Procurement Transformation Blog

Procurement Transformation Blog

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Will The Buyer Become a Subscription Manager?

Predicting the future is not easy. Still, many people maintain a habit of contemplating the future every once in a while. As procurement professionals, we are curious about the developments that may occur in our area of expertise. Some things are easy to predict: the incremental steps that are a consequence of a clearly distinguishable trend. Others are difficult or impossible to foresee because they are the result of sudden, unexpected (disruptive) changes. Recently I became aware of two trends that might have a big impact on the procurement profession; cradle to cradle and the subscription economy.

Cradle to Cradle

Since the Club of Rome commissioned the report The Limits to Growth in 1972, many people have realized that the actions of human beings have a huge impact on the world. Since then a lot has been done to maintain our living: energy saving, reduction of poisonous materials emissions of poisonous materials, wild life protection, etc. However, it appears thatthese efforts are not sufficient and that mankind is demanding far more from mother earth than she can durably deliver. There is no balance. As early as 2002, Michael Braungart and William McDonough presented a solution for this problem. In their book Cradle to cradle: Remaking the Way We make Things they present a concept that teaches organizations to take into account the reuse of all waste in order to avoid residues. The solution is not saving energy, consuming less or making production processes more environmentally friendly. Instead, waste should be banned, like in the biological cycle. Nature does not know waste. All material produced by creatures is reused by others. The same mechanism should be true for the technical cycle: as early as  the design phase it should be clear how used materials can be reused when the product becomes obsolete. Not from the cradle to the grave, but to the next cradle. This point of view goes beyond recycling, because recycling usually turns out in downcycling. Reclaimed material is simply converted into inferior products. With this process,important raw materials are lost for all eternity. This cannot go on forever. For some rare materials, like those used in high tech materials such as television screens and smart phones, we have seen recent price hikes because demand exceeds supply. In countries with  large populations and  high economic growth like China, India and Brazil, this will soon be true for many other raw materials. For this reason it is not unlikely that for quite some durable consumer goods like cars, televisions, etc. the costs of raw materials will soon surpass the labor costs. The remedy for this is a cycle that brings products back to the manufacturer after they are considered waste. Moving forward with this logic results in the question of why a manufacturer would sell a product. If you intend to take back a product at the end of the product lifecycle, then it might make more sense to just sell the right to use the product during a specific period of time. Hence, some kind of subscription.

Subscription Economy

Another relatively new phenomenon is the advent of the subscription economy. In a recent Gartner report this is defined as:  “A subscription business model is characterized by a product or service that is paid for by the customer or consumer on a continuous, periodic basis; includes ongoing access to content, products or services for the life of the subscription agreement; and fosters a degree of customer experience or customer loyalty that is unique from a purchased product.

This model originates from both the media market (papers, magazines, books, music, movies, etc.) and the technology market (applications, content, services) where products can easily be delivered in a digital format. From a commercial perspective, there are several key advantages to this model such as  the opportunity to build up a lasting relationship with customers, generating incremental turnover by offering additional services, more control over the replacement market and a more steady and predictable turnover. It is clear that this model can also be applied outside the media and technology market and that it already is. Instead of selling both equipment and a maintenance contract, organizations could offer one umbrella contract for both usage and maintenance of the equipment.

Cradle to Cradle Subscription Economy

There is a very clear parallel connection between the concepts of cradle to cradle and subscription economy. When thinking about reverse logistics to realize reuse of materials it is easy to take the step of linking subscriptions to the usage of certain products. Why bother buying a refrigerator if it is possible to make use of a well-functioning appliance at all times, that is repaired whenit breaks down and is automatically replaced by a newer model. The same applies to cars, televisions, washing machines, etc.

It is obvious that this concept will have a huge impact on the B2B and B2C markets. It will also  affect procurement and supply chain management in a broader sense. A few examples of its effects include:

  • Sourcing – the demand specification will change. The emphasis will shift even more from technical specification to functional specification (usage specification) and  will drive more focus to related services.
  • Contract management – what will be the impact on a purchase contract? Which clauses must be included to support this type of agreement?
  • Supplier management –The distinction between goods and services suppliers fades away. How will supplier performance be measured and managed?
  • Cost control – for suppliers the challenge is to generate incremental sales by offering additional services. How will the buyer manage this?
  • Pricing and billing – price and billing models will change. How to record receipts and to verify process. Will three-way matching still be possible?
  • Supply chain management – if this concept becomes commonplace, then it will have an impact on both the supply and the demand side. Complex relationships will occur in logistical chains. Reverse logistics is in many industries a well-known phenomenon, but one that will grow exponentially in volume and complexity.

It looks as if we will be seeing an increase in the use of subscriptions in service and billing models. Will the buyer become a subscription manager? What do you think?

About the author

Martin Putters
Martin Putters
Martin Putters is Principal Consultant. He has a diversified experience in management consultancy in supply chain management and over 20 years of experience in sourcing and procurement. He has been involved in several procurement transformation projects and ERP- and SRM implementations. In such programs, implemented in environments as diverse as public organizations, utilities, pharmaceutical, food- and chemical industry and the financial sector, he usually combines consulting and project management roles.
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