Video Transcript

You know I was so excited when I joined Volvo about ten years ago, I called my family and I said I joined Volvo, I am so excited about this opportunity and my wonderfully supportive older brother said to me, "What are you doing? Selling used cars now? Is that what you're doing?" and I went, "No. No. No, Volvo has nothing to do with cars" and we sold the car company to Ford many years ago and they have since sold it to a company in China since then but we are in the truck business, it's actually what we're in. 70% of what we do is make those big 18-wheeler trucks that you see on the road. We do it under a lot of different brand names, here is just a quick facts and figure slide for you to give you a little bit of idea of where the indirect procurement is coming from on the Volvo side, we're doing the trucks, the busses, construction equipment, boat motors and board boat motors and then we also support the corporate finance piece of Volvo and because we're a global company we have corporate facilities all over the world.

I am a global resource so I get to travel throughout the world and I get the opportunity to do projects and indirect procurement programs throughout the world and one of the things that I learned along the way was if you're going to be in Asia, only use pictures on your slides. If you're going to be in Europe only use words on your slides and if you're going to be in America, put everything you can on the slide because people will then pay attention to it. So we've talked a lot about cost savings and this week I've listened through the different presentations and I heard a lot of stuff that I can really relate to. One of the things that I heard was how to stay current? Wow! That was a good one, a good topic to talk about. In my world, moving into revenue is how I get to stay current in what I do today. The word innovation was used a lot. For me, moving from cost savings to revenue that is an innovation especially in the world of Volvo, so that was really pertinent to what I heard, the word revenue was used a lot during this conference. I was very excited to hear that, this is not something new that I'm telling you about. This is stuff that you're probably already doing, maybe you don't understand the full impact of it, maybe you're not using it to the full extent that you could in your management meetings. And then the word journey was used a lot and I went, "Wow! That's kind of what we all say now.' We're on a journey to do something, I don't know exactly what that means, if that's good or bad but we're on this journey together, absolutely.

So I'm going to talk about revenue a little bit. Are we going to boldly go where no man has gone before? Probably not, you've probably already been there, you probably already going there, maybe you don't understand the full impact of it yet, maybe your team doesn't, maybe I can say something to you today that will help you communicate better not only to your team but to your management as well. Are we going to blaze new trails, ________ [00:03:01] and little Joe? Probably not, you're probably again already doing this stuff but what's the real value of it? What we're really going to talk about here is how to lead this thing instead of just be a follower as part of creating revenue, purchasing is a support function. We're a cost center but wait a minute; don't we have some expertise somewhere on cost and on how to generate revenue and how our suppliers create revenue? How do we use that to say we don't want to see that the table which I've heard a lot this week but we have a table and we're going to invite you to come sit at our table and talk about a new thing called revenue, we know about that one too.

So here is my Asian slide where there is nothing but pictures, what is the real takeaway here? Don't limit your thinking, how do you stay current? How do you stay innovative? What is this journey that we're on? Now I also want to stop and take a moment and say that the core competency of procurement is to save something and most of us call that money, there's also a value out there, a proposition of some kind, what is the definition of value in your company or your industry but it's our role in procurement to learn how to protect it, to save it, to acquire more of it in cases where we can that value proposition. We'll never walk away from that, that is our life blood if you will. That is our bread if you will. But wait a minute, if we're going to go on a journey to stay current and stay innovative, don't we also have an opportunity to make something as well not to just save something? How do we make money? How does our company make money? How do we contribute to the way our company makes money and what are we doing every day from our expertise of procurement that actually contributes to the making of money. So many of you like me on your journey have seen things change, for me at Volvo I've seen us go from tactical to strategic. I've seen us talk from price to total cost or cost reductions, I've seen us go the gamut if you will, that's the point here, you sort of see that innovation journey happening whether we wanted it to or not. My favourite one is at the bottom; we went from guessing to data analysis which is a formalized guessing.

The traditional cost savings approach, again we can never walk away from it. I spent years at Volvo talking to management, talking to suppliers, talking to internal stakeholders, talking about cost elimination, cost avoidance, all the different things that we talk about in procurement, payment terms, improvement, supplier relationship, management, contract management, on and on and on we go and I found that the questions that I was being asked at the end of those presentations weren't really about the things on this slide. I was being asked things about trend analysis, market intelligence. I was being asked questions about or how does all of this equate into our bottom line next year or what's your forecast on what's going to happen to the cost of things, so it took me a little while to start figuring out, how do we take that and how do we turn it into again the next piece of the journey. Well, a group of strategic objectives came out from Volvo, like every company we go through re-organizations every few years and one of our re-organizations, they actually came out with about 25 strategic objectives and I was looking at the set of them that pertained to purchasing if you will and I saw the very first one, I highlighted it on the slide for it talks about reduce something, save something and then I go down the list there and they all start with that adjective about decrease something along those lines and then I hit an interesting down there; 3.4, increase aftermarket sales.

In our world, aftermarket is where we are selling parts of trucks. We have a dealer network, that dealer network is selling the trucks but then they're also selling the service and how to keep the trucks on the road and all that, we call all of that the aftermarket. And I started asking myself, what is this one doing in purchasing? And then I started thinking about what exactly do we do that has something to do with the aftermarket? Well, I happen to be the guy in-charge of the oil contracts, I do all the negotiations for them, I manage the contracts, I manage the relationships, I'm touching all of that and I said, "Okay. Wait a minute, a lot of what I'm doing does have to do with revenue and how the money is created." Well here's a my journey, this is when I really sat down and I went, Wait a minute, I've been in my entire time at Volvo, have been trying to go from that price discussion to more the value chain, up the value chain if you will, up to the revenue side of it using different terms probably at that point but on the journey you learn and you become more aware of the different pieces of it.

So this is where and I didn't ask for a voice at anybody's table, I called a group of aftermarket people to my table and I said, "Ladies and gentlemen, strategic object 3.4 how are you going to increase your sales? Well, let me tell you how I'm going to help you do that let me tell you how I'm going to contribute to that, let me tell you what I think. We've got to accomplish together now to achieve those objectives" and they were very intrigued by all of that. So I walked away from that meeting going, "All right. I've got three steps here that I need to become very skilled at talking about in front of this group of people as well as the management on a global perspective. Number one is the idea, what is it that I'm actually talking about? Am I actually going to go sell something and bring a check back to Volvo? Many of you are already doing that, if you got an asset recovery program where you're selling off surplus assets or you're selling off surplus materials, surplus inventory and whatnot, you get checks for that, that's creating revenue for your company. Maybe you've got a rebate program, the P-Card, I think that's what mentioned a couple of times during this event, you get a rebate check for that or maybe you've got some incentive for and compliance on that, again that's a program that you created, you managed, you're getting that revenue, you are contributing from that standpoint and then I took a step back and I said, "But wait a minute, what is the real value? Who were the people involved here? This is an aftermarket scenario, we are reselling something that we buy. Maybe we're putting our brand name on it, maybe we're selling the original manufacturer's brand through our dealer network but what's the real value?" And spoiler alert, it wasn't cost savings, it was something else completely.

So then it was, all right now as the procurement guy in the room, I'm not a salesman, I'm the procurement guy. I'm not the guy that's going to set the business model for how we sell in the retail world if you want to call it that at Volvo but I'm the business guy who understands the cost, who understands the logistics. I know how to get the product here, I know how to find the right supplier for it, I know how to negotiate the right price for it and I believe I know how to create the right value proposition for the aftermarket people but before I can do that, they've got to tell me what the value proposition is to them. So I set back with the ideas, I understand, I'm supposedly an expert on revenue where the suppliers are concerned. If I'm doing my job correctly I know their cost structure and something that we say at Volvo, it's a philosophy that we try to run purchasing by. We want every supplier that we do business with to make a fair profit margin for two reasons; number one we want them to stay in business, number two we want them to stay interested in our business but it's my job as the procurement guy to know what a fair profit margin is in their industry. How do you take the philosophy and you turn it around to the revenue side?

Then I started asking myself, "Wait a minute who is really leading, managing, owning? Who has got the sense of urgency for the revenue piece of the company, of these products that we're selling in the aftermarket?" And I realized I took lubricants, oil if you will as the example and I said, you know there are three people involved in this. There's purchasing because somebody's got to buy the oil. There's the aftermarket, somebody's got to market/merchandize the oil but then there's the technology team which has to create the formulation of the oil if we're going to brand it or they have to make sure that our engines can stand the brand of oil if it's some other supplier's brand of oil. Who is leading that scenario and the answer that I came up with was nobody. So guess what? If you want to control it, you got to own it so I said I am going to become the guy in charge of this relationship and I began a symposium concept within our company that continues on today and the whole purpose of it is to lead this relationship because it brings that value. Along the way one of my colleagues said, "What do you manage?" and I sat there for a second and I went, "Yikes, that's a very good question. I don't write purchase orders; I don't even know what a purchase order looks like at Volvo, I do write contracts. What do I manage? I'm not a technical; I know very little about oil, I've never changed the oil in my own car. Wait a minute, I manage suppliers, I manage supplier relationships. What's the whole point of making revenue on something that you didn't manufacture yourself? You buy it and then resell it, it's a relationship."

All right, now I've got something here to take back to the aftermarket people, I manage the supplier relationship, I tell my colleagues, "Talk to anyone you want, anytime you want about anything you want in the supply base but never sign anything that I haven't signed first." It works, I own the relationship with the supplier which I own the ability to create a revenue or the value stream of the aftermarket people if you will. So I called the suppliers in and I said first in my team, "Are we challenging them to decrease our cost or are we challenging them to increase our revenue?" I think you know the answer to that question. So I brought the top five in and I said, "Why do you do business with us? We're selling or reselling your product in the marketplace. If we weren't in the picture, you could sell this product direct without us and you allow us to put our brand name on your product in some cases, what's in it for you?" Again if our brand or product wasn't out there, you'd be selling your own brand through our dealer network, that was the answer itself. All five of them came back to me and they said, "We want access to your marketplace" but we've got an extensive dealer network in the United States and North America as well, that's what they wanted access to. It wasn't necessarily our brand name, it wasn't because they loved Volvo or Mack Trucks, it was because they wanted our marketplace.

So I sat back with that one for a minute and I said, "Wait a minute, if we're going to give them access to our marketplace, if we're going to allow them to represent us through our brand name, they should be participating in the expenses of doing this piece of business." So when I came back to my aftermarket people and I said, "What's valuable to you?" That's when they said the marketing funds, we spend a lot of money each year marketing these products, selling these things to the dealer network, finding the right supplier if you will. Finding the right brand to use, finding the right formulation of the product. Do we have to market it and we have to merchandize it and that cost money and they said if the supplier were to bring money to the table to participate in all of that, it would be great value to us and I said, "Fantastic. I think I know how we can accomplish that one." Also, I call it here customer incentives, the customer for us in this model would be the dealer, the retail house if you will. How do we get them to promote the products more? That was important to them, the commissions, the revenue stream side of it, the royalties if they're going to be selling, if the supplier is selling our brand of product somewhere outside of our dealer network, they're paying us a royalty and in some cases a commission to get to do that, to use our brand name. And then the gross margin, that was very important to them. Go figure.

The rebate scenario was interesting to them but not quite as important as a commission or a royalty. So I said, okay, all of these things can be taken care of in a negotiation, in a contract and can be part of the deal of working with Volvo because we have something they want, our marketplace and they've got to learn to participate in more of our marketplace than in just getting to sell products. So of course we've combined forces at that point, purchasing after market and technology, the people who actually control what the products are and we said, "All right, we have to have process to do all of this with" there were none believe it or not and then the light came on for me because for a couple of years, the head office of AB Volvo in Gothenburg, Sweden had been asking me directly, "What are you doing to protect our brand?" I didn't quite understand the question. I'm a purchasing guy, how do I protect the brand of Volvo? I'm not in marketing, I'm not in merchandizing, I'm not in technology and then the light went off in my head, "What does they actually mean?" They're talking about the trademark infringement, they're talking about the anytime something is being sold through the Volvo network or with the Volvo name on it, is it correct? Is it in the quality specs? Is it in the black and grey list as we call it? The chemical side of the business, is it environmentally safe? Is it a product that we want to have our name on? That's when I said, "Aha! Here's part of our process of how we collect these revenues if we will." So from the marketing fund and the dealer incentive piece of it, those are negotiations that I directly do with these suppliers.

My aftermarket colleagues don't necessarily set any of those numbers, it's what the business guy here, the purchasing guy says, "I believe it's a fair and mutually beneficial way for us to do this. It's going to cost us a million dollars to launch this product then I think you should find X% of that million dollars then it becomes a negotiation from there. The commissions and royalties piece of it became a negotiation for if you want to do something, sell our product in another country with our brand name on it, this is what you then have to give us in return; it's a piece of the profit, it's maybe logistical cost, it's maybe and I call it, front money for being able to touch our brand or warehouse our brand somewhere, all of that. I mean these are typical procurement things, they just weren't being done from the revenue perspective and the past would only done them from the cost and how to save a few bucks on some of that. Maybe not ship it from this central warehouse but have the supplier ship it one of their distributers, now all of that becomes a moot point, it's more about pay me a commission, pay me a royalty to do that and these checks are large amounts of money coming into the Volvo world. It was a really interesting and fun thing for me to learn how to negotiate not from a piece price perspective anymore but from a gross margin perspective. I was no longer talking to the oil companies about what a barrel of oil cost and what percentage of that oil was actually playing into the gallon price for a court of oil.

Now it's about the margin. My margin needs to be at this number and we will not budge from this number. If you want to do business with me, if you want to put the Volvo brand on my oil, your oil actually or you want to sell your brand of oil through my dealer network the margin has to be at this piece right here. Now, piece price becomes irrelevant because there are so many buckets of money from the supplier stand point, there's their marketing bucket of money then there's their cost of goods as well, so if you just want to have a piece price discussion with them, you can have that all day long and at the end of the day you'll probably come out with some nice mutually beneficial price that you can sell oil at but we took it to a different piece of it. Let's talk about the margin side of it, they've got to make what they're comfortable with. We've got to make what we think is fair and we're comfortable with because there are other mark-ups that go on beyond the OEM in this case, us. So we have to make sure that's a piece of it as well. Complete different way of negotiating than just trying to get to a cost elimination or associated piece of the negotiation and then the rebates as well.

Even though the aftermarket people weren't all that excited about rebates, the idea came to me of all the spend for oil, we'll just use that as an example, about 70% of that spend is in the aftermarket; us reselling somebody else's oil or branding in our sales. About 30% of it is used in our factories. Hey, wait a minute. Purchasing 101, how do we leverage that to get a better price or a better precision for our factories? So that became another piece of it and that also played into something that I call the capital model, capital improvement model where the oil company would front the factory some amount of money which we would use to improve our processes internally for oil. The oil company owned nothing in this scenario, we gave the oil company nothing except we'll buy your oil for the next, I don't know, two years, we will use your brand of and not necessarily their brand, a lot of time it was our brand. We will use your oil for the next two years, there was nothing tied to the piece price in the scenario, there was no amortization of that capital money but it was a negotiation of the volume of our aftermarket. So it became revenue to the factory which they just flipped over to a capital improvement at that point.

Circle of influence and we've talked about this in a lot of the round tables that I've participated in. Suddenly I find myself not giving presentations with bar charts and pie charts and graphs about how much money I'm going to save you anymore. Now the management presentations are about look at the money that we're going to make, can make, how much money do you want to make, what products are we going to brand next, what new category can we expand this to and then it became a scenario of the supplier relationship. I own it, I'm responsible, I'm accountable for it. My internal people realize nothing can be done with the supplier that I don't approve of and I preach to my internal colleagues on a regular basis. The name of the supplier is a relevant to you, the gross margin is relevant to you, the revenue is relevant to you, you have no horse in the race as to who the suppliers. That's the way, only way that I can properly leverage the relationship with them. The supplier strategy piece of it, I have PowerPoint slides after PowerPoint slide from those top five suppliers, what is your strategy? Not necessarily dealing with Volvo but from a geographical perspective where are you strong? Where are you weak? Maybe just from a market perspective, what are you focused on in the business because I need to know what's next for us, I need to take to my management, "Hey, this particular supplier is going to be strong next year in brake fluid, we should structure our programs towards brake fluid." Again it's a completely different kind of a meeting now with management other than what kind of money are you going to save me, it's what kind of revenue opportunities are you going to bring to me. Then from the information and collaboration piece of it with the supplier, the business reviews, the best practices, the industry updates, all standard stuff in procurement but I use it differently now than I did before. It's about the seat at the table is no longer one that I'm chasing, it's now my table. I'm sitting at the head of it and I'm inviting sales, I'm inviting upper management, I'm inviting operations management into the room for me to tell them here's where we're going next on this.

Who the supplier is no longer the issue, I pick that to the sourcing process. What the products are is not my issue, that's the technology people but they're on board here. Here they are sitting at my table with me. The sales people are no longer and I need a cheaper price in Latin America because I can't sell the oil; it's not about that anymore, it's about what's the program that I need to use in Latin America? It's a very unique scenario to be in, so have I become that used car salesman that my brother thought I was going to be? No, I say with great passion I am not a sales man but I also say with great reality I'm becoming one more and more every day whether I like it or not. Okay, so there's my story on the revenue side of the house from the procurement world. Any questions? Comments? Suggestions?

Host: Questions? Comments?

Randy: The only thing standing between you and lunch is me. Will this work in any other industry? I don' t know, I would challenge you to go back and in your team meetings and in your management meetings, change the subject and that was actually said in the last presentation as well, stop talking about the savings side of what we do and start talking about what we call it Volvo, the value contribution side of it and it can have a different definition for whatever industry you're in. Maybe you don't rebrand the things in your industry, maybe you don't buy things that you resell, I don't know. You have to take this concept and see how it works for you. I had a great conversation with a guy earlier this week and I finally got to the point of saying, "So what do you buy that is revenue for your company?" and he goes, "Oh! nothing, I don't buy anything that we make any money off of" and I went, "Really? Do you have a fleet?" "Yeah. Yeah. Yeah. We have a whole fleet of vans" in their scenario and I said, "Who buys those vans?" "Oh! yeah. I do. I'm in-charge buying those vans." "What do you use those vans for?" and he began to tell me, this is how we use the vans and I said, "And all those things that you use those vans for, what is that generate for your company?" "It generates revenue. Oh! wait a minute." The conversation then went to the scenario of why am I not talking to this supplier of vans to set some kind of program in place where as I'm marketing my company, the van seller manufacturer or what it is participating in that marketing because the bigger my business grows, the more vans they're going to sell me. So I would challenge you to go back and look at the things that you buy and say, "Is there anything here that's contributing to revenue maybe not directly but indirectly that I need to change the conversation with management about." It's no longer about what the van cost, it's about how does the van deliver the revenue side and help me grow the business that we're in. Thank you very much. Any questions on this? I have explained it so clearly that you're ready to jump in front of management now and tell them how you're going to create revenue.