When I last spoke with “friend of the site,” Ramsay Chu in early 2012, he had just been hired as the new Global Head of Procurement (“CPO”) at Rio Tinto (“RT”) to replace another “friend of the site,” Scott Singer who had just been promoted (as we describe in this CPO Rising article: From CPO to EVP & Global Head of Business Services). Then, Ramsay was excited as he told me it would take 18 months of almost non-stop global travel to accomplish we he wanted to do. Well, he was right – his travel in 2012 was almost non-stop (when I saw him last week, I’m pretty sure he told me he was home less than 10% of the time for all of 2012) but if our quick chat and his keynote at Ariba LIVE 2013 are any indication, he is none the worse for wear. In fact, he (and his large organization) are thriving. They are also adopting a model of effectiveness which was one of the main themes of his presentation.
Ariba LIVE Keynote – Networked World: A Model of Effectiveness for Procurement
Effectiveness. Ramsay believes this can mean different things for different stakeholders in the supply chain so to really optimize effectiveness, each stakeholder must be able to find and latch onto something that is core to the overall corporate strategy. For the larger organization, Ramsay believes there are three keys to optimizing effectiveness or what he calls a “Model of Effectiveness” – organization, strategy, & people.
Compared to most other organizations, Rio Tinto is highly complex, operating on much larger scale than most companies and operating in far-flung and often, highly remote, locations. Rio Tinto (Ticker NYSE: RIO) is a leading global mining and metals company that focuses on finding, mining and processing the Earth’s mineral resources. It has 71,000 employees working in more than 40 countries across six continents. The kind of business that RT is in has created a series of unique requirements for the entire company and for Ramsay’s procurement operation, in particular. For example, Ramsay notes that Rio Tinto has 65,000 suppliers and while rationalizing that number down might be the goal in an ideal world, RT’s global footprint as well as the agreements it strikes with different country governments to support the local economy (for example: the new copper and gold mine it plans to open in Mongolia requires a staff that is 90% Mongolian) make it unlikely that it ever achieves a “super-supplier” model where a few dozen suppliers comprise the majority of total spend.
Another example of RT’s overall complexity is the impact that a single buying decision can have on revenue. Ramsay highlighted a potential multi-million dollar negotiation for a haul rail-car contract that could generate tens of millions in savings but could cost the company even more (in lost revenue) if the cars do not arrive on time.
As Ramsay continued to explain and highlight the “model of effectiveness,” he noted that one of the key breakthroughs in recent years for the RT procurement operation was the development of a category management approach that occurred in the aftermath of the Alcan acquisition in 2008. He made many great points about the impact of this shift in approach and shared those and other interesting aspects about the operations and plans of RT Procurement including:
- On the importance of data
- Company-wide, Rio Tinto gained a huge focus on data because, “facts are by far, the best way to lead collaboration”
- Improving the data model is critical in order to have more meaningful and insightful discussions with our suppliers, customers, and peers
- On the importance of its focus on category management
- As part of its category management initiative, RT Procurement centralized everything that it could from a global commodity standpoint so a central sourcing group (based in Singapore). This team now sources and manages $9B+ of the almost $16B of operating expense spend in 2013
- To better address the remaining $7B that was not centralized in Singapore, RT Procurement established four regional hubs to manage sourcing that could be standardized and aggregated within a region (but not company-wide) – this has been a great way to develop new strategies and approaches in category management
- The shift to category management has helped RT Procurement continue to establish the right mix of governance and oversight with outcomes – travel and build-out at the 200+ sites around the world are two examples of categories that need this addressed deliberately
- RT Procurement has maintained operational delivery capabilities within each of the roughly 200 sites
- On the importance of a centralized, common technology platform (Ariba) for the team
- With such a large, globally-dispersed team, having a centralized common platform is critical so that everyone can see and understand what everyone else is doing – they use the Ariba suite of applications and the Ariba network
- Ramsay says the Ariba suite is invaluable from a visibility standpoint and from a strategic standpoint and has supported huge volumes of sourcing projects and contracts and helped to deliver billions in savings
- Ramsay noted that the Ariba system’s usage and reach is not limited to developing nations
- RT’s “License to Operate”
- Ramsay continued with a discussion and a series of examples that showed how procurement is at the company’s leading edge in its global license to operate strategy which stresses local investment and sourcing
- They have developed supplier centers that are focused on developing supplier capabilities in many under-developed areas
- Why ask why?
- Ramsay concluded with a look at the evolution of people within procurement saying that “for the past 15 years, procurement people have focused on the ‘How.’ I need this spec at this time, how am I going to do that? Once in a while, we have to ask why.”
- “A new perspective and outlook that can bring intellectual curiosity to procurement is needed – we need people who will take risks and speak up to challenge plans when they don’t make sense and ask why are we doing this.”
Great stuff from Ramsay Chu, a CPO on the Rise.
