Procurement-Powered Business Performance

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1 Assessment of Excellence in Procurement Study, 2014 Procurement-Powered Business Performance Leaders use procurement to catalyze lasting, superior business performance through excellence in managing categories, suppliers, and teams. 1

2 Over the past 20 years, businesses have come to expect increasing value from procurement. Our recently completed global Assessment of Excellence in Procurement Study finds that: Leading companies get twice as much measurable cost reduction as typical companies, while capitalizing on their supply base for competitive advantage through supplier-driven innovation, risk management, and other means. Since 2011, progress in the typical company has leveled off, leaving executives to ask: What s next for procurement? Leaders use procurement as a catalyst to drive durable superior business performance through excellence in managing categories, suppliers, and teams.

3 The rush to cut costs in the wake of the Great Recession propelled procurement organizations to the forefront at companies around the world. Faced with so much uncertainty, companies raced to shed costs and procurement rose to the challenge, delivering exceptional results. With this came an increase in procurement s stature, influence, and reach. A.T. Kearney s Assessment of Excellence in Procurement (AEP) 2011 study saw a doubling in the rate of benefits achieved by the procurement functions since the 2008 study, yielding the highest percentage gains seen in the more than two decades since we began conducting this study. 1 (For information about AEP 2014 goals and demographics, see the sidebar: About the Study.) In 2011, we projected that this upward trajectory would continue: procurement appeared poised to deliver even greater impact to the business. Our 2014 AEP study finds that while leading companies continued their trajectory, most procurement organizations only sustained the gains in influence and reach made between 2008 and In short, the typical company may be wasting a crisis by not continuing to enhance one of the most powerful levers to improve profitability and competitive advantage. About the Study A.T. Kearney s 2014 Assessment of Excellence in Procurement study is the eighth in the series since The objective of this latest study is threefold: Evaluate how procurement has progressed since 2011 Determine how ready procurement is for the future Identify lessons learned from leading procurement organizations The study includes input from procurement and supply chain executives at more than 185 companies in the manufacturing (33 percent), process industries (41 percent), and services (26 percent) sectors, with average annual revenues of approximately $15 billion. Participants are from all regions of the world: 43 percent from Europe, the Middle East, and Africa, 41 percent from the Americas, and 16 percent from Asia Pacific. Participants completed a comprehensive online survey with more than 1,000 elements spanning eight dimensions of purchasing and supply management covered by our House of Purchasing and Supply SM (see figure) and were evaluated and scored on their use of leadership practices on each dimension. Companies designated as overall AEP leaders exhibit a combination Source: A.T. Kearney analysis of overall strong performance in the use of procurement practices across the eight dimensions, together with high financial impact as measured by return on supply management assets, or ROSMA SM. Additionally, leaders were designated for each dimension, based on those companies scoring in the top 20 percent. Figure A.T. Kearney s House of Purchasing and Supply SM forms the basis for the AEP study Sourcing and category management Performance management Supply management strategy Organizational alignment Supplier relationship management Human resources management Operating process management Information and knowledge management 1 See Follow the Procurement Leaders: Assessment of Excellence in Procurement Study, 2011 at 1

4 The Typical Company Has Leveled Off To be clear, procurement performance at most companies has not declined since the previous AEP study. Figure 1 shows some key ways in which the procurement function s status has slightly increased since then. Procurement has kept its seat at the executive table and better aligned itself with the overall business strategy. Most companies recognize sourcing s unique power to deliver major cost reduction and have mastered basic sourcing and contracting principles. Many have even awakened to the need to measure procurement performance. But we are not seeing the progress we expected coming out of our 2011 study. Gains from sourcing have slowed, as multiple waves of brute force sourcing approaches such as volume bundling, supplier consolidation, and competitive bidding have led to resistance from suppliers and yielded diminishing returns. Procurement benefits as a percentage of influenced spend have returned to the historical average following the heights reached in 2009 and 2010 (see figure 2). The use of leadership practices for procurement has not increased substantially, limiting companies ability to generate new streams of cost reduction and deliver value through supplier relationship management (SRM). Finally, at many companies, procurement lacks the additional influence and reach needed to achieve the next level of performance. What is holding them back? The reasons include the lack of designated responsibility to take the lead for all major spend categories and explore broader value creation opportunities, weak strategic and organizational links to the rest of the business, and difficulty communicating the function s return on investment (ROI). Quite simply, procurement organizations at many companies have maintained the status quo when they should have continued increasing their business impact. Figure 1 Procurement s stature has solidified and slightly increased between 2011 and 2014 Procurement organization stature (% of companies selecting fully agree ) Leadership for all key expenditure areas Mandate communicated and accepted Extended mandate to explore broader value creation opportunities Extended mandate to identify and recommend new business opportunities Source: A.T. Kearney Assessment of Excellence in Procurement Study Figure 2 Procurement benefits are returning to the historical average Procurement benefits (% of influenced spend) Source: A.T. Kearney Assessment of Excellence in Procurement Study 2

5 The Leaders Are Showing the Way In contrast, leading procurement organizations have found ways to advance, delivering even greater impact since our 2011 study. Integrating more closely with the business units and regions has increased their relevancy, influence, and impact. They have continued their journey toward procurement excellence by expanding their use of leadership practices. They have achieved breakthrough financial results from procurement generating double the Return on Supply Management Assets (ROSMA SM ) performance levels compared to the typical company and delivering benefits at a rate ten times greater than the cost of their people, technology, and external support (see the sidebar: ROSMA SM Basics). Leaders have achieved this performance by: Building high-performance teams as a catalyst for business alignment Reducing costs through category excellence Creating competitive advantage through supplier capabilities Investing in the procurement team to deliver durable superior performance The sections below examine these four key differentiators. Building high-performance teams as a catalyst for business alignment Leading procurement organizations are maximizing benefits by improving performance both internally and externally. They are closely aligning procurement with the business at the corporate, business unit, and regional levels. They begin by developing a compelling vision for procurement excellence that is shared at all organization levels. Leaders look ahead of the current year s budget to imagine and articulate how they will sustain present-day benefits, while reaching beyond traditional sourcing to find ways to deliver value that transcends mere cost savings. As part of this company-wide benefits and value discussion, procurement leaders communicate what the function delivers to the company in terms that the business can understand, typically by using the finance organization s language to measure and share performance data. They also ensure that their own organization is aligned by regularly engaging the entire procurement function around the three- to five-year vision. Leaders focus on achieving tight coordination with both internal and external organizations through practices such as mutual goal setting with business units, regional organizations, ROSMA SM Basics A company s Return on Supply Management Assets (ROSMA SM ) score measures procurement s contributions to the business and articulates those benefits in financial terms. 2 A ROSMA SM score is calculated by dividing procurement s Financial Results Delivered by the Invested Supply Management Assets, whereby: Financial Results Delivered = Spend Actively Sourced * Yield * Compliance + Additional Benefits Invested Supply Management Assets = Total Procurement Costs ROSMA SM offers a sustainable framework to assess procurement performance management and offers insight into supply management value drivers. Additionally, it provides a platform for holistic discussions with stakeholders and a way to benchmark performance on a peer-to-peer basis or among industries. 2 For more information, please see 3

6 and functional stakeholders and use reward systems that encourage cooperation among the parties. Excellence in stakeholder relationship development and management is recognized and nurtured as a critical foundation for success, both at the individual and functional level. Transparent communications around the value that procurement brings help leaders earn the support needed to continue with and advance their value-added efforts. Leaders have earned a much broader mandate and far greater organizational acceptance to generate value for the enterprise. Procurement leaders share procurement performance data beyond their function to ensure that company-wide stakeholders are kept aware of procurement s contributions. Finally, leaders have greater credibility with business leaders than has the typical procurement organization they have invested in the systems, data management, and capabilities to ensure their benefits reports and other data are accepted and trusted by finance and other leaders within the business. Reducing costs through category excellence To help portray the full array of methods at procurement s disposal to reduce cost and increase value, A.T. Kearney developed The Purchasing Chessboard, a two-by-two matrix that portrays 64 of these methods including advanced analytical approaches mapped to different degrees of supply and demand power in the marketplace. 3 AEP study leaders systematically use more of these methods than the average company across every chessboard quadrant, as demonstrated in figure 3. Leaders extensively use these techniques to leverage competition and internally manage Figure 3 Leaders use a broader set of improvement methods The Purchasing Chessboard (% of companies selecting systematically used ) High Leaders Typical companies Change nature of demand Seek joint advantage with suppliers Key 90% 12.0 Supply power % 10% 4.3 Manage spend Leverage competition among suppliers 5.2 Low Low Demand power High Source: A.T. Kearney Assessment of Excellence in Procurement Study 3 See 4

7 spend. More importantly, where supply power is high, leaders employ advanced methods in order to change the nature of demand or work with suppliers to seek joint advantage. In addition to applying the chessboard methods to today s spend, leaders are positioning themselves for long-term success by developing strategic playbooks plans for key categories designed to better help the company meet its future needs and, if possible, shift the supply-demand balance in the company s favor. Leaders incorporate a broad set of elements into these strategic playbooks, including continuous monitoring of supply markets and company requirements, identification and development of alternative sources of supply, and supply chain and logistics considerations, including contingency plans (see the sidebar: On the Road to Category Excellence). On the Road to Category Excellence Over 20 years ago, a multinational company began its journey toward category excellence. It adopted a formal sourcing process, which it systematically applied over three years to the majority of its spend. As the years passed, the company revisited the categories using a broader range of improvement methods, adding deeper category expertise, and applying new analytical techniques. These additional actions gave it an ongoing stream of additional cost savings for several years. But competition was beginning to catch up, and the company was not satisfied; it was time to take the next leap forward in category management to stay ahead. That involved developing strategic playbooks that would define the moves needed over three to five years in order to better position the company and (if possible) fundamentally change supply and demand power for select categories. It chose to pilot the approach with two categories. One category involved purchased technology that was changing rapidly. The company needed a strategy to slipstream the new technology into its product development and production processes while continuing to manufacture and service its legacy products that used the old technology. The other category involved a risk with a sole-source supplier three tiers upstream in the supply chain. For this category, they needed a strategy to mitigate risk in the short term while creating options in the longer term. For each category, a crossfunctional team including procurement, manufacturing, marketing, R&D, and new product development researched the situation in depth and developed scenarios. They then brainstormed options and analyzed the most promising among them. Finally, the strategies, short- and longer-term actions, and contingency plans were documented, and implementation began. For the technology-based category, the strategy was to integrate its product development plans with supplier A, judged to have the most promising technology road map. For its existing product line, the company chose to continue dual sourcing from supplier A and supplier B, while adding contract provisions that would guarantee availability for legacy products and warranty coverage for the installed base. For the risk-vulnerable category, the strategy was to go directly to the tier 3 supplier to evaluate its risk readiness including financial health, management stability, quality assurance, production stability processes, and potential for a natural disaster. In the short term, it concluded that it should direct upstream suppliers to stockpile inventory of the tier 3 s goods in the event of a failure. Longer term, two alternatives were under consideration: work with tier 1 and 2 suppliers to find a substitute for the tier 3 s products, or redesign the tier 1 and 2 components to avoid using the tier 3 at all. While the company is just beginning to execute these two playbooks, the near-term actions are already in place. As the future unfolds and situations change, the company will refine these playbooks and develop new ones for other important categories. 5

8 Besides tracking more conventional supply and demand conditions, procurement leaders closely monitor and prepare to deal with disruptive technologies that could change demand for their end products and services. They also actively scan for the emergence of new technologies and nontraditional suppliers that can increase market competition. Additionally, they recognize the importance of supply risk management: nearly all use techniques such as continuous risk monitoring, scenario planning, value chain modeling, disaster planning, and secondary supply sourcing, while barely half of typical companies do the same. Creating competitive advantage through supplier capabilities Procurement leaders are finding ways to harness the suppliers capabilities, work collaboratively with them to benefit from excellence in their supply base, and thus achieve competitive advantage. Leaders have generated significant value from their SRM efforts. In fact, one-third of the value their organizations create comes from SRM, versus about one-quarter for the typical company. Achieving high SRM performance requires developing a common, cross-enterprise understanding of what we call TrueSRM SM in order to drive value throughout the supplier life cycle (see sidebar: TrueSRM SM ). Leading procurement organizations have developed and continually demonstrate their SRM understanding by using a consistent, repeatable, and commonly understood SRM process and vocabulary that is embraced throughout the company and the supplier community. Using SRM, leaders address a broad range of business goals beyond the basics of supply continuity and lower unit costs, including innovation and growth, asset optimization, and risk mitigation (see figure 4 on page 7). Successful strategic SRM efforts also require selecting the right suppliers. The best candidates show longer-term alignment with the company s business strategy as well as the capabilities to enhance the company s growth. In identifying these suppliers, leaders develop hypotheses about potential mutual value creation opportunities to discuss with suppliers, jointly agreeing with them on implementation plans that include improvement recommendations. Leaders deliver value beyond cost from SRM by integrating suppliers into the company s own processes. They use a range of methods to streamline supply chains with their strategic suppliers, including collaborative capacity management, collaborative cost reduction, integrated operations planning, and virtual inventory management. Additionally, procurement TrueSRM SM TrueSRM SM is A.T. Kearney s approach for converting SRM from a purely tactical realm focused on process into a strategic agenda to: Manage all supplier interactions in relation to business objectives Encourage desired behaviors at suppliers Achieve internal alignment on the above points The key to meeting these challenges is to rigorously manage suppliers in a highly differentiated way. This is based on a rigorous corporate-wide and top-down assessment of performance and strategic potential, which then leads to nine differentiated interaction models for dealing with suppliers. Exponents of TrueSRM SM focus their time, effort, and resources on the critical cluster of relationships that have the true potential to bring competitive advantage. 4 4 For more information, see the book Supplier Relationship Management: How to Maximize Vendor Value and Opportunity. 6

9 Figure 4 Leaders use SRM to address a broader range of business goals SRM capability (% of companies selecting significant results or breakthrough results ) Leaders Typical companies Meet current business or supply requirements Reduce supplier unit cost Mitigate risks Improve asset or capital structure Drive end-to-end cost down Pursue innovation development Grow existing markets or enter new ones Develop or leverage differentiating supplier capabilities The basics Advanced dimensions Source: A.T. Kearney Assessment of Excellence in Procurement Study leaders integrate key suppliers into innovation and growth initiatives (see the sidebar: Innovation through Collaboration on page 8). All AEP 2014 study leaders have an innovation target for procurement, and nearly half have a major open-innovation effort underway to integrate suppliers into their innovation stream. Investing in the procurement team to deliver durable superior performance To help ensure that their procurement organizations will continue to deliver and sustain superior results, leaders are investing in their teams capabilities, technology, and performance management. Leaders invest to increase procurement team members capabilities, including subject matter knowledge, analytical capabilities, leadership abilities, and teaming skills. They use a planned training and development road map, invest to ensure the skill advancement takes place, and routinely review the capabilities required to realize the procurement vision. With continued globalization of supply and customer markets, leaders are actively addressing the needs of a diverse and dispersed workforce. They employ strategies to attract the best talent in every market and promote interactions and collaborations around the globe. Leaders are relentless about shifting responsibility for transactional processes outside of procurement (either via migration to an outsourced provider, shared service center, or automation) to free up resources for high-value activities. To enhance their teams capabilities, leaders are leveraging enabling technologies to strengthen analytics and support broader and deeper knowledge management. Because spend visibility is so critical to cost management, they are investing in systems that provide current spend data for ongoing analysis. Almost all leaders capture and share procurement knowledge and invest in intellectual capital development. They train their teams to use spend analytics, supply market analysis, and other procurement information technology tools. Over half of our study leaders have introduced new tools for optimization and other emerging techniques. 7

10 Innovation through Collaboration With only two manufacturers of long-distance aircraft, long-haul airlines have a very limited choice of suppliers. While volume purchases provide an opportunity for savings, other sources of value beyond cost are available by collaborating with suppliers on design. In the late 1980s, one aircraft manufacturer started to develop a new ultrahigh-capacity airliner that would break the dominance of its competitor in that segment. Developing new technologies and designing aircraft is a long-term process with significant financial risk. A leading global airline recognized the opportunity to build a strong relationship with this aircraft manufacturer and influence the design. Both sides had high win-win expectations. The airline wanted first-mover advantage as the launch customer, but it had a primary interest in influencing the development process, specifically the passenger cabin design. Its premium class cabin was designed around luxurious suites targeted at passengers who do not want to compromise on sleeping, seating, or working while in air. Each suite has a full-size mattress, sliding doors, and pull-down windows. This innovation propelled the airline to the top as the trendsetter for luxury air travel. The airline had great success as the launch customer for the new jumbo jet. It significantly expanded its brand value, customer base, and new services. In less than 18 months, the one-millionth passenger flew with the airline on the new aircraft. A big marketing effort, followed by extensive media coverage, turned the airline into the best-known international airline carrier. Especially successful was a charity auction on ebay, in which passengers bought seats paying between $600 and $100,000 for the first scheduled flight of the aircraft. The manufacturer s early-stage cooperation turned into a big success for them as well, as it not only heard the voice of the customer through the entire product development process but also profited from free media coverage. And even more importantly, the buying commitment from one of the largest and most admired airlines positively influenced buying decisions from other airlines. Leading procurement organizations make broader and more robust use of performance management metrics than the average company. They do not simply measure quantitative results; they also measure the effectiveness and efficiency of the underlying processes that drive those results. The metrics and dashboards they use provide insights that help drive continuous improvement. To reinforce teamwork, leaders also link compensation to performance that reflects both group and individual performance. Leaders tie compensation to the achievement of measureable benefits, with clear differentiation in rewards between high and low performers. Leaders also benchmark compensation levels externally to stay competitive in talent attraction and retention. In terms of procurement operating models, leaders focus on strategic activities and develop specialists in areas such as category management, SRM, analytics, and process design and implementation. Procurement outsourcing is targeted toward more tactically and operationally focused activities. The Path Forward Procurement organizations face a choice: maintain the status quo or reach higher by unleashing the full potential of their supply base. Over the next few years, for the typical company, maintaining the present course will almost certainly lead to a reduction in procurement s impact on company performance and diminished stature for the function. 8

11 The second path suggests procurement soars as it becomes an even greater strategic business contributor with a strong internal brand and advanced capabilities, staffed by procurement athletes who are widely recognized as a valued asset throughout the company. What will happen to the procurement organizations that opt to maintain their present heading? Inaction will do more than simply erode some of the gains recently achieved; it could bring about deeper repercussions. Already, the typical finance organization views the procurementreported results with a raised eyebrow, according to a recent A.T. Kearney survey that found less than one-third of finance executives widely accept these reports. Credibility will be lost by those organizations that do not reach higher. Failure to act could also lead to a lower profile for procurement organizations, which will bring about changes in reporting relationships and potentially lead to outsourcing of strategic procurement activities. Most damagingly, inaction could negatively impact procurement s financial contribution to the bottom line, ultimately hindering the overall business s performance. Without the procurement engine to deliver a stream of ongoing benefits, fewer funds will be available to support important growth initiatives such as innovation and market expansion or to directly boost earnings per share. Companies that adopt the procurement practices that separate the best from the rest will have a much brighter future. Procurement leaders provide insights into how to apply world-class procurement practices to achieve team, category, and supplier excellence, while demonstrating the economic benefits of doing so. Continued growth will lead to a strong procurement brand as executives throughout the company come to acknowledge procurement as a strong, consistent value generator, leading to increased stature, influence, and reach. Key suppliers will recognize that the company can be trusted to partner for longer-term joint advantage. Procurement will be known for attracting, developing, and retaining premier talent. A portion of the increased return on the procurement investment achieved by leading organizations can be reinvested in enhanced skills, tools, and capabilities. As procurement excellence helps to generate benefits and have greater business impact, companies will be more inclined to free up more funds for innovation, growth, and improved shareholder value. The time is now for procurement to reassert its position as a critical value driver. Authors John Blascovich, partner, New York john.blascovich@atkearney.com Alejandro Ferrer, director, San Francisco alejandro.ferrer@atkearney.com Stephen Easton, partner, London stephen.easton@atkearney.com The authors would like to thank Sonali Agarwal and Bill Markham for their valuable contributions. 9

12 A.T. Kearney is a leading global management consulting firm with offices in more than 40 countries. Since 1926, we have been trusted advisors to the world's foremost organizations. A.T. Kearney is a partner-owned firm, committed to helping clients achieve immediate impact and growing advantage on their most mission-critical issues. For more information, visit Americas Atlanta Bogotá Calgary Chicago Dallas Detroit Houston Mexico City New York Palo Alto San Francisco São Paulo Toronto Washington, D.C. Asia Pacific Bangkok Beijing Hong Kong Jakarta Kuala Lumpur Melbourne Mumbai New Delhi Seoul Shanghai Singapore Sydney Tokyo Europe Amsterdam Berlin Brussels Bucharest Budapest Copenhagen Düsseldorf Frankfurt Helsinki Istanbul Kiev Lisbon Ljubljana London Madrid Milan Moscow Munich Oslo Paris Prague Rome Stockholm Stuttgart Vienna Warsaw Zurich Middle East and Africa Abu Dhabi Doha Dubai Johannesburg Manama Riyadh For more information, permission to reprint or translate this work, and all other correspondence, please insight@atkearney.com. The signature of our namesake and founder, Andrew Thomas Kearney, on the cover of this document represents our pledge to live the values he instilled in our firm and uphold his commitment to ensuring essential rightness in all that we do. A.T. Kearney Korea LLC is a separate and independent legal entity operating under the A.T. Kearney name in Korea. A.T. Kearney operates in India as A.T. Kearney Limited (Branch Office), a branch office of A.T. Kearney Limited, a company organized under the laws of England and Wales. 2014, A.T. Kearney, Inc. All rights reserved.