BENCHMARKING SUPPLIER RELATIONSHIP MANAGEMENT

(1)

Hackett Advisory Inquiry Response

Kurt Albertson – Associate Principal, Procurement Advisory

September 8

th

, 2014

BENCHMARKING SUPPLIER

RELATIONSHIP

(2)

Statement of Confidentiality and Usage Restrictions

This document contains trade secrets and other information that is company sensitive, proprietary, and confidential, the disclosure of which would provide a competitive advantage to others. As a result, the reproduction, copying, or

redistribution of this document or the contents contained herein, in whole or in part, for any purpose is strictly prohibited without the prior written consent of The Hackett Group.

(3)

Kurt Albertson is an Associate Principal with The Hackett Group with

responsibility for North American Advisory programs focusing on program

growth, client relationships, delivery, and research. Mr. Albertson works

with

global

organization

leveraging

quantitative

insight,

thought

leadership and research to provide strategic direction and business

advice within the Procurement and Finance areas. Prior to joining the

Hackett Group Mr. Albertson spent six years as a management

consultant in Sourcing and Procurement during which he worked with

executives on Procurement transformation and sourcing, business and

technical strategies, organizational and business process design, and

cultural change.

Kurt Albertson, Associate Principal – Procurement Advisory

Mr. Albertson also has five years of automotive experience working in manufacturing,

quality, and operations. In this role he designed and implemented global manufacturing

processes and supervised production operations. Mr. Albertson has been quoted in the Wall

Street Journal and other major publications, has been the key note speaker at many

national events, and travels globally to support client objectives.

Mr. Albertson has a

Bachelors of Science in Engineering from the University of Michigan and a Masters in

Business Administration from the University of North Carolina.

(4)

Agenda



Introductions



Why Supplier Relationship Management (SRM) matters?



How does Oil & Gas compare?



What are the key components of an SRM Framework?

(5)

The Hackett Group

A leader in organizational effectiveness and best practice insight

Mission



Hackett is an IP-based Global Advisory and Consulting firm helping clients implement

and sustain

world-class

business performance across General and Administrative Services

Hackett’s Value:



We formulate strategies based on our proprietary repository of Certified Hackett best

practices and competitive insights



We design and implement sustainable performance improvement solutions

Results



Our efforts have delivered 20%-40% in sustainable cost savings and over $25 billion of

improved cash flow for clients across the globe

Hackett Group Solutions:



Finance



Enterprise Performance Management



Human Resources



IT



Procurement & Sourcing



Supply Chain



Operations, Strategy, and Marketing

Performance



Working Capital



Global Business Services/

Outsourcing



Workforce Solutions



Technology Implementation

Oracle, SAP, Hyperion,

Kronos, and Business

Objects

97%

of the Dow

Jones

Industrials

73%

of the

Fortune 100

88%

of the Dow

Jones Global

Titans

73%

of the DAX

30

45%

of the FTSE

100

35%

of the CAC

40

(6)

General comments



Metrics and Data are shown to demonstrate trends and findings



Some information in this presentation is shown in aggregate across industries



Please ask questions as we go or we discuss in more detail after or setup

follow-up discussion



Version of this presentation will be made available for those interested



My contact information is below or grab a card

– Kurt Albertson

– Associate Principal, Procurement Advisory

– [email protected]

(7)

Agenda



Introductions



(8)

Supplier

Development

Performance

Management

SRM

Governance

Supplier

Stratification

SRM Definition & Best Practices

SRM Systems

• Supplier Stratification

Definition

Expectations

Execution

• Systems Strategy

• SRM Model Definition

• Teams, Roles and

Competencies

Definition

• Ongoing Governance

Management

• SRM Adoption

Management

• Performance

Management Definition

• Performance

Management Tool

Development

• Ongoing Supplier

Performance

Management

• Supplier Development

Needs Definition

• Supplier Development

Program Definition

• Ongoing Supplier

Development

• Systems Management

• Best Practices

Supplier Relationship Mgmt provides a framework to manage

supplier interactions across a broad set of objectives

(9)

Procurement aligns its value proposition to support enterprise

objectives with capabilities evolving depending on primary focus

VA

L

U

E

+

(10)

Supplier Relationship Mgmt objectives are around growth, cost

reduction, supplier performance mgmt, and supply risk mitigation

35%

50%

46%

50%

62%

35%

67%

85%

30%

50%

60%

40%

60%

Regulatory compliance

New business generation /

revenue uplift (non-innovation…

Reliability

Cost /price reduction

Quality

Flexibility

Supply Assurance and Risk

Mitigation

Innovation

Top Performer

Non-TP

What dimensions of SRM performance for key suppliers would you like to improve?

(% of responses – multiple responses allowed)

Growth

Performance

Cost

Risk

What are the critical

objectives for Oil & Gas?

(11)

Many of these SRM objectives mirror the key priorities of most

Procurement organizations and SRM is a key enabler

48%

50%

52%

58%

69%

76%

Reduce Supply Risk

Free up cash (e.g.,

through working capital

improvements)

Reduce and avoid

purchased costs

Deepen influence on

complex indirect spend

categories to drive value…

Enable innovation and

product/service support

Expand procurement's

scope/influence

Source: Key Issues Study, The Hackett Group, 2014

Percent of companies identify as Critical or High Importance

41%

59%

69%

73%

75%

83%

97%

Talent management

Upgrading technology

tools

Measuring and

managing procurement

performance

SRM programs and

processes

Value contribution

visibility

Category management

Strategic sourcing

Where Will Procurement Invest To

Achieve Its 2014 Objectives?

What art the Top Priorities for

(12)

In 2014 a critical strategic business priority across the marketplace is

growth fueled by innovation…cost savings are also important

32%

33%

46%

Increase market

share

Expand customer

base

Innovate

business model

and go-to-market

strategy

Innovate product

and/or service

offerings

Strategic Business Priorities*

* Combined percentage of companies ranking strategy as #1 or #2 priority

Growth

Strategy

=

Innovation

+

Market

Expansion

Source: Hackett 2014 Key Issues Study

Improve

margins/

profitability

Grow

revenue

66%

61%

Strategic Financial Priorities*

* Combined percentage of companies ranking critical or important

(13)

Supplier Relationship Management is a key enabler for

Procurement when it comes to Innovation

Low

Adoption

High

Most

Effective

Least

Effective

E

ffec

tiv

enes

s

Source: Hackett 2014 Innovation Quick Poll

Create discrete

programs/roles in

procurement to

support enterprise

innovation

Offer incentives for

innovation in

procurement goals

Define

innovation-related goals in the

procurement

organization

Use technology within the

procurement organization

to foster innovation

(information sharing,

collaboration social media)

Involvement in

early stage new

offering research

Manage supplier involvement in

solution road-mapping

Drive adoption of

technology that can

deliver

breakthrough

improvements

Develop

innovation-related

skills in

procurement roles

(14)

Best Practices Conference | 14

Supplier Relationship Management is also an enabler of

spend cost savings

“As global sourcing finance head, I monitor the financial

performance impact of global sourcing on top and bottom

line. Of the overall benefit pie, we are now starting to see

shift toward higher cost avoidance contributions

compared to P&L savings.

We are just kicking off a more centrally driven SRM

program. I think that not only will a robust SRM program

drive the next wave of savings

(15)

Spend cost savings deteriorate based on economic cycles

and maturity of the organization

2.3%

2.0%

3.1%

3.4%

2.2%

2.93%

2.97%

4.4%

4.8%

7.0%

7.7%

7.6%

6.46%

5.34%

2007

2009

2010

2011

2012

2013

2014

Non World Class

World Class

Total spend cost savings (reduction and

avoidance) as a percent of annual spend

The Hackett Group Procurement Benchmark-2014

8.54%

4.68%

4.40%

4.35%

<50%

Between 50%

and 66%

Between 66%

and 85%

>85%

Percent of Spend Influenced

Total spend cost savings (reduction and

avoidance) as a percent of influenced spend

(16)

Supplier Relationship Management helps to sustain spend cost

reduction savings in addition to enabling growth-related benefits

1.20%

2.48%

1.93%

2.90%

0.53%

0.95%

1.14%

1.16%

Non-TP

Top Performer

Non-TP

Top Performer

Growth-Related

Benefits (SRM)

Cost Savings/

Avoidance from SRM

Total monetary value delivered from SRM processes as a percentage

of total spend

Currently

Three Years

Sourcing

Savings:

5.00%

4.13%

3.60%

3.37%

(17)

Protecting supply continuity and ensuring compliance are main

drivers of supply risk management which SRM enables

48%

30%

21%

15%

55%

9%

6%

30%

15%

9%

6%

15%

9%

52%

18%

9%

24%

67%

Ensure supply continuity

Ensure regulatory compliance

Ensure supplier financial viability

Manage price fluctuations

Mitigate geopolitical risks

Critical

High

Medium

Low

Not a driver

Q1.1 Please rank the main drivers of your supply risk management program

(18)

As important as SRM is to Procurement it is the least mature

capability according to Hackett’s Capability & Maturity study

Source: Procurement Capability Maturity Model, The Hackett Group, 2013

1 2 3 4

Lagging Achieving Exceeding Leading

1.0 2.0 3.0 4.0

2.28

2.25

2.18

2.11

2.08

2

1.05

1.09

1.01

1.02

1.1

Strategic sourcing/Cat mgmt

Internal Customer

management

Function management and

administration

Purchase-to-Pay

Innovation-NPDI

Supplier management and

development

Current Maturity Level

Gap to Future Maturity Level

(19)

Agenda



Introductions



(20)

High level efficiency metrics: Oil & Gas procurement costs are

higher but FTEs consistent with World Class

0.492% _0.443% 0.028% 0.082% 0.082% 0.126% 0.049% 0.058%

0.603%

0.758%

Oil and Gas Peer

World-Class

Labor Outsourcing Technology Other

Cost as a % of Spend

17.3

16.1

19.5

20.5

3.8

4.1

2.6

3.3

43.7

43.4

Oil and Gas Peer

World-Class

Operations and Compliance Mgmt Sourcing and Supply Base Mgmt

Planning and Strategy Mgmt and Administration

(21)

When it comes to SRM, Oil & Gas invest the same but have

lower FTEs supporting compared to World Class

0.056%

0.057%

4.8

5.6

Supplier Management and Development

Process Cost as a % of Spend

Supplier Management and Development

FTEs per Billion Spend

(22)

High level effective metrics: Oil & Gas have lower influence and

lower savings resulting in lower ROI compared to World Class

5.1

10.7

99%

93%

66%

60%

Materials

Services

2.40%

4.53%

1.48%

1.93%

Oil and Gas Peer

World-Class

Cost Reduction

Cost Avoidance

Percent of Procurement’s Influence

Over Spend

Cost Reduction and Avoidance

Savings as a % of Total Spend

Return on Investment

(23)

In general SRM Top Performers go deep with fewer strategic

suppliers by truly investing in critical relationships

Metric Description

Peer

Performer Observation

Top

Total SRM FTEs per $B Spend 5.16

3.50

Top Performers seem more efficient… and

'underinvested'

Strategic SRM FTEs per $B

spend

1.07

1.74

But Top Performers allocate more FTEs to Strategic

Suppliers

Strategic SRM suppliers per

$B spend

5.3

2.3

Top performers have less # of suppliers in the strategic

SRM program (and less suppliers per $B spend overall)

Strategic SRM suppliers per

Enterprise Strategic SRM FTE 4.23

1.54

Top performers go deeper with their strategic SRM FTEs

- working with only 1.5 suppliers rather than 4.2

1.04%

0.45%

Non-TP

Top Performer

0.53%

0.40%

Non-TP

Top Performer

Percentage of

suppliers in Strategic

SRM program (direct)

Percentage of suppliers

in Strategic SRM

program (indirect)

(24)

Oil & Gas have a higher level of suppliers comprising 80% of spend with

a much lower level of their SRM resources supporting these suppliers

46%

80%

Indirect

7.6%

4.6%

Percentage of Suppliers Providing 80% of

Spend

Percent of Supplier Management FTEs supporting

80% of Spend

(25)

Percentage of Spend where Performance Measures are Maintained

Oil & Gas generally have a lower level of performance

measurement maintained compared to World Class

52%

0%

47%

38%

36%

31%

49%

78%

68%

45%

85%

27%

50%

Capital

Eqpt/Facilities

Ops

IT & Telecom

Sales & Mktg

Support

Mtls, Genl Eqpt &

Sppl.

Travel & Ent.

HR Svcs.

Admin Svcs.

Business &

Oil and Gas Peer

World-Class

(26)

29%

57%

14%

An enterprise wide formal supply base risk

assessment and management program

exists and is utilized consistently across

the businesses

An enterprise wide formal supply base risk

assessment and management program

exists but is not utilized consistently

across the businesses

BU/divisional formal supply base risk

assessment and management program

exists and is utilized consistently

Oil & Gas most often have an enterprise wide supply risk

program but it is utilized inconsistently across the businesses

Extent to which Formal and Standard Procedures Exist for Assessing Supply Base Risk

(Oil & Gas Peers)

(27)

Agenda



Introductions



(28)

Supplier

Development

Performance

Management

SRM

Governance

Supplier

Stratification

SRM Definition and Best Practices

SRM Systems

•Supplier Stratification Definition •Supplier Stratification

Expectations

•Supplier Stratification Execution

•Systems Strategy •SRM Model Definition

•Teams, Roles and Competencies Definition •Ongoing Governance Management •SRM Adoption Management •Performance Management Definition •Performance Management Tool Development •Ongoing Supplier Performance Management •Supplier Development Needs Definition •Supplier Development Program Definition •Ongoing Supplier Development •Systems Management •Best Practices

Supplier Stratification provides clear guidelines for defining,

prioritizing, and allocating resources to supplier relationships

(29)

Hackett Advisory Inquiry Response Transactional Suppliers Partners Strategic Suppliers Core Suppliers Transactional Suppliers Partners Strategic Suppliers Core Suppliers Transactional Suppliers Partners Strategic Suppliers Core Suppliers Transactional Suppliers Partners Strategic Suppliers Core Suppliers Strategic Suppliers Core Suppliers Basic Suppliers

A well defined stratification process aligned with program objectives is

foundational to SRM but often done only informally

Strategic Suppliers:



Critical to operations of functional group(s) and to

long-term functional goals



Require significant functional resources and

investment

Core Suppliers:



Important to operations of functional group(s) and to

long-term functional goals



Potential incremental value from developing ongoing

relationship



Difficult to replace

Basic Suppliers:



Short-term, transactional relationships



Minimal investment



Purely cost-driven performance management

Strategic Company-Wide Partners:



Qualified as Strategic Supplier



Multi-dimensional relationship (multi-function,

buy-sell, etc.)



Typically require high levels of cross-functional

resources and investment

80% Financial Value 20% Financial Value Strategic Company-Wide Partners

Stratification Example: The first three supplier tiers are determined at the Function level, allowing for

flexibility. The highest tier is determined across Functions, providing a company-wide perspective.

Percent of

active suppliers

0.1-0.6%

0.5-3.0%

2.5-7.0%

89 - 97%

(30)

Clearly defining expectations by supplier tier is essential to driving

overall SRM program value…as is limiting strategic suppliers

Tiers

Expectations

Supplier Base

Guideline

Strategic

Company-Wide

Partners

• Dedicated cross-functional account team / resources • Formal joint objective and goal planning process

• Active joint identification of opportunities to expand relationship across the Company • Aggressive pursuit of joint value opportunities

• Executive-to-executive relationships • Formal multi-level governance process

• Significant supplier relationship management investment • Experienced Supplier Relationship Managers

• No more than 3-10

across the company

Strategic

Suppliers

• Dedicated account team with cross-functional participation • Formal joint objective and goal planning process

• Active joint identification of opportunities to expand relationship within Function • Aggressive pursuit of joint value opportunities within Function

• Executive-to-executive relationships • Formal multi-level governance process

• Significant supplier relationship management investment • Experienced Supplier Relationship Managers

• 3-10 per

Function/Category

Core

Suppliers

• Formal account management process • Communication of objective to suppliers • Formal governance process

• Limited supplier relationship management investment

• Varies by

Function/Category

Basic

Suppliers

• Governance process consists of ad hoc escalations • Interaction limited to operational and transactional events • Limited plans for future business

• Require re-approval annually

• Varies by

(31)

While an initial financial value stratification is conducted

an assessment of business impact is critical

•

Business Criticality / Continuity Impact

•

Role of Supplier in Delivering Business Objectives

•

Fit with Company Culture

•

Scalability, Flexibility, Global Reach

•

Operational / Technical Integration with Supplier

•

Switching Costs / Uniqueness of Capabilities

Performance

Integration

Alignment

Impact

Financial Value

•

KPI Scores

•

Innovation / Value Creation

•

Financial Stability of Supplier

Suppliers will be stratified using financial value and rated on a scale from 1 (low) to 5 (high)

against each of the following four business impact criteria

•

Most recent annual spend data

•

Most recent annual sales data

Criteria

Considerations

Business Impact

(Qualitative)

Financial Value

(Quantitative)

SUPPLIER 36,998,378SUPPLIER 42,853,273SUPPLIER 104,053,273 SUPPLIER 26,941,008SUPPLIER 31,479,242SUPPLIER 54,397,575 SUPPLIER 24,766,510SUPPLIER 28,134,228SUPPLIER 34,171,366 SUPPLIER 8,510,312SUPPLIER 8,543,312SUPPLIER 31,479,242 SUPPLIER 4,730,055SUPPLIER 4,730,055SUPPLIER 28,134,228 SUPPLIER 2,848,113SUPPLIER 3,625,544SUPPLIER 8,543,312 SUPPLIER 2,173,953SUPPLIER 2,848,113SUPPLIER 8,412,126 SUPPLIER 1,982,849SUPPLIER 2,188,515SUPPLIER 6,452,324 SUPPLIER 1,965,361SUPPLIER 2,175,271SUPPLIER 4,730,055 SUPPLIER 1,868,799SUPPLIER 1,986,971SUPPLIER 4,611,551 SUPPLIER 1,866,533SUPPLIER 1,868,988SUPPLIER 4,478,276 SUPPLIER 1,737,556SUPPLIER 1,866,533SUPPLIER 3,625,544 SUPPLIER 1,557,214SUPPLIER 1,785,640SUPPLIER 2,848,113 SUPPLIER 1,510,851SUPPLIER 1,510,851SUPPLIER 2,188,515 SUPPLIER 1,215,796SUPPLIER 1,287,140SUPPLIER 2,175,271 SUPPLIER 1,196,060SUPPLIER 1,247,575SUPPLIER 1,986,971 SUPPLIER 1,140,944SUPPLIER 1,203,211SUPPLIER 1,868,988 SUPPLIER 1,012,126SUPPLIER 1,140,944SUPPLIER 1,866,533 SUPPLIER 880,926SUPPLIER 1,012,126SUPPLIER 1,785,640 SUPPLIER 858,793SUPPLIER 902,324SUPPLIER 1,510,851 SUPPLIER 850,761SUPPLIER 882,493SUPPLIER 1,287,140 SUPPLIER 815,474SUPPLIER 880,926SUPPLIER 1,203,211 SUPPLIER 815,393SUPPLIER 857,204SUPPLIER 1,140,944 SUPPLIER 807,977SUPPLIER 821,756SUPPLIER 882,493 SUPPLIER 807,848SUPPLIER 815,393SUPPLIER 880,926 SUPPLIER 786,335SUPPLIER 807,930SUPPLIER 857,204 SUPPLIER 732,601SUPPLIER 732,601SUPPLIER 821,756 SUPPLIER 716,765SUPPLIER 717,773SUPPLIER 815,393 SUPPLIER 666,225SUPPLIER 666,225SUPPLIER 807,930 SUPPLIER 612,319SUPPLIER 612,319SUPPLIER 732,601 SUPPLIER 549,996SUPPLIER 559,108SUPPLIER 717,773 SUPPLIER 549,258SUPPLIER 539,971SUPPLIER 666,225 SUPPLIER 530,400SUPPLIER 530,400SUPPLIER 612,319 SUPPLIER 517,016SUPPLIER 517,016SUPPLIER 559,108 SUPPLIER 507,597SUPPLIER 511,551SUPPLIER 539,971 SUPPLIER 486,551SUPPLIER 508,167SUPPLIER 530,400 SUPPLIER 484,790SUPPLIER 492,786SUPPLIER 517,016 SUPPLIER 470,144SUPPLIER 484,790SUPPLIER 508,167 SUPPLIER 465,976SUPPLIER 470,144SUPPLIER 492,786 SUPPLIER 454,085SUPPLIER 465,976SUPPLIER 484,790 SUPPLIER 437,497SUPPLIER 437,497SUPPLIER 470,144 SUPPLIER 436,740SUPPLIER 436,221SUPPLIER 465,976 SUPPLIER 429,064SUPPLIER 429,064SUPPLIER 437,497 SUPPLIER 414,220SUPPLIER 414,220SUPPLIER 436,221 SUPPLIER 356,127SUPPLIER 371,366SUPPLIER 429,064 SUPPLIER 354,932SUPPLIER 356,127SUPPLIER 414,220 SUPPLIER 351,605SUPPLIER 354,932SUPPLIER 356,127 SUPPLIER 351,156SUPPLIER 351,605SUPPLIER 354,932 SUPPLIER 349,212SUPPLIER 351,156SUPPLIER 351,605 SUPPLIER 316,200SUPPLIER 349,212SUPPLIER 351,156 SUPPLIER 311,558SUPPLIER 320,974SUPPLIER 349,212 SUPPLIER 291,562SUPPLIER 316,200SUPPLIER 320,974 SUPPLIER 285,815SUPPLIER 312,360SUPPLIER 316,200 SUPPLIER 285,194SUPPLIER 291,562SUPPLIER 312,360 SUPPLIER 281,745SUPPLIER 286,024SUPPLIER 291,562 SUPPLIER 278,276SUPPLIER 285,194SUPPLIER 286,024 SUPPLIER 274,181SUPPLIER 282,145SUPPLIER 285,194 SUPPLIER 263,932SUPPLIER 278,276SUPPLIER 282,145 SUPPLIER 260,508SUPPLIER 274,181SUPPLIER 274,181 SUPPLIER 250,625SUPPLIER 260,508SUPPLIER 260,508 SUPPLIER 247,378SUPPLIER 250,625SUPPLIER 250,625 SUPPLIER 244,554SUPPLIER 247,378SUPPLIER 247,378 SUPPLIER 244,283SUPPLIER 244,554SUPPLIER 244,554 SUPPLIER 240,000SUPPLIER 244,283SUPPLIER 244,283 SUPPLIER 232,000SUPPLIER 240,000SUPPLIER 240,000 SUPPLIER 219,821SUPPLIER 232,000SUPPLIER 232,000 SUPPLIER 216,621SUPPLIER 222,624SUPPLIER 222,624 SUPPLIER 215,754SUPPLIER 219,821SUPPLIER 219,821 SUPPLIER 206,625SUPPLIER 218,568SUPPLIER 218,568 SUPPLIER 204,726SUPPLIER 216,621SUPPLIER 216,621

Functional Spend Ranking Total Spend Ranking Total Value Ranking (Spend + Sales)

Top 80%

Alignment Impact Performance Integration

Fit with Culture Business Criticality Continuity Impact KPI Scores

Operational / Technical Integration with Supplier WEIGHTING 0.20 0.40 0.00 0.20 SUPPLIER RATING A 5 5 5 5 4.00 B 5 5 5 5 4.00 C 4 2 4 3 2.20 D 5 5 3 2 3.40 F 2 1 2 5 1.80 G 1 1 1 1 0.80 I 1 4 2 5 2.80 J 4 5 3 5 3.80 K 2 3 1 2 2.00 L 5 2 3 4 2.60 S C O R E

BUSINESS IMPACT CRITERIA Alignment Impact Performance Integration

BUSINESS IMPACT CRITERIA Alignment Impact Performance Integration

(32)

The stratification process has four high-level steps

1

2

3

4

The second cut of the Functional Stratification

process will be driven by Business Impact

ratings

The final step of Supplier Stratification is to

promote suppliers to the Company-Wide

Strategic Partner tier

The first cut of the Functional Stratification will

be driven by the Financial Analysis of

suppliers

After conducting the Functional

Stratification, Functions may refine supplier

assignments based on unique needs and

situations

P t P t P t P t Strategic Suppliers Basic Suppliers Core Suppliers Basic Suppliers P t P t P t P t Strategic Suppliers Basic Suppliers Core Suppliers Basic Suppliers P t P t P t P t Strategic Suppliers Basic Suppliers Core Suppliers Basic Suppliers P t P t P t P t Strategic Suppliers Basic Suppliers Core Suppliers Basic Suppliers

SUPPLIER 36,998,378SUPPLIER 42,853,273SUPPLIER 104,053,273

SUPPLIER 26,941,008SUPPLIER 31,479,242SUPPLIER 54,397,575

SUPPLIER 880,926SUPPLIER 1,012,126SUPPLIER 1,785,640

SUPPLIER 858,793SUPPLIER 902,324SUPPLIER 1,510,851

SUPPLIER 807,977SUPPLIER 821,756SUPPLIER 882,493

SUPPLIER 530,400SUPPLIER 530,400SUPPLIER 612,319

SUPPLIER 232,000SUPPLIER 240,000SUPPLIER 240,000

Functional Spend Ranking Total Spend Ranking Total Value Ranking (Spend + Sales)

Top 80% Top 80%

Alignment Impact Performance Integration

Fit with Culture Business Criticality

Continuity Impact KPI Scores

Operational / Technical Integration with Supplier WEIGHTING 0.20 0.40 0.00 0.20 SUPPLIER RATING A 5 5 5 5 4.00 B 5 5 5 5 4.00 C 4 2 4 3 2.20 D 5 5 3 2 3.40 F 2 1 2 5 1.80 G 1 1 1 1 0.80 I 1 4 2 5 2.80 J 4 5 3 5 3.80 K 2 3 1 2 2.00 L 5 2 3 4 2.60 S C O R E

(33)

SRM Governance provides the tools and structure required

consistently manage supplier relationships

Supplier

Development

Performance

Management

SRM

Governance

Supplier

Stratification

SRM Systems

Expectations

(34)

Selected SRM Governance best practices are adopted to a much

higher degree by Top Performers

0.48 0.38 0.71 0.73 0.92 1.57 2.10 3.00 3.20 3.20

Outsourcing, offshoring, and specialized

COEs are used to support specific

processes within SRM

Talent management processes assess

current/future SRM skill gaps

SRM Business Office / Center of Excellence

(COE) centralizes the management of SRM

program

Structured buyer-supplier senior executive

relationship

A formal supplier account management role

is used to manage key supplier accounts

Top Performer Peer

0=Not Applied

1=Applied somewhat in a few areas

2=Applied very well in a few areas

3=Applied somewhat across most areas

4=Applied well across most/all areas

5=Going even beyond this practice

The extent to which these select practices have been implemented

(35)

From an SRM governance perspective Procurement manages the

framework and reporting but not necessarily the relationship

Each supplier team consists of roles filled by global procurement, functional group, and

supporting functions. Each role will have a named individual (generally not full-time);

individuals may fill multiple roles

Operational Management

Executive

Leadership

Business Office

SRM Core

Team

Sales Management Contracts Management Financial

Performance Mgmt Legal and Audit Support ManagementDelivery ManagementProject Transition Management Performance Management Escalation Management Supplier Risk Management Supplier Development Executive Sponsor Operational

Management Lead Sourcing Lead SRM Lead

A supplier’s Account Management team structure should closely mirror the SRM team

structure, including supplier-side counterparts to the SRM Lead and Executive Sponsor

roles

Functional Group Personnel Corporate Procurement Personnel Other Supporting Functions Either GP or Client Personnel Technology Management Support Leadership Communications Management Either CP or FG Personnel

(36)

SRM roles vary by supplier tier to align effort with opportunity to

drive value

Overall Team Role Tier 1

Enterprise

Tier 1

Functional Tier 2 Tier 3 Tier 4

Executive Leadership

Executive Sponsor (e.g., CFO, SVP R&D, depending on tier 1 type)

SRM Core Team

SRM Lead

Operational Management Lead* Sourcing Lead Communication Management Escalation Management Business Support Contracts Management Supplier Risk Management

Technology Management Financial Performance Management Legal and Audit Support (Automated)

Sales Management Operational Management* Performance Management Transition Management Delivery Management Project Management

Supplier Development (initially will be lower)

High Significant

N/A Minimal Moderate

Level of Involvement:

(37)

Procurement specialist skills current importance and effectiveness:

SRM expertise today is important but not effective for most

Applied with

poor results

Applied with

mixed results

Applied with mostly

good results

Applied with very

strong results

CORE COMPETENCE

NICHE COMPETENCE

RED ZONE

SKILLS DEFICIENCY

Procurement strategy and transformation expertise

Specific supply market / commodity expertise

Strategic sourcing process expertise

SRM expertise

SCM expertise

P2P transactions, procedures and administration knowledge Supply Risk

Management expertise

Market intelligence expertise

Systems testing and quality assurance Legal / commercial expertise

New product development and

innovation skills

Technology and tools acumen

Essential for

most jobs

(>75%)

Essential for

majority of jobs

(50%-75%)

Essential for

some jobs

(25%-49%)

Niche skill

(<25%)

Level of Effectiveness

Lev

el

of

I

m

por

tanc

e

(38)

Procurement strategy and transformation

expertise

Specific supply market / commodity expertise Strategic sourcing process expertise SRM expertise SCM expertise P2P transactions, procedures and administration knowledge

Supply Risk Management

expertise Market intelligence

expertise Financial analysis and

controls expertise

New product development and innovation skills Sustainability / regulatory / diversity knowledge Technology and tools acumen

Demand outlook for procurement specialist skills: SRM expertise will

increase in demand as well as difficulty to attract/retain

Extreme difficulty

attracting/retaining

Difficulty

Minor difficulty

Very strong demand

(Critical skill)

Significant demand

(Growing need)

Low demand

(Replace turnover)

Current

2-3 years

R

E

D

Z

O

N

E

Q5.1 What is the current overall demand for the following specialist skills/ knowledge within your function and how do you expect it to change over the next 2-3 years?

Q5.2 What has your experience been attracting and retaining the following specialist skills/ knowledge from the function labor market and what do you expect over the next 2-3 years?

(39)

Supplier

Development

Performance

Management

SRM

Governance

Supplier

Stratification

SRM Systems

Expectations

Performance Management provides the tools and structure necessary

to maximize supplier performance, minimize total costs, and drive

(40)

SRM Performance Management consists of defined metrics, supporting

tools, ongoing measurement and execution against outcomes

KPI Catalog

KPI Definition Example Data Delivery Method Owner

Average spend per mile

Average spend per flight mile

in period $0.33 / flight mile in 1Q04Supplier feed Travel SRM Mngr Average daily rate per car rental$ daily rate over period $74 / day in May 03 Hertz download Travel SRM Mngr Online Booking Tool Operational

Savings

Net $ savings due to online

booking $102,000 saved in 1Q04 Finance feed Travel SRM Mngr Average Cost per Hotel night

booked

Average cost over all hotel

nights book through Travel $123.24 / night Finance feed Travel SRM Mngr Supplier Agency Costs $389,000 in 1Q04 Supplier feed Supplier Average Domestic Ticket PriceAverage price over period 469 Finance feed Supplier Average International Ticket Price Average price over period 824 Finance feed Supplier Business vs. First class metric

Ratio of first class to business

tickets issued during period 0.21 in FY02 Supplier feed Travel SRM Mngr Average spend per mile by airline

Average spend by airline over period

$0.31 / flight mile on Airline

X Finance feed Travel SRM Mngr

KPI Catalog

• Align metrics to Function objectives and targets

• Align metrics to contract SLAs

• Define KPIs, performance targets and

contractual consequences

• Apply scorecards and dashboards to report

KPIs at different levels

• Use Action Item Register to track and

escalate issue resolution

• Apply other tools to manage overall KPI List

and supplier commitments

• Report supplier performance based on strata

frequency requirements

• Manage ongoing issue identification and resolution

• Provide performance inputs to Supplier Reviews

• Resolve performance issues

• Provide rewards/incentives to suppliers exceeding

performance targets

• Penalize and/or eliminate underperforming

suppliers

KPI Definition Owner Source

Uptime Percent of system uptime Supplier System log Capacity Utilization Weekly system utilization Function System monitor User satisfaction Survey rating score Function Survey

Action Item Registers

Ref # Action Item Owner Priority Date Identified Date Due Status Notes / Comments

PM 003 Details of action item issues and directionResponsible Party

High / med /

low 23-Aug 1-Nov open /

closed details of actions taken, required,

pending, or otherwise

Supplier Evaluation Scorecard Category Manager<Name>, GS Grade Account Manager <Name>, Supplier Good

Completion Date Fair Poor

Fill Rate % >=9294-92<=9495.397.097.097.096.493.099.099.094.796.4

Monthly Turnover Rate % <=55-10>=108.04.04.05.05.34.04.04.04.04.0

Preventable Turnover Rate % <=55-10>=107.04.04.06.05.02.02.02.02.02.0 Account Management Account Management QualityRating 1-33 2 13.03.03.03.03.02.02.02.02.02.0

Invoice Timeliness Days late <=0 0-5 >=52.72.02.02.02.22.02.02.02.02.0

Invoice Accuracy % Variance

of Total Bill<=0 0-2 >=20.71.01.01.00.92.01.01.02.01.5

Reporting Timeliness Days late <=0 0-5 >=50.71.01.01.70.92.02.02.02.02.0

Reporting Accuracy Reporting

Errors<=0 0-3 >=31.70.00.03.30.62.32.02.02.02.1

On-site Management QualityScore 1-5 >=3.52-3.5<=22.02.02.02.02.02.02.02.02.02.0

Temporary Associate QualityScore 1-5 >=3.52-3.5<=24.04.04.04.04.02.02.02.02.02.0

Update Meeting QualityRating 1-33 2 1

Improvement Feedback QualityRating 1-33 2 13.03.03.03.03.02.02.02.02.02.0

<Name> <Name> <Name> Omaha Q1Q2Q3 Annual Average Q2 Q4 <Name> Company Functional Managers

Supplier On-Site Managers

Representatives Base Evaluation Metrics Survey Results Quar ter ly Met rics Reporting and Invoicing Quarterly Reviews

Q3 Comments / Action Items

Metric Units Good Fair (between

range) Poor Annual Average

Fort Worth

Q1

Definition

Meets or exceeds requirements Nearly meets requirements, improvement needed within one month Fails to meet requirements

Annual Scorecard By Quarter and Location Evaluation Category Mo nth ly Met ri cs Evaluation Criteria Q4

Metrics

Tools

Ongoing Measurement

Outcomes

Scorecards & Dashboards

Incentives / Rewards Penalties Elimination Incentives / Rewards Penalties Elimination

(41)

Top performers quantify the value of their SRM programs to a

much greater degree although there is still room for to improve

73%

20%

19%

20%

8%

30%

Non-TP

Top Performer

>75%

50-75%

25-50%

<25%

Percent of the true value of SRM program/process that is quantified well

(percent of responses)

(42)

Top performers have a broader and more holistic measurement

system for measuring supplier performance

11%

40%

41%

40%

37%

20%

11%

Non-TP

Top Performer

N/A - we don't measure suppliers

formally

Narrow: biased towards the

contract

Broader, but biased to what is

easily reported or required for

risk/compliance requirements

Holistic: focused on executing

and expanding strategic

business outcomes and

capabilities)

How comprehensive are the supplier performance metrics that you employ?

(% of responses)

(43)

Supplier scorecards are based on common elements across all

suppliers but can be tailored to meet specific category needs

Source: The Hackett Group

Definition

Supplier representatives: Company representatives: Meets or exceeds requirements

Nearly meets requirements, improvement needed Fails to meet requirements, action required

Range Good

Fair

Poor

Aggregated supplier score:

Comments

Criteria Metrics Performance ranges Performance trend

Q u a lit y Ar e a De liv e ry Co s t

SLA / KPI _measureUnit of Target_range Poor Fair Good Yr ago -1 Qty -1 Mon. Today One qtr_trend Criteria_score

Supplier name

SRM lead:

Account manager:

Supplier contact:

Function/category:

Scorecard date:

Adjustable timeline for performance trends Flexible target range

Consistency of performance ranges Number of metrics

can vary by supplier

Ability to select metric attributes as required

Consistency of supplier scores

100% % % S e rvi c e Flexible function/category attribute weightings Wt. %

(44)

To drive value through SRM being considered a “customer of choice” is

important and Top Performers are more often perceived as such

4%

38%

46%

12%

0%

20%

30%

50%

We are definitely NOT a

customer of choice

We are a good customer

in a few areas

We are a good customer

overall, but still have a few

opportunities

We are a very good

customer, especially with

critical suppliers

Extent you are a “customer of choice” to your critical suppliers

(45)

Supplier Development includes formal programs for advancing supplier

capabilities and improving joint processes to create long-term value

Supplier

Development

Performance

Management

SRM

Governance

Supplier

Stratification

SRM Systems

Expectations

(46)

Supplier development activities must be aligned against the tier of

suppliers to align effort with opportunity to drive value

Program

Techniques

Strategic /

Applicability by supplier tier

Company-Wide

Core

Basic

Supplier

Capability

Improvement

Joint-investment in new capabilities



Intellectual capital sharing



Joint value creation opportunity identification



Joint process mapping and improvement



Capability acquisition by supplier



Multi-supplier collaboration



Supplier and Company personnel training



Exception-only

(47)

Conclusions



SRM is increasing its role in value creation for many organizations



The value of SRM evolves as Procurement’s value proposition evolves



Measuring value beyond cost reductions is a challenge although some do it

better than others



SRM effectiveness comes mostly from going deep with a few strategic

suppliers



Overall, companies are fairly immature in SRM and it is heavily

under-resourced



SRM efficiency is a challenge and compounded by a lack of strong

technology tools



SRM Top Performers

have a 3x Capability Adoption advantage over their

peers

(48)

Agenda



Introductions



(49)

Appendix

(50)

What are examples of potential development techniques?

Technique

Description

Considerations

Joint investment in

new capabilities

• Development of supplier capabilities required to serve Company accomplished through joint supplier / Company investment

• Objective is to enable suppliers to develop Company-specific or tailored capabilities by reducing the investment required from the supplier • Investment decisions must be reviewed and

rationalized at SRM Executive Management Team reviews

• Appropriate for high-priority capabilities that are either not available in the marketplace or are specialized and customized

• Company investment may come in the form of staff participation in initiatives and in use of Company facilities / assets for improvement initiatives; funding may be provided on exception basis

• Requires formal ROI evaluation (standard project approval process may be used) and approval by SRM executive management team except in cases below predetermined minimum investment

Intellectual capital

sharing

• Share subject matter expertise, source code, proprietary systems, process knowledge, management capabilities, and other forms of intellectual capital with suppliers

• Facilitate knowledge transfer by allowing onsite “Supplier Knowledge Champions”, and sending Company subject matter experts to supplier sites • Establish and enforce rules governing the use of

Company intellectual capital in contracts with each supplier

• Requires clearly established definition of each party’s contribution

• Supplier contract should be revised to cover terms and conditions surrounding intellectual capital use beyond supplier’s relationship with Company

• Agreement may include payment to Company for the intellectual capital

(51)

What are examples of potential development techniques?

Technique

Description

Considerations

Joint value creation

opportunity

identification

• Enabling suppliers to formally identify and propose new value creation opportunities to Company • Suppliers may approach Company with new

proposals for relationship models (e.g. buy vs. outsource), recommended changes in technology, services acquired, contract scope, supply strategy, contract duration,

• Requires structured forum with up-front communication of Company’s objectives, expectations, decision process and value proposition to suppliers

• Requires formal Gain-Sharing plan that details how Company and suppliers will split cost savings from joint value creation opportunities

• Opportunities may be outside of scope of current relationship

• Company should be ready to distinguish between real value opportunities and supplier “sales pitch”

• Ability to measure value creation from Gain Sharing

• SRM Executive Management Team reviews should include evaluation of key supplier proposals

Joint process

mapping and

improvement

• Focuses on evaluation of joint supplier and Company processes and activities to identify and achieve joint improvements in cycle time, cost, and quality

• Joint team should work to examine joint processes and interdependent activities to identify breakdowns and barriers, conduct root cause analysis, identify improvement opportunities, and execute

improvements

• Systems changes may be required to enable process changes

• Requires formal Gain-Sharing plan that details how Company and suppliers will split cost savings from process improvement

• Objective (e.g. cycle time reduction, cost, etc) should be identified up front

• Process improvement benefits may be realized largely within Company or within the supplier operations – gain sharing should strive to provide win-win

• Requires “Open Book” approach to sharing internal processes

• Both Company and supplier process subject matter experts should be identified

(52)

What are examples of potential development techniques?

Technique

Description

Considerations

Capability

acquisition by

supplier

• Supplier acquisition of assets, technology, regional service capabilities, or other capabilities required to serve Company

• Capability acquisition may be required as part of contract

• Joint relationship planning between Company and supplier may formally identify capability

requirements and may evaluate and rate potential