Category Archives: Procurement Innovation

Procurement Mastery in 2015

While far from a complete picture of what Procurement Mastery will look like in 2015, Accenture’s outlook for 2015 in their recent “Compulsive Contributors” report, identified three areas of emerging excellence which are among the foundations of Procurement Mastery for any organization that wants to make it to Next Level Supply Management. In brief, they were:

  • Excellence in Risk Management
    Disruptions are becoming more common by the day as supply chains increase in length and complexity. If there was ever an appropriate use of the term “the new normal” (there isn’t, by the way), this would be it. Masters have to be very adept at identifying, predicting, detecting, and mitigating risks before they turn into full blown, costly, disruptions.
  • Closed Loop Spend Management
    Leading Procurement organizations work closely with finance, manage supply and demand, and “close” the loop on the end-to-end spend cycle.
  • Analytics
    Using data to understand what you are spending, with whom, on what, from where, what is being obsolesced before it is used, and what might not even be needed in the first place. Using data to understand supplier performance. And using data to predict what might happen next. The masters will embrace, and get value from, predictive analytics long before the contenders.
  • A Transformed Workforce
    There is a talent management process in place that manages the full lifecyle, from recruitment through development to retirement. And the caliber of the talent, as a result of this program, is above the norm.

What Defines a Procurement Master?

In their recent piece on “Compulsive Contributors”, which reported the results of their 2011 Procurement study, Accenture defined their hallmarks of procurement mastery. Briefly, they were:

  • A formal procurement strategy integrated with the corporate strategy.
    77% of masters have this, 88% have procurement governance processes in place, and 90% provide innovative value above cost savings as a key element of such strategy
  • Effective integration with supply networks.
    66% of masters look beyond first-tier suppliers for collaboration opportunities (and 60% of masters actively monitor supplier performance)
  • Sourcing and category management excellence.
    Coupled with a push for better demand management as part of a long-term category strategy that drives continual cost improvement. Nearly 75% of masters have resources and processes in place to ensure compliance and nearly 70% of masters have structured sourcing processes.
  • More spend under management (SUM).
    And better visibility to boot (by way of a melding of process and technology). (81% of masters have an integrated end-to-end source-to-pay process and 73% have a master data strategy.) In fact, they manage 15% more indirect spend and 12% more direct spend.
  • They do more to retain and attract the best talent.
    While they need to do more, and recognized this, masters are ahead of contenders in terms of talent development programs. In addition, 67% of using balanced scorecards and KPIs.

These insights, which echo what many Procurement thought leaders have been preaching for some time now, are good as they validate what the experts know. Talent-focussed masters go beyond three-bids-and-a-buy. Taking the strategic approach, they look for value across the board — and deliver that value like no other function can.

Are You a Procurement Master?

Leave it to a Big 5 Player, and Accenture to be particular, to decide we need yet another set of terminology to describe the same old Procurement goal. In their recent piece on “Compulsive Contributors”, they focus on Procurement Masters and Procurement Contenders, differentiated by TCO vs TVO (no, not TiVo, but that was my first take too . Picking up on the Total Value Management (TVM) concept that leading bloggers like yours truly have been preaching for five or so years now, they have decided to embrace it as a cornerstone of Procurement Mastery, but relabel it Total Value of Ownership (TVO). This is good, because TVM is necessary for mastery, while simultaneously annoying, as we don’t need new acronyms for established concepts. (I know, I know. You can’t use someone else’s acronym as then you can’t take credit for the idea.)

However, I must say that I like the fact that they state that masters, who go beyond simple TCO in their award considerations, also take into account the need to:

  • enhance materials sourcing and labor
  • reduce fixed cost structures
  • optimize processes
  • eliminate non-value add activities
  • increase working capital efficiency
  • eliminate unnecessary demand
  • accelerate new product introduction
  • increase revenue
  • reduce risks to supply and brand
  • reduce the carbon footprint

Even if they re-invent the language wheel, it’s important that the big firms (with the big marketing budgets) get the word out that Procurement Mastery is

Remember the Dangers of Centralized Buying

In an effort to combat the inflation across the board, I’m hearing a number of consulting firms emphasize the need to leverage your spend across the board, which is good advice. However, I’m worried about how some firms might be interpreting this advice. I’m getting signs that some firms, not yet as advanced in Supply Management as they need to be, are interpreting this as a need to “centralize”. While this has been the common historical response when a firm needs to obtain spend leverage and Supply Management for the categories in question are decentralized, it’s usually the wrong one. What needs to happen is the firm needs to move from decentralized buying straight to center-led buying and skip the centralization step and the growing pains that will result.

When you centralize, you lose:

  • local opportunities
    while a national temp labor agency can offer you better rates across the board, sometimes a local agency that is 10% more is actually 40% cheaper because you don’t have any travel expenses for local resources
  • local knowledge
    and sometimes a local buyer has a better understanding of the ups and down of commodity or service pricing in a region than a buyer on the other side of the globe and knows that she can spot buy a better price 80% of the time
  • (some) control over supplier performance
    as a centralized buy will typically be with one or two international suppliers who will not only have a lot more weight and leverage, but distributed production; in comparison, if buys are more local, they are typically with smaller suppliers where the buyer has the dominant position in the relationship and more control over quality and the production schedule

In addition, when you centralize, you can pave the way for organizational conflict as a result of:

  • the divergence of subunit goals
  • conflicts of preference between the central units and remote units
  • the lack of subunit inclusion
  • higher costs of certain purchases on the corporate contract as compared with local costs from a local supplier

However, a center-led purchasing organization will work with each subunit to insure that the best buy is made every time. Sometimes that will be through amalgamation of volume to obtain leverage through a larger contract with an international supplier (where costs are high) and sometimes it will be through the provision of best practices to each unit, which will secure the best rates in their region. You only get leverage where it exists to be found.

An Idea for Aligning the Non-Competing Finance and Procurement Agendas

About two weeks ago, in What Competing Agendas, SI pointed out that, where Finance and Procurement are concerned, there are no competing agendas. Furthermore, as far as the doctor is concerned, whomever said that the dynamics and sometimes competing agendas between finance and procurement are widely known doesn’t get it. At all. Remembering that the ultimate goal of any organization is to derive value for the stakeholders — employees, customers, and shareholders alike — both organizations are trying to find the right balance between cost cutting and value generation to meet the company’s goals and shareholder return. Just because Procurement is always spending while Finance is always trying to cut spend doesn’t mean that the departments are in opposition. Finance knows better than any other department that companies have to spend money to make money, as long as the money is being spent wisely, and a good Procurement organization has better spending as its ultimate goal. There is no competing agenda.

However, since Finance and Procurement sometimes speak a different language, because Procurement hasn’t learned to Speak the Language of the CFO, the agendas aren’t always aligned. And while they both plot a route to the same goal, the routes barely intersect. And any good financier as well as any good sourcerer knows that taking two planes from New York, New York to Mumbai, India with one routed through Frankfurt, Germany and the other routed through Sydney, Australia, is wasteful. Thus, the agendas have to be closely aligned for optimal performance.

But how do you align the agendas?

One idea could be to use balanced scorecards as a shared framework. Back in the early days, SI ran a post that asked if you need a Chief Strategy Management Officer. Back in 2006, CFO Research Services published a short paper that summarized the highlights of their annual executive conference in New York, New York. Part of that report was a mini-paper on aligning the finance function to strategy execution based on a presentation by Robert S. Kaplan, co-developer of the balanced scorecard and co-author of Alignment: Using the Balanced Scorecard to Create Corporate Synergies with David P. Norton.

At the conference, Kaplan discussed various approaches for aligning the finance function more strategically with the goals of business units and corporate leaders, including:

  • the use of balanced scorecards as a shared framework to run the business, guide the operating agenda, and evaluate progress against strategy
  • the use of activity-based budgeting to link the strategic planning capability of Balanced Scorecards with the operational budgeting mechanism of a time-driven ABC (activity-based costing) model

And, as I suggested in my original post, I think it’s a great idea. And I still see no idea why it can’t work for Procurement. In the process of creating a balanced scorecard, Procurement and Finance will have to agree on budgets and savings / avoidance targets, payment terms, working capital objectives, inventory turnover, and a host of other supply management issues. And by scoring themselves on the same metrics, they will have to stick to the plan to collectively succeed. Now, getting the right scorecard might not be easy, but the exercise will get the organizations to a deep alignment that will pay off in the long run if each goes in to the discussions with an open mind and a true desire to work together.