centralization procurement_24apr

1Centralizing China Procurement

Centralizing China Procurement

Insights on operational effectiveness, risk and compliance

Apr 2015

2 EY’s Asia Pacific Advisory Center 2014

Procurement centralization is vital to driving productivity gains while assuring compliance and appropriate controls are in place


Welcome

Welcome to Centralizing China Procurement.China for China. These three words have been a driving tenet of executive decision making for their operations in China for quite some time now. But what do they mean exactly?

Under the lens of market penetration, quite clearly the primary interpretation was to localize management to drive growth and expansion. Given the remarkably dynamic and emerging state of affairs of the past two decades, who better to understand and navigate the terrain than a native?

Unfortunately, the broad application of “China for China” has had some unintended consequences for Supply Chain and Procurement operations.

The push to localize and expand autonomy on a regional level has warped into mass decentralization, in many cases down to a provincial basis or worse. Functionally speaking, this level of laissez-faire management is anathema to a strong corporate compliance and risk mitigation culture.

Recently, with the slowing of growth and shift to a cost productivity focus, the pendulum has swung. Many multi-national firms have begun to look at reining in maverick outposts under the corporate umbrella of Supply Chain and Procurement Centralization through ERP. But as any parent can tell you, behaviors forged from years of lax oversight cannot be changed overnight.

Jonathan WrightEY Asia-Pacific Supply Chain [email protected]

Alan BeebeExecutive Director, Advisory [email protected]

Kyle M HillSenior Manager, Advisory [email protected]


Opportunities from procurement centralization

• When purchasing and contracting are more ad-hoc and end-user driven, it increases the number of contracts and orders and drives up purchase cost and overheads, versus using strategic sourcing to optimize the supplier base and establish long-term contracts.

• By maximizing participation in a well-designed, centralized P2P platform, Procurement and AP performance and results will improve. Additionally, Contractual compliance will also increase.

• Strategic sourcing and supplier management will be better enabled and informed from the improved processes and information of Centralized Procurement to maximize participation and compliance.

• Rational and balanced internal controls will allow for end-user time efficiency and fast order fulfilment, while mitigating significant risks.

• eProcurement and Electronic Invoice Presentment & Payment (EIPP) network solutions import electronic data into ERP, increasing efficiency and lowering administrative costs.

• Our approach typically begins with an assessment and an initial, high-level design to make clear what spend will stay offline, what will be catalogued by item, what will be matched and verified.

Sourcing Contracting

Appraise TCO including Process

Manage Contract Master File

Manage CatalogsManage Item Master File

Transmit Orders

Administer Workflow Rules

SupplierManagement

Strategic ProcessesTransactional Processes

2-Way MatchERS

SupplierOnBoarding

3-Way Match PCard

Appraise Supplier Performance

Database Administration

Enforce Buy-Pay Channels

Prescribe Buy-Pay Channels

Manage Supplier Master FIle

Monitor Supplier Performance

Provides Spend

Visibility, Supplier

Performance Data and enforces Contract

Compliance

Drives Supplier e-

Enablement, Suppliers’ Process

Quality, Risk Mitigation &

Contract Compliance

Define and ConveyRequisition

Complete and Place

Orders

Invoice & PaymentProcessing

ReceiptProcessing


Operational procurement models

DecentralizedLow Coordination

DecentralizedHigh Coordination Lead Buyer Centralized

• Each BU manages own requirements with control over supply, process, technology decisions and strategic sourcing and procurement execution

• Reports into operations or BU manager

• Coordination of sourcing strategies by category leaders

• No business (site, BU, etc.) specific resources reporting hierarchically to CPO

• Commodity supply council sets overall procurement strategy and policy and coordinates Lead Buyers

• Lead Buyers negotiate framework agreements but do not buy or take title

• BU’s call off from existing agreements, taking legal title to goods and services

• Regional/Global Center takes legal title to goods and sells on to BU

• All procurement activities executed centrally, including strategic sourcing and buying activities

• Center has some logistics and planning capability

• Local BU feels in control• Speed and flexibility of response• Knowledge of local procedures

and requirements• Greater accountability

• Coordinated Sourcing Strategy, Leverage knowledge base across geography

• Good transition step to begin to test the lead buyer model

• Improved strategy setting, spend leverage within framework agreements

• Supplier engagement more focused and category skills concentrated

• Often more acceptable to BU because perceived to be more connected to local business

• Leverage corporate spend, sharing best practice & lower cost

• Improve strategic supplier relationships and minimize supply and reputation risks

• Smooth forecasting and planning

• Able to hedge & place forward contracts

• Fails to leverage spend• Inconsistent supplier engagement• Low planning capability• Too much focus on local sources• Inconsistent processes• Increased likelihood of business

risk• Unable to manage inconsistent

supply patterns

• Not formally designed to coordinate and is more organic in nature

• Lower levels of spend leveraged

• Can lead to conflicting priorities across hubs

• Low planning capability• Perceived slow decision

making• Inconsistent processes• Conflicting priorities for lead

buyers• Unable to hedge / place

forward contracts• Maverick spend occurs

• Perceived lack of flexibility

• Can be too insular• Non-traditional

procurement skills required

• High technology dependency

Proc

urem

ent M

odel

sCh

arac

teris

tics

Pros

Cons


One size rarely fits all & changes should be gradual

Objectives

• Effective organization structure, that supports the procurement strategy

• Encourage collaborative organizational culture within the company

• Continuous skill improvement

• Labor cost reduction

Benefits

• Effective human resource allocation through an adequate organization and a goal-oriented task allocation to achieve Procurement strategy and goals

Procurement Organizational Approach

An effective Procurement organizational structure highly depends on the company’s operational values and its subsequent Procurement strategy. For businesses operating in China the prevailing attitude has been to allow local divisions or acquisitions to control their own spend and rarely stand in the way.

Moving along the Centralization path above will require deep knowledge of the current organization and the latitude to make significant and fundamental changes that will effect existing power structures. Serious and debilitating friction could occur if appropriate change management techniques and local sensitivities are not applied and considered.

Deg

ree

of

Syne

rgy

low

high

Degree of Centralization

low high

Decentralize

Cooperation

Hub concept

Lead buyerconcept

Shared Service Center

Central

Organization and Strategy


Centralization can elevate & drive sustainable benefits

Based on our findings and experience:• Demand management and sourcing opportunities

generate ‘potential savings’ of between 5-15% at contract award

• Process efficiency through the introduction of automation and systems delivers a savings of between 1-3% of the ‘cost to procure’

• Up to 50% of ‘potential savings’ are often lost through poor compliance and supplier management

1 Sourcing capability

2 Procurement centralization

3 P2P processes and systems

• Significant savings, up to 18%, are left on the table from poor execution of centralization and the achievable benefits through focused effort on the procurement organization and category management

Maverick buying and lack of contract management quickly

erode value (-10-50%)

Supplier collaboration(2-5%)

2

Contractual compliance and continuous improvement

Break through performance improvement

Val

ue

Time

Demand and Sourcing (5-15%)

Efficiency benefits

Strategic sourcing Compliance and Supplier relationship management

Contract award

1

3

2

2


Leverage your spend for optimal supplier service

Methodologies and sourcing strategies• Centralizing and leveraging

suppliers is a strong methodology with a set of value levers to optimize Spend – addressing both demand management and commercial initiatives

• Each subcategory is evaluated against tactical value levers to ensure that all options have been applied as appropriate to maximize savings and achieve desired supplier behaviors

Price Attack

High

Low

Financial Impact

Price Down

Competitive Leverage

Volume Consolidation

Cost and Remuneration Model Analysis

Demand Management

Specification Optimization

SSC, Small Country

Solutions, MSP

Supplier Integration

Purc

hasi

ng C

apab

ility

and

In

tern

al/S

uppl

ier

Col

labo

rati

on

Price Attack Cost Down Cast Out

Price Benchmarking &

Leveling


Initial step on centralization path is a quick health check

Case study: Category management and standardizationRapid Procurement diagnostic detailed overlap across 6 separate Chinese entities of over 50% of spend across 2 primary categories, compelling the introduction of centralized commodity / category management.

Project benefits:Pooled China-wide demand and went direct to vendors, eliminating local / regional agent and distributor relationships. Improved supplier service levels and increased participation in annual supplier volume rebate programs. Saved $2M USD in first year of program.

► Procurement activities are strategy driven

► Global Procurement Shared Services (e.g. for indirect material)

► Strategy for key commodities► Center lead procurement

organization► Fully integrated policies &

responsibilities► Trained & certified procurement

teams

► Carbon footprint requirements

► Documented environmental concerns and resolution approach

Pro

fit &

Pro

cess

Lea

ders

hip

Effective Capital Expenditure

► Procurement Metrics alinged to business objectives

► Benchmarking against best in class

► Internal and External customer satisfaction

► Balanced scorecard approach

► Central supplier mgmt.database (supplier performance, contracts, etc.)

► e-based procurement processes(auctions, catalogue systems, etc.)

► Supplier self service► Optimized process across business:

Consistent application of TCOCommitment visibility & controlsAutomated invoicing & payments

► Tax optimization (input tax deduction)► Management of payment obligations

► Build-up supplier mgmt. approach and monitoring system(performance & risk)

► Carry-out supplier qualification& development

► Leverage supplier innovation► Implement cost optimization

programs with suppliers

► Maximum leverage & aggregation

Effective demand bundlingfor standardized materialand servicesGlobal standard contracts

► Optimization of payment terms and conditions

► Consideration of total cost of ownership

►

►

►►►

Provides holistic picture of what needs to be done and helps to benchmark against leading procurement organisations

Key Current State Desired State Basic Leading Practice


From the market leader in supply chain management

Clients consider EY to be better than many of its peers in the areas of challenging corporate culture, directly improving the client’s overall commercial performance and meeting project timelines. Additionally, EY’s consultants are perceived as better at helping enterprises drive supply chain innovation through the organization, creating a more effective supply chain and leveraging supply chain talent.

Cushing Anderson Vice PresidentBusiness Consulting Services IDC

Case study: Merger led centralizationAs a result of large scale M&A activity, the China procurement functions of two newly joined companies, representing a total of 10 separate entities, were mandated to be centralized. Business Unit buy-in was critical to achieving project goals.

Project benefits:Identified quick win synergies in supplier rationalization, volume aggregation and leverage, payment terms and pricing totaling $3M USD in cost reductions in first year of transition ($5M USD annualized).

EY ranked best in class for Supply Chain ManagementSource: IDC MarketScape Vendor Assessment 2014

IDC MarketScape: SCM Business Consulting Services

Strategies

Capa

bilit

ies

Participants

Contenders

Major Players

Leaders

EY

IBM

PwC

Deloitte

CSCKPMG

McKinseyCapgemini

BCGAccenture


Jonathan WrightEY Asia-Pacific Supply Chain [email protected]

Alan BeebeExecutive Director, Advisory [email protected]

Kyle M HillSenior Manager, Advisory [email protected]


EY | Assurance | Tax | Transactions | Advisory

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About EY’s Advisory ServicesImproving business performance while managing risk is an increasingly complex business challenge. Whether your focus is on broad business transformation or, more specifically, on achieving growth or optimizing or protecting your business, having the right advisors on your side can make all the difference. Our 30,000 advisory professionals form one of the broadest global advisory networks of any professional organization, delivering seasoned multidisciplinary teams that work with our clients to deliver a powerful and exceptional client service. We use proven, integrated methodologies to help you solve your most challenging business problems, deliver a strong performance in complex market conditions and build sustainable stakeholder confidence for the longer term. We understand that you need services that are adapted to your industry issues, so we bring our broad sector experience and deep subject matter knowledge to bear in a proactive and objective way. Above all, we are committed to measuring the gains and identifying where your strategy and change initiatives are delivering the value your business needs.

© 2015 Ernst & Young (China) Advisory Ltd. All Rights Reserved. APAC no. 03001619 ED None

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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