Every week as part of my procurement update on Blog Talk Radio I include a guest soundbite. Sometimes I have an excerpt from a recent webinar, but most of the time I select something current and relevant from YouTube and pull the audio. On good weeks, I find a clip with an obvious tie-in to an event taking place that week. On bad weeks, well… you’ve been on YouTube right? Sometimes it takes me a couple of hours to wade through boring and irrelevant content looking for the right two-minute clip.
But all of the work is worth it, especially on those weeks when I find something that clicks. On May 27th I managed to click big time, with a clip from Michael Porter, Harvard Business School professor and creator of Porter’s Five Forces model for industry analysis. In this clip, he talked about ‘creating shared value’, which is his philosophy on corporate sustainability. You may have already read Jon’s take (‘Why I believe that Michael Porter’s position on corporate social responsibility smacks of colonialism’, 27 May).
While I’ve been around long enough not to be new to supply management, when a different perspective comes to light I have to stop and figure out where I stand. This is one of those cases. Here is the ‘Reader’s Digest’ version of Porter’s philosophy: when sustainability is based on a company voluntarily paying more than they have to for a product or service, the benefit to that supplier is limited and buoys that supplier at the expense of the buying company’s profitability. On the other hand, if you help them ‘build a better mousetrap’, they can charge everyone more (not just companies with surplus margin) and they offer the buying company a better product at a price based on the value they bring to the market.
Porter goes into much greater detail, but that gives you the general idea. If you’d like to watch a longer version of his philosophy on creating shared value, I’d recommend this YouTube interview he did with the World Economic Forum.
I attended a negotiations class once where the professor all but begged us never to ‘meet someone in the middle’. Why? Because meeting in the middle is arbitrary. Pricing should be tied to costs and operating margins. I’m not saying there is anything wrong with the technique if you are trying to sell your car, but in our role as procurement professionals we must act purposefully and with visibility into the goods and services we are buying.
Not all sustainability initiatives are the same, but buying from suppliers that can’t price their product competitively or associate the additional cost with tangible value strikes me as a short-term strategy for everyone. There has to be advantage on both sides. A good example of value all around is Starbucks. They work with farmers to buy fair-trade coffee at higher prices than they would pay for ‘conventional’ coffee. But that coffee is higher quality, and brings in as many ‘green-leaning’ coffee drinkers as it scares away with $5 a cup prices. The farmers benefit and so does Starbucks. I think this is a good example of the shared value model outlined by Porter.
If I’ve learned anything in my career, it is that nothing is simple. So we do need to consider the flip side of the ‘collaborative’ buyer-supplier relationship, where input from the buying company is a thinly veiled effort to purge a supplier of product and profits. I believe this is where the Wal-Mart and Vlasic pickles story Jon mentions comes in. Wal-Mart used their huge market presence to force Vlasic to sell huge volumes of pickles to them below cost. This was not paired with strategies to lower operational or packaging costs based on Wal-Mart’s experience. It was a heavy-handed tactic that got them the product they wanted at the price they wanted, and it ultimately landed Vlasic in bankruptcy.
I’m not suggesting that Starbucks is the angel and Wal-Mart the devil. I’m sure both play the opposite role all the time. The goal has to be to promote sustainability – and forcing a supplier to eat their costs is not sustainable. As with so many other discussions in procurement these days it comes back to value on both sides. The buyer and supplier both have to get value from the arrangement. If the driving factor is price, you’re likely looking at bullying rather than collaboration, an example of colonialism if I’ve ever seen one.