurement, knowledge is power, particularly when it comes to dealing with suppliers and formulating long-term strategies. And one of the major benefits of setting up the kind of operation that has allowed BP and Syngenta to be so successful is that the return on investment is not just considerable – it's also immediate.

"If you target the right kind of intelligence and bring it in, then, at all times, you've got your next transactions going through that you can either re-route, confirm, change the shape of, or even utilise different solutions because of the kind of information that's available,” says Neil Deverill, former CPO of electronics giant Philips.

"Generally, organisations that run these kind of operations already have maturity to the extent that the different functions within the business are co-operating so they're coming up with a game play to go to market, but they need this kind of intelligence for the market around supply chains," he says.

At BP, the fundamental driver for the inception of De Luca's brainchild occurred midway through 2004, when procurement demonstrated just how "blown" the company's budgets were.

"The reality six months into the year was so fundamentally different to our planning assumption that, as a business, we had a crisis," says De Luca.

"We had already started investing in our capability and quickly leveraged that before switching over to inform the business strategy."

"We had the capability to quickly demonstrate that the fundamental issues they had were associated with supply markets and inflation and they embraced the concept that supply market intelligence was fundamental to the planning of the business."

However, De Luca argues that the work being carried out by BP isn't just essential for the company's own procurement operation – it should be an area that all firms making long-term capital investments view as fundamental.

"Any business that is looking at making capital investments that are going to be paid off over many years has to ask itself: 'what basis am I using to assume how much it's going to cost to build this thing'," says De Luca.

"Where you have long lead item construction there's quite a bit of uncertainty over what the cost of that investment is going to be. We had basic steel commodities that had 1,100% inflation in a year." 

That, in itself, is a frightening statistic but one that is unlikely to phase the new generation of intelligence gatherers that the likes of BP and Syngenta are attracting.

And as the war for talent continues to rage on fronts from the US to Asia, it's clear that a welcome by-product of the expanding procurement intelligence market is the diverse roles and opportunities that this new market is creating.

"In my experience, this kind of operation is attracting bright young graduates with financial acumen and very enquiring minds," says Deverill. "They’re the people that can uncover and find out the kind of information that procurement needs. They're also fresh enough not to have any tribal links to the organisation to pass the information to people that need it willingly."

Missing a trick

Deverill also believes companies that are using 'traditional' procurement executives to execute this role are really missing the point.

"There are companies that are using traditional people from the discipline itself, but it's not something I would recommend. It's a really useful way of attracting young talent because they get a free-ranging brief, they have contact with all parts of the organisation and the external market as well."

From De Luca's perspective, the work carried out by the company's procurement intelligence operation is still very much a work in progress.

"The unit really serves two very different audiences; there is a part of their activities that is very much geared to the procurement professional, bringing them the market intelligence for them to formulate better strategies and help them do better work," says De Luca.

"That has really come off a long capability journey because until that individual is confident and capable of using market intelligence well, then all the information in the world is not going to help you." 

During a period of relative stability it's easy to forget the tumultuous times that procurement has had to cope with in recent years and while the volatility could well return – and in some markets hasn't really gone away – market intelligence, while no silver bullet, has undoubtedly armed those companies that have been prepared to embrace it with an invaluable eye into the future.

And it's the future, not the past, that is now dictating their strategy.