Delivering Value Through Global Procurement

Executing a sound procurement strategy is crucial for a company to realize its business objectives, a point made by Richard Spoor, senior vice-president of global procurement at Merck & Co. (Whitehouse Station, NJ). Spoor spoke at the DCAT–ISM Sourcing Summit: Forward Thinking Sourcing, an educational program presented by the Drug, Chemical, and Associated Technologies Association (DCAT), along with its partner, the Pharma Forum and Chemical Group of the Institute of Supply Management (ISM). The program was held Nov. 3–4, 2010, in New Brunswick, New Jersey. Post its merger with Schering-Plough (Kenilworth, NJ) in November 2009, Merck articulated an overall company goal of achieving $3.5 billion in annual cost savings by 2012. Merck’s global procurement organization is playing an integral role in helping the company meet those goals.

Procurement aims to contribute to Merck’s overall annual cost-savings goals. That goal will be realized as part of an overall strategy for Merck’s global procurement activities. Merck’s procurement organization is responsible for approximately $15 billion in annual spending, which is allocated to procurement for indirect materials, direct materials (e.g., raw materials, intermediates, active ingredients, finished drug products, and packaging), research, and emerging markets. These categories are organized in a matrix structure across three main geographic areas:  the Americas (North, Central, and South America), Europe, and Asia Pacific/Japan.

Spoor emphasized that Merck functions as a global procurement organization, and as such, constantly evaluates whether a particular activity or function “can be sourced at a higher level.”  This choice means assessing whether the spending should be elevated, for example, from a local to a regional level, or from a regional to a global level. The ability to elevate relies on supply-market capabilities and the nature of the requirements. The benefit of that elevation, where appropriate, said Spoor, is the opportunity to improve efficiencies, reduce costs, and develop more strategic and collaborative partnerships with fewer suppliers. He offered facilities management as one area in which the company has taken that approach. “Facilities management had been locally administered on a site-by-site basis,” he said. “But now it is a function that we have been able to globally integrate.” In doing so, the company has been able to reduce the number of contract providers providing facilities-management services.

Supplier consolidation, however, is not an objective unto itself. Spoor emphasized that in seeking to concentrate its vendor base, the company has to ask the fundamental question of whether a supplier is the right supplier. “In short, how should we modify our supplier base?” he said. That process of deciding whether a supplier fits the company’s sourcing and procurement strategy is an implicit part of Merck’s overall procurement strategy, which evolves from a cross-functional, multistep process in which the strategy is defined, analyzed, created, implemented, and managed. Supplier value management, particularly for the company’s top strategic suppliers, is a crucial part of the company’s procurement activities. Supplier value management involves the key elements of governance, performance management, and continuous improvement. The governance model involves deciding on the frequency of a communication with a supplier, who participates in meetings and related communication, and the key stakeholders in that relationship, meaning the operations within Merck for which the supply relationship is strategic. Performance review entails quality assessments as well as evaluating how successfully a given supplier meets the business requirements of Merck. Continuous improvement involves collaborating with strategic suppliers to innovate and create value for both companies.

Given this framework and underlying philosophy of Merck’s global procurement strategy, Spoor said that the company has taken three approaches in evaluating its procurement activities and supplier base as part of its integration process following its merger with Schering-Plough and in moving on the path to realizing its cost-synergies targets. These approaches may be classified as “fast-start,” “quick win,” and “strategic sourcing.” The fast-start approach, or the initial stage of this process, evaluated Merck’s relationships with approximately 30 external suppliers, which included legacy suppliers from Merck, Schering-Plough, and the combined company. Merck was seeking compelling business cases for business continuity that created long-term value for Merck and growth for its suppliers. The resulting evaluation of suppliers included how these relationships were important to overall procurement goals of managing supply, risk, and related issues.  The “quick-win” approach evaluated opportunity for consolidation to enable cost savings. The third approach, which is an ongoing process, is evaluating the company’s sourcing strategies across all categories to ensure that the right relationships are in place. “We are unfreezing the organization and looking at all activities and relationships,” said Spoor. 

But in all these approaches, Spoor emphasized that the key evaluation of suppliers evolves around how a supplier satisfies the business requirements of the company. In a hierarchy of needs, these requirements start at the most fundamental level with assurance of supply and quality and ascend up a hierarchy of requirements of service, cost, and finally innovation. Spoor said strategic suppliers are those that hit all performance characteristics, bring to the table new models of collaboration such as new service-delivery models, and operate in an open, transparent, and flexible way in which the customer­–supplier relationship can be optimized.  

Just as Merck evaluates its suppliers, procurement evaluates itself by determining how the procurement organization adds value back to the company. The company has a feedback loop, which involves two formal survey reviews per year by which top global and regional executives within the company are asked to evaluate the performance of procurement. In this way, the procurement organization can improve to deliver sustained value to the company. “It is all part of building a world-class organization,” he said.