Leveraging an innovative purchasing operation at LaFarge
Jun 27, 2011 12:20:00 PM
Paul Harridine [PH] VP Purchasing for Europe at LaFarge discusses how an innovative Purchasing operation can deliver value, more than just savings, back to the end customers of the business.
CG: Today we are talking with Paul Harridine, VP Purchasing for Europe, LaFarge. Hi Paul, thanks for joining me today. Paul, can you tell me a little bit more about your role at LaFarge?
PH: Sure, I look after purchasing across the European region. That’s 15 countries, from UK and France, all the way across to Russia, and Ukraine and Greece in the east of the region. This encompasses our three divisions - Cement, Aggregates and Concrete and Plaster board totalling 30 different business units.
CG: So obviously your role touches on all those business units?
PH: And every commodity, so the total spend is somewhere in the region of 3.5 billion Euros.
CG: Great. Looking out to the industry, the construction markets in the US and Europe have been struggling in the current economic climate combined with new strict regulations and rules and new competitors. Can you tell me a bit more about the European construction market and some key trends you’re anticipating over the next 12 months?
PH: Many countries construction markets’ have been depressed due to a combination of governments cutting back on expenditure, particularly infrastructure expenditure, and a depressed private sector impacting the housing market.
Geographical markets like Spain are probably the most sever casualties of the economic crisis along with countries like the United Kingdom and Greece. Others have faired a little bit better notably Poland which seems to have come through the crisis pretty well because of ongoing infrastructure, expenditure and funding from the European union.
With the region as a whole seeing very limited growth over the last 2 years and with some countries seeing as much as a 35 percent decline, Lafarge has faced a very tough business environment.
CG: When do you anticipate growth to return to those countries which are still underperforming?
PH: Some markets are already growing again, and we’ve seen some positive signs in Poland, Germany and Russia which all seem to be doing better than they were 12 months ago.
Others such as the UK are pretty fragile, while a number of others are still seeing economic contraction. Their confidence is still not fully established with economic and government cut backs still very much on the agenda, which are still likely to impact on construction spending at least for the next two or three years.
CG: And a recent Bloomberg article that quotes your CEO, Bruno LaFont, pledging to ‘reduce spending to eat away at 14.7 billion euros of net debt’ resonates with what you’re talking about?
PH: We obviously have to pay interest on that debt and the credit rating agencies view about our ability to service this has a big influence on our share price. Consequently we have been working strongly on improving our cash flow through strategies to improve our throughput time, reduce our stock levels, and our improve payables.
CG: All of this obviously puts a lot of pressure on you and your team, What are your three objectives over the next 12 months?
PH: The key objectives haven’t really changed and actually the pressures won’t have changed much this year compared to last year, or the year before because this crisis has been around us now for a while.
Safety remains the number one priority, no matter what function you’re in. We operate in a dangerous sector - working in quarries or cement works or in transportation of materials. These things all involve a lot of dangers and we focus very, very hard on the safety of our people and our suppliers.
Secondly we have stretch targets to improve our cost and cash position and thirdly we are working hard to develop our people.
CG: How do you communicate the progress and successes of procurement back to the rest of the organisation?
PH: We have standard templates and methodology for reporting what’s achieved on all of our KPI’s which are typically published on a quarterly basis. Procurement has spent a lot of time developing these templates over the last three or four years, to improve their credibility.
It’s been an area that’s worked on a lot because you need consistency, in the interpretation of results and how they’re reported, particularly as you need to gain credibility with the general managers of business and the finance community.
CG: And, when we talk about credibility, how often do the CFO’s and FD’s question and challenge the numbers your presenting them?
PH: Our numbers and progress are validated by finance and reported on a quarterly. In addition, we have the opportunity to present our strategy during various meetings.
The savings/cash numbers are also presented at cross functional (cross business) performance reviews and customer board meetings, where purchasing report back to the internal stakeholders about progress against particular objectives.
CG: Okay, what are some of the key messages that you’re looking to get across, especially into the finance community?
PH: From a finance point of view, I think the main message is the credibility of savings against the objectives we’re trying to achieve. Our objectives have to be aligned with the business unit’s objectives, the finance people obviously want to keep a very close eye on how we’re doing against those and review with us any new initiatives that we might have to improve our cash or cost situation.
CG: In regards to these key messages, how sceptical are finance of procurements ability to drive business performance?
PH: I don’t think too sceptical. Maybe three or four years ago there was quite a lot of scepticism about purchasing’s role within the organisation. Part of it was because there wasn’t really a sensible way of measuring or linking achievement to the P&L or the balance sheet. I think over a period of time, gaining credibility and delivering some real improvements, finance like any other functional stakeholder or business partner starts to believe what’s being said because they can see the evidence. I think there’s no substitute for delivering what you say you’re going to deliver but also having KPIs which are measured in a way which finance can understand definitely help.
One of the problems we had in the past was that the function used to measure purchasing savings against market movement taking into account inflation, rather than against the bottom line - so you may be claiming a saving even though a price increase was agreed, which is clearly nonsense.
CG: If we can take a step back for a moment and talk about what procurement means to you - how would you define procurement?
PH: First and foremost it should be contributing to and supportive of, business strategy. In doing this the function should be delivering additional value on a balanced score card of objectives. It’s not just about looking at price, it’s about delivering value across a spectrum of critical KPIs using a wide variety of levers. In the end, if you have a truly innovative and successful purchasing organisation, the actions of the Purchasing function will be delivering value back to the end customers of our business.
CG: Would your CFO define it in the same way?
PH: No, not typically. In my experience CFO’s tend to be a lot more focused on financial metrics and I think that they would primarily see that the value of purchasing purely in terms of the delivery to the bottom line or the balance sheet.
CG: Is this a good thing or a bad thing do you think?
PH: I don’t think it’s one or the other. Each person in an executive committee has their own role in the organisation.
CG: From your point of view, do you feel you’re in complete control of what makes up your cost base?
PH: No, and we’ve still got a long way to go. I think what I’ve described to you in this interview is three years of activity. Across a group the size of LaFarge, total group expenditure is probably nine to ten billion euro’s spread across every continent.
We’ve got a large presence in Middle East, Africa, Asia, South America as well as the mature economies and I would say, even in what you would call probably more mature Europe, we’ve still got a huge amount to do.
The construction industry is probably a decade or so behind industries like automotive or pharmaceutical on the journey towards world class purchasing techniques. So it’s still something that we’re working on.
CG: What’s your reference point for good procurement - how do you know your procurement function is on the way to being world class?
PH: Firstly it’s a personal reference point having worked in a number of different industries including the automotive industry. Furthermore we do refer to benchmarking across industries and from external agencies, who give us some support from time to time.
We need to be cautious about comparing with those in our own industry as this would limit our ambition, as this industry still has a long way to go on its journey to world class purchasing.
Finally we conduct internal benchmarking, comparing the performance of our business units across the globe, allowing us to identify good practice and to set some targets for under-performing BU’s.
CG: Echoing with your CEOs words, many senior managers have agreed that the focus for the next 12 months will be on efficiency not effectiveness – which means focusing on quick cash wins and more importantly focusing on the core business offering. Do you see an increased trend for outsourcing of back-office functions over the next 12 months?
PH: To be honest I think we’ve been short term focused for the last 12 to 18 months but at the same time there’ve been pockets of activity that have been looking further out especially where we’ve been tackling new areas of expenditure where sourcing haven’t traditionally been involved. Some of these activities do require longer term perspectives and I think in particular of Transportation services which is an enormous area of expenditure for us.
Of course we’ll still be very focused on what we can do within the year but I would also argue we’ve got a very good balance of activities that are making us more effective for the long term as well.
In terms of outsourcing, having looked at this in other industries (and other companies) the first question you have to ask is yourself is, are you outsourcing a core competence and is it something that really drives value for the customer? If you answer yes, then you don’t really want to be looking at outsourcing.
The second question you’ve got to ask should be – is there an external supplier who can manage this more effectively than you over the long run.
You can then get into all the detail about how you tender it, how you look at performance managing suppliers and how they will continuously improve going forward.
Lastly, before you consider outsourcing, you’ve really got to try and optimise the activity yourself to ensure that you understand the full cost structure.
CG: If there is one thing procurement teams in the UK, across Europe and the world, should be doing in becoming a strategic, indispensable, part of any organisation?
PH: I think I have already mentioned that Purchasing needs to be continually providing value through to the end customers of the business. If this is the case then Purchasing will be a truely strategic function. There are many examples where product or service innovation is generated trough Purchasing working creatively with Suppliers.