PROCUREMENT EXCELLENCE:

(1)

Chris Sawchuk

Principal, Global Procurement Advisory Practice Leader

The Hackett Group

PROCUREMENT

EXCELLENCE:

How World-Class Procurement Optimizes

Global Performance

(2)

Setting

(3)

Best Practices Conference | 3

Many supply markets have returned to pre-recession levels,

but stability has not. Easy savings are dissipating.

3.1%

2.5%

2.6%

2.4%

3.6%

3.90%

4.00%

Annual Spend Cost Savings

(Hackett Procurement Benchmark)

?

(4)

Higher purchase prices are now accompanied by equally

high price volatility and high supply risk

Source: The Hackett Group 2012 Key Issues Study

18%

15%

29%

12%

22%

16%

30%

15%

Demand votality

Votality of market prices

of our outputs

Votality of prices of our

inputs: raw materials,

resources (incl. energy)

Exchange rate votality

Current Year (2011)

Next 2 years

Average annual level of variance

(5)

Supply risk is broader than just price risk



Natural disaster risk (e.g., Thailand flooding)



Brand risk (e.g., Apple / Foxconn)



Geopolitical risk (e.g., Middle East conflict: $200 / bbl oil?)



Regulatory risk (e.g., Frank Dodd Act)



Industry-specific

Risk/Agility dominates 2012 Supply Chain Agenda

Source: 2012 Hackett Supply Chain Key Issues

92%

80%

77%

Improving supply chain flexibility/agility

Improving Cross-Organization Collaboration -

Improve planning, forcasting and visibility with

customers and suppliers

Mitigating supply chain risks (e.g. supply

disruption, severe quality problems, severe

technical failures)

Mitigating rising/votalite raw materials or

component costs

Risk / Agility issues

dominate

(6)

2011 Best Practices Conference Enterprise Presentation | 6

-10%

0%

10%

20%

30%

40%

50%

60%

70%

Consumer

Goods

Energy

Financials

Health Care

Industrials

Information

Technology

Material

Telecom /

Utilities

Total negotiated savings as a percent of net income

(includes cost reduction and cost avoidance)

Procurement is certainly helping improve profitability

Median

Top

Quartile

3

rd

Quartile

(7)

2011 Best Practices Conference Enterprise Presentation | 7

…and world-class procurement organizations outperform

their peers across traditional procurement measures

85%

80%

63%

99%

95%

90%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

Direct Materials Indirect Materials Indirect Services

Peer Group

World Class

Cost reduction

(Direct)

Cost avoidance

(Direct)

Cost reduction

(Indirect)

Cost avoidance

(Indirect)

Annual Spend Savings

(year-on-year savings as % of spend)

Procurement Spend Influence

Source: 2012 Procurement Benchmark Database

Direct

Indirect

Peer Group

World Class

4.72

12.53

"Procurement ROI" (Spend savings divided

by the cost of procurement)

Peer Group

World Class

(8)

Savings

Procurement

Globalization,

Growth

…but are we

worried about

the wrong

problem?

Original thought caption

:

(9)

2. Achieving global operational excellence

…and enabling decision making agility

A. Globalization is no longer a question

of whether to do it, it’s how well you

globally execute it.

B. Leaders recognize they will thrive

or die on information quality, access,

and speed.

1. Striving for profitable growth amidst uncertainty

A. Emerging markets revenue

growth continues, a more

targeted approach required

in domestic markets.

C. Resulting in greater caution

in Europe and overall, a

renewed focus on

productivity

B. Volatility

has become

business as

usual

The enterprise wants global growth

Apple Corp:

Q211 APAC

revenues was

51% of Americas.

Q212: 77%

(now >Europe)

(10)

Are we aligned?

Procurement 2012 – key issues (performance)

(% of respondents citing the issue as ‘major’ or ‘critical’)

72%

53%

51%

44%

42%

40%

32%

25%

0%

20%

40%

60%

80%

REDUCE AND AVOID PURCHASED COSTS to take out

costs and mitigate price inflation

EXPAND PURCHASING'S SCOPE/INFLUENCE -support

new catagories, new value drivers, etc.

DEEPEN INFLUENCE ON COMPLEX INDIRECT SPEND

categories, drive value beyond sourcing

INNOVATION and Product/Service support (e.g. tap

supplier innovation, early procurement phase-gate

…

REDUCE SUPPLY RISK (e.g, supplier risk, regulatory

compliance, CSR/ERM support etc.

FREE UP CASH (e.g. working capital improvements,

fixed cost variabilization, etc.)

GROWTH ENABLEMENT BEYOND INNOVATION via M&A

support JVS, new market entry, demand generation

…

REDUCE COST OF PROCUREMENT operating expense -

via improved process efficiences

Q: “What is the strategic priority of the following performance-related key issues on the procurement agenda for 2012?”

Most Procurement organizations still doing this…

…but less are doing this

(11)

Procurement’s

response

(12)

2011 Best Practices Conference Enterprise Presentation | 12

Procurement excellence starts with alignment

Requirements

(and investments)

Procurement

Value

Enterprise

Procurement Value:

Redefine

Service Value

“What do we aspire to be?” which

becomes “What to execute?”

Performance:

Recalibrate

Service Execution

“What is the level of performance

for both efficiency and

effectiveness?”

Capability:

Redevelop

Service Capability

“What capabilities do we have today or

need to acquire to change?”

Service

Delivery

Information

Service

Placement

Process

Sourcing

Process

Design

Enabling

Technology

Skills &

Talent

Governance

&

Organization

Supp

ly

Base

Supply

Value

Spend

•Global

•Growth

•Profitable

•Agile

(13)

2011 Best Practices Conference Enterprise Presentation | 13

Procurement must align and develop its major capabilities

Global

Growth

Profitability

Agility

Productivity

Improvement

Global

Procurement SDM

Revenue /Growth

Enablement

SRM

2011 Best Practices Conference Enterprise Presentation | 14

The good news is that we’re aligned in many areas

17%

19%

23%

26%

32%

34%

38%

43%

52%

53%

58%

71%

PROCESS SOURCING/PLACEMENT' Support enterprise outsourcing,

offshoring, and shared services / COEs

UPGRADING INFORMATION capabilities via emerging information-based

solutions for intelligence and analytics

KNOWLEDGE MANAGEMENT to acquire/re-use knowledge outside of hiring

FTEs. Includes BPO, on-demand knowledge service, 'virtual shared services'

/ COEs, social networking, KM systems.

PROCUREMENT SHARED SERVICES / COEs / BPO / GLOBALIZATION for

globalizing and transforming the Procurement Service Delivery Model (SDM)

UPGRADING TECHNOLOGY tools (e.g., SAP SRM, Oracle iSupplier, Ariba,

niche applications, etc.)

SUPPLY MARKET INTELLIGENCE capability upgrade (processes,

resources, tools)

CONTINUOUS IMPROVEMENT programs and techniques (e.g., Lean, Six

Sigma) internally and/or at key suppliers

UPGRADE OF TALENT/SKILLS through traditional talent management (e.g.,

hiring, training)

VALUE CONTRIBUTION VISIBILITY via savings tracking, compliance,

metrics monitoring, etc.

SRM programs and processes to drive more value from existing key suppliers

CATEGORY MANAGEMENT to drive more value out of existing categories

than sourcing alone (e.g., consumption management, specification changes,

SRM linkages, etc.)

STRATEGIC SOURCING to increase spend influence, aggregate spend,

establish preferred contracts, and reduce purchased costs

Q: “What is the strategic priority of the following capability-related key issues on the Procurement agenda for 2012?

(15)

2011 Best Practices Conference Enterprise Presentation | 15

But to really make this transformation, procurement must

change its fundamental role in the organization

15%

7%

63%

54%

15%

46%

Peer Group World Class

Valued

Business

Partner

Negotiations /

Sourcing

Expert

Gatekeeper

Administrator

Old Role

New Role

Steward to purchased

cost savings

Steward to a balanced

supply scorecard

Procurement process

executor

Business process enabler

Stock picker and trader

Money manager (i.e., risk

manager, not risk owner)

Supply gate keeper

Supply gate opener to

supply market innovation

Siloed function owner

Coordinator of

cross-functional supplier

interactions

Sourcing methodology

zealot

Solutions assembler

(agnostic to the toolset)

(16)

If procurement’s role is changing, so will the skills and knowledge

Finding this talent is going to get even harder

Source: Skills and Talent Management Performance Study, The Hackett Group, 2012

Strategic thinking and

analysis

Change

management and

process

improvement

Vendor/outsourc

ing management

Data analysis

and modeling

Business

acumen

Relationship

management

Problem

solving

R

E

D

Z

O

N

E

Project/program

management

Low demand

(Replace turnover)

Significant demand

(Growing need)

Very strong demand

(Critical Skill)

Extreme difficulty

Attracting/retaining

Difficulty

attracting/retaining

Minor difficulty

Attracting/retaining

CORE COMPETENCE

NICHE COMPETENCE

SKILLS DEFICIENCY

RED ZONE

(17)

2.91%

3.58%

4.26%

<=$550

>$550 to <=$1450

>$1450

3.30%

3.40%

3.94%

<$260

>$260 to <=$1900

>$1900

Solidifying our foundation – strategic sourcing

You still need to do it, but you need to go deeper

Source: Hackett Procurement Benchmark Database, 2012

Spend savings as % of spend vs. ‘investment’

(process cost) per RFx

Spend savings as % of spend vs. ‘investment’

(process cost) per Contract

(18)

Real value. Real results.

Requisition

and PO

processing

Implementation

Source & Negotiate

Strategy & Opportunity Development

PO

Execution

Execute Buy and

Sourcing

Strategy

Develop Buy and

Sourcing Strategy

•

Vendor

identification and

selection

•

Bid execution and

negotiations

•

Award

recommendation

and notification

•

Reverse auction

•

SOW and

contract

execution

SmartBuy

Category Managers

Buy Center

•

Category Cards

Creation - RFx

Strategy

•

RFx

requirements,

thresholds,

engagement

criteria

•

AVL strategy

Conduct

Negotiations and

Develop

Agreements

*Source: Hackett Research “

Tactical Sourcing: Non-Strategic Sourcing is Important, Too”

, November, 2011

•

The middle zone

between sourcing/P2P

•

4.3% savings and >3.5X

ROI

*

is better than 0!

•

Not bogging down

category managers

Solidifying our Foundation

(19)

1996

1998

2000

2002

2004

2005

2006

2007

2008

2009

2010

2011

2012

Non World Class

World Class

The Hackett Group Procurement Benchmark-2012

Productivity improvement

Efficiency enables reallocation of resources

Cost of Procurement

Procurement cost (labor, outsourcing, technology, other) as a percent of spend

(20)

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Pr

ocu

rement

Per

fo

rmance

Score

Hackett Benchmark Procurement Performance 2000-2011

Effectiveness

Efficiency

Efficiency improvements

are easier than

effectiveness….

…and also “fund”

effectiveness

improvements

1%

3%

15%

40%

66%

74%

0%

20% 40% 60% 80%

% of indirect

materials/services

suppliers transacting with

no manual intervention

(post-requisition)

% of direct

materials/services

suppliers transacting with

no manual intervention

% of Supplier invoice

inquiries performed via

self-service supplier portal

World-Class

Peer Group

22X

5X

40X

‘Hands-free’ / ‘No Touch’

Extreme Supplier Self-Service

‘Guided Buying’

Productivity improvement

“Funds” procurement effectiveness

Procurement must FINALLY get out

of the transactions business!

(21)

11%

13%

11%

23%

24%

28%

3%

6%

4%

10%

16%

22%

Business Services

Supply Chain

Management of

product and/or

service lines

Current

In 2-3 Years

Maximum global level achievable

(over 80% global)

Predominantly global (51%-80%

global)

26%

22%

13%

39%

37%

34%

3X

Globalization

Procurement needs to get global – like the rest of the business

Direct

(22)

2011 Best Practices Conference Enterprise Presentation | 22

Globalization: More than just a global supply base

28%

30%

40%

43%

41%

38%

40%

47%

53%

52%

51%

Procurement COEs

or transactional

processing centers

Management of

procurement talent

Procurement

process design and

build

Procurement

policy/strategy

standards

Technology platform

supporting

procurement

Procurement master

data

Current state

2 - 3 years from now

% of companies that have globalized the majority of their

procurement processes

(23)

2011 Best Practices Conference Enterprise Presentation | 23

• Country specific procurement

organizations

• Highly fragmented process and

procurement systems

• Little or no procurement

standardization or resource leverage

• Regional procurement organizations

and systems

• Process coordination across regions

• Procurement standardization and

resource leverage across units

• Global Procurement with some local

resources

• Global processes

• Integrated procurement systems

• Global standardization and resource

leverage

Procurement Attributes

3 Stage

Global Model

Stage

3

Global

Operations

Stage

2

Multinational

Operations

Stage

1

International

Presence

Globalization

You need to evolve your global procurement operating model

16%

25%

Currently (Year-end

2011)

Projected in 2 years'

time (Year-end 2013)

Procurement FTEs

currently globalized in a

low-cost geography

(24)

Strategic Sourcing Attributes

•

Regional & local sourcing groups operating ad hoc

•

Opportunistic use of LCCS and offshoring

•

Few truly globally managed suppliers

•

Corporate-centric policies, tools, and processes

with inconsistent international implementation

•

Regional IPOs supported by corporate-run COEs

•

Category management and sourcing processes

tailored to regional needs

•

Tools and data standards available to support local

requirements for most regions

•

Globally coordinated IPOs and COEs

•

Global category management with end-to-end

sourcing and SRM capabilities - virtually located

•

“Flex capacity”

•

‘Mass-customized’ global design for processes,

tools, and standards to scale and meet local needs

3 Stage Global Model

Globalization

More specifically…Strategic Sourcing

Stage

3

Global

Operations

Stage

2

Multinational

Operations

Stage

1

International

Presence

(25)

2011 Best Practices Conference Enterprise Presentation | 25

Category management

Broader than strategic sourcing

Source: “Category Management: Beyond the ‘Strategic’ in Strategic Sourcing,” The Hackett Group, July, 2011

STRATEGIC SOURCING

CATEGORY MANAGEMENT

Goal



Reduce purchased costs for a given

commodity, most often by selecting

lower-cost suppliers through demand

aggregation, competitive bidding and

negotiation.



Maximize realized category value to

the organization, including total cost of

ownership (TCO), risk, operational

performance, innovation, etc.

Frequency



Periodic and project-based. Triggered

over one or more years in the course of

managing a commodity.



Ongoing, day-to-day process.

Triggers project-based activities and

other operational improvements as

needed.

Approach



Conducted via an n-step sourcing

methodology culminating in transition to

a new supplier contract.



Develops a category strategy and

applies appropriate value levers and

supporting techniques/tools as needed

to meet value objectives (e.g., strategic

sourcing, SRM, value engineering,

process reengineering, demand and

compliance management).

Results



Reduced contract pricing translating to

actual realized savings hitting the bottom

line.



Category value is targeted, including

validated savings and broader value

measurement.

(26)

2011 Best Practices Conference Enterprise Presentation | 26

Category management

Go broader and deeper for more value

Category value objectives link to stakeholder objectives

Reduce TCO

Increase revenue

Support other goals

Improve flexibility/

responsiveness/delivery

Improve marketing

effectiveness

Improve cost quality

Reduce purchased costs

Variabilize asset structure

Alternate new product

development

Reduce working capital

Reduce cost of risk

Support sustainability goals

Enter new markets

Improve delivery

performance

Reduce internal process

costs

Strengthen the brand

Enable new business

capabilities

Reshape consumption

Reduce fixed costs

Category strategies pull multiple value levers

Category sourcing

Product/service

Process

Supply base

Overall

Strategic sourcing

Value engineering

Compliance

management

SRM

Risk management

Low-cost country

sourcing

Design for supply

Demand

management

Supplier stratification

and governance

Performance

management

Outsourcing/

make vs. buy

Purchase-to-pay

support

Supplier collaboration

and development

Value chain network

reconfiguration

Waste elimination

Tier 2 supply base

management

(27)

2011 Best Practices Conference Enterprise Presentation | 27

Category management

Sample value lever: demand management

3.78%

3.26%

3.23%

5.913%

4.983%

4.932%

Design / Specification (Demand

Mgmt.)

Supplier Identification

Negotiation & Contracting

Total Indirect Spend Savings as a % of [Total or Influenced] Indirect Spend

Total Spend

Influenced Spend

Stage when

Procurement is first

involved:

(28)

2011 Best Practices Conference Enterprise Presentation | 28

Supplier relationship management

The SRM inflection point

“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.”

(29)

2011 Best Practices Conference Enterprise Presentation | 29

Supplier relationship management

Multiple value streams to harness when you go deep…

35%

50%

46%

50%

62%

35%

67%

85%

30%

50%

60%

40%

60%

Regulatory compliance

New business generation / revenue uplift

(non-innovation related)

Reliability

Cost /price reduction

Quality

Flexibility

Supply Assurance and Risk Mitigation

Innovation

Top Performer

Peer

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

(% of responses – multiple responses allowed)

Growth

“Agility” as

antidote to

Risk

Compliance

(30)

Supplier Relationship Management

The inflection point: SRM top performers will have higher value contribution from SRM than

sourcing in 3 years

1.20%

2.48%

1.93%

2.90%

0.53%

0.95%

1.14%

1.16%

0.06%

0.57%

0.13%

0.70%

Peer Group

Top Performer

Peer Group

Top Performer

Growth-related benefits

(Non-SRM)

Growth-related benefits

(SRM)

Cost savings/avoidance from

SRM

Total monetary value delivered from SRM

(and non-SRM growth benefits) processes

as a percentage of total spend

Currently

Three Years

Sourcing

Savings:

5.00%

4.13%

3.60%

3.37%

“SRM ROI”

> 20X!

(31)

Revenue/growth enablement

Takes many forms – not just via SRM

8%

38%

44%

48%

56%

58%

Other

Improving sales and marketing programs

(e.g., campaign effectiveness)

M&A activity (e.g., merger integration;

identifying supplier targets, etc.)

Building supplier capacity and capabilities

to execute growth plans

SRM efforts to tap suppliers for revenue

uplift ideas

Product/service development (including

lower-priced value offerings)

What growth-related initiatives will you focus on in 2012?

(% of respondents - multiple answers allowed)

30 different ways to support growth

spelled out in Hackett

Revenue/Growth

Enablement Study

closing next week

3 biggest gaps between enterprise revenue/growth importance and procurement

support effectiveness are:

•

Finding new target industries/channels

•

Penetrating emerging markets

(32)

Revenue/growth enablement

Top implemented enablers

1. Formal early supplier

involvement (ESI) in

product/service development

2. Sharing best practices

internally/externally

3. Procurement focus on process

enablement rather than process

control

4. SRM programs/processes to tap

suppliers for growth

ideas/support (e.g., supplier,

"innovation days,” councils,

surveys, etc.)

1. Training/hiring of Procurement staff

who can help enable growth (e.g.,

sales/marketing backgrounds)

2. Formal procurement-stakeholder

metric/goal alignment

3. Executive Council/Committee to

align senior stakeholders

4. A top-down mandate for

procurement involvement in

growth-related processes

5. Procurement getting formally

measured and credited for

revenue/ growth uplift

Top Process

Enablers

Top Organizational

Enablers

(33)

2011 Best Practices Conference Enterprise Presentation | 33

Revenue/growth enablement

The dilemma: How to measure?

70%

61%

48%

13%

22%

13%

17%

26%

22%

17%

39%

9%

4%

9%

13%

9%

35%

0%

13%

17%

26%

13%

Number of new supplier ideas or % of new products/services

from early/better supplier involvement

New product/service development related: time-to-launch,

time-to-ramp/profit, on-time, on-budget, etc.

Revenue/Profit Uplift from suppliers (procurement-led or

enabled)

Process-related causal metrics (e.g., % of

products/projects/processes using compliant process and

procurement involvement - e.g., phase-gate development)

Revenue protection (e.g.,decreasing the Revenue at Risk due

to Supply Risk

Revenue/Profit Uplift from internal efforts (procurement,

cross-functional team, trading unit, etc.)

Stakeholder satisfaction' or similar internal alignment question

Not tracked; N/A

Tracked internally within Procurement

(34)

(35)

Summary



Align and build capabilities to broader global growth agenda.



Extreme efficiency is helping to fund the capability building for

effectiveness.



Category Management



SRM



Innovation



Growth



Building a truly global service delivery capability is a multi-pronged

effort and procurement can’t do it alone.



A professional services orientation is critical – especially for indirect

spend. A formal Service Delivery Model (SDM) is critical to ensure

this:



Align to GBS (Global Business Services) model, not organization



Accelerate selective outsourcing on supply side while going deeper

on demand side (quality of spend influence) – indirect.

(36)