Manufacturing companies are realizing that yesterday’s operating models won’t help them grow today. What opportunities are there to drive digital transformation and free up cash for growth? And what value is there in benchmarking against the community? For answers, we spoke to Jon Goss, Value Architect at Coupa — and formerly a Coupa customer at a manufacturing company.
Many manufacturing companies are in growth mode. What are some of the roadblocks they’re facing?
Two key obstacles to profitability come to mind. The first is sensitive supply chains. We’ve come to expect delays and disruptions, and I think we’re going to see even more of them in the future. And when a manufacturing cycle starts to stretch, that shows up on the margin.
The second is inflation’s impact on sourcing. It’s hard to negotiate with suppliers of your critical and direct goods and services when they can simply turn around and sell the commodity to other buyers. And, at least in this vertical, procurement isn’t measured on how much it’s able to negotiate down — it’s what hits the P&L. Let’s say you paid $1 million for a commodity last year, and inflation brings up this year’s price tag to $1.5 million. Even if you found another supplier and negotiated that down to $1.3 million, you’re not financially better off — you’ve actually achieved negative savings because you never paid the $1.5 million. Imagine that happening with every one of your commodities. So while procurement professionals are out there negotiating fantastic discounts in tough environments, that effort doesn’t bring them the recognition or impact they deserve.
Which strategies for profitable growth are manufacturing companies turning to? And how well are they working?
We’re seeing several approaches emerge, each with varying degrees of success. Successful manufacturing companies are looking to manage unforeseen emergencies through tighter supplier collaboration at the moment and mitigate their impact in the future. Many organizations muscle through collaboration today with buyers who’ve done their role for decades and thousands of emails, but with younger workers joining the workforce, this is very unappealing work. Smarter ways to collaborate are essential to keep up. Manufacturing companies also want smarter ways to manage inventory together with their suppliers and be warned if their suppliers are becoming risky, whether through financial instability, changing regulations, or issues related to sustainability.
It’s hard to think of digital transformation without AI these days, but manufacturing companies are watching the AI hype and there’s a lot of disappointment and fear setting in. Leaders are digging into use cases and just not seeing real process efficiency gains yet, in, say, contract management or AI chat bots. At the same time, employees are worried that AI will replace their jobs, so they resist it, and highlight when AI fails, or at best the augmentations make their day a bit easier, but do not truly reduce their workload. AI needs time and data to truly be powerful and transformative, but the industry needs to focus on the AI features that drive meaningful impact and measurable improvement to their organizations, not just look cool in a demo.
The last strategy I’m seeing is more geared to survival, and it’s one that no one particularly likes. Manufacturing companies are getting a lot scrappier. You see it show up in things like shrinkflation or diluting the quality of their products. They don’t like doing this because believe me when I say that these companies do actually have an emotional investment in their brands. The reality is that they don’t see many viable alternatives to stay in business. Everyone recognizes this is a losing plan in the long term.
Can Coupa set up manufacturing companies to thrive?
Absolutely. We often talk about the “margin multiplier effect,” which is basically the ways our platform delivers compounding operational improvements that have an outsized positive impact on margins. Some examples:
- Our Supply Chain Collaboration helps buyers and suppliers work together easier and faster, digitally, to resolve issues at the line-item level. Not only are companies better equipped to keep direct materials supplied and protect revenue, but people are free to do higher-value work because they don’t have to dig through hundreds of emails or spend time on the phone. AI is actually starting to help here too by sifting through the emails of suppliers who won’t ever log into a portal by creating confirmations automatically. This is a great example of generative AI making a meaningful impact on a buyer’s day.
- Our AI-driven supplier risk management and contract management solutions provide insights into risky suppliers throughout the system during purchasing, sourcing, and contracting. Look at this as an early warning system rather than an ivory tower full of difficult-to-understand metrics.
- Our sourcing optimizations and expressive bidding drive real improvements upstream. This lets suppliers be creative in the areas they provide differentiating value to the organization, not just forcing every supplier into the same box. Creativity is good to overcome cost pressure.
Manufacturing companies will always focus on direct spend and MRO, and how supply chain resilience and supplier collaboration support that. Coupa is a confident leader in this space according to analyst reports, and they can expect a lot of innovation from Coupa here on top of the foundation we have. But manufacturing companies should also know that our platform helps leadership teams get indirect spend under control to free up significant amounts of cash that can fund strategic projects across the business and relieve cost pressure on the direct side.
The Coupa Clarity Total Spend Management Benchmark Report for Manufacturing Companies showcases KPIs and community-powered benchmarks along with best practices that have an exponential impact on growth, productivity, efficiency, resiliency, and sustainability.
Where should manufacturing companies look for guidance on transformation and growth?
There is so much pressure to get digital transformation right. ERPs are evolving and companies everywhere are consolidating their tech stacks. For manufacturing companies, digital transformation is complicated by challenges like multiple leadership hierarchies, IT infrastructures, and workplace cultures. So CPOs and their counterparts are going to be very focused on what initiatives deliver a fast time-to-value.
This is where the Coupa community comes in. When faced with change this big, leaders often ask early on, “What are companies like mine doing?” Where source-to-pay is concerned, we answer that with really powerful data from the $6 trillion in spend flowing across our platform. Decision-makers can see “what good looks like,” so to speak, in our Total Spend Management Benchmark Report for Manufacturing Companies. It covers a suite of source-to-pay KPIs and benchmarks for those KPIs from the Coupa manufacturing community. As a very first step, teams can see how their company stacks up against the community and which areas could see the most improvement.
How can CPOs at manufacturing companies get the most out of Coupa’s KPIs and community benchmarks?
My advice to CPOs and their teams: Turn the numbers into meaningful dollars. Here’s an example. The current benchmark for pre-approved spend at manufacturing companies is at 96.7%. Let’s say I’m at a company where pre-approved spend is at 60%. And I realize there’s this gain of just over 36%. In many manufacturing companies, this unmanaged spend is likely indirect spend, as direct spend tends to include many quality tollgates.
Ask yourself: “What is that benchmark delta in relation to dollars for me?” Do the math. For a delta of just over 36% in pre-approved spend, every percent increase in managed spend could result in 4-6% savings on average. Now it isn’t just about knowing how my metric compares. It’s about leaving millions of dollars on the table, dollars that I could be using more wisely instead of saving money in ways that hurt my brand.
Same goes for KPIs that may have been considered nice-to-have in years past but are becoming important now. Supplier diversity and sustainability are good examples. CPOs can still ask their teams, “How are we doing in comparison to the benchmark? If we’re doing poorly, can we get an analysis for what that is worth? Can we start marketing this as a differentiator if we’re doing well?”
You can lean on Coupa for help with this, or a third party, or your internal teams — just do the math and see how much money is on the table. Getting these insights from the report is a much easier and faster way to fund growth than doing experiments with your business that might affect your relationships with your customers in the long term.
