BENCHMARKING SUPPLIER RELATIONSHIP MANAGEMENT

Transcription

1 BENCHMARKING SUPPLIER RELATIONSHIP MANAGEMENT Kurt Albertson Associate Principal, Procurement Advisory September 8 th, 2014 Business Advisory Services 1

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. Copyright 2014 The Hackett Group, Inc. All rights reserved. World-Class Defined and Enabled. Business Advisory Services 2

3 Kurt Albertson, Associate Principal Procurement Advisory 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. 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. Business Advisory Services 3

4 Agenda Introductions Why Supplier Relationship (SRM) matters? How does Oil & Gas compare? What are the key components of an SRM Framework? Q&A Business Advisory Services 4

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 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 % of the Dow Jones Global Titans 73% of the DAX 30 45% of the FTSE % of the CAC 40 Business Advisory Services 5

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 followup 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 kalbertson@thehackettgroup.com Business Advisory Services 6

7 Agenda Introductions Why Supplier Relationship (SRM) matters? How does Oil & Gas compare? What are the key components of an SRM Framework? Q&A Business Advisory Services 7

8 Supplier Relationship Mgmt provides a framework to manage supplier interactions across a broad set of objectives The Hackett Group Supplier Relationship (SRM) Model: SRM Definition & Best Practices SRM Model Definition Best Practices Supplier Stratification SRM Governance Performance Supplier Development Supplier Stratification Definition Supplier Stratification Expectations Supplier Stratification Execution Teams, Roles and Competencies Definition Ongoing Governance SRM Adoption Performance Definition Performance Tool Development Ongoing Supplier Performance Supplier Development Needs Definition Supplier Development Program Definition Ongoing Supplier Development SRM Systems Systems Strategy Systems Business Advisory Services 8

9 +VALUE Procurement aligns its value proposition to support enterprise objectives with capabilities evolving depending on primary focus The objectives of SRM expand along with Procurement s evolution Business Advisory Services 9

10 Supplier Relationship Mgmt objectives are around growth, cost reduction, supplier performance mgmt, and supply risk mitigation What dimensions of SRM performance for key suppliers would you like to improve? (% of responses multiple responses allowed) Innovation 60% 85% Supply Assurance and Risk Mitigation Flexibility 40% 35% 60% 67% Growth Cost Quality 60% 62% Cost /price reduction 60% 50% Performance Risk Reliability 50% 46% New business generation / revenue uplift (non-innovation 30% 50% Regulatory compliance Top Performer Non-TP 30% 35% What are the critical objectives for Oil & Gas? Business Advisory Services 10

11 Many of these SRM objectives mirror the key priorities of most Procurement organizations and SRM is a key enabler What art the Top Priorities for Procurement in 2014? Where Will Procurement Invest To Achieve Its 2014 Objectives? Expand procurement's scope/influence 76% Strategic sourcing 97% Enable innovation and product/service support Deepen influence on complex indirect spend categories to drive value Reduce and avoid purchased costs Free up cash (e.g., through working capital improvements) 69% 58% 52% 50% Category management Value contribution visibility SRM programs and processes Measuring and managing procurement performance Upgrading technology tools 83% 75% 73% 69% 59% Reduce Supply Risk 48% Talent management 41% Percent of companies identify as Critical or High Importance Source: Key Issues Study, The Hackett Group, 2014 Business Advisory Services 11

12 In 2014 a critical strategic business priority across the marketplace is growth fueled by innovation cost savings are also important Strategic Financial Priorities* Strategic Business Priorities* Growth Strategy = Innovation + Market Expansion Grow revenue 66% Innovate product and/or service offerings 46% Innovate business model and go-to-market strategy 33% Improve margins/ profitability 61% Expand customer base 33% Increase market share 32% * Combined percentage of companies ranking critical or important * Combined percentage of companies ranking strategy as #1 or #2 priority Source: Hackett 2014 Key Issues Study Business Advisory Services 12

13 Supplier Relationship is a key enabler for Procurement when it comes to Innovation Manage supplier involvement in solution road-mapping Most Effective Low Offer incentives for innovation in procurement goals Develop innovation-related skills in procurement roles Drive adoption of technology that can deliver breakthrough improvements Use technology within the procurement organization to foster innovation (information sharing, collaboration social media) Adoption Define innovationrelated goals in the procurement organization Create discrete programs/roles in procurement to support enterprise innovation Involvement in early stage new offering research High Effectiveness Least Effective Source: Hackett 2014 Innovation Quick Poll Business Advisory Services 13

14 Supplier Relationship 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 $13B information services firm, quoted from Hackett World Class Procurement LinkedIn Group 2014 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is Best Practices Conference 14

15 Spend cost savings deteriorate based on economic cycles and maturity of the organization Total spend cost savings (reduction and avoidance) as a percent of annual spend Total spend cost savings (reduction and avoidance) as a percent of influenced spend 8.54% 7.7% 7.6% 7.0% 6.46% 4.4% 4.8% 5.34% 4.68% 4.40% 4.35% 2.3% 2.0% 3.1% 3.4% 2.2% 2.93% 2.97% Non World Class World Class <50% Between 50% and 66% Between 66% and 85% Percent of Spend Influenced >85% The Hackett Group Procurement Benchmark-2014 Business Advisory Services 15

16 Supplier Relationship helps to sustain spend cost reduction savings in addition to enabling growth-related benefits Total monetary value delivered from SRM processes as a percentage of total spend 1.16% 0.95% 1.14% Growth-Related Benefits (SRM) 0.53% 1.20% 2.48% 1.93% 2.90% Cost Savings/ Avoidance from SRM Non-TP Top Performer Non-TP Top Performer Currently Three Years Sourcing Savings: 5.00% 4.13% 3.60% 3.37% Hackett SRM Study Business Advisory Services 16

17 Protecting supply continuity and ensuring compliance are main drivers of supply risk management which SRM enables The main drivers of supply risk management Ensure supply continuity 48% 15% 30% 6% Ensure regulatory compliance 30% 15% 30% 15% 9% Ensure supplier financial viability 21% 55% 15% 9% Manage price fluctuations 9% 15% 52% 24% Mitigate geopolitical risks 6% 9% 18% 67% Q1.1 Please rank the main drivers of your supply risk management program Critical High Medium Low Not a driver Business Advisory Services 17

18 As important as SRM is to Procurement it is the least mature capability according to Hackett s Capability & Maturity study Lagging Achieving Exceeding Leading 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 SRM Source: Procurement Capability Maturity Model, The Hackett Group, 2013 Business Advisory Services 18

19 Agenda Introductions Why Supplier Relationship (SRM) matters? How does Oil & Gas compare? What are the key components of an SRM Framework? Q&A Business Advisory Services 19

20 High level efficiency metrics: Oil & Gas procurement costs are higher but FTEs consistent with World Class Cost as a % of Spend FTEs per Billion Spend 0.758% 0.126% 0.082% 0.058% 0.603% 0.049% 0.082% 0.028% % 0.443% Oil and Gas Peer World-Class Labor Outsourcing Technology Other Oil and Gas Peer Operations and Compliance Mgmt Planning and Strategy World-Class Sourcing and Supply Base Mgmt Mgmt and Administration

21 When it comes to SRM, Oil & Gas invest the same but have lower FTEs supporting compared to World Class Supplier and Development Process Cost as a % of Spend Supplier and Development FTEs per Billion Spend 0.056% 0.057% Oil and Gas Peer World-Class Business Advisory Services 21

22 High level effective metrics: Oil & Gas have lower influence and lower savings resulting in lower ROI compared to World Class Percent of Procurement s Influence Over Spend Cost Reduction and Avoidance Savings as a % of Total Spend Return on Investment 99% 93% % 60% 1.93% 1.48% % 2.40% Materials Services Oil and Gas Peer Cost Reduction Oil and Gas Peer World-Class Cost Avoidance World-Class

23 In general SRM Top Performers go deep with fewer strategic suppliers by truly investing in critical relationships Metric Description Peer Top Performer Observation Total SRM FTEs per $B Spend Top Performers seem more efficient and 'underinvested' Strategic SRM FTEs per $B But Top Performers allocate more FTEs to Strategic spend Suppliers Strategic SRM suppliers per $B spend Strategic SRM suppliers per Enterprise Strategic SRM FTE Top performers have less # of suppliers in the strategic SRM program (and less suppliers per $B spend overall) Top performers go deeper with their strategic SRM FTEs - working with only 1.5 suppliers rather than % 1.04% Percentage of suppliers in Strategic SRM program (direct) 0.40% 0.45% Percentage of suppliers in Strategic SRM program (indirect) Non-TP Top Performer Non-TP Top Performer Business Advisory Services 23

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 Percentage of Suppliers Providing 80% of Spend 7.6% Percent of Supplier FTEs supporting 80% of Spend 80% 4.6% 46% Indirect Oil and Gas Peer World-Class Business Advisory Services 24

25 Oil & Gas generally have a lower level of performance measurement maintained compared to World Class Percentage of Spend where Performance Measures are Maintained 78% 68% 85% 52% 49% 52% 47% 45% 38% 36% 27% 31% 50% 0% Capital Eqpt/Facilities Ops IT & Telecom Sales & Mktg Support Mtls, Genl Eqpt & Sppl. Travel & Ent. HR Svcs. Business & Admin Svcs. Oil and Gas Peer World-Class Business Advisory Services 25

26 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) 14% An enterprise wide formal supply base risk assessment and management program 29% 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 57% BU/divisional formal supply base risk assessment and management program exists and is utilized consistently Business Advisory Services 26

27 Agenda Introductions Why Supplier Relationship (SRM) matters? How does Oil & Gas compare? What are the key components of an SRM Framework? Q&A Business Advisory Services 27

28 Supplier Stratification provides clear guidelines for defining, prioritizing, and allocating resources to supplier relationships SRM Definition and Best Practices SRM Model Definition Best Practices Supplier Stratification SRM Governance Performance Supplier Development Supplier Stratification Definition Supplier Stratification Expectations Supplier Stratification Execution Teams, Roles and Competencies Definition Ongoing Governance SRM Adoption Performance Definition Performance Tool Development Ongoing Supplier Performance Supplier Development Needs Definition Supplier Development Program Definition Ongoing Supplier Development SRM Systems Systems Strategy Systems Business Advisory Services 28

29 A well defined stratification process aligned with program objectives is foundational to SRM but often done only informally 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. Strategic Company- Wide Partners Percent of active suppliers % Strategic Company-Wide Partners: Qualified as Strategic Supplier Multi-dimensional relationship (multi-function, buysell, etc.) Typically require high levels of cross-functional resources and investment 80% Financial Value 20% Financial Value Partners Strategic Suppliers Strategic Suppliers Core Suppliers Transactional Basic Suppliers % % 89-97% 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 Business Advisory Services 29

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 Strategic Suppliers Core Suppliers Basic Suppliers 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 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 Formal account management process Communication of objective to suppliers Formal governance process Limited supplier relationship management investment Governance process consists of ad hoc escalations Interaction limited to operational and transactional events Limited plans for future business Require re-approval annually No more than 3-10 across the company 3-10 per Function/Category Varies by Function/Category Varies by Function/Category Business Advisory Services 30

31 While an initial financial value stratification is conducted an assessment of business impact is critical Total Value Ranking Functional Spend Ranking Total Spend Ranking (Spend + Sales) SUPPLIER 36,998,378 SUPPLIER 42,853,273 SUPPLIER 104,053,273 SUPPLIER 26,941,008 SUPPLIER 31,479,242 SUPPLIER 54,397,575 SUPPLIER 24,766,510 SUPPLIER 28,134,228 SUPPLIER 34,171,366 SUPPLIER 8,510,312 SUPPLIER 8,543,312 SUPPLIER 31,479,242 SUPPLIER 4,730,055 SUPPLIER 4,730,055 SUPPLIER 28,134,228 SUPPLIER 2,848,113 SUPPLIER 3,625,544 SUPPLIER 8,543,312 SUPPLIER 2,173,953 SUPPLIER 2,848,113 SUPPLIER 8,412,126 SUPPLIER 1,982,849 SUPPLIER 2,188,515 SUPPLIER 6,452,324 SUPPLIER 1,965,361 SUPPLIER 2,175,271 SUPPLIER 4,730,055 SUPPLIER 1,868,799 SUPPLIER 1,986,971 SUPPLIER 4,611,551 SUPPLIER 1,866,533 SUPPLIER 1,868,988 SUPPLIER 4,478,276 SUPPLIER 1,737,556 SUPPLIER 1,866,533 SUPPLIER 3,625,544 SUPPLIER 1,557,214 SUPPLIER 1,785,640 SUPPLIER 2,848,113 SUPPLIER 1,510,851 SUPPLIER 1,510,851 SUPPLIER 2,188,515 SUPPLIER 1,215,796 SUPPLIER 1,287,140 SUPPLIER 2,175,271 SUPPLIER 1,196,060 SUPPLIER 1,247,575 SUPPLIER 1,986,971 SUPPLIER 1,140,944 SUPPLIER 1,203,211 SUPPLIER 1,868,988 SUPPLIER 1,012,126 SUPPLIER 1,140,944 SUPPLIER 1,866,533 SUPPLIER 880,926 SUPPLIER 1,012,126 SUPPLIER 1,785,640 SUPPLIER 858,793 SUPPLIER 902,324 SUPPLIER 1,510,851 SUPPLIER 850,761 SUPPLIER 882,493 SUPPLIER 1,287,140 SUPPLIER 815,474 SUPPLIER 880,926 SUPPLIER 1,203,211 SUPPLIER 815,393 SUPPLIER 857,204 SUPPLIER 1,140,944 SUPPLIER 807,977 SUPPLIER 821,756 SUPPLIER 882,493 SUPPLIER 807,848 SUPPLIER 815,393 SUPPLIER 880,926 SUPPLIER 786,335 SUPPLIER 807,930 SUPPLIER 857,204 SUPPLIER 732,601 SUPPLIER 732,601 SUPPLIER 821,756 SUPPLIER 716,765 SUPPLIER 717,773 SUPPLIER 815,393 SUPPLIER 666,225 SUPPLIER 666,225 SUPPLIER 807,930 SUPPLIER 612,319 SUPPLIER 612,319 SUPPLIER 732,601 SUPPLIER 549,996 SUPPLIER 559,108 SUPPLIER 717,773 SUPPLIER 549,258 SUPPLIER 539,971 SUPPLIER 666,225 SUPPLIER 530,400 SUPPLIER 530,400 SUPPLIER 612,319 SUPPLIER 517,016 SUPPLIER 517,016 SUPPLIER 559,108 SUPPLIER 507,597 SUPPLIER 511,551 SUPPLIER 539,971 SUPPLIER 486,551 SUPPLIER 508,167 SUPPLIER 530,400 SUPPLIER 484,790 SUPPLIER 492,786 SUPPLIER 517,016 SUPPLIER 470,144 SUPPLIER 484,790 SUPPLIER 508,167 SUPPLIER 465,976 SUPPLIER 470,144 SUPPLIER 492,786 SUPPLIER 454,085 SUPPLIER 465,976 SUPPLIER 484,790 SUPPLIER 437,497 SUPPLIER 437,497 SUPPLIER 470,144 SUPPLIER 436,740 SUPPLIER 436,221 SUPPLIER 465,976 SUPPLIER 429,064 SUPPLIER 429,064 SUPPLIER 437,497 SUPPLIER 414,220 SUPPLIER 414,220 SUPPLIER 436,221 SUPPLIER 356,127 SUPPLIER 371,366 SUPPLIER 429,064 SUPPLIER 354,932 SUPPLIER 356,127 SUPPLIER 414,220 SUPPLIER 351,605 SUPPLIER 354,932 SUPPLIER 356,127 SUPPLIER 351,156 SUPPLIER 351,605 SUPPLIER 354,932 SUPPLIER 349,212 SUPPLIER 351,156 SUPPLIER 351,605 SUPPLIER 316,200 SUPPLIER 349,212 SUPPLIER 351,156 SUPPLIER 311,558 SUPPLIER 320,974 SUPPLIER 349,212 SUPPLIER 291,562 SUPPLIER 316,200 SUPPLIER 320,974 SUPPLIER 285,815 SUPPLIER 312,360 SUPPLIER 316,200 SUPPLIER 285,194 SUPPLIER 291,562 SUPPLIER 312,360 SUPPLIER 281,745 SUPPLIER 286,024 SUPPLIER 291,562 SUPPLIER 278,276 SUPPLIER 285,194 SUPPLIER 286,024 SUPPLIER 274,181 SUPPLIER 282,145 SUPPLIER 285,194 SUPPLIER 263,932 SUPPLIER 278,276 SUPPLIER 282,145 SUPPLIER 260,508 SUPPLIER 274,181 SUPPLIER 274,181 SUPPLIER 250,625 SUPPLIER 260,508 SUPPLIER 260,508 SUPPLIER 247,378 SUPPLIER 250,625 SUPPLIER 250,625 SUPPLIER 244,554 SUPPLIER 247,378 SUPPLIER 247,378 SUPPLIER 244,283 SUPPLIER 244,554 SUPPLIER 244,554 SUPPLIER 240,000 SUPPLIER 244,283 SUPPLIER 244,283 SUPPLIER 232,000 SUPPLIER 240,000 SUPPLIER 240,000 SUPPLIER 219,821 SUPPLIER 232,000 SUPPLIER 232,000 SUPPLIER 216,621 SUPPLIER 222,624 SUPPLIER 222,624 SUPPLIER 215,754 SUPPLIER 219,821 SUPPLIER 219,821 SUPPLIER 206,625 SUPPLIER 218,568 SUPPLIER 218,568 SUPPLIER 204,726 SUPPLIER 216,621 SUPPLIER 216,621 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 Financial Value (Quantitative) Criteria Considerations Top 80% Financial Value Most recent annual spend data Most recent annual sales data Business Impact (Qualitative) BUSINESS IMPACT CRITERIA Impact Performance Alignment Integration Operational / S Technical Fit with Culture Business Criticality KPI Scores Integration with C Continuity Impact Supplier O R WEIGHTING E SUPPLIER RATING A B C D F G I J K L Alignment Impact Integration Fit with Company Culture Scalability, Flexibility, Global Reach Business Criticality / Continuity Impact Role of Supplier in Delivering Business Objectives Operational / Technical Integration with Supplier Switching Costs / Uniqueness of Capabilities Performance KPI Scores Innovation / Value Creation Financial Stability of Supplier Business Advisory Services 31

32 SUPPLIER 36,998,378 SUPPLIER 42,853,273 SUPPLIER 104,053,273 SUPPLIER 26,941,008 SUPPLIER 31,479,242 SUPPLIER 54,397,575 SUPPLIER 24,766,510 SUPPLIER 28,134,228 SUPPLIER 34,171,366 SUPPLIER 8,510,312 SUPPLIER 8,543,312 SUPPLIER 31,479,242 SUPPLIER 4,730,055 SUPPLIER 4,730,055 SUPPLIER 28,134,228 SUPPLIER 2,848,113 SUPPLIER 3,625,544 SUPPLIER 8,543,312 SUPPLIER 2,173,953 SUPPLIER 2,848,113 SUPPLIER 8,412,126 SUPPLIER 1,982,849 SUPPLIER 2,188,515 SUPPLIER 6,452,324 SUPPLIER 1,965,361 SUPPLIER 2,175,271 SUPPLIER 4,730,055 SUPPLIER 1,868,799 SUPPLIER 1,986,971 SUPPLIER 4,611,551 SUPPLIER 1,866,533 SUPPLIER 1,868,988 SUPPLIER 4,478,276 SUPPLIER 1,737,556 SUPPLIER 1,866,533 SUPPLIER 3,625,544 SUPPLIER 1,557,214 SUPPLIER 1,785,640 SUPPLIER 2,848,113 SUPPLIER 1,510,851 SUPPLIER 1,510,851 SUPPLIER 2,188,515 SUPPLIER 1,215,796 SUPPLIER 1,287,140 SUPPLIER 2,175,271 SUPPLIER 1,196,060 SUPPLIER 1,247,575 SUPPLIER 1,986,971 SUPPLIER 1,140,944 SUPPLIER 1,203,211 SUPPLIER 1,868,988 SUPPLIER 1,012,126 SUPPLIER 1,140,944 SUPPLIER 1,866,533 SUPPLIER 880,926 SUPPLIER 1,012,126 SUPPLIER 1,785,640 SUPPLIER 858,793 SUPPLIER 902,324 SUPPLIER 1,510,851 SUPPLIER 850,761 SUPPLIER 882,493 SUPPLIER 1,287,140 SUPPLIER 815,474 SUPPLIER 880,926 SUPPLIER 1,203,211 SUPPLIER 815,393 SUPPLIER 857,204 SUPPLIER 1,140,944 SUPPLIER 807,977 SUPPLIER 821,756 SUPPLIER 882,493 SUPPLIER 807,848 SUPPLIER 815,393 SUPPLIER 880,926 SUPPLIER 786,335 SUPPLIER 807,930 SUPPLIER 857,204 SUPPLIER 732,601 SUPPLIER 732,601 SUPPLIER 821,756 SUPPLIER 716,765 SUPPLIER 717,773 SUPPLIER 815,393 SUPPLIER 666,225 SUPPLIER 666,225 SUPPLIER 807,930 SUPPLIER 612,319 SUPPLIER 612,319 SUPPLIER 732,601 SUPPLIER 549,996 SUPPLIER 559,108 SUPPLIER 717,773 SUPPLIER 549,258 SUPPLIER 539,971 SUPPLIER 666,225 SUPPLIER 530,400 SUPPLIER 530,400 SUPPLIER 612,319 SUPPLIER 517,016 SUPPLIER 517,016 SUPPLIER 559,108 SUPPLIER 507,597 SUPPLIER 511,551 SUPPLIER 539,971 SUPPLIER 486,551 SUPPLIER 508,167 SUPPLIER 530,400 SUPPLIER 484,790 SUPPLIER 492,786 SUPPLIER 517,016 SUPPLIER 470,144 SUPPLIER 484,790 SUPPLIER 508,167 SUPPLIER 465,976 SUPPLIER 470,144 SUPPLIER 492,786 SUPPLIER 454,085 SUPPLIER 465,976 SUPPLIER 484,790 SUPPLIER 437,497 SUPPLIER 437,497 SUPPLIER 470,144 SUPPLIER 436,740 SUPPLIER 436,221 SUPPLIER 465,976 SUPPLIER 429,064 SUPPLIER 429,064 SUPPLIER 437,497 SUPPLIER 414,220 SUPPLIER 414,220 SUPPLIER 436,221 SUPPLIER 356,127 SUPPLIER 371,366 SUPPLIER 429,064 SUPPLIER 354,932 SUPPLIER 356,127 SUPPLIER 414,220 SUPPLIER 351,605 SUPPLIER 354,932 SUPPLIER 356,127 SUPPLIER 351,156 SUPPLIER 351,605 SUPPLIER 354,932 SUPPLIER 349,212 SUPPLIER 351,156 SUPPLIER 351,605 SUPPLIER 316,200 SUPPLIER 349,212 SUPPLIER 351,156 SUPPLIER 311,558 SUPPLIER 320,974 SUPPLIER 349,212 SUPPLIER 291,562 SUPPLIER 316,200 SUPPLIER 320,974 SUPPLIER 285,815 SUPPLIER 312,360 SUPPLIER 316,200 SUPPLIER 285,194 SUPPLIER 291,562 SUPPLIER 312,360 SUPPLIER 281,745 SUPPLIER 286,024 SUPPLIER 291,562 SUPPLIER 278,276 SUPPLIER 285,194 SUPPLIER 286,024 SUPPLIER 274,181 SUPPLIER 282,145 SUPPLIER 285,194 SUPPLIER 263,932 SUPPLIER 278,276 SUPPLIER 282,145 SUPPLIER 260,508 SUPPLIER 274,181 SUPPLIER 274,181 SUPPLIER 250,625 SUPPLIER 260,508 SUPPLIER 260,508 SUPPLIER 247,378 SUPPLIER 250,625 SUPPLIER 250,625 SUPPLIER 244,554 SUPPLIER 247,378 SUPPLIER 247,378 SUPPLIER 244,283 SUPPLIER 244,554 SUPPLIER 244,554 SUPPLIER 240,000 SUPPLIER 244,283 SUPPLIER 244,283 SUPPLIER 232,000 SUPPLIER 240,000 SUPPLIER 240,000 SUPPLIER 219,821 SUPPLIER 232,000 SUPPLIER 232,000 SUPPLIER 216,621 SUPPLIER 222,624 SUPPLIER 222,624 SUPPLIER 215,754 SUPPLIER 219,821 SUPPLIER 219,821 SUPPLIER 206,625 SUPPLIER 218,568 SUPPLIER 218,568 SUPPLIER 204,726 SUPPLIER 216,621 SUPPLIER 216,621 The stratification process has four high-level steps 1 The first cut of the Functional Stratification will be driven by the Financial Analysis of 2 suppliers The second cut of the Functional Stratification process will be driven by Business Impact ratings Top 80% Total Value Ranking Functional Spend Ranking Total Spend Ranking (Spend + Sales) BUSINESS IMPACT CRITERIA Alignment Impact Performance Integration Fit with Culture Business Criticality Continuity Impact KPI Scores Operational / Technical Integration with Supplier WEIGHTING SUPPLIER RATING A B C D F G I J K L S C O R E 3 After conducting the Functional 4 Stratification, Functions may refine supplier assignments based on unique needs and situations The final step of Supplier Stratification is to promote suppliers to the Company-Wide Strategic Partner tier Strategic Suppliers Core Suppliers Basic Suppliers P t Business Advisory Services 32

33 SRM Governance provides the tools and structure required consistently manage supplier relationships SRM Definition and Best Practices SRM Model Definition Best Practices Supplier Stratification SRM Governance Performance Supplier Development Supplier Stratification Definition Supplier Stratification Expectations Supplier Stratification Execution Teams, Roles and Competencies Definition Ongoing Governance SRM Adoption Performance Definition Performance Tool Development Ongoing Supplier Performance Supplier Development Needs Definition Supplier Development Program Definition Ongoing Supplier Development SRM Systems Systems Strategy Systems Business Advisory Services 33

34 Selected SRM Governance best practices are adopted to a much higher degree by Top Performers The extent to which these select practices have been implemented A formal supplier account management role is used to manage key supplier accounts Structured buyer-supplier senior executive relationship SRM Business Office / Center of Excellence (COE) centralizes the management of SRM program Talent management processes assess current/future SRM skill gaps Outsourcing, offshoring, and specialized COEs are used to support specific processes within SRM Top Performer Peer =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 Business Advisory Services 34

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 Executive Leadership SRM Core Team Leadership Support SRM Lead Executive Sponsor Communications Operational Lead Escalation Sourcing Lead Business Office Operational Contracts Supplier Risk Technology Performance Transition Financial Performance Mgmt Legal and Audit Support Sales Delivery Project Supplier Development A supplier s Account team structure should closely mirror the SRM team structure, including supplier-side counterparts to the SRM Lead and Executive Sponsor roles Corporate Procurement Personnel Functional Group Personnel Either CP GP or or FG Client Personnel Other Supporting Functions Business Advisory Services 35

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 Lead SRM Core Team Operational Lead* Sourcing Lead Communication Escalation Contracts Supplier Risk Business Support Technology Financial Performance Legal and Audit Support (Automated) Sales Performance Operational * Transition Delivery Project Supplier Development (initially will be lower) *Operational lead is filled by one of the Operational roles (not a separate role) Level of Involvement: N/A Minimal Moderate High Significant Business Advisory Services 36

37 Procurement specialist skills current importance and effectiveness: SRM expertise today is important but not effective for most RED ZONE CORE COMPETENCE Strategic sourcing process expertise Essential for most jobs (>75%) SRM expertise SKILLS DEFICIENCY Supply Risk expertise New product development and innovation skills Market intelligence expertise SCM expertise Technology and tools acumen Specific supply market / commodity expertise NICHE COMPETENCE Procurement strategy and transformation expertise Legal / commercial expertise Systems testing and quality assurance P2P transactions, procedures and administration knowledge Essential for majority of jobs (50%-75%) Essential for some jobs (25%-49%) Niche skill (<25%) Level of Importance Applied with poor results Applied with mixed results Applied with mostly good results Applied with very strong results Level of Effectiveness Business Advisory Services 37

38 Demand outlook for procurement specialist skills: SRM expertise will increase in demand as well as difficulty to attract/retain New product development and innovation skills SCM expertise Market intelligence expertise Financial analysis and controls expertise Sustainability / regulatory / diversity knowledge Supply Risk expertise P2P transactions, procedures and administration knowledge SRM expertise Technology and tools acumen Specific supply market / commodity expertise R E Extreme difficulty D attracting/retaining Procurement strategy and transformation Strategic sourcing expertise process expertise Z O N E Difficulty attracting/retaining Minor difficulty attracting/retaining Low demand (Replace turnover) Significant demand (Growing need) Very strong demand (Critical skill) Current 2-3 years 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? Business Advisory Services 38

39 Performance provides the tools and structure necessary to maximize supplier performance, minimize total costs, and drive continuous improvement SRM Definition and Best Practices SRM Model Definition Best Practices Supplier Stratification SRM Governance Performance Supplier Development Supplier Stratification Definition Supplier Stratification Expectations Supplier Stratification Execution Teams, Roles and Competencies Definition Ongoing Governance SRM Adoption Performance Definition Performance Tool Development Ongoing Supplier Performance Supplier Development Needs Definition Supplier Development Program Definition Ongoing Supplier Development SRM Systems Systems Strategy Systems Business Advisory Services 39

40 Category Manager <Name>, GS Grade Definition Account Manager <Name>, Supplier Good Meets or exceeds requirements Completion Date Fair Nearly meets requirements, improvement needed within one month Poor Fails to meet requirements Evaluation Criteria Fort Worth Omaha Evaluation Category Fair Annual Annual Comments / Action Items Metric Units Good (between Poor Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Average Average range) Fill Rate % >= <= Base Evaluation Monthly Turnover Rate % <= >=10 Metrics Preventable Turnover Rate % <= >= Account Account Quality Rating Invoice Timeliness Days late <=0 0-5 >= % Variance Invoice Accuracy <=0 0-2 >=2 Reporting and of Total Bill Invoicing Reporting Timeliness Days late <=0 0-5 >= Reporting Reporting Accuracy <=0 0-3 >= Errors On-site Quality Score 1-5 >= <= Survey Results Temporary Associate Quality Score 1-5 >= <= Update Meeting Quality Rating Quarterly Reviews Improvement Feedback Quality Rating Company Functional Managers <Name> <Name> Representatives Supplier On-Site Managers <Name> <Name> SRM Performance consists of defined metrics, supporting tools, ongoing measurement and execution against outcomes Metrics 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 Align metrics to Function objectives and targets Align metrics to contract SLAs Define KPIs, performance targets and contractual consequences Ongoing Measurement KPI Catalog KPI Catalog Ref # Action Item Owner Priority Date Identified Date Due Status Notes / Comments Data Delivery Responsible High / med / open / details of actions taken, required, PM 003 Details of action item issues and direction 23-Aug 1-Nov KPI Definition Example Owner Party low closed pending, or otherwise Method Supplier Evaluation Scorecard Average spend per flight mile Average spend per mile in period $0.33 / flight mile in 1Q04 Supplier 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 Net $ savings due to online Annual Scorecard By Quarter and Savings booking $102,000 saved in 1Q04 Finance feed Travel SRM Mngr Average Cost per Hotel night Average cost over all hotel booked nights book through Travel $ / night Finance feed Travel SRM Mngr $389,000 in 1Q04 Supplier feed Supplier Supplier Agency Costs Average Domestic Ticket Price Average price over period 469 Finance feed Supplier Monthly Metrics Average International Ticket Price Average price over period 824 Finance feed Supplier Ratio of first class to business Business vs. First class metric tickets issued during period 0.21 in FY02 Supplier feed Travel SRM Mngr Average spend by airline over $0.31 / flight mile on Airline Average spend per mile by airline period X Finance feed Travel SRM Mngr Quarterly Metrics Tools Action Item Registers Scorecards & Dashboards 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 Outcomes Incentives / Rewards Penalties Elimination 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 Business Advisory Services 40

41 Top performers quantify the value of their SRM programs to a much greater degree although there is still room for to improve Percent of the true value of SRM program/process that is quantified well (percent of responses) 8% 19% 30% 73% 30% 20% >75% 50-75% 25-50% <25% 20% Non-TP Top Performer Source: Supplier Relationship Study, The Hackett Group, 2012 Business Advisory Services 41

42 Top performers have a broader and more holistic measurement system for measuring supplier performance How comprehensive are the supplier performance metrics that you employ? (% of responses) 11% 20% N/A - we don't measure suppliers formally 37% 40% Narrow: biased towards the contract 41% 11% Non-TP 40% Top Performer 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) Business Advisory Services 42

43 Supplier scorecards are based on common elements across all suppliers but can be tailored to meet specific category needs SRM lead: Account manager: Supplier contact: Flexible target range Function/category: Scorecard date: Supplier name Criteria Metrics Performance ranges Performance trend Quality Area Wt. % SLA / KPI Unit of measure Number of metrics can vary by supplier Target range Poor Fair Good Yr ago -1 Qty -1 Mon. Today Adjustable timeline for performance trends One qtr trend Criteria score Comments Service Flexible function/category attribute weightings Delivery Cost % % 100% Ability to select metric attributes as required Consistency of performance ranges Aggregated supplier score: Consistency of supplier scores Range Good Fair Poor Definition Meets or exceeds requirements Nearly meets requirements, improvement needed Fails to meet requirements, action required Supplier representatives: Company representatives: Source: The Hackett Group Business Advisory Services 43

44 To drive value through SRM being considered a customer of choice is important and Top Performers are more often perceived as such Extent you are a customer of choice to your critical suppliers 46% 50% 38% 30% 20% 12% 4% 0% We are definitely NOT a customer of choice We are a good customer in a few areas Non-TP We are a good customer overall, but still have a few opportunities Top Performer We are a very good customer, especially with critical suppliers Business Advisory Services 44

45 Supplier Development includes formal programs for advancing supplier capabilities and improving joint processes to create long-term value SRM Definition and Best Practices SRM Model Definition Best Practices Supplier Stratification SRM Governance Performance Supplier Development Supplier Stratification Definition Supplier Stratification Expectations Supplier Stratification Execution Teams, Roles and Competencies Definition Ongoing Governance SRM Adoption Performance Definition Performance Tool Development Ongoing Supplier Performance Supplier Development Needs Definition Supplier Development Program Definition Ongoing Supplier Development SRM Systems Systems Strategy Systems Business Advisory Services 45

46 Supplier development activities must be aligned against the tier of suppliers to align effort with opportunity to drive value Program Supplier Capability Improvement Techniques Applicability by supplier tier Strategic / Company-Wide Core 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 Basic Supplier and Company personnel training Exception-only Systems and process integration Exception-only Business Advisory Services 46

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 underresourced 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 Business Advisory Services 47

48 Agenda Introductions Why Supplier Relationship (SRM) matters? How does Oil & Gas compare? What are the key components of an SRM Framework? Q&A Business Advisory Services 48

49 Appendix Supplier Development Business Advisory Services 49

50 What are examples of potential development techniques? Technique Description Considerations Joint investment in new capabilities Intellectual capital sharing 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 Team reviews 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 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 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 Business Advisory Services 50

51 What are examples of potential development techniques? Technique Description Considerations Joint value creation opportunity identification Joint process mapping and improvement 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 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 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 Team reviews should include evaluation of key supplier proposals 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 Business Advisory Services 51

52 What are examples of potential development techniques? Technique Description Considerations Capability acquisition by supplier Multi-supplier collaboration 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 sources (e.g. acquisition candidates, etc) Sales volume and/or timeline commitments to supplier may be required to ensure positive financial impact of supplier s capability acquisition Use of multi-supplier process improvement efforts to ensure effective operation of processes involving handoffs, interactions, or dependencies among multiple suppliers Company should serve as system integrator for the capability, driving documentation and communication of current processes, touchpoints, handoffs, and dependencies, and facilitating discussions for gap identification and resolution Company should define specific objectives, ground rules, and approach for process improvement effort Supplier may buy or build capability Company should be prepared to evaluate and qualify the capability acquired Losing visibility and control of value chain as second and third tier providers are included Single supplier may serve as program lead for improvement effort Company participation throughout effort is needed to ensure outcome results in value for Company Ground rules established up front should consider competitive issues among suppliers and should establish a process for mediating disputes without disrupting improvement activities Business Advisory Services 52

53 What are examples of potential development techniques? Technique Description Considerations Supplier and Company personnel training Provide training on Company internal policies, systems, and processes (e.g., purchasing objectives, SRM model, online procurement tools, performance evaluation process, etc.) Sponsor joint training on best practices, quality or industry standards (e.g., Six Sigma, ISO standards, etc.) Enable cross-training by participating in rotational programs and supporting on-site supplier teams Retention of core supplier personnel Training material revision and updates Systems and process integration Integration of Company and supplier systems to enable efficient information exchange, visibility, and support of joint processes Often required to enable business process outsourcing (BPO) and other suppliers to effectively and seamlessly deliver services and products to Company Requires joint discussions on technology upgrade and migration plans Requires consideration of security and business continuity risks and development of mitigation measures May results in significant increase in switching costs requiring long-term commitment May require significant joint investment Business Advisory Services 53

54 Contact information Kurt Albertson Associate Principal, Procurement Advisory The Hackett Group Amsterdam Atlanta Frankfurt Hyderabad London Miami New York Paris Philadelphia San Francisco Sydney Business Advisory Services 54