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Re-inventing Direct Procurement | © Spend Matters. All rights reserved. 1 of 23

Re-inventingDirect Procurement

by Pierre MitchellChief Research Officer, Spend Matters


Introduction 3

Study Approach: Defining the Capabilities that Matter and Learning from Leaders 4

Changing the Paradigm in Direct Procurement 5

Alignment on the Balanced Scorecard of Supply 5

Transformation and Leadership 7

Direct Procurement Capabilities that Matter—Beyond Strategic Sourcing 8

A Model for Success 10

“Supply Performance Management” and Supply Risk Management are hampered by Poor IT support 11

“Design for Supply” introduces supply market powerwhen it really counts—before the costs are locked in 12

Multi-Tier Cost Management is Core Competency 13

Supply Network Design 2.0: Intelligent Designfor a multi-tier network of supply 14

Advanced Supply Planning: Beyond ‘Feeds and Speeds’ 16

Implementation Success Factors 18

Looking Forward 21

Appendix—Study Demographics 22

Links and References 23

About the Author 23

About E2open 23


Introduction

The quest for innovation and global growth is leading to an increasingly multi-channel, micro-segmented, localized and customer-focused value chain that can only be supported by an agile and resilient “virtually integrated” extended supply chain. So, the ideal management of the multi-tier chain of supply in value chains must optimally provision and orchestrate internal and external partner resources alike – which of course is no easy task! So who should be the lead orchestrator in end-to-end supply management activities?

In 1983, McKinsey & Co. consultant Peter Kraljic published a seminal paper positing that “purchasing must become supply management,” and that procurement organizations must elevate their roles to manage the supply base more methodically and strategically (e.g., using the famous complexity vs. impact matrix to segment supply markets and associated supply management processes). Back then, purchasing in the supply chain was primarily a back office role where buyer planners helped launch, communicate, and expedite purchase orders.

Fast-forward to today, 30 years later, and things have certainly progressed. Most procurement groups (supported by a bevy of consultants) have both formalized and centralized their strategies and processes, with particular focus on strategic sourcing methodologies to help “rightsize” the supply base. But, has procurement become a truly strategic supply management transformation agent that helps lead the redesign and orchestration of multi-tier supply beyond its primary role as negotiator, cost cutter, contract manager, etc.?

Unfortunately, in the supply chain, the answer is generally no.

In this report, we will highlight how and where direct procurement organizations are exerting their influence and leadership (or not) on the broader extended supply chain. We will also examine the impact on performance, and specifically how more advanced organizations are implementing 11 key supply management activities that transcend traditional direct procurement (see Fig 4).


Study Approach: Defining the Capabilities that Matter and Learning from Leaders

For the quantitative aspect of the study, we divided the study population into two groups. The first was a “top capability” group containing the top quartile firms based on their average capability score across the 11 evaluated capability areas shown in Fig 4 (see pg. 10). The ‘peer’ group was the rest of the study population. We wanted to see if the “top capability” firms had higher performance than the other firms. To ascertain performance, we had respondents self-assess themselves on nine supply performance KPIs relative to their industry peers. Similar to the ‘top capability’ approach, we created a “top performer” group for the top quartile performers on an evenly weighted scorecard for the performance metrics shown in Fig 3.

Fig 3—Higher capability firms enjoy higher supply performance (25% on average)

We found a moderate-to-strong statistical correlation of capability score to performance score (r-sq = 0.54) that can be seen either on the capability or performance dimensions.

The bottom line is that these capabilities matter, and they have an impact on performance (to the tune of a 25% advantage, shown in Fig 3). The next part of the study analysis focuses on how these capabilities are implemented, and this is where we’ll augment the quantitative results with the qualitative lessons learned based on primary qualitative interviews and additional secondary research.


Changing the Paradigm in Direct Procurement

One of the first problems to address is terminology. Giving an old-school purchasing department the new moniker of “supply management” doesn’t change anything. Rather, progressive direct procurement groups at leading manufacturers align themselves with internal and external supply partners to systematically improve their strategic supply management processes and capabilities. They examine direct procurement not just as a process conducted by a stovepiped function, but rather as a process to aggressively embed best practices into the broader inbound supply chain. They integrate the best methodologies, techniques, and tools from multiple domains—regardless of where the resources report1.

Consider the sourcing area, and the term “source” itself. Does it mean a purchasing-led supply base rationalization process? Is it a tactical supply chain purchase order planning and execution process? At advanced firms, strategic sourcing and strategic supply planning are integrated with each other as well as new product development, supplier collaboration, supply network design, and other areas. How should we define and measure this re-invented direct procurement organization that advocates and leads the transformation of the broader multi-tier chain of supply? Spend Matters recently conducted a quantitative study with ISM (The Institute for Supply Management)2 to assess the:

• Alignment of procurement’s objectives with the supply chain organization• Level of formal procurement influence on broader supply-side processes• Degree of adoption of more advanced capabilities• Impact of such capability adoption on a balanced scorecard of supply

performance• Lessons learned from the capability leaders in how they achieved success

We also conducted over a dozen interviews with supply leaders at some of the world’s most advanced manufacturers for their candid off-the-record insights.

Alignment on the Balanced Scorecard of Supply

Direct procurement is technically part of supply chain, but this doesn’t mean their objectives are always aligned with those of the broader supply chain group (Fig 1).

2 E2open also helped sponsor the report and we offer thanks—especially with setting up some of the executive interviews with their most advanced customers (who we’d also like to thank!)

1 This is similar to the transition that Quality groups made decades ago from technically driven QA/QC corporate functions to transformation-driven CI (continuous improvement) entities driving Lean and 6 Sigma capabilities pervasively into the business (i.e., “quality as process” rather than “quality as function”).


Fig 1—The supply chain scorecard is more ‘balanced’ than procurement in terms of focus on growth, innovation, and flexibility/resiliency

It’s not surprising to see cost reduction and supply assurance at the top of procurement’s list, and it is encouraging to see a deeper focus on strategic partner collaboration.

In the supply chain, strategic partners can include ODMs (original design manufacturers), CMs (contract manufacturers), 3PL (3rd party logistics) firms, BPO (business process outsourcing) firms, information/technology providers, and others. These external partners are not just suppliers to source and monitor. They are also extensions of the firm that can help satisfy the broader supply chain objectives such as innovation, M&A, and sustainability. But this can only happen if they are properly utilized and best practices are aggressively adopted!

This is where procurement has an opportunity to expand its role from the input cost reduction owner to being an advocate for improving broader supply outcomes. Procurement must influence internal and external supply chain partners to improve the collective supply capabilities of all process participants.


Taming the multi-tier problem

As more supply chain processes (make, move, store, service, transact) are outsourced, visibility generally disappears. We asked study participants what aspects of this issue were most concerning to them.

Interestingly, advanced firms were concerned because they were more outsourced, or they “wanted to know what they didn’t know.” Procurement respondents were more concerned with cost and risk visibility.

Supply chain respondents were more concerned with multi-tier supply planning and execution, particularly in high-tech. Overall though, as shown in the chart, while cost visibility was an issue, supply assurance of all forms form the majority of the multi-tier problem.

This multi-tier problem is multi-faceted, and has many root causes (mistrust of trading partners, lack of systems). One respondent said the “inability to create communication channels with more than first tier suppliers” was the biggest problem.

Transformation and Leadership

A high procurement “quantity of spend management influence” during sourcing does not imply a high “quality of supply management influence” across the end-to-end supply chain.

Transformation and leadership requires influence. Dale Carnegie sold a lot of books on this topic (75 years ago!). But being a high quality influence is just as relevant as ever, especially in supply-side processes where single accountability is murky. For procurement, standard benchmarks for direct spend influence hover around 90%, so things look great, right? But this spend influence is typically defined as “procurement being involved during the sourcing process.”

What about all the other processes in the inbound supply chain? What type of influence is exerted there?

We asked this question and found that although a slight majority of procurement organizations owned the sourcing process, a minority of firms could say the same in over a dozen other key process areas (Fig 2).


Fig 2—Beyond sourcing, procurement has a relatively low level of influence and responsibility for broader supply management processes

Even with “managing the matrix” as part of process leadership, few firms allow procurement to drive key processes such as strategic third-party management/innovation, inventory/supply planning, and more. Worse still, 30-50% of these firms have no real procurement participation at all. Whether procurement hasn’t been invited (or hasn’t delivered), this is clearly a problem.

So, let’s begin to unpack this problem and see how others are solving it. More specifically, we will evaluate how those with the most advanced capabilities and the highest supply performance are building the specific capabilities in the processes above—and in the individual capabilities spelled out in Fig 4 (see pg. 10).

Direct Procurement Capabilities that Matter—Beyond Strategic Sourcing

In this study, we assumed that organizations have already performed some level of strategic sourcing in terms of analyzing their spend and rationalizing their supply base. Some of the capabilities evaluated do support strategic sourcing (e.g., cost modeling), but also go beyond it (e.g., using supplier collaboration for joint cost takedown projects).


We grouped the 11 capabilities we studied into four main groups, including a ‘foundational’ category for performance management and then three main process-centric categories:

I. Guiding and ensuring supply performance. Defining KPIs (and capability metrics), targets, gaps, priorities, and projects that ensure balanced supply scorecards at multiple levels – and that the supply performance is protected via supply risk management. 1. Supply risk modeling/monitoring (“heat maps”, external intelligence for predictive analysis or compliance monitoring, etc.)2. Integrated performance management (aligning KPIs for business units, product lines, spend categories, suppliers, etc.)

II. Design for Supply. Designing products and services to systematically tap supply (internal or external) market power for the purposes of innovation, reduced costs, sustainability, or customer satisfaction.3. Innovation support (early supplier involvement; make vs. buy; crowdsourcing; etc.)4. Multi-tier cost modeling, forecasting, and intelligence

III. Designing the Supply Network. Designing and re-designing the extended supply network to optimally position supply resources (inventory, tooling, logistics assets, labor, etc.—whether internal or external) to meet multiple concurrent objectives from diverse stakeholder segments.5. Supply base segmentation to drive category management, supplier management, risk/regulatory, etc.6. Multi-tier raw material inventory positioning (including at suppliers)7. ‘Tax-advantaged’ supply strategies IV. Planning and executing supply against demand within the network. Optimally matching supply to demand within the current supply network while providing feedback to strategic supply processes for needed changes.8. Translation of S&OP to a multi-tier collaborative supply plan9. Dynamic supply allocations based on supplier rebates, penalties, capacity, lead times, etc.10. Performing “buy-sell” to buy on behalf of smaller suppliers11. VMI support (JIT Warehouses, inventory visibility, etc.) We asked study participants the extent by which they had adopted these 11 capabilities. They are shown below in Fig 4 for both the “top performer group” (i.e., the top quartile performers on the performance criteria shown in Fig 3) and the rest of the study population.


Fig 4—Top [quartile] performers have higher capability levels than peers; capability levels still vary widely

It should be apparent that as the capabilities get more complex (from “basic” supply base segmentation analysis at the top, down to “buy-sell” support and tax sheltering, practiced by larger international manufacturers) the level of adoption drops off and varies quite a bit within each.

A Model for Success

An operating model that features cross-functional and cross-firm alignment around the balanced scorecard of supply.

Before diving into various process-specific capabilities, it’s important to mention that one of the recurring themes was cross-functional and supplier alignment, and this isn’t so much about specific organizational hierarchy. Although the top performers had a slightly higher level of centralization via a single procurement executive responsible for all direct procurement, the connectedness of procurement to other groups and suppliers was what made a difference. Almost a third of the “top capability” firms adopted a supply chain strategy/CoE (Center of Excellence) group that drove improvements across procurement, operations, logistics, quality, engineering, etc.—compared with only 6% for their peers.

The pace setters we interviewed aggressively pursue all paths to transformation, not just purchasing-centric methodologies. They are happy to take the projects/priorities and approaches adopted from anywhere (supply chain network design, Lean/6 Sigma, sustainability, B2B information networks, etc.) if they have the potential to unlock value. This is where supply chain centers of excellence prove useful, not just in best practices benchmarking and transformation planning, but


also in ensuring that the proper governance structures are in place (e.g., a cross-functional supply risk council) and that measurement systems are aligned from supply chain performance to spend/supply category performance to supplier performance—even down to a purchased SKU level. Some of these groups may be part of a separate profit center, and even a separate fiscal entity (e.g., located in a tax advantaged country). But even without this governance structure, procurement can merely use a well-run supplier management approach to coordinate the priorities, projects, and capabilities of different internal groups (risk, EH&S, quality, IT, engineering, logistics, etc.), helping to drive them into the extended inbound supply chain in a coordinated way.

“Supply Performance Management” and“Supply Risk Management are hampered by poor IT support

Performance management and risk management are the two key capabilities in “guiding and ensuring supply performance” shown earlier. They ensure that scorecards are defined (at different levels for various stakeholders), aligned to diverse priorities, and “protected” via a supply risk management program of some sort. A supply market intelligence capability is also needed to help inform these and other key processes (e.g., cost/price intelligence for sourcing activities).

Case Study— HP’s PPS (Printing and Personal Systems) business unit is a good example of such cross-functional integration.

HP’s corporate head of direct procurement reports to the head of operations for PPS (who also serves as global CPO). HP is very advanced, but since 2009, PPS has used its “Supply Chain Optimization” approach to align procurement with logistics and the rest of the multi-tier network with a combination of improved processes and tools that not only reduced supply network complexity by nearly one-quarter and direct suppliers by almost 50% (down to just over 1,000 for over $40B in spend!), but also supported other objectives such as HP’s focus on supplier and environmental responsibility (carbon emissions, workers rights,

conflict minerals, etc.) and a deeper push into western China. Although the tier 1 supplier network has been massively rationalized, it now creates the challenge of orchestrating an equally massive tier 2 and tier 3 supplier network to support the different “supply chain pipes” (click here for a description of these that include the Value Added Pipe, the Low Touch Pipe and the No Touch Pipe), or the proverbial “supply chains within a supply chain.” These can change within a product lifecycle and also be driven back to a tier 2 component level. Luckily, HP has a strong competency in managing a multi-tier supply network with its buy-sell process (that we’ll touch on later).

http://h30507.www3.hp.com/t5/Supply-Chain-Management-Blog/HP-Supply-Chain-The-concept-of-Supply-Chain-Pipes/ba-p/41203#.Ujy2CmRgZyY


Unfortunately, the IT requirements to handle complex scorecarding, data integration, and analytics are daunting. This area is a work in progress for even the most sophisticated firms we talked to, with a strong prevalence of spreadsheets and custom systems. Still, it’s one of the most active areas, and companies are trying to at least implement the monitoring systems that can notify staff if there’s a potential problem.

After the recession of the late 2000s, supply risk management was a very popular corporate program to identify potential supplier failures, and also natural disaster risk and other threats to supply lines. Risk types were defined, “heat maps” generated, gaps identified, and remediation steps executed—down to the location and even part level. But, risk is not a one-time phenomenon, and it’s not limited to tier 1 suppliers. Many research studies have shown that tier 2 supply is one of the biggest problems, and many manufacturers are trying to focus on supply chain ‘agility’ and ‘resiliency’ as a more systematic approach to dealing with supply volatility and risk. This is not a one-time supply risk project.

Rather, it needs to be systematically “baked” into other supply-side processes such as extended supply network design, buy-sell, supply planning, and contract management.

One firm that has successfully addressed this problem is a telecommunications equipment manufacturer (see case study on page 17) that set up an agility program for certain tier 2 components that are ‘risky’ and in need of agility. This is defined by the parts needing shorter lead times and/or higher upside capacity to help mitigate the risk of demand side volatility relative to customer services levels and corresponding impact on product revenue/profitability. We will dive into some of these details shortly, but the basic lesson here is that procurement is applying a more sophisticated segmentation (similar to the Krajlic 2x2 matrix discussed earlier) to not just tier 2 supply, but also into ongoing supply planning and supplier contracting (e.g., upside flexibility) and collaboration (e.g., lead time reduction, VMI planning).

Study Respondent: “Make sure that your risk mitigation plans are current!”

“Design for Supply” introduces supply market power when it really counts—before the costs are locked in

When discussing the broadest sense of matching supply to demand, it’s necessary to address how to best tap suppliers when it really counts—at the time of design when innovation is practiced and productized (and when the majority of product costs are locked in).

Study Respondent: “Start early. Inject yourself into the process at the earliest possible time with sales and engineering. The more you know sooner, the sooner you can engage the supply base.”


For procurement, this is not just about being involved from the phase-gate development process and then sourcing components from a single tier BOM (Bill of Material) to existing suppliers on the approved vendor list. Developing strategic supplier relationships AND supply market intelligence is critical to wring the most innovation and value from supply markets. It’s the difference between being an innovation-centric “gate opener” rather than just a compliance-centric “gatekeeper.”

Gate openers have:

• Senior executive support to set up the resources and processes for externalizing such innovation. P&G’s Connect & Develop program is an obvious example, but there are dozens of others: open innovation events, supplier innovation centers, supplier study groups, co-location/rotation of staff, joint technology roadmapping, etc.

• Strategic SRM programs that segment the truly strategic suppliers as customers of choice, allowing deep collaboration on revenue uplift programs, cost reduction projects, value analysis/engineering, and any types of joint capability development.

• Pre-M&A work to identify innovative and game-changing suppliers. We interviewed a Life Sciences manufacturer who called this “Invent to Order.” They supported a key business strategy of embedding new technology into a ‘system’ that would essentially ‘give away’ the customized device to make money on the consumables over the product lifecycle.

A deep competency in cost management to perform multi-tier cost modeling which in turn requires multi-tier BOMs, process models, input cost libraries, price forecasts, etc. The result is not just “should cost” analysis to support negotiations and collaborative cost reductions. It’s also the target cost needed to make money and the gap to “should cost” and “could cost” under different supply chain designs. This competency is also needed on an ongoing basis because pro forma profit planning can’t exist without input cost planning and forecasting. Who can do this? The best CPG manufacturers can, and many bulk chemicals firms live and die on it. One good example of a discrete manufacturer doing this is Borg Warner. You can read a case study here.

Multi-tier Cost Management is Core Competency

Cost management is a massive topic that goes well beyond this paper’s scope, but it’s important to address. Cost management should not be confused with cost accounting. While the latter is useful to post PPV (purchase price variance) values to the general ledger in a standard costing regime, its narrow book value approach does not support the true activity and market-based approach for evaluating total costs and procurement performance in today’s volatile and global multi-tier supply chains.

This narrow measurement system bestowed on procurement is perhaps the single

http://spendmatters.com/2013/05/02/commodity-price-management-at-borgwarner-part-1-the-tip-of-the-iceberg-in-supply-analytics/


greatest detriment to the journey from purchasing to supply management. At the best firms, procurement actively works with finance, operations, suppliers, and a bevy of third-party providers (one study interviewee had over 25 cost estimation providers in place!) to build a competency that supports multiple areas beyond strategic sourcing events: customer quoting, make vs. buy analysis, and collaborative cost reduction efforts with suppliers. Honda, Toyota, and John Deere are masters of this.

Cost management is decidedly unsexy, but critical as a core competency for any manufacturer. If you believe that all supply is in scope for supply management (i.e., an internal manufacturing plant is evaluated like a supplier—just as a key supplier’s factory might need to be managed with similar rigor as an internal one), then product cost management will primarily be about supply cost management. Therefore, procurement will have a key role to play.

This doesn’t mean procurement does the activities alone. Rather, it helps build an organizational capability to perform cost management—such as during the design process. A “design for cost” process is a critical capability that is often associated with a “Design for Manufacturability & Assembly” (DFMA) methodology that helps ensure that a product design can be executed, either internally or at a supplier’s factory.

The same is true for the design of the supply chain itself. It must be advanced, but it must be executable with the right resources: people, tools, management support, etc. This is the subject of our next capability area.

Supply Network Design 2.0: Intelligent design for a multi-tier network of supply

Designing a product based solely on existing components, suppliers, and supply chain resources only goes so far. At some point, it’s necessary to re-think how they design the entire multi-tier supply chain, with multi-tier cost modeling and cost management.

HP is a great example to revert to. The company was very successful with its “Design for Supply Chain” efforts in the mid 2000’s, but also with its “Buy-Sell” capability. Buy-Sell has allowed HP to design a supply chain that is heavily outsourced to ODMs and CMs, but they still retain supplier control and collaboration with the tier 2 and tier 3 suppliers.

HP has been deliberate and adamant about retaining key engineering and manufacturing staff (augmented by third parties) in core processes/technologies, having them work alongside procurement and other supply chain staff to continually and cross-functionally optimize the extended inbound supply chain.

Most people know the Buy-Sell program for how HP uses buying power to


negotiate with tier 2 suppliers, and then uses ‘price masking’ to keep favorable pricing proprietary (so CMs/ODMs/competitors can’t lean on suppliers to demand comparable pricing—and reduce HP’s advantage3). But there’s more to this story. Although most companies don’t have HP’s buying power, some of this model can still be emulated. But it requires appropriate technology to orchestrate. It’s not just a simple drop-ship process, but rather a multi-tier execution run in conjunction with a VMI hub (a ‘JIT warehouse’ that replenishes the CM/ODM sites). The P2P process for direct materials is not a simplistic Req-to-Pay process like that found in many indirect spend categories. It’s a complex inbound supply chain execution process. Without the ability to execute, the best sourcing and planning activities are for naught. Beyond Buy-Sell, there are many other examples of capturing more of value by designing a multi-tier supply network. Before sharing some, it is important to clarify what we mean by “supply network design 2.0” and how it differs from the traditional notion of supply network design. The latter has historically focused on using high-level ‘steady-state’ optimization modeling tools to re-jigger plants and warehouses within a firm’s internal supply chain. In contrast, advanced firms mix and match the following elements of the network design, driving them upstream into the multi-tier network:

• Determining optimal postponement points and inventory positioning that may be owned by the supplier. When considering the use of massive contract manufacturers and their respective network capabilities, many more options can open up. One study interviewee viewed CMs as core to his global operation. Another CPO actually set up an advisory council with the presidents of strategic CMs to build alignment, transparency, and trust.

• Modeling critical upstream capacity to allow for multi-tier capacity planning and contractually securing upside flexibility. HP’s Price Risk Management program is a great example of optimizing these complex decisions.

• Sourcing transportation that optimizes the assets of shippers, suppliers, and third-party logistics providers. Procurement has a key role in working with the supply chain transportation department, operations, IT, and the logistics suppliers themselves to ensure smooth implementation and perform ongoing re-sourcing as needed.

Study Respondent: “Create an inbound logistics team to manage the process. Maximize efficiencies through control of all inbound freight from supplier facility to your plants.”

• Using tax-efficient supply chain techniques to augment a buy-sell model by establishing a corporate trading entity in a low tax country (Switzerland, Netherlands, Singapore, etc.) or special economic trade zones within a country. This is very popular in consumer packaged goods, pharmaceutical, IT/Telecom, automotive, etc. Given the regulatory scrutiny on such practices, these are broad supply chain groups set up as separate fiscal entities that work hard (accompanied by their tax advisory partners) to demonstrate a true arms-length

3 This multi-tier procurement model is also popular with major automotive and A&D OEMs who buy metal on behalf of their suppliers. Honda Trading of America sources 60-70% of its steel, aluminum, and plastics purchases on behalf of its supplier. Similarly, ‘supply chain finance’ programs use a large buyer’s low cost of capital to lower the trade credit rates for suppliers (and get some gain sharing too). P&G’s recent program around this is featured here.

http://spendmatters.com/2013/06/03/exploring-ap-and-procurement-best-practices-at-pg-lesson-1


business to regulators.• Designing flexibility into the network through alternate parts, dual sourcing,

multi-tier/region buffer stocks, alternate tooling, contingency plans/playbooks, product/platform redesign, lead time reduction, financial hedging, and other methods.

• Segmenting the supply base on multiple dimensions (spend category, supplier type, risk type, customer/demand type, geography, compliance requirements, etc.) to “rightsize the processes” appropriately for each segment rather than using a one-size-fits-all approach.

Once the supply network is generally implemented, you can move toward some of the progressive techniques to match supply to demand and then execute on the promised commitments.

Advanced Supply Planning: Beyond ‘Feeds and Speeds’

Align S&OP strategy intelligently into multi-tier execution—collaboratively with suppliers.

Demand drives supply. In traditional supply planning, planners evaluate projected time-phased material and capacity requirements derived from external and internal demands and then check for the ability to execute (rough-cut capacity planning). Raw material requirements might even be shared with suppliers to give them some advance visibility. But, there are a few issues:

• What if the firm uses contract manufacturers? How can this information be passed on to tier 2 suppliers? How do we share requirements through multi-tier BOMs and routings?

• If demand is coming from several different upstream channels, is it wise to lump all the requirements together as a dampened consensus demand signal to feed further upstream (and to merely size the inventory buffers to hopefully absorb fluctuations that inevitably show up)?

• What if some form of supply allocation rules that transcend simplistic fixed percentages for allocating supply to different suppliers are necessary?

• How do we reflect reality with the supply plan in factoring in contractual requirements with suppliers, such as penalties or rebates?

• How can we get early commitments from suppliers to ensure they can execute, especially if there’s a demand spike (rather than only finding out when the PO drops, or worse yet, when materials don’t show up)?

• What if forecasted supplier price increases are on the horizon when a contract renews or price escalators take effect? How will that feed back into the plan, especially if eroded product margins will change demand itself?

• Similarly, how do we deal with end-of-life issues when it’s necessary to run out raw material existing stock (which might be sitting on the suppliers’ books)?

Most traditional supply planning processes don’t deal well with these issues, and


readers will likely have additional industry- and company-specific ones to add. Even if a firm has a strong S&OP (Sales & Operations Planning) process, procurement and other inbound supply chain staff be integrated into this process, plus they must also have the tools to deal with the above scenarios and bring the suppliers in as well. If this doesn’t happen, the plan will not reflect reality on the ground, and downstream problems will inevitably flair up.

Study Respondent: “Share your forecast, but also update regularly so a trend could be noticed or problems on the supply side may be foreseen.”

Case Study: Telecommunications Equipment Manufacturer

We highlighted this firm’s agility program for critical components earlier, but we’re more interested in its advanced supply planning capability. Although the firm felt that customer collaboration and demand planning processes made it best in class relative to its peers, monthly forecast accuracy still ranged in the 60–70% range.

Accommodating demand variability by systematically translating it to critical supply requirements and then collaboratively working with suppliers to assure the supply lines is key. It focuses not so much on the 75% of SKUs that the CM manages, but really on the rest, namely the SKUs in the agility program that are tied to high revenues/profits. The firm works with suppliers to reduce lead times and contractually ensure upside flexibility.

But it also uses an innovative software tool that accommodates the segregation of demand based on forecast variability, customer-specific service levels, and other factors so that there

is a virtual “supply chain within a supply chain” at a [tier 2] component level.

Therefore, whenever demand spikes (or drops) outside these more fine-grained tolerances, the firm and its suppliers are notified so that appropriate decisions can be made. The decision could be to do nothing, or it might merely refine some of the planning parameters. In more drastic cases, it involves changing quantities, allocations, expediting, etc. And it also potentially affects the supplier contract and scorecard, which procurement must keep aligned to actual performance (including supplier responsiveness/flexibility).

Once this is done, the suppliers can do their formal “forecast commits” via EDI, and then the remaining execution takes place through the VMI hubs and the supply chain execution systems and linkage into ERP. This formal and automated commitment process is key to establishing the system of record for measuring promised/committed vs. actual performance.

Supply risk must be baked systematically into other supply-side processes, not performed as a periodic or even one-off exercise.

More broadly, the overall process cited above creates a collaborative link between planning and execution that helps to failsafe the execution by doing more robust fine-grained planning—with better tools.

Of course, a lot of ongoing ‘plumbing’ is required to keep the execution systems integrated (e.g., transportation and warehouse management, import/export


tools), and nearly all interviewees were in a never-ending ERP upgrade/consolidation process.

And process execution costs should not be ignored. Based on 2013 process benchmarks from The Hackett Group, typical procurement organizations allocate nearly 70% more of their activity-based costs for transactional processes in direct procurement than their ‘world class’ procurement counterparts. If you are spending 35–40% of your procurement labor and outsourcing on transactions rather than 10–20%, the opportunity cost of precious budget squandered on wasteful expense vs. productive investment is a tragedy, especially given all the opportunities we’ve laid out so far.

Implementation Success Factors

In the study, we expected that success factors such as top management commitment, use of good tools, clear ROI definition, alignment with trading partners, etc. would all be cited as critical. As Fig 5 shows, this was indeed true.

Fig 5—Top Enablers of Successful Implementations

But this is a complex area, and the “Other” bucket in Fig 5 is indicative of the breadth of domain-specific enablers needed for success.


It was also clear that the pacesetters shared some common attributes. They were motivated by the quest for ongoing value creation that made them aggressively go after new cross-functional and cross-enterprise methods to unlock new value when they hit a wall. This quest was not always pleasant, especially when old business strategies no longer met new global business realities (see “LapCo” case study on the next page).

There were also multi-year journeys that used external benchmarking to learn the “art of the possible” before choosing which capabilities made the most sense for them specifically. Finally, they rigorously executed and used the best people and partners that they could find. They practiced what they preached in terms of tapping supply market power, and used a broad ecosystem of providers from the physical supply network players (e.g., CMs, ODMs, 3PLs) to supply chain information network providers to support their IT requirements.

From an IT perspective, the scope of the inbound supply chain is so large that there isn’t any single provider, nor even class of application that is supporting all of the 11 capabilities that we’ve outlined. However, there is a clear trend toward:

• SaaS (Software as a Service) applications moving to “the cloud” to reduce technology ownership costs and speed up innovation cycles

• Applications that can model and orchestrate “virtually integrated” multi-tier supply networks in order to:• Connect previously stovepiped processes (e.g., planning vs. execution;

PLM vs. SCM vs. SRM; etc.) like discussed throughout the paper• Use information, analytics, and intelligence as a competitive edge to spot

opportunities and risks – whether just to keep supply lines flowing (e.g., predicting adverse events) or to uncover hidden opportunities

• Utilizing secure and IP-protected supply chain information networks that provide not just transactional document exchange, but also collaborative process support and value-added services for content, analytics, and intelligence as just mentioned

• Driving towards industry-specific and cross-industry standardization for process definitions, regulatory compliance documents, data syntax and semantics (master data and workflow data), measurement frameworks, and technology infrastructure such as PaaS (Platform as a Service) and IaaS (Infrastructure as a Service)

So, in essence, we’re talking about a trend towards near real-time extended supply network design (and re-design) and execution. But, if we may be so bold, we believe that the future will not just be about a broader cloud-based supply chain application footprint, but rather a supply chain information network that also serves as a supply chain PaaS where the platform provides a ‘loosely coupled’ set of applications and value-added services integrated into the platform and network(s). Think of this as a supply chain equivalent to what Salesforce has done with its Force.com PaaS, but deeper in terms of process specificity. It might seem like a stretch, but it’s closer than you might think.


Case Study: How Multi-Tier Supply Management Helped Save “LapCo” from extinction

A well-known PC manufacturer (that we will call “LapCo”) was facing a crisis. It was wildly successful with its consumer-facing configure-to-order supply chain. However, by the mid-2000’s, PCs, in the words of a senior supply chain executive we interviewed, were “starting to look like toasters with price points at $500-750.” The firm found itself selling into a cutthroat retail channel with demanding customers (“NEVER miss an order” was a key mantra), in addition to supporting the firm’s enterprise business. So, cost became mission critical to survival, and air-freighting laptops from Asia to US-based final assembly locations obviously was not a sustainable supply.

So, the firm outsourced fixed configuration models to large contract manufacturers, but the inability to strongly control upstream supply not only had cost disadvantages, but also risk issues as became evident in 2006-2007 with battery shortages that cropped up. The firm took a multi-pronged approach. First, it set up a separate trading organization that would perform a “Buy-Sell” model with items like LCD displays and batteries, and also use tax efficient supply chain methods (e.g., buy raw glass and mark it up in low-tax/no-tax areas). Although the tax benefit was felt to be ‘icing on the cake’, the visibility and supply assurance in this virtual model was the key. To wit: “we didn’t have to stand up anything but supply/demand signals.”

Of course, there were challenges. The make vs. buy decisions were frequent—and critical. Every platform entailed specific negotiations with CMs on the BOM about who had the volume and who would own the contract. As the executive said: “We were careful with the categories and where you need a category strategy. We had a whole procurement department that had a pretty cool continuity of supply strategy… this is easy to screw up.”

The firm also worked with a third party technology provider to build a multi-tier platform (including multi-tier BoM) that supported the virtual orchestration of demand/supply signals, inventory visibility (none of it held by LapCo), and total cost tracking throughout the system from tier 2 suppliers to various VMI hubs near the manufacturing sites. From a logistics standpoint, the firm picked the 3PLs, and then “set the network protocol” that all partners used for execution. The firm was very process-centric and procurement was part of the core cross-functional design team, helping the team not just with category strategy, market intelligence, and sourcing execution, but also helping to build standard component libraries, performing supply-demand matching (e.g., translating forward looking supply pictures back to demand estimates and making adjustments), and various other processes.

By overhauling the multi-tier supply network, this firm was able to get cost competitive with its peers and to survive the 2008-2009 recession. While the industry remains hyper-competitive and the firm’s future success is not guaranteed, it has at least stayed in the game so it can play its cards down the road.


Looking Forward

Hopefully, this report has illustrated the vast opportunity available to direct procurement organizations and broader supply chain organizations seeking to capture this larger prize associated with optimizing the multi-tier supply network.

Yet, finding the best place to start can be overwhelming. We recommend a combination of top-down and bottom-up approaches. The top-down aspect involves taking stock of the broader supply chain strategy (which we’ll assume is aligned with business strategy) and translating the balanced scorecard of supply down to the direct procurement organization, the key internal stakeholders, and out to suppliers. This ensures partner alignment to the most pressing business issues (revenue, innovation, sustainability, globalization, etc.) that must be reflected in the supply chain priorities, procurement priorities, and hopefully supplier priorities. Of course, use ‘organizational judo’ to align to the most critical priorities that have C-level attention…and budget.

If nobody in the firm is taking enough proactive and deliberate leadership in building the capabilities needed to execute on this balance scorecard of supply, this is procurement’s opportunity to define a broader set of strategic supply management services rather than just executing on a narrower cost-focused set of sourcing services. As Tom Linton, the CPO and Chief Supply Chain Office for Flextronics often says: “You have to lead the business or it will lead you.” Such leadership requires internal and external benchmarking to show others in your organization the size of the prizes that await—and then prioritizing the largest capability gaps that can be meaningfully executed in a self-funded way.

From a bottom-up standpoint, map the prioritized opportunities to your “in flight” projects and priorities to see where there is alignment (or not). You may end up shifting things around or completely mothballing others. But, re-inventing direct procurement is obviously not about business-as-usual. It’s about bringing best practices and transformation to the broader supply management opportunity—with benefits ascribed to all the process participants. If direct procurement organizations can be advocates for improving strategic supply outcomes rather than just owners of purchased cost reductions, and if they can learn from the leaders to apply the best strategies, methods, and tools, the world will be very bright for them and their organizations.


Appendix—Study Demographics

The study was conducted during June–August 2013 through a combination of an online survey for quantitative analysis (n=122) and augmented by a set of qualitative interviews with supply executives at large progressive manufacturing firms who have chosen to remain anonymous due to the confidential nature of many of the insights. The industry, functional, and size breakouts are shown below. Study participants ranged from manager level up to the VP-CPO level.


Commodity Price Management at BorgWarner Part 1: The Tip of the Iceberg in Supply Analytics http://spendmatters.com/2013/05/02/commodity-price-management-at-borgwarner-part-1-the-tip-

of-the-iceberg-in-supply-analytics

HP Supply Chain - The concept of Supply Chain Pipes http://h30507.www3.hp.com/t5/Supply-Chain-Management-Blog/HP-Supply-Chain-The-concept-of-

Supply-Chain-Pipes/ba-p/41203#.Ujy2CmRgZyY

Exploring A/P and Procurement Best Practices at P&G: Lesson 1 http://spendmatters.com/2013/06/03/exploring-ap-and-procurement-best-practices-at-pg-lesson-1

About the Author Pierre Mitchell leads the procurement research activities at Spend Matters. He has 25 years of procurement and supply chain industry and consulting experience, and is a recognized procurement expert specializing in supply processes, practices, metrics, and enabling tools and services. Prior to Spend Matters, he was the first industry analyst to put procurement research on the map for both AMR Research (now Gartner) and later at The Hackett Group. He has also led numerous operations and systems transformations at Fortune 500 organizations. Industry positions include manufacturing project manager at The Timberland Company, materials manager at Krupp Companies and engineer at EG&G Torque Systems. He holds an engineering degree from Southern Methodist University and an MBA from the University of Chicago. His recent writing can be found at: http://spendmatters.com/author/pierre/

E2open (NASDAQ: EOPN) is a leading provider of cloud-based, on-demand software solutions enabling enterprises to procure, manufacture, sell, and distribute products more efficiently through collaborative planning and execution across global trading networks. Enterprises use E2open solutions to gain visibility into and control over their trading networks through the real-time information, integrated business processes, and advanced analytics that E2open provides. E2open customers include Celestica, Cisco, HGST, HP, IBM, Lenovo, L’Oréal, LSI, Motorola Solutions, Seagate, and Vodafone. E2open is headquartered in Foster City, California with operations worldwide. For more information, visit: http://e2open.com

Links and References

About E2open

http://spendmatters.com/2013/05/02/commodity-price-management-at-borgwarner-part-1-the-tip-of-the-iceberg-in-supply-analytics

http://spendmatters.com/2013/05/02/commodity-price-management-at-borgwarner-part-1-the-tip-of-the-iceberg-in-supply-analytics



http://spendmatters.com/2013/06/03/exploring-ap-and-procurement-best-practices-at-pg-lesson-1

re-inventing direct procurement - e2openinfo.e2open.com/.../images/...procurement_2013_09.pdf ·...

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