2011 assessment of excellence in procurement follow the leaders: driving procurement results 1 john...
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2011 Assessment of Excellence in Procurement
Follow the Leaders: Driving Procurement Results
1
John P. Willi, Director, Dana-Faber Cancer Institute
Marc Hochman, Partner, A.T. Kearney, Inc.
Macro economic forces will continue to accelerate and impact our global business environment
DemographicShifts
Global Economic Integration
RisingActivism
Natural Resource
Constraints
Science & Technology
Forces
• Expected to be a strategic partner• Increased Supply Chain Complexity
– Product proliferation – Demographic/ market shifts– Shorter product lifecycles
• Intensified need for supply chain integrity– Accountability for all components
of supply chain• Increased emphasis on risk
management– Supply surety– Transportation network frailty– IP protection
Implications for Procurement Organizations
2
Dirty Bomb Bioterror Attack Iran closes the Straits of Hormuz
Confrontation with North Korea
Natural Disaster Global Pandemic Crop Pandemic Viruses Disable GPS Satellites
Power Struggle in Beijing Currency Collapse Carbon Sequestration
Breakthrough Quantum Leap
….and there’s no telling what ‘wildcards’ we will face
The 2011 Assessment of Excellence in Procurement is the seventh study in a series that started in 1992
Research Objectives
• How has Procurement progressed since 2008?
• How ready is Procurement for the future?
• What can we learn from leading Procurement organizations?
Leader Identification
• Over 1,000 elements benchmarked across 33 leadership practices covering 8 dimensions of Procurement
• Selected and verified 13 leaders (7 Americas, 5 EMEA, 1 Asia-Pacific) across 12 industries based on:
• Top overall scores
• Strong, world-class performance in at least 3 dimension
• Above average overall performance in each dimension
Participants
• 176 companies submitted responses for the initial comparison
• Survey remains open; tracking to 500+ participation
• Average participant is US$12B in revenues
4
AEP 2011 Key Findings
Becoming More Strategic
•90% have increased their role in developing and executing the business strategy
•Leaders are 3-4X more involved in driving the top line and comprehensive risk management
•C-level reporting has increased by 50%
•75% of procurement staff focused on strategic activities
•SRM is expected to generate 40% of procurement’s value in 3 years
•But, maturity of SRM and Category Management is still evolving versus Sourcing and Transactional Processes…although most Leaders have implemented structured processes
Improving Procurement Performance
•Procurement influences ~75% of the total spend with Followers closing the gap in % benefits
•All Leaders and most Followers continue to leverage center-led or centralized organizational models to drive success
•Leaders use 2-3X more strategies to impact cost and demand and eSourcing is their default approach
•BRIC sourcing is significantly increasing
•Most performance metrics focus on cost but many are beginning to extend their search for benefits further
•Leaders are more transparent in their performance reporting and are significantly better at spend coverage, velocity, yields and managing internal procurement costs
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Procurement is poised to deliver even greater impact
Broader and More Strategic Mandate• Influence and reach at an all-time
high• Expansive collaboration on
development of top-line strategies• Followers migrating toward leaders’
organizational characteristics
StrategicDirection
House of Purchasing and Supply Management SM
SupplyManagement
Strategy
SupplyManagement
Strategy
Organizational Alignment
Organizational Alignment
Supplier Relationship Management
Supplier Relationship Management
Sourcing &Category
Management
Sourcing &Category
Management
Operating Process Management
Operating Process Management
Performance ManagementPerformance Management
Knowledge/ Information
Management
Knowledge/ Information
Management
Human Resources Management
Human Resources Management
Key Insights
6
Procurement’s stature, influence and reach has never been higher…
Comparable standing
Mandate to explore broader value creation opportunities
Mandate to identify and recommend new business opportunities
Leadership for all key expenditure areas
Mandate communicated and accepted
2011 Overall2008 Overall
69%
69%
100%
77%
54%
2011 StudyLeaders
Over 90% of all study participants report that, since 2008, Procurement has increased its role in developing and executing the business strategy
Procurement Organization Stature(% Companies Selecting “Fully’’)
7
Leaders have used this as a springboard to influence far more spend and generate greater % benefits quicker
Procurement’s Influence over External Expenditures
(% of Spend)
Procurement’s Influence over External Expenditures
(% of Spend)
Average Annual Savings Achieved(Savings as a % of spend under Procurement’s
influence)
Average Annual Savings Achieved(Savings as a % of spend under Procurement’s
influence)
1.4x
1.5x
1.2x
8
Alignment Index (Perfect Alignment = 100)
Supporting procurement
strategy elements in place and yielding
benefits?
Business goals with high importance to
success
For leaders, individual elements of the procurement strategy are far better aligned with their company’s key business goals
Develop and access external sources of innovation
• Increase level/speed of product innovation
• Integrate suppliers into new product development process
• Create new business opportunities with suppliers
Minimize risk exposure
… and 12 others
• Ensure supply continuity
• Develop optimum global supply footprint
• Increase competition in key supply markets
… and 24 others
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Leaders are casting a wider net to generate value
Broader and More Strategic Mandate• Influence and reach at an all-time
high• Expansive collaboration on
development of top-line strategies• Followers migrating toward leaders’
organizational characteristics
StrategicDirection
House of Purchasing and Supply Management SM
SupplyManagement
Strategy
SupplyManagement
Strategy
Organizational Alignment
Organizational Alignment
Supplier Relationship Management
Supplier Relationship Management
Sourcing &Category
Management
Sourcing &Category
Management
Operating Process Management
Operating Process Management
Performance ManagementPerformance Management
Knowledge/ Information
Management
Knowledge/ Information
Management
Human Resources Management
Human Resources Management
Key Insights
10
Leaders use a wider range of methods to tailor their strategy based on relative supply and demand power
The Purchasing Chessboard ®
(Average number of sourcing and category management methods ‘Systematically Used’)
Low
Hig
h
Low HighDemand Power
Invention on demand
Core cost analysis
Vertical integration
Bottleneck management
Make or buyCompliance management
Design for sourcing
Intelligent deal structure
Political framework
management
Buying consortia
Closed loop spend
management
Functionality assessment
Composite benchmark
Product benchmark
Cost data mining
Master data management
Supplier consolidation
Spend transparency
Bundling across
generations
Value chain reconfigu-
ration
Supplier tiering
Collaborative capacity
management
Visible process
organization
RFI/RFP process
Supplier market
intelligence
Revenue sharing
Sustainability management
Virtual inventory
management
Vendor managed inventory
Expressive bidding
Reverse auctions
Best shoring
Profit sharing
Project based
partnership
Total life cycle
concept
Supplier development
Total cost of ownership
Cost regression analysis
Strategic alliance
Value based sourcing
Supplier fitness
program
Leverage market
imbalances
Unbundled prices
Factor cost analysis
Demand reduction
Contract management
Bundling across
product lines
Bundling across sites
Global sourcing
LCC sourcing
Linear performance
pricing
Supp
ly P
ower
Specification assessment
Design for manufacture
Process benchmark
Complexity reduction
Standardi-zation
Procurementoutsourcing
Cost based price
modeling
Sourcing community
Mega supplier strategy
Product teardown
Leverage innovation network
Collaborative cost
reduction
Price benchmark
Leverage Competition
Among Suppliers
LeadersFollowers
Seek Joint Advantage
with Suppliers
Change Nature of Demand
Manage Spend
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(Percent of all companies using methods ‘Systematically for all relevant categories’)
Most widely used methods Selected under-utilized methods
Traditional methods are well-embedded in many companies, but some methods are under-utilized even by leaders
Use of eSourcing technology continues to increase, both in number of events conducted and percentage of spend sourced
1020
750
213269112 114
eRFX eAuctions Advanced eSourcing
Estimated Number of Sourcing Events in 2010(Average Count of Events for eSourcing Users)Estimated Number of Sourcing Events in 2010(Average Count of Events for eSourcing Users)
41%
66%
22%
39%
21%
38%
23%
40%
7%
20%
6%15%
2010 2012 2010 2012 2010 2012
Expected use of eSourcing Tools(% of Spend Sourced for eSourcing Users)Expected use of eSourcing Tools(% of Spend Sourced for eSourcing Users)
eAuctionseRFx Advanced eSourcing
1.6x1.6x
1.9x1.9x1.8x1.8x
eSourcing Technology Usage(% Companies)eSourcing Technology Usage(% Companies)
92%
62%
eSourcing Technology Usage
LeadersFollowers
13
Although leaders far more systematically manage supply risk, there is ample room to improve
(Percent of companies that use approach “Systematically for all relevant categories”) LeadersFollowers
Approach
Eighty percent of companies are a tsunami away from major business disruption
14
SRM objectivesSRM objectives( % of companies selecting “Primary focus”)( % of companies selecting “Primary focus”)
Share of Value, Sourcing vs.SRMShare of Value, Sourcing vs.SRM
LeadersFollowers
Most expect SRM to become increasingly strategic, with leaders using a broader set of value drivers
15
… and use a structured process focused on strategic and critical suppliers
Level of involvement of ProcurementLevel of involvement of Procurement(% companies selecting “lead/co-lead”)(% companies selecting “lead/co-lead”)
Structured process by type of supplierStructured process by type of supplier(% companies selecting “Yes”)(% companies selecting “Yes”)
Critical Suppliers
Strategic Suppliers
LeadersFollowers
Leaders play a far more active role across a broad spectrum of SRM activities
16
Few take a strategic approach to identifying gaps that suppliers could address
Methods used to identify gaps in supplier performance(%companies selecting “Regularly”)
LeadersFollowers
Leaders use a wider variety of techniques to identify gaps in supplier performance
17
Competitive pressure is driving us to search for more innovative suppliers for the future(% Participants)
Supplier innovation(% Participants selecting “Fully”)
LeadersFollowers
Leaders place 2X more importance on supplier-driven innovation
Not at all
18
Leaders are investing in capabilities to maximize their Return On Supply Management Assets (ROSMA©)
Broader and More Strategic Mandate• Influence and reach at an all-time
high• Expansive collaboration on
development of top-line strategies• Followers migrating toward leaders’
organizational characteristics
StrategicDirection
House of Purchasing and Supply Management SM
SupplyManagement
Strategy
SupplyManagement
Strategy
Organizational Alignment
Organizational Alignment
Supplier Relationship Management
Supplier Relationship Management
Sourcing &Category
Management
Sourcing &Category
Management
Operating Process Management
Operating Process Management
Performance ManagementPerformance Management
Knowledge/ Information
Management
Knowledge/ Information
Management
Human Resources Management
Human Resources Management
Key Insights
19
Necessity and technology are driving a sea change in procurement performance management practices
Procurement Future….
Robust spend and process visibilityRASIC defined spend governanceActive sourcing pipeline management90+% sourcing coverageSourcing results validated and realization accountabilities definedProcess and individual performance KPI’s defined and monitoredProcess improvement efforts ongoingJoint and transparent planning and performance reporting with stakeholders
Procurement Past….
Poor spend visibilityUnclear spend governanceLess than full sourcing coverageLimited focus on productivityResults not validated or pushed to budgetsFew KPI’s trackedNo application of lean process principles
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Source: A.T. Kearney AEP Study 2011
Universal Universal KPIKPI
Increasingly Common KPI’s
Gro
win
g S
op
histicatio
n
Followers are beginning to “measure up”
Source: A.T. Kearney AEP Study 2011
Leaders are twice as transparent and are actively optimizing their procurement productivity
Effe
ctivene
ss Metrics
Trad
ition
al Metrics
Source: A.T. Kearney AEP Study 2011
ROSMAROSMA©
Structural InvestmentPeriod CostsSpend
Coverage Velocity Category Yields Compliance Additional
Benefits
Return on Supply Management Assets
A new performance management framework is emerging bringing clarity, rigor and convention to procurement
Technology
Total Spend
Visibility
Spend Governance
Infra-structure Capabilities
Process Recruiting
Training
Knowledge Manage-
ment
Category Profile
Sourcing Strategies
Sourcing Initiative Yields
Benefit Stream Forecast
Policy
Visibility
Enforcement
Benefit Stream Realized
Negotiated Value From Prior
Periods
in Inventory
in DPO
e(PV) From SM Enabled
Innovation
Working Capital Improvement
External Support Costs
Other
People Costs
Roles
FTEs
Rates
• Advanced• Conventional
Executed Sourcing Events
Supplier Performance &
Exchange
LESS Losses Due Supplier Performance
Issues
Balance of Trade & Barter
Deferred Revenue
Amortized One-time Costs
Source: A.T. Kearney AEP Study 2011
+42% +28% +14% +19%
Select Indicators(1)
Leaders
Followers
+104%+144%+33%
Note: (1) A.T. Kearney 2011 AEP Survey Data. Complete assessment of the ROSMA© drivers include more quantitative and qualitative information
Leaders vs. Followers ROSMA© variation analysis
ROSMA© Quantitative Score
ROSMA© Drivers
2011 Composite benchmarks reveal substantial performance variations exist
Participants in our AEP survey generated a range of ROSMA© scores
% Influenced Spend
Sourced
ROSMA© Score(1) The first 105 participants (less outliers) that fully completed the AEP / ROSMA survey questions
Others have high return on
a small amount of
spend
ROSMA© Score vs. % Influenced Spend Sourced
Some companies have low return and address a
small % of spend
Others may have high costs,
but address a lot of spend
Others Lead the Pack
25
Procurement by Chaos
Performance Driven
Procurement• Actively managed
processes• Integrated PPM• Continuous improvement
ROSMA© Distribution
Δ ROSMA© = 4
Active procurement performance management (PPM) is coming
ROSMA© Simulation
“Managed” Procurement
• Managing to average or better
• Today’s practices
If we moved from an “As Is” to a “Managed” state, how much would our ROSMA© move?
0
20
40
60
80
100
0 2 4 6 8 10 12ROSMA© Score
% I
nflu
ence
d S
pend
0
20
40
60
80
100
0 2 4 6 8 10 12% I
nflu
ence
d S
pend
Sou
rced
0
5
10
15
20
25
0 2 4 6 8 10 12
% Y
ield
0
20
40
60
80
100
0 2 4 6 8 10 12
% C
ompl
ianc
e
0
5
10
15
20
25
0 2 4 6 8 10 12
Cos
t of
Pro
c %
of
Spe
nd
“Manage” to XS ≧
0
20
40
60
80
100
0 2 4 6 8 10 12ROSMA© Score
% I
nflu
ence
d S
pend
0
20
40
60
80
100
0 2 4 6 8 10 12% I
nflu
ence
d S
pend
Sou
rced
0
5
10
15
20
25
0 2 4 6 8 10 12
% Y
ield
0
20
40
60
80
100
0 2 4 6 8 10 12
% C
ompl
ianc
e
0
5
10
15
20
25
0 2 4 6 8 10 12
Cos
t of
Pro
c %
of
Spe
nd
“As Is”
% Influenced Spend
Sourced
ROSMA© Score
(1) The first 105 participants (less outliers) that fully completed the AEP / ROSMA© survey questions
Before PPMTransformation
After PPM Transformation
Total Spend $ 4B $ 4B
Spend Sourced 20% 50%
Velocity 300 1,000
Yields (%) 12% 18%
Compliance 72% 80%
Proc. Costs (%) 1.8% 1.2%
ROSMA© 1.0 6.0
Financial Results Delivered
$ 71MM $ 281MM
Illustrative ExampleWhat is the Value of Improvement?
Before PPM Transformation
After PPM Transformation
Same
Value of Improvement = $210MM
Supply Management can deliver higher financial results with a focused Procurement Performance Management (PPM) Transformation effort
1.5x
1.3x
1.6x
1.4x
Expanded technical skills
As Procurement’s involvement in cross-functional efforts increases so does the need for “business savvy” skills
Skills/Capabilities Required From Procurement Personnel(% Companies selecting “Required”)
1.8x
1.6x
1.2x
1.2x
Deeper interpersonal
skills
Use of IT Tools
Spend Analysis
Supplier Development
Programs
Team Building
Risk Management
Project Management
Change Management
Communication/Presentation
Skills
The skill set requirements of procurement professionals are becoming broader and more complex over time
28
Leaders are taking more proactive and aggressive steps to recruit and retain top talent
29
Leaders are more adept at formalizing career planning, development and advancement for Procurement employees
(% of companies with “formal” process)
HR Foundation
Leaders are better positioned in the “war for talent”
Career planning
Development and advancement
LeadersFollowers
30
Leaders provide a broader range of training topics to Procurement employees
Most participants do not include cross functional team members outside procurement in training on procurement topics
Procurement topics(% participants selecting “Training available to procurement employees”)
Business leadership skills topics(% participants selecting “Training available to procurement employees”)
LeadersFollowers
31
In conclusion: It is time for procurement to become more strategic and drive higher performance
Increased Pressure for Value Delivery
• Greater alignment with business needs
• Continued TCO reduction
• More and faster innovation
• Proactive risk management
Key Requirements to Make It Happen
• Improved collaboration capabilities
• Integrated performance management
• Pervasive technology
• Creative talent management
Leaders have moved from being credible business partners to being strategic contributors
32
