Category Archives: Procurement Innovation

The Art of Procurement Mastery

Now more than ever, procurement leaders have enormous responsibilities on their shoulders. Not only are they expected to drive even larger cuts in costs of goods sold but they are under fierce pressure to make every business process as efficient as it can possibly be. So notes Gregory Spray in a recent Supply Chain Management Review article on “The Art of Procurement Mastery”.

The article also notes that not many companies are using the downturn as an opportunity to radically rethink their activities and strategies. A downturn is a great opportunity to snap up top talent, apply business analytics to develop sharper insight, collaborate closely with suppliers to drive product innovation, and outsource effectively.

The article examines the performance gap between “procurement masters” and their lesser performing industry peers that was highlighted in a recent Accenture survey across more than 600 procurement executives from Asia, Europe, and North America which found that procurement masters achieve 30% higher savings with costs that are 50% lower, procurement masters outsource at a frequency that is two to four times higher than low performers (depending on the function), and procurement masters are leaders in supplier relationship management. I have to say that these results are not unexpected, given that Hackett has been logging similar results for almost three years now.

The study defined a “procurement master” as one with superior performance in the following five metrics:

  • Total-Cost-of-Ownership (TCO) savings
  • Spend Under Management (by Procurement)
  • Ratio between TCO Reduction and Procurement Operating Costs
  • Percentage of NPD/NPIs where Procurement has a Material Role
  • Percentage of Suppliers Managed Under a Formal Process

So what do procurement masters do that their industry peers don’t?

  1. More Thoughtful and Pragmatic Procurement Strategy
    Masters look and think three to five years out when planning purchases for critical business categories and they do a more innovative job of measuring procurement performance.
  2. Better Guidance for Sourcing and Category Management
    Masters employ a center-led organizational design that cuts across organizational entities and employ best-practice sourcing processes that emphasize

    • common processes
    • wide-spread usage of cross-functional procurement teams
    • formally tracked activities
    • tight focus on TCO
    • end-to-end supply chain orientation
  3. Greater Innovation in Procurement Processes
    For example, 83% of masters (compared with 8% of low performers) excel at providing clear and documented buying channels to end users and 87% of masters use LCCS for value creation.
  4. More Assertive Supplier Relationship Management
    Supplier Relationship Management is a leading practice of procurement masters with 84% employing a supply-base segmentation approach (compared to 1% of low performers), 83% employing automated tracking and reporting of supplier performance (compared with 1% of low performers), and 80% employing central logging and proactive management of contracts (compared with 8% of low performers).
  5. Supplier Workforce Management and Organization
    Masters excel in workforce management with 78% (compared to only 3% of low performers):

      • Objectively measuring existing competencies
      • Frequently adjusting organizational skills to align with procurement strategy
      • Emphasizing ongoing training
      • Blanketing competency development strategies across the procurement network

    In addition, 86% of masters use variable pay schemes (that compensate high performers).

  6. More Effective Use of Technology
    As the article astutely points out, technologies and technology-based solutions have advanced considerably in being able to support innovations in procurement and leading procurement executives are looking to new technology solutions to help digitize the entire supply chain.

As this echoes many of the messages my fellow bloggers and I have been conveying for the past few years, I’d say that this is good advice across the board.

Managing The Purchasing Factory


Today’s guest post is from Pierre Mitchell, Director, Procurement Research and Advisory for The Hackett Group.

Dave Nelson, the CPO from John Deere, co-authored a book titled “The Purchasing Machine“. The book was good, but never explained the meaning of the title. It did however get us thinking about the analogy of a factory to a Procurement function, and how Procurement can apply Lean Manufacturing principles to its operations.

Many companies are currently implementing Six Sigma methodologies, and both Lean and Six Sigma emphasize a focus on the customer and the elimination of waste. Six Sigma’s “DMAIC” methodology can very easily be applied (and is being applied at some progressive organizations):

  • Defining the needs of procurement’s internal customers,
  • Measuring the criteria of success (e.g., supply assurance, savings, supplier innovation, etc.),
  • Analyzing the current situation (e.g., too many suppliers, too many ways to buy, etc.),
  • Improving the processes (i.e., the “opportunity identification” step in a sourcing methodology), and
  • Controlling processes to “hold the gains” (e.g., contract compliance) through fail-safe processes.

This is foundational and fundamental stuff. However, applying lean manufacturing techniques to the “white collar factory” of sourcing and P2P (Purchase-to-Pay) is a mostly untapped area of opportunity.
Interestingly, some procurement organizations have named themselves “Supply Chain Management” even in non-manufacturing environments (e.g., Bank of America), but yet they always haven’t taken to heart key practices that manufacturing organizations have put in place on the shop floor. This is unfortunate, because it can be done.

Managing the “sourcing factory”

One way to view strategic sourcing is that of a Configure-to-Order business that “manufactures” highly profitable services. How profitable? For every $1 invested in procurement, world-class procurement delivers $7 to the firm, and that number goes even higher when looking at strategic supply processes. Unfortunately, there is a backlog of work because there is not enough investment in the bottleneck work centers (e.g., commodity managers), and not enough profitable services are getting out the door. So, attacking the bottleneck is critical, but funds are not unlimited to purchase more capacity, and must be freed from other areas (e.g., transactional processes) while improving “yield” through better work methods and measured doses of appropriate automation (e.g., freeing up commodity manager’s time via better spend/supplier analytics).

Another issue within the sourcing factory is aligning capacity to customer expectations via a “Capable-to-Promise” model. Various types of standard sourcing services, and their associated lead times and quality levels, should be offered up to customers based on finite capacity, and then configured to order. Without segmented “flow lines” (e.g., simple negotiations versus complex ones), standard lead times, capacity planning, and demand management (e.g., setting rules by which procurement must be involved in sourcing), the factory is going to be backlogged, quality will suffer, and customers will be very unhappy.

Designing what you can manufacture

The end of the sourcing factory is not the contract. A sourcing service is only profitable when preferred agreements are actually utilized within the “P2P factory” (where orders are placed and bills are paid). Unfortunately, they often aren’t. For the average company, our benchmark data puts overall bypass/maverick spend at 10%; but the real problem lies within indirect spend. A custom study that we did with 200 firms on contract management revealed a 23% maverick spending figure for influenced indirect spend. This translates to $11 million in lost savings per billion in indirect spend for the typical company. The problem with this $11 million of “scrap” is that the design of the Source-to-Settle process didn’t adequately consider the downstream processes of P2P (or supplier management and development). Strangely, every strategic sourcing methodology includes a “stakeholder management” process, yet the methodologies rarely explicitly define how P2P processes and systems will guide users to preferred supply sources and optimal buy/pay methods. It’s important to make strategic sourcing staff accountable for maverick spending (and not just savings). Treat P2P process users as customers – key stakeholders – and utilize thoughtfully designed downstream processes such as P2P and supplier management and development.

Converting the P2P job shop to flow lines

Most companies claim they have a defined P2P process, but if you scratch the veneer, you’ll find issues — e.g., only one-quarter of typical firms have single accountable P2P process owners. Frankly, some companies’ P2P processes are positively medieval, with each transaction handcrafted in a manner befitting the purchaser trying to get it through the system. If a firm has moved into the industrial age of P2P manufacturing and does have any P2P methods defined, it is likely the venerable three-way match. In manufacturing vernacular, this is known as a “job shop” — a “one facility fits all” general purpose processing capability, where everything goes in on one side and hopefully makes it out the other. If it’s an ERP environment, it’s “one system fits all”. In Lean manufacturing environments, flow lines (or “cells”) are set up based on families of similarly-made parts; for P2P processing, firms should define tailored transactional flow lines beyond the 3-way match, to include p-cards, assumed receipts, Evaluated Receipts Settlement (ERS), invoice-to-contract matching when POs not required, etc.

Papers from Hackett’s Purchase-to-Pay advisory program describe these concepts: “”Using an Optimized Transaction Strategy to Achieve P2P Efficiency”” and “A Management Primer for Balancing Risk and Control in P2P”. By designing a “P2P manufacturing” factory with transactional flow-lines that are fit-for-purpose, efficiency and effectiveness will invariably improve.

Thanks, Pierre!

We Don’t Need No Consultants

Today’s guest post is from Patrick J. Horgan of Paladin Associates.

Why Some Companies Don’t Seek Needed Cost-Reduction Help

Cost-reduction is essential in today’s economy, but unfortunately many managers have little experience in these activities. Mistakes in cost-reduction can damage morale, productivity, and can even precipitate a corporate death-spiral. Experts recommend independent cost-reduction consultants, but most companies don’t seek external help. Their reasons sometimes make sense, but they are often emotional and thought through poorly. Here are some common rationalizations which prevent many companies from seeking the help and getting the results they really need:

“We don’t need help.”
“We can do cost-reduction ourselves”. Or, “we should be able to do it ourselves.” “We already have cost-reduction initiatives.” “We will soon have cost-reduction initiatives underway.” “External consultants will probably try to take credit for things we have already identified.”

“We don’t want help.”
“Consultants may find things that are embarrassing or that we probably should have found. We may be blamed for these things.” “We will not be able to personally control what they find or communicate.” “We are currently too disorganized to undertake such an initiative.” “We don’t want a lot of change and turmoil.”

“We can’t afford help.”
“Consultants charge a lot, usually up front.” “We have no budget for this.” “We can do it for less.”

“We don’t believe consultants can actually help.”
“Consultants just feed back what we already know. They don’t actually produce results.” “Consultants won’t understand our business.” “How would we know if we actually saved anything?” “We’ve had bad experiences with consultants and cost-reduction projects in the past.” “External consultants are against company policy, or require high-level approval.”

“We are not the decision makers.”
“We don’t really know who decides this, and we don’t want to ask.” “Someone else is in charge of this; it’s not our job.” “IT/Telecom has sourcing responsibility; not Sourcing.” “IT and Telecom are under different organizations, yet buy off of the same contract.”

“It is not in my personal political interest to support this.”
“Cost-reduction can be risky… might result in reorganization, reassignment, budget cuts, layoffs, new priorities, loss of power, change — could be bad for me personally.” “Our boss doesn’t want to do this.” Or, “Our boss might want to do this, but we don’t.” “If this doesn’t work out, we might be blamed.” (But maybe we should pretend to be interested and slow-roll this.)

“We don’t have or control the resources to support such an effort.”
“We have other priorities.” “We don’t have good data on costs and spending.” “We don’t have the staff for this.” “We have lots of contract leakage as internal components are organizationally fragmented.” “To capitalize on many initiatives may require cross-functional cooperation and coordination which we don’t control, and priorities which we don’t have.”

“We don’t want to disrupt our vendor relationships.”
“We already have great prices.” “We depend on our vendors for things other than price.” “The supplier has a personal relationship with the CXO.” “We really enjoy the annual Vendor Golf Weekend at Pebble Beach.”

The Real Facts
Sometimes these rationales are valid, but most often they are not. Companies may have excellent relationships with their suppliers, but it’s inescapable that continuous competition improves the breed and reduces cost. Cost-reduction falls directly to the bottom line, and should be pursued aggressively despite fuzzy reasons to the contrary.

Even though companies “ought” to be able to run effective cost-reduction programs themselves, in reality they frequently do not. For many reasons — budgets, staffing, expertise, priorities, timing, politics, whatever — the opportunities go unmined… and the potential savings go unrealized. Or they are done in an amateur fashion, often with unintended consequences. Most companies don’t and probably can’t have enough qualified resources to do this thoroughly.

Cost-reduction consultants do this for a living, not just during the occasional recession… they are experts and know all the tricks. External consultants can often help cut through internal politics and conflicts of interest. They can catalyze stalled activities and get them rolling.

Independent consultants can help analyze spending patterns, and specifically focus on and drive results… particularly if they are paid on a percentage of savings realized. This approach eliminates upfront fees, reduces risk, and insures an excellent ROI. The money saved can pay for fees many times over. External resources can accelerate cost-reduction savings. Additional bandwidth leverages employees, and gets more done, faster. Time is money.

External cost-reduction experts jump-start and insure execution of cost-reduction programs that can preserve a business in times like these. Cost-reduction programs should be win-win initiatives, structured and empowered to encourage cross-functional cooperation. They should be supported and regularly reviewed by high-level executives, not just lower-level employees who may fear blame or loss of status.

Thanks, Pat.

Even in Night, Procurement Shines Bright

The Winter Edition of CPO Agenda had a great article on how stand-out procurement functions are continuing to extend their reach and value despite volatile market conditions. In “How the Stars Shine Brighter”, the authors reviewed the 2008 Assessment of Excellence in Procurement from A.T. Kearney (AEP 2008) that surveyed and benchmarked almost 500 respondents against their industry and geographic peer groups as well as best-in-class companies.

The study identified three key trends from leading procurement practices that can be directly linked to the attainment of sustainable competitive advantage:

  • Leaders achieve a broader mandate to drive change,
  • Leaders develop dynamic new value-creation strategies to satisfy ever-increasing customer demands, and
  • Leaders continue to develop and maintain robust enabling capabilities in performance management, knowledge and information management, and human resources management.

Leaders Drive Change

In direct materials leaders typically control two-thirds of external expenditure — twice that of the average firm. In indirect materials, the proportion is 73% for leaders, 42% for followers. By addressing a larger portion of the total corporate spend, leaders are yielding overall procurement-related savings that are 2.3 times greater than the followers. For a $20 billion company that could represent a 21% advantage in earnings per share versus its competition.

How do they do this? They:

  • Align with Corporate Strategy
    The CPO maintains a close relationship with senior management to help him or her align procurement strategies with the overall corporate strategy.
  • Refine the Organizational Structure
    Today’s procurement organizations frequently follow a center-led model that features common policies, approaches and practices for purchasing company-wide.
  • Increase Strategic Focus
    Leaders focus on strategic initiatives, not transactional activities that are best left to automated systems.

Leaders Develop New Value-Creation Strategies

Leaders go above and beyond the basics, initiate supplier collaboration, and differentiate themselves through superior approaches to risk management, best-cost country sourcing, and sustainability. They

  • Take Sourcing Practices to New Heights
    Leaders take a highly systematic approach to the application of traditional sourcing strategies, including volume concentration, best-price evaluation and global sourcing, as well as more relationship-orientated approaches such as product specification and joint process improvement, and relationship restructuring. Leaders also create value by using sourcing and category management methods such as innovation network leveraging, product “teardown” (a common method of analysing competitors’ products), collaborative cost reduction, expressive bidding and price benchmarking, to name but a few, to a far greater extent than followers. As a result, they attain higher levels of cost savings and value.
  • Drive Supplier Collaboration and Innovation
    Leaders are redefining boundaries and reaping the benefits of true partnerships, such as more product and service innovation and faster time to market.
  • Unlock Value through Risk Management
    The majority of leaders systematically use internal risk mitigation strategies to ensure supply continuity, develop category management contingency plans, align supply security with their overall business risk tolerance goals, and define, measure and track risk management and supply chain key performance indicators (KPIs).
  • Source from Emerging Markets
    Leaders arrive to the party early, while the savings buffet is full and plentiful. Leaders demonstrate that potential obstacles around emerging market sourcing can be overcome by actively engaging with and investing in suppliers. The ability to manage risk — through supplier process auditing, process risk assessment, high-quality data reporting and analysis, and the placement of key procurement executives in offshore locations — gives the leaders confidence that their emerging market sourcing activities will bring cost improvements without introducing excess risk.
  • Follow Sustainability and Corporate Social Responsibility Best Practices
    Finding the right balance between economic viability, environmental awareness and social well-being is a significant challenge, but a competitive advantage can be gained by companies that locate intersection points for all three. Sustainability leaders are differentiating themselves in a number of ways, be it through reductions in energy use and waste, taking on a holistic, future-orientated focus, or extending sustainability outward to the extended enterprise.

Leaders Employ Robust Enabling Capabilities

Leaders measure actual benefits, perform audits of procurement benefits, examine the function’s impact on profit and loss, and track productivity performance indicators. Leaders

  • Employ Best-of-Breed Technology
    Leaders have taken spend visibility to the next level, linking systems to product development and product lifecycle management tools to further improve control and influence procurement decisions earlier in the design and decision-making process. Leaders are improving their business intelligence capabilities with respect to spend management, using techniques such as predictive modeling at a much faster rate than followers. And leaders hold, on average, more than five e-sourcing events per business day — a rate four times greater than that of the followers.
  • Win the Fierce Battle for Talent
    Leaders realise that continued success depends on their ability to attract and retain the right people.

What are The Drivers of Procurement Excellence? Part II

Yesterday’s post discussed the recent article in the Supply Chain Management Review on “The Drivers of Procurement Excellence” that discussed seven megatrends that are currently exerting their impact on the global procurement function which the authors claimed to be driving procurement excellence by way of the pressures they are exerting on procurement departments across the board. While I agree that all of the megatrends are driving the need for a greater procurement function, and while I believe that each of the five elements that they listed as being core to a procurement transformation are necessary, I do not think that megatrends drive procurement excellence.

As far as I’m concerned, procurement excellence is driven by one thing — and one thing alone. Talent. People drive excellence — and although this excellence generally needs to be supported by kick-ass processes and kick-ass technology, excellence is driven by people first, process and technology second, and external influences third.

Face it, as the SCMR article deftly notes, the skills and capabilities required in today’s procurement function are vastly evolved and nearly unrecognizable from those of 10 to 15 years ago and no technology or process is going to come close to meeting a fraction of the requirements, or deliver the results today’s procurement functions need, without a very talented individual at the helm. An individual that is an experienced, collaborative, customer-focused market zen master team player who is driven to succeed. An individual that is adept at analysis, skilled at strategy, and focussed on sustainability and who will seek out the knowledge she needs, consult with experience, and innovate all the while. A new breed of professional who is a jack-of-all-trades and master of one — spend and supply management!

Of course, given that there’s a talent crunch, and maybe even a talent war, for A-level procurement professionals that has already progressed to the point that only 11% of executives are confident that they will be able to recruit and retain the needed talent they need, attracting the talent you need might be easier said than done. That’s why true leaders will take their intelligent, hard-working, driven B-level players and provide them with the training (possibly through industry-leading certifications such as the SPSM offered by Next Level Purchasing) and job experience they need to become A-level players and kick ass. (And when you consider that, as pointed out in this Supply Excellence piece, A players, who only cost 40% more, often deliver an overall return of 100% or more in a given year, the payback on talent acquisition and development is almost exponential!)

So hire the best, train the best, and retain the best … and you will achieve procurement excellence, because the best will accept nothing less.