Procurement at Philips: Total transformation on a global scale
Supply Chain Quarterly published a bylined article written by Russell Reynolds Associates' Pieter Ligthart titled "Procurement at Philips: Total transformation on a global scale." The piece looks at how Philips implemented a new product design and procurement process. The article is excerpted below.
When Royal Philips implemented a new product design and procurement process, it also completely reconfigured its procurement organization. The author, who worked together with Philips executives Fredrick Spalcke and Ad Boon on the project, explains the initiative's origins, challenges, and successes.
In mid-2012, Peter Jeeninga, a product engineer at the Dutch electronics company Philips, sat down for an eight-week stretch with two dozen other engineers, designers, marketing representatives, and procurement managers to figure out how to disassemble and redesign the way the company makes juicers. There was nothing particularly wrong with the existing juicers; customers liked them, and the company's kitchen appliances had a reputation for quality. But Philips, then Europe's largest electronics company, was in the middle of a major restructuring, the latest stage in an ongoing battle to retain its leadership position in an era of global competition fueled by low-cost Asian challengers. As part of that initiative, Philips was taking a fresh look at virtually all of its products and processes.
A new chief executive (CEO), Frans van Houten, had taken over the previous year, and he had already shifted the company's portfolio away from businesses where it could no longer compete, spinning off its loss-making television unit and ultimately its entire audiovisual division. In addition to making strategic decisions about which businesses to drop, Philips needed to squeeze more value out of every product it made. Van Houten had announced a multiyear transformation program, called Accelerate!, that would save 1.8 billion euros by 2016. In addition, he had a new initiative he was counting on to generate an additional 1 billion euros in cumulative savings within three years. That initiative had come out of Philips' procurement department.
Philips had always relied on its procurement staff to drive production costs down by negotiating better prices from suppliers. But what they were embarking on now was something different. Van Houten worked with the advisory firm Russell Reynolds Associates to bring in a new chief procurement officer (CPO), Fredrick Spalcke, previously executive chief procurement officer at the Chinese electronics giant Huawei. Spalcke is a believer in a design procedure called Design for X, or DfX, which initially grew out of work at the equipment manufacturer NRC in the 1980s. DfX entails bringing together different business functions at the beginning of the design process to identify the product's key values for customers as well as what trade-offs are involved in different options.
One major group affected by the change in responsibilities was the procurement engineers, on-site procurement staff in various roles who often were attached to small functional organizations and had little responsibility beyond chasing parts, managing suppliers, and trying to negotiate lower prices. In their redefined positions, they would play a strategic role on the leadership team of their business units and would sit at a level equal to that of research and development or of manufacturing.
Another group, the commodity managers, who were responsible for sourcing, also experienced significant organizational change. They would now become a separate function from the procurement engineers. Moreover, in the old system, commodity managers were located at the business group they worked for. Under the new system, commodity managers would be sited at the point of origin for the commodity they sourced. They also would perform sourcing for that commodity across all of the company's different organizational units, rather than for separate business groups. This meant that some commodity managers had to relocate and that some groups were merged. Commodities groups would now also report directly to Spalcke, the CPO, who has a direct line to CEO van Houten. Spalcke calls this "verticalizing and virtualizing" the company's commodities management.
This was no easy task, but the company moved quickly to put everything and everyone in place. "Basically, we took 2,000 people, we put them in a new structure, and we moved them from the tactical to the strategic level," Boon says. "The thing is, we did it in 18 months. That's really fast."
At the same time, Boon was hiring a 12-person executive leadership team in procurement, to become Spalcke's allies in pushing his transformation. Boon partnered with Russell Reynolds Associates (RRA) to find the right candidates for these roles. He chose RRA because its global supply chain practice has experience assisting clients across all industries to find leaders who understand the challenges and complexities of operating end-to-end supply chains. The candidates RRA and Boon found for the new procurement executive team came partly from inside Philips and partly from outside the company.
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