research brief how best in class companies embrace ...€¦ · may 2015. how best in class...

Sponsored by

On behalf of

R E S E A R C H B R I E F

M A Y 2 0 1 5 How Best in Class Companies Embrace Operational Excellence to Drive Procurement and Supply Chain Performance

1

RESEARCH REPORT

IntroductionEnterprises today are under enormous pressures. They must keep supply chain costs low, innovate with new products and services, and respond to rapid changes in how products are marketed and sold, while executing their operations within an increasingly volatile, complex world. Responding to all these pressures and executing well in these volatile times makes operational excellence imperative.

Many leading companies have adopted Operational Excellence programs that establish a framework for supply chain performance improvement. While there are many definitions of Operational Excellence and various approaches to excellence programs, at its core, Operational Excellence is about creating value for the enterprise on a continuous, measurable basis. Value can be derived from lower procurement costs, a more resilient, risk tolerant supply chain, and improvements in customer service. As the world becomes more e-commerce driven, value also is created by excelling at logistics and fulfillment, being first to market with new products, and by rapidly capturing new channel opportunities.

Operational Excellence and Procurement Excellence programs vary by company, but they might span all these areas of value creation and more. While reducing the cost of purchased materials is a high priority for most companies, Procurement Excellence programs might also address priorities such as supply chain risk and resiliency, supplier management, and leveraging partnership agility to capitalize on new markets, or corporate sustainability objectives.

In sum, Operational Excellence and Procurement Excellence initiatives are about value creation and measurable improvement across those goals critical to the success of a business. Examining how the most successful companies approach Operational and Procurement Excellence provides insight into how companies might better attain their operational and strategic supply chain goals.

In a recent study sponsored by IHS, Inc. and conducted by Peerless Research Group (PRG) on behalf of Supply Chain Management Review, 236 leading supply chain executives provided insights on the efficacy of their procurement and sourcing operations. Specifically, the research examines how implementation and proper execution of programs such as Operational Excellence and Procurement Excellence provide supply chain executives with the direction needed for making key strategic decisions necessary for running highly proficient procurement and sourcing operations.

In particular, this research brief examines companies whose procurement practices successfully contribute to their company’s business accomplishments, in combination with their adoption and approach to Operational and Procurement Excellence. The practices and characteristics of these companies are contrasted with organizations that deem themselves less successful in meeting procurement and sourcing goals for their companies, and report lower adoption of excellence initiatives. These business segments are referenced as Best in Class and Laggard, respectively.

How Best in Class Companies Embrace Operational Excellence to Drive Procurement and Supply Chain Performance

2


Best in Class companies and Laggard businesses Responding companies are grouped into one of these two categories based on how the supply chain executives we surveyed perceive their company’s overall performance relative to their competition. Managers in “Best in Class” companies distinguish their corporation as either a top or leading performer when compared to competitors, while executives in “Laggard” businesses consider their company to be either an average or lagging performer in their market.

Company’s Procurement Organizations

Best in Class organizations are far more assured of hitting their performance goals. One out of five Best in Class companies are extremely confident they will meet their performance objectives. Furthermore, more than four out of five believe that they are poised to hit specific goals. By contrast, fewer than one out of 10 (9 percent) Laggards feel certain they’ll reach their targets while one-half in this group are confident they’ll meet performance objectives.

The number of global suppliers with whom procurement organizations work is comparable across both segments. On average, Best in Class companies are working with 213 (median = 75) global suppliers while Laggards partner with an average of 193 (median = 78) providers worldwide.

Although Best in Class and Laggards are similar in some regards, the organizational structure of companies’ procurement operations does differ in design. Best in Class companies are generally more apt to have a centralized, organization-wide global procurement operation while Laggards have a greater

Evaluating company’s overall business performance

Top or leading performer (Best in Class) 65%

Average or lagging performer (Laggards) 35%

Structure of procurement organization

Best in Class

Laggards

37%30%

A single enterprise-wide organization,responsible for all global procurement

26%26%

A single enterprise-wide organization, managing most procure-ment with some managed by sites, regions, or business units

25%27%

Divisions, business units, or regional organizationstructures manage their procurement

5%12%

Procurement is managed by the company’sindividual sites and facilities

5%1%

Other

3%4%

Don’t know

Confidence that company will reach performance goals

Best in Class

21%

60%

15%

4%%Laggards

9%

41%

41%

9%Extremely confidenttE

Very confident

Somewhat confidentntS

Not very/Not at all confident

81%

50%

3


Top key performance indicators (KPIs) are largely similar across the two segments. Overall supply chain cost savings, meeting customer service-driven metrics, and lowering transportation costs are the top KPIs among both groups. However, Best in Class takes a more expansive approach to key performance indicators (KPIs) and places greater emphasis on KPIs tied to speed and process performance efficiencies, improved cycle times, reductions in warehouse costs, and implementations of green solutions.

Key performance indicators

Best in Class

Laggards

89%84%

64%61%

63%56%

51%38%

50%37%

45%42%

44%48%

42%30%

37%35%

34%28%

34%40%

26%28%

24%12%

22%10%

Cost savings

Meeting customer service metrics

Reductions in transportation costs

Documented process andperformance efficiencies

Improved cycle times

Improved workflow processes

Documented inventory reduction

Reduced warehousing costs

Meeting sales forecasts

Better supplier collaboration

Reduced raw materials sourcing costs

Improved labor management

Implementation of environmentallysustainable/green initiatives

Automation implementations

tendency to run their procurement function on a siloed, decentralized basis.

Best in Class’ procurement divisions are larger. On average, 70 employees (median = 26 employees) work in Best in Class procurement departments as compared with Laggards who, on average, employ 53 individuals (median = 15) in their procurement group. One-fourth of the Best in Class operate with over 100 employees in procurement while only 14 percent of the Laggards have 100 or more workers in their procurement departments.

Best in Class have a greater estimated procurement spend level than do Laggards. More than one out of four Best in Class companies (28 percent) report procurement spend to be in excess of $100 million a year while, in contrast, 20 percent of Laggard companies are spending $100 million or more on goods and services annually.

This would suggest that Best in Class performers are afforded the necessary resources and that more staffing and funding is needed to attain performance excellence as well as reaching operational goals. It also suggests that Best-in-Class performers have more spend under their control, relative to the overall spend of the organization. By that, we mean that procurement groups in the “Laggard” category are not managing as large a percentage of spend for the company as a whole as “Best-in-Class” performers. For example, capital spend may fall outside the realm of procurement in a Laggard organization, putting it outside the scope of a global procurement strategy, and the standards and metrics to which that group is held.

4


Performance EvaluationsAs it pertains to companies meeting their annual financial performance expectations, the majority of Best in Class regularly hit their goals. More than one out of four (27 percent) always meet their financial expectations as compared with only 6 percent of the Laggards who are able to make this same claim.

Operational ExcellenceBest in Class are more likely to have an Operational Excellence strategy in place. In our survey, more than one-half (54 percent) of the Best in Class companies follow an Operational Excellence program while only half that many Laggards (27 percent) have a similar strategy in place. Because Operational Excellence programs often stress value creation and a framework for continuous improvement around established goals, the use of these programs correlates to greater effectiveness. In essence, Operational and Procurement Excellence programs apply methodology and measurement to the attainment of goals.

Have a strategy for Operational Excellence

Best in Class

54%

33%

13%

Laggards

16%

57%

27%Have strategyin place

No strategy

Not familiar with/Never heard of

Operational Excellence (OE)

Meeting performance goals

Best in Class

27%

62%

10%1% 1%

Laggards

41%

51%

6%Always

Frequently

Sometimes

89%

57%

1%1% Not very often Never1%1%

“ We have a fairly good handle on real time performance, and this includes procurement commitments versus budgets.”

—Best in Class/Corporate Manager/Healthcare/

$1B - $2.5B in revenues

“ We’re looking for tools to allow resources to spend greater time on value added initiatives”

—Best in Class/Supply Chain Manager/Food Services/$50M

5


Further, more than four out of five (82 percent) Best in Class companies who are following Operational Excellence principles link their sourcing and procurement function to their Operational Excellence program. And, respondents at Best in Class businesses further assert that procurement is a highly critical discipline to their overall Operational Excellence methodology (Best in Class: 38 percent versus Laggards 25 percent).

Procurement Effectiveness By substantial margins, Best in Class companies’ procurement functions are significantly more effective than those in Laggard organizations, most notably in areas relating to cost savings, meeting procurement objectives, acquiring better and highly accurate data for business decision-making, labor, and risk planning.

While the major challenge facing procurement operations in both the Best in Class and Laggard segments is the same, working with a lack of resources (53 percent and 50 percent, respectively), other obstacles differ among the two groups. Procurement operations in Best in Class businesses recognize a lack of visibility, using out-of-date technology and difficulties finding talent with the right skillsets. Laggards not only fight these same challenges, but also struggle working with insufficient benchmarking data, poor planning and insight, a lack of understanding of procurement methods, minimal support from management as well as inadequate funding.

Maintaining consistency in procurement practices enables businesses to rely on better data. This greatly applies when working to get a handle on pricing, negotiating and spend issues. Best in Class organizations, to a far greater degree than Laggards, are more successfully leveraging reliable data to gain a better understanding of market conditions, to be better prepared for negotiating with suppliers, in fostering more insightful decision-making and for developing cost estimates and spend analysis.

Procurement organization’s effectiveness in…

Best in Class

Laggards

81%50%

80%57%

77%47%

74%40%

73%44%

72%46%

69%47%

61%30%

60%34%

60%39%

60%27%

Meeting procurement targets

Achieving cost savings from suppliers

Conducting transparent /objective negotiations

Accurate cost and price analysisfor spend categories

Reducing costs/expanding margin

Understanding markets

Balancing cost and risk

Knowledge sharing & retention

Optimizing talent

Planning for risk in supplier decisions

Benchmarking performance

“ We are building a strong cohesive procurement strategy that is not just cost focused...includes capacity commitments and service related goals that are tied into an overall corporate strategy.”

—Best in Class/Purchasing Management/Electronics/$2.5B+

6


Challenge(s) procurement organizationsfaces in working to meet business goals

Best in Class

Laggards

53%50%

39%31%

31%25%

30%35%

19%28%

14%16%

13%27%

11%16%

11%12%

Lack of time/resources

Lack of visibility

Outdated technology

Talent shortage

Inability to benchmark performance

Lack of management support

Poor insight

Lack of funding

Other

Consistency in global procurement practices…

Best in Class

Laggards

78%52%

72%44%

66%39%

63%35%

62%27%

56%33%

56%41%

45%33%

44%35%

43%

33%20%

Reviewing historical price data

Preparing for supplier negotiations

Performing spend analysis

Estimating project costs

Reviewing input costs for spend categories

Evaluating market drivers of costs

Evaluating supplier/material cost structures

Evaluating economic influences

Understanding geographic/country risk

Modeling future price assumptions

Forecasting future prices

27%

“ There’s a severe talent shortage. We just do not have the manpower to complete jobs in a timely manner.”

—Laggard/Corporate Management

manufacturing/ <$50M

“ We have clear, accurate visibility into our customer’s sales cycles, forecasts, and demand planning.”

—Best in Class/Corporate Management/Pharmaceuticals/

$50M - $99M

“ In our forecasting, we rely on historical data for productivity, transportation,

and a use this to get firm estimate of projected cost increases.”

Best in Class/Warehouse Manager/Food & Beverage/$2.5B+

7


As expected, the inverse holds true as procurement performance among Laggards is inconsistent in all key areas. Because Laggards report a higher inability to benchmark performance, it’s likely that the lack of comprehensive scorecards and structured excellence methodologies contribute to greater inconsistencies and less confidence in measuring and modeling procurement programs. Without doubt, the maxim, “you can’t improve what you can’t measure” is at play here, as further seen by a greater tendency among Laggards to report inconsistency in being able to model, evaluate, and understand critical nuances involved in Procurement Effectiveness.

Procurement Excellence Best in Class companies are four times more likely to have a Procurement Excellence program in place. More than one out of four Best in Class companies have a formal Procurement Excellence or Procurement Effectiveness strategy in place. By comparison only 6 percent of Laggards have this type approach in operation. However, there’s still a need for greater awareness of what these programs are and how corporations can capitalize; roughly one out of six Best in Class and nearly one in five Laggard respondents are not familiar with the concept of Procurement Excellence or Procurement Effectiveness.

“ Understanding our volatile demand better is critical in reducing in-process scrap, and cutting manufacturing lead times.”

—Laggard/Supply Chain Manager/Tool Manufacturing/

$250M - $500M

Areas in which procurement is inconsistent

Best in Class

Laggards

14%26%

8%23%

15%23%

4%23%

6%21%

12%20%

5%20%

12%19%

6%18%

2%14%

3%11%

Modeling future price assumptions

Evaluating supplier/material cost structures

Forecasting future prices

Reviewing input costs for spend categories

Estimating project costs

Understanding geographic/country risk

Evaluating market drivers of costs

Evaluating economic influences

Performing spend analysis

Preparing for supplier negotiations

Reviewing historical price data

Companies having a formal “Procurement Excellence”or “Procurement Effectiveness” program

Best in Class

26%

61%

13%

Laggards

19%

75%

6%Yes

Not familiar with/Never heard

of these concepts

No

8


Cost savings and on-time delivery are the main goals that Best in Class businesses are trying to achieve with their Procurement Excellence program. As only a small percentage (6 percent) of Laggards interviewed has a “Procurement Excellence” philosophy in place, their KPI objectives are not reported as data are unstable.

Managers in Best in Class companies are extremely confident they’ll hit their Operational Excellence goals. In fact, of the supply chain, procurement, and executive managers we surveyed, all are confident with seven out of 10 (71 percent) being highly certain they’ll fully achieve performance objectives.

Confidence that company will reach performance goals

Extremely confident 25%

Very confident 46%

Somewhat confident 29%

Not very/Not at all confident 0%

Best in Class

KPI’s or target objectives of Procurement Excellence strategy

Total cost savings

On-time delivery

Quality

Contract terms

Total cost of ownership

Continuity of supply

Inventory optimization

Profit margin

Purchase Price Variance (PPV)

Value creation

Innovation

77%

53%

43%

43%

40%

37%

37%

30%

23%

23%

17%

9


ConclusionsIt’s evident why some businesses place value on archetypes that enable operations to run efficiently. We see in our survey findings that companies who follow disciplines intended to make operations run efficiently are accomplishing their business goals. These Best in Class companies are more likely to centralize their procurement operations as well as allocate the necessary funding and resources allowing for greater procurement efficiencies. Further, they place greater importance on key performance indicators such as cycle times, warehouse costs, and environmental or green initiatives.

Effectively leveraging a highly proficient procurement function within their operational excellence platform, companies are realizing:• cost savings• better decision-making and negotiating

through the use of current and more accurate data

• upgraded workforce optimization; and• improved planning and execution of risk

mitigation.In practicing key operational and performance methodologies such as Procurement and Operational Excellence programs organizations are well-equipped to address and, subsequently, hit performance goals.

MethodologyThis research was conducted by Peerless Research Group (PRG) on behalf of Supply Chain Management Review for IHS, Inc., a leading provider of supply chain information and services. This study was executed in November and December of 2014 and administered over the Internet among subscribers to Supply Chain Management Review magazine. All respondents were prequalified for being involved in decisions related to sourcing and procurement of goods and services for either their organization or for companies with whom they consult.

A detailed profile of survey respondents describing Best in Class and Laggards is on the right.

Demographics

VP/General manager

Supply chain manager

Corporate/Divisional manager

Logistics/Distribution manager

Purchasing management

23%17%16%13%12%

19%15%22%11%14%

Best in Class LaggardsTop job title/function

Electronics and media

Healthcare

Oil and gas

Automotive

Chemicals

Aerospace and defense

Agriculture

Consumer and retail

Metals and mining

Wholesale/retail trade

Transportation/warehouse services

3PL provider

Business/consulting services

Top industries

8%6%4%4%4%3%3%3%3%

12%7%6%

12%

2%5%0%3%0%5%3%

11%5%

11%12%

6%6%

Under $100 million

$100 million-$249,999 million



$1 billion-$2.49 billion

$2.5 billion or more

Revenues

43%14%

5%6%8%

23%

$785.4M

$199.5M

$411.9M

$125.0M

46%19%12%11%

6%6%

United States

Canada

European Union/Europa

Asia/Pacific Rim

Other

Location

89%3%7%1%1%

80%5%5%9%2%

Average revenues

Median revenues

Learn more: www.ihs.com/PricingPurchasing

For more information

Americas: Tel: +1 800 447 2273

Email: [email protected]

Europe, Middle East, and Africa Tel: +44 (0) 1344 328 300


Asia Pacific: Tel: +65 6439 6000


About IHS, Inc.The IHS Pricing & Purchasing Service delivers timely, accurate, cost and price forecasts and analysis helping organizations ensure consistency, increase visibility, and maximize spend. IHS has enabled clients to reduce spend, optimize talent, minimize risk, and achieve well over $1B in cost savings.

Key differentiators:• The greatest breadth of forecast coverage on the market today: With a database of more than 500,000 historic prices and thousands of price, wage, and input cost forecasts, IHS offers more coverage than any other provider in the market.

• Proven and recognized industry expertise: Established reputation as the most accurate economic forecasters.

Most recent accolades includes being named No. 1 U.S., China, and Australia forecasters by Consensus Economics.

• 40+ years serving the purchasing community: Since 1970, IHS has enabled clients to reduce spend, optimize talent, minimize risk, and achieve billions in cost savings.

• Consistent model framework: We offer a model-based framework for analyzing price change, providing visibility into cost and market drivers, and enabling clients to meet and sustain cost savings targets.

• A strategic global supplier: IHS is more than a data provider. We are a strategic partner who will support both tactical and strategic decision-making, alleviate your skill shortage, and help you do more with your existing talent base.

research brief how best in class companies embrace ...€¦ · may 2015. how best in class...

Documents