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Creating a more strategic procurement function

Yin Shaorong, executive director of Global Sourcing at Lenovo Group, speaks with Accenture about managing procurement risks.

Yin Shaorong is the executive director of Global Sourcing at Lenovo Group, a $34 billion personal technology company. Under his leadership, Lenovo’s procurement team has been extended from desktop operations in China to desktop, workstation and server operations globally.

Lv Yunbo, senior manager of Global Sourcing Operation Management/Project Management at Lenovo Group, also participated in the interview.

Outlook Q&A: For many companies, coordinating procurement with R&D and sales is a major challenge, which can lead to breakdowns in the overall supply chain and cause delays in getting new products to market. How can global companies achieve better coordination in these areas?

Yin Shaorong: The R&D teams in our business units are charged with creating a rich variety of products across our entire portfolio—computers, smartphones, televisions and so forth—to meet our customer needs, taking into account competitive and market conditions. Our sourcing unit focuses on developing a sourcing strategy during the product design period and then seeks out potential suppliers to involve in early development and innovation.

Then, more generally, our sourcing unit coordinates our company’s procurement activities, led by Offering Delivering Teams—ODTs—that work across different product portfolios and prepare for the next generation of products. These teams are led by senior project managers within Lenovo’s business units, and include functional project managers and representatives from departments such as system support and quality control. Each ODT has weekly meetings, management oversight and regular audits of project progress. In this way, we make sure procurement is integrated more deeply into the strategy of the business.

How can the sourcing function manage risks more effectively during procurement—risks such as breakdowns in supply or poor quality?

It is important to have a well-established supplier inspection system. This process assesses vendors’ financial eligibility, supply capacity and quality assurance systems, monitors the supplied products and assesses how the company functions overall. Further, each supplier must use materials that can be traced using serial numbers. This process allows us to manage our operational risks.

One of the key areas we monitor is a supplier’s ability to respond to the needs of particular markets in different geographies. This can involve such things as assessing the quality of raw materials used, the capabilities of their labor force, their ability to respond to supply chain breakdowns and so forth.

This inspection system is accompanied by a risk management and control plan, which allows us to quickly identify risks and deploy third parties to investigate and analyze issues. Using this approach means we can effectively manage problems such as supplier bankruptcies and natural disasters. For example, after the 2011 Fukushima earthquake in Japan, we quickly found new suppliers to sustain our supply chain before many of our competitors, enabling us to maintain production.

We also carefully tend to our key supplier relationships through cooperation programs, long-term investment and development, and joint promotion of specific products to reduce risks caused by supply variability.

What are some of the important qualities to look for in a supplier?

For today’s business needs, suppliers need to think of themselves as business partners. This means not just providing a piece of the overall value chain but understanding your impact across the entire chain. So, we consider a supplier’s cost effectiveness, to be sure, but also their understanding of their role as a strategic partner and their ability to drive innovation. We also look for high manufacturing standards and their capabilities to provide high-quality follow-up support. For those suppliers who are responsible for developing products, we apply the same controls and processes that apply within Lenovo.

What steps are you taking to improve cost control in today’s increasingly competitive environment?

As everyone knows, the price of high-tech products is constantly falling and margins are shrinking. That makes cost control vital, which, in turn, makes procurement especially strategic. This requires that we pursue innovations in terms of developing beneficial procurement relationships, and putting in place universal designs that require fewer customizations and, therefore, reduce expense.

We analyze costs at every step of the production process. We regularly assess the cost of raw materials, software and intellectual property. Further, our products use multifunctional software that can be used in a range of products, which helps us keep costs down.

In addition, Lenovo’s cost-analysis process has rigorous criteria. For instance, we specify that deviations between forecast and actual costs should be less than 2 percent within 90 days of production and less than 3 percent within 180 days. Before a product is finalized, the cost analysis must also be backed by a robust business case.

>b>How can companies balance local and overseas procurement arrangements in a global sourcing environment?

Local procurement—in China, in our case—generates a variety of benefits, as we can closely monitor and manage factories, processes and product quality. We can also quickly respond to changes in market conditions. For some other types of materials, international markets such as Brazil, Hungary, India and Mexico offer lower prices than sourcing them locally in China.

However, effectively choosing between local and foreign sourcing depends on balancing supply and cost. For instance, although certain packaging and accessories are cheaper in China, it takes a long time for us to transport goods to Mexico or other countries. For this reason, we use local suppliers for these tasks.

For goods that we need to ship overseas to be built or enhanced, we require our suppliers to establish vendor-managed inventories or provide their own assembly lines to ensure they can manage changes in supply. In some jurisdictions, governments require a certain percentage of production or procurement to take place locally. In these locations, Lenovo asks suppliers to set up their own factories to support local supply.

The issue of sustainability is increasingly on the minds of consumers and companies. How do you view the importance of sustainable development in procurement?

Sustainability is very important to Lenovo and to our customers, and our sourcing function plays a key role. Our standard purchase order contract states that our suppliers must comply with environmental regulations, avoid the use of hazardous substances and substances that accelerate ozone depletion, issue liability insurance and guarantee the safety of imported and exported products.

As part of our supplier performance evaluation, we assess the number of sustainable development projects suppliers are undertaking. We issue around 200 supplier audit reports each quarter to assess supplier performance and to encourage these companies to grow with us.

Based on Lenovo’s environmental standards, we classify suppliers according to their level of sustainability risk. For example, our environmental auditors pay special attention to suppliers that need to deal with emissions of harmful substances and product lifecycle management. These suppliers may need to meet additional environmental conditions.

We also measure and report our carbon emissions and water use in accordance with Electronic Industry Citizenship Coalition guidelines, and we urge our suppliers to do the same.

What challenges does the high-tech industry face from a procurement perspective and how do companies need to evolve their sourcing strategies in light of those challenges?

Today’s global supply chain presents substantial challenges. For instance, a small number of large companies control valuable technology and work with key suppliers, but we also need this technology and access to these suppliers to support our future growth. We have a strong share of the global PC market– almost 16 percent at this time—and this position can support a strong partnership with major suppliers.

In addition, innovation will grow increasingly important as a means of competitive differentiation. From a sourcing perspective, this means we need to take steps to better integrate our value chain and form closer strategic partnerships with suppliers to foster joint investment and innovation. By improving this integration, we can become more flexible and better able to quickly respond to changing market conditions.

About this interview
The interview was jointly conducted by Fred Chen and Evelyn Yan from Accenture in China, in conjunction with the China Federation of Logistics & Purchasing.

For more information about this interview, please contact Xuyu Chen.