Do you remember Steve Austin? If you’re not old enough to have watched this 1970s TV show, Steve Austin was the main character in The Six Million Dollar Man, an American science fiction and action-adventure television series. The show was about a former astronaut, U.S. Air Force Colonel Steve Austin, portrayed by Lee Majors. After being seriously injured in a NASA test flight crash, Austin is rebuilt (at considerable expense, hence the title of the series) with bionic implants that give him superhuman strength, speed and vision. Austin was then employed as a secret agent by a fictional U.S. government office titled OSI.
What in the world could Steve Austin possibly have to do with procurement?
…Or middle market Food & Beverage manufacturing? In our experience serving the middle market Food & Beverage manufacturing industry, most manufacturers have highly immature procurement capabilities – and they’re leaving millions of dollars of EBITDA on the table as a result.
The State of Procurement in Middle Market Food & Beverage Manufacturing
To test this observation, Saphineia recently reviewed the supply chain teams at 10 middle market Food & Beverage manufacturers.
What we found:
- In the majority of these companies, the person leading procurement had never been in a procurement role prior to joining their current employer (ie, they are home-grown)
- In the majority of these companies, the person to whom the procurement leader reports did not have specific procurement experience
- Just 1 of these 10 procurement leaders previously served in a procurement role at a multi-billion manufacturer (which is our qualitative proxy for having had exposure to more mature procurement practices)
This research supports what we’ve observed in the field, which is that most middle market manufacturers have what we consider to be ‘basic’ procurement capabilities and competencies, which represents the lowest score out of four in Saphineia’s Procurement Maturity Framework.
Specifically, most companies at this level of maturity don’t have fundamental procurement elements such as:
- a procure-to-pay financial process that records the company’s spending with 3rd parties and contains requisite governance protections
- spending visibility with some basic analysis (e.g. aggregation of like items)
- supply and supplier market analysis
- go-to-market tools (as simple as RFI/RFP)
- negotiation acumen and expertise
- material management optimization
- basic price and supply risk management
To further sanity check our findings and observations, we asked the CPO of an upper middle-market PE firm to describe the quality of the procurement organizations she sees in the companies her firm looks to buy. Her answer:
“It’s rare that we find mid-sized companies with procurement leadership we would call ‘skilled’. Most of the businesses we work with don’t have very mature procurement efforts, so when we implement or augment, the businesses are surprised with the results – even though they’ve been told what to expect. In many cases, the owners of these businesses had been aware of what a ‘solid’ procurement effort could give them, but they just never chose to invest.”
What is having more mature procurement practices worth?
The middle market businesses we reviewed average ~$100mn in annual revenue and spent ~$60mn annually on ingredients, packaging and indirect expenses. Given the ‘basic’ maturity level of these companies’ procurement practices, we estimate that these manufacturers could achieve ~10% or $6mn in one time savings within 2 years of hiring a skilled CPO – hence, our reference to the Six-Million-Dollar-Person!
Moreover, we would expect a more mature procurement practice to generate substantial incremental annual savings after achieving these initial benefits – similar to how mature continuous improvement programs generate incremental savings on the shop floor each year.
