State of Flux 2012 Global Supplier Relationship Management Research Report in Greece focuses on Procrument and Supply Chain Practices. Nearly 500 Supply Management professionals have contributed to this year's research. Its free to download but provides incredible insights into the SRM market right now.
Procurement and Supply Chain Practices
Improve Your Competitiveness by Leveraging Your Supply Chain
Procurement and Supply Chain Management Research Report 2012, Greece
FOREWORD
Welcome to State of Flux’s Greek Procurement and Supply Chain Practices report. Thank you to those organisations that participated in the 1 st Procurement and Supply Chain Survey in Greece and who attended the subsequent cross-organisational workshops. We are pleased by the interest of over 130 organisations that contributed to our study and enriched our ability to produce this insightful report. Special thanks go to the companies that shared their experiences in case studies that are featured in the report. The objective of our survey was to gauge the recent developments in procurement and supply chain in Greece, to assess the current level of maturity of Greek organisations across multiple industry sectors, and to enable organisations to benchmark themselves with each other. The completion of the survey was followed by cross-organisational workshops, the purpose of which was to provide an opportunity for both the participants and State of Flux to reflect upon the preliminary results and comment on the trends that the survey highlighted. The results of the survey and the discussions that took place during the workshops reinforced our view that now is the time for procurement and supply chain to be given more attention and considered a strategic function within the organisation. Especially in (and because of) the current economic conditions, organisations have started to look at procurement and supply chain to unlock greater value, which goes directly to the top and bottom lines, and gain competitive advantage. Through previous research we have seen that procurement and supply chain is a critical function in driving profitability, innovation, speed to market and overall business growth. We firmly believe that procurement and supply chain management should be approached as a discipline with strong strategy and governance, rigorous processes, supporting people and technology in order to deliver real value to an organisation. We see some great opportunities for Greek organisations to improve the role and positioning of procurement and supply chain, maintain control with effective contracts management, ensure resilience with proactive risk management, and work collaboratively with their suppliers jointly to cut costs and improve efficiencies. The current harsh economic situation offers procurement and supply chain functions the chance to grasp the opportunity to become integral to delivering change and driving sustainability in their organisations. We hope that this report provides you, as a practitioner, with a clear picture of what “good” looks like in procurement and supply chain, along with actionable insights, benchmarking data and ideas to help you launch, establish and develop best-in-class procurement and supply chain initiatives in your organisation. Please get in contact if you would like to discuss any of the issues raised by this report. You will also be most welcome to join the “state of play” forums that State of Flux organises throughout the year to continue dialogue about the challenges, trends and effective practices in procurement and supply chain.
Alexandros Tsagkas Head of State of Flux Greece
Alan Day Chairman, State of Flux Limited
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“During the past two years, Greece has experienced an unprecedented financial crisis. This has massively affected every sector of the economy and has placed a premium on issues addressing corporate survival and growth. In such a hostile environment, this well-documented survey by State of Flux shows that the majority of companies have put a higher dependence on their procurement departments to help improve their financial outlook. It convincingly argues that procurement and supply chain management, when properly implemented, can potentially have an impact on the bottom line, mitigate risks and build the basis for sustainability and growth. It is surprising, though, that the majority of respondents do not believe that more robust procurement processes, better risk management techniques and better use of technology can help them through the economic crisis. However, the evidence, both qualitative (through workshops) and quantitative (through a survey), shows that procurement and supply professionals are offered a lot of opportunities and long-term strategies to impact the bottom line of their organisations (these include, among others, the suggestion that Greek companies should explore opportunities to realise cost savings by looking internally). It seems that the procurement and supply chain executives need to strengthen their share of voice and influence inside their organisations, as their strategic role is not evident in many companies in the areas of category management, contracts management and risk management. In this fluid external environment the leaders of our organisations have to realise that procurement and supply chain management is not just a cost-saving mechanism or an efficiency enhancing tool, but also a core competence offering potentially significant strategic advantages to the organisation. Hopefully, this State of Flux research will spur further discussion and developments in this very important topic.”
Vassilis Papadakis (PhD London Business School) PROFESSOR AND CHAIRMAN OF THE DEPARTMENT OF BUSINESS ADMINISTRATION Athens University of Economics and Business
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TABLE OF CONTENTS
FOREWORD
01
TABLE OF CONTENTS
03
EXECUTIVE SUMMARY
04
LIST OF CHARTS
06
INTRODUCTION
09
SECTION 1: PROCUREMENT GOVERNANCE
13
What good Procurement Governance looks like
22
Case study - Starbucks Coffee Company
24
SECTION 2: CATEGORY MANAGEMENT
27
Spend Management
29
Contracts Management
34
Supply Chain Risk Management
38
What good Category Management looks like
46
Case study - Aluminium of Greece
47
SECTION 3: SUPPLIER MANAGEMENT
49
What good Supplier Management looks like
57
Case study - Sanofi
58
SECTION 4: BUYING MANAGEMENT
61
Sourcing Management
62
Contract Management
66
Procurement-to-Pay Management
69
What good Buying Management looks like
71
Case study - Papastratos, an affiliate of Philip Morris International
72
ADOPTION OF TECHNOLOGY
74
PROCUREMENT IN THE ECONOMIC CRISIS
76
CONCLUSIONS
78
RECOMMENDATIONS AND NEXT STEPS
80
HOW CAN STATE OF FLUX HELP?
82
APPENDICES
84
Appendix 1: About the Research
85
Appendix 2: Contributors
87
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EXECUTIVE SUMMARY While the origins of the Greek economic crisis can be traced back several decades, it has been the past couple of years that have really seen Greece bearing the full force of a recessionary storm. Organisations have been massively affected by the economic and sociological impacts of the crisis and have the choice of either seeking strategies and remedies or facing an uncertain future. Procurement and supply chain management practices, when appropriately implemented, can deliver results that go directly to the top and bottom lines, mitigate risks and help to build the basis for sustainable investment and growth.
delivered by procurement and supply chain functions. This was reported as the second biggest challenge by respondents after lack of budget. Organisations appear to have processes in place for the operational side of purchasing, including spend authorisation and procurement-to-pay, but the development of processes in the more strategic areas of category management, contract management and risk management is lower. In risk management, in particular, organisations appear not to be sufficiently proactive. This is reflected in the fact that only one in four organisations includes risk mitigation in its function’s objectives. Lastly, organisations appreciate that results will come through people development and have highlighted people’s capabilities as their key improvement area in the future. Category Management Our survey indicates that organisations are now being more diligent in managing and controlling their third- party spend. More than nine out of 10 organisations in our survey regularly conduct an analysis of their spend, and three-quarters have put in place a programme of cost-savings initiatives. The top two initiatives are externally focused and call for either incumbent suppliers to reduce their pricing or new, less expensive, suppliers to come onboard. At the same time, however, more than half of the organisations in the survey are missing out on internal cost-saving opportunities that Spend Management could deliver through Total Cost of Ownership (TCO) analysis, better management of business requirements and demand, and addressing inefficiencies in the way categories of products or services are managed. Contracts Management is an aspect of procurement that Greek organisations appear to be relatively good at based on the results of the survey. But the feedback
State of Flux commenced an online survey and follow- up workshops in 2011, which were welcomed by over 130 organisations across 20 industry sectors. The results of this study suggest that there are pockets of good practice among Greek organisations, but equally there are a lot of both quick-win opportunities and long-term strategies that procurement and supply chain professionals have yet to fully implement.
Hard times call for hard measures. We recommend that organisations take the following steps:
· get closer to their suppliers; · tighten their risk management processes; · use contracts management to identify opportunities for cost savings or levers to mitigate risks; · measure the benefits delivered by procurement and promote them internally; · increase the use of technology to automate business processes and embrace change; and · improve the capabilities of the procurement team. Ultimately, organisations must develop plans to improve the management of third-party spend and achieve operational efficiencies. Procurement Governance The positioning of procurement and supply chain functions is reported to have been improving since the financial situation for organisations worsened as a result of diminishing revenues. Procurement has been under pressure to contribute cost savings – an objective that is formally set by nine out of 10 organisations that took part in our survey. There are difficulties in measuring the benefits
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procurement approaches, highlighted by both the low use of eSourcing and the perception among around half of respondents that eSourcing is not an appropriate way to buy products and services. This reflects the low awareness and education on eSourcing that was reported as the main challenge in adopting it. On the operational side of Contract Management , we noted again a low adoption of processes and automation in managing third-party contracts during their lifecycle. The main challenges include high levels of off-contract and “maverick” spend, as well as long contracting cycles. Lastly, the majority of organisations appear to have put in place Procurement-to-Pay Management processes and systems. Adoption of technology To date, technology has been used to automate the operational aspects of procurement. There has been a high adoption of inventory management and procurement-to-pay systems, which reflects the necessity of ERP systems in a modern organisation. Where organisations are lagging is in the use of tools that enable them to support more robust processes to manage their contracts, risks and suppliers. However, this is where technology adoption is heading. The main technology solutions that Greek organisations will be looking at using in the next couple of years include supplier performance management and contract management. Procurement in the economic crisis The challenges that Greek organisations face during the economic crisis are not new to procurement professionals, even if the size and scale of those challenges appear bigger and more daunting than in the past. The main challenges include pressure for cost savings, restricted cash flow, low budgets and increased risk in the supply chain. The majority of survey respondents (63%) believe that better control and analysis of spend are essential in overcoming the current challenges. However, about six out of 10 organisations do not believe that cost-saving initiatives, more robust procurement processes, training, risk management and adoption of technology can help them in the management of the economic crisis. This finding implies that procurement professionals have either lost faith in management practices that ought to help them in overcoming the crisis or they have not been convinced of the value and benefits of applying these practices in the first place.
from our post-survey workshops and our experience in working with global organisations on contract management projects have left us with doubts about the effectiveness of such initiatives (which appear, on the surface, to be better on average than those of global organisations we work with). Our post-survey discussions revealed some opportunities around leveraging third-party contracts to secure savings or mitigate risks that are not currently being addressed by Greek organisations. An area that stood out from the survey results is Risk Management. There are indications that risk management has started to gain prominence, although little action has so far been taken to put risk management processes into practice. There are certainly some pockets of good risk management activity among some of the organisations in our survey, including multi-sourcing, increased safety stocks and business continuity plans. However, little reference was made to policies on risk management, risk reporting, and collaboration with suppliers to jointly mitigate risks in the supply chain. Only 16% of organisations communicate their risk-related considerations to their suppliers. Supplier Management Whereas only a small percentage of the survey population reported formal supplier management processes, there is an understanding that not all suppliers are equal and each supplier segment requires different management practices. The majority of organisations segment their suppliers into different classes and revise the segmentation on a regular basis. The most frequent supplier management activity is sharing information such as demand and forecast data, market information and performance data. We have also noted an increase in organisations engaging their suppliers in collaborative efforts on cost savings and innovation, but not risk management. Little information is currently shared on strategic plans, strategic alignment and relationship strategy, while less than 10% request feedback from their suppliers regarding their performance (e.g. through “Voice of the Supplier” surveys) or conduct 360-degree (two-way) assessments with their suppliers.
Buying Management Sourcing Management is the area where all
organisations appear to have standard processes in place. But these do not always include cross- functional collaboration, which is where procurement can play a facilitating role. There appear to be some misconceptions about electronic
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LIST OF CHARTS
INTRODUCTION State of Flux Procurement Building Blocks
Figure 1
9
Buying management process
Figure 2
10
Supplier segmentation
Figure 3
10
Category portfolio
Figure 4
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SECTION 1: PROCUREMENT GOVERNANCE Framework by which third-party spend is managed
Figure 5
14
Accountability for procurement
Figure 6
15
Targets and objectives of procurement
Figure 7
16
Measurement of procurement function’s performance
Figure 8
17
Main challenges that procurement faces
Figure 9
18
Improvement areas for procurement
Figure 10
18
Skills and capabilities that procurement professionals need to improve Figure 11
19
Established procurement processes
Figure 12
20
Internal functions that procurement works closely with
Figure 13
21
SECTION 2: CATEGORY MANAGEMENT Frequency of conducting a spend analysis
Figure 14
29
Criteria for assessing the importance of a category
Figure 15
30
Cost-saving programme
Figure 16
30
Cost-saving initiatives
Figure 17
31
Category planning process
Figure 18
32
Criteria for assessing the potential for cost savings
Figure 19
32
Accessibility of supplier contracts
Figure 20
34
Awareness of off-contract spend
Figure 21
35
Level of off-contract spend
Figure 22
35
Contract repository
Figure 23
36
Ownership of contracts
Figure 24
36
Contract due diligence
Figure 25
37
Inherent supply chain risks
Figure 26
39
Major supply chain risks
Figure 27
39
Risk information sources
Figure 28
40
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LIST OF CHARTS
CONTINUED...
Risk management strategies
Figure 29
42
Risk management initiatives
Figure 30
42
Sharing risk management expectations with suppliers
Figure 31
44
Impact of risks throughout the supply chain
Figure 32
44
Internal collaboration on risk management
Figure 33
45
SECTION 3: SUPPLIER MANAGEMENT Supplier segmentation
Figure 34
50
Supplier segmentation model
Figure 35
51
Frequency of supplier segmentation
Figure 36
51
Number of strategic suppliers
Figure 37
52
Spend of strategic suppliers
Figure 38
52
Supply management processes
Figure 39
53
Supplier management initiatives
Figure 40
54
Information sharing with suppliers
Figure 41
55
Supplier management technology
Figure 42
55
SECTION 4: BUYING MANAGEMENT Sourcing process
Figure 43
62
Sourcing management process
Figure 44
63
Activities in a sourcing process
Figure 45
63
Market research
Figure 46
64
Use of eSourcing
Figure 47
64
Suitability of eSourcing
Figure 48
65
Challenges in the adoption of eSourcing
Figure 49
65
The contract lifecycle
Figure 50
66
Contract management policy
Figure 51
67
Tracking the expiry / renewal dates of contracts
Figure 52
67
Involvement of legal function
Figure 53
67
Contract terms and conditions
Figure 54
68
Challenges in contract management
Figure 55
68
Procurement-to-Pay system
Figure 56
69
Purchase orders
Figure 57
69
Purchase documentation
Figure 58
70
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LIST OF CHARTS
CONTINUED...
ADOPTION OF TECHNOLOGY Technology solutions that organisations currently use
Figure 59
74
Technology solutions that organisations will look to develop in the future Figure 60
75
PROCUREMENT IN THE ECONOMIC CRISIS Main challenges in the economic crisis
Figure 61
76
Essentials to overcome the economic crisis
Figure 62
77
ABOUT THE RESEARCH Respondents by job level
Figure 63
85
Respondents by turnover
Figure 64
85
Respondents by industry sector
Figure 65
86
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INTRODUCTION
We strongly believe that the competitiveness of an organisation can be improved by leveraging the potential of procurement and supply chain. This is achieved when there is an understanding of the building blocks of procurement and supply chain and how these can be used to provide the foundations on which to deliver business value. What does the procurement and supply chain practice include? How is it defined? For many organisations, articulating the boundaries that procurement and supply chain activity takes place within is a challenge, mainly because of the increasingly multi-faceted role it plays. Today’s procurement and supply chain organisations are required to deliver not only year-on-year cost reduction and efficiency benefits, but also to manage supply risk, develop sustainable sourcing practices and build strong relationships with key suppliers on a global basis. Procurement and supply chain can be approached from several perspectives. There is not a single definition that can wholly incorporate all elements of procurement and supply chain management practice and which is universally accepted by the business community at large. Different organisations have different definitions of procurement and supply chain management. Some organisations refer to procurement as purchasing or supply management; others include logistics, materials management or demand management in their definition. There are even some organisations that believe that the discipline is mainly relevant in a manufacturing context. However, procurement and supply chain management is equally relevant to services, retail, health, transportation, banking and other types of organisations. The evolution of procurement and supply chain management as a discipline and profession has led organisations to adopt their own definitions of what it covers. At State of Flux, we believe that procurement and supply chain is about more than just buying products and services. We have used a framework, which we call the Procurement Building Blocks , to analyse an organisation’s approach to procuring products and services and have used this framework in this report to facilitate the analysis of the current state of Greek procurement and supply chain practices.
Figure 1: STATE OF FLUX PROCUREMENT BUILDING BLOCKS
Procurement Governance defines the policies and guiding principles for procurement and the interactions between business users, supporting internal functions and suppliers. Category Management relates to the spend, contracts and risk management of all products and services that are procured as part of an organisation’s operations. Supplier Management focuses on developing supplier relationships through information sharing and performance improvement programmes. The approach to dealing with each supplier is aligned to the organisation’s supplier segmenation strategy. Buying Management relates to the sourcing, contract management and procurement-to-pay of all products and services that are procured as part of an organisation’s operations.
Procurement Governance
Category Management
Supplier Management
Buying Management
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As its title suggests, this framework depicts hierarchically the building blocks within which the discipline of procurement and supply chain management takes place. At the lower level ( Buying Management ), a sourcing cycle is initially triggered to facilitate the sourcing of a product or service. Typical Sourcing Management practices consist of a number of steps from set up and gathering requirements to supplier selection and contract negotiations. The end of the sourcing cycle is followed by the Contract Management cycle, in which the contract is administered through its lifetime, from authorisation and signature to termination or renewal. During the lifetime of a contract, requisitions trigger the Procurement-to-Pay Management process in order for products and services to be ordered and processed and the suppliers paid.
Figure 2: BUYING MANAGEMENT PROCESS
Contract Management
Procurement-to-Pay Management
Sourcing Management
Whether it is a quick, one-off exercise or a long-term and concurrent process, the buying management process is necessary for the acquisition of all products and services. This is the operational side of procurement and supply chain. If products and services are not procured in-house, they will need to be bought by third parties, which are the focus on the second of State of Flux’s Procurement Building Blocks. Depending on the importance of the supplier, different Supplier Management strategies are employed. Tactical suppliers may potentially go through the Buying Management process once and never be used again. At the other end of the spectrum, strategic suppliers, which are vital to the success of an organisation, will therefore be closely managed with a view to collaboratively maximise the potential value for both parties. Figure 3 depicts a typical supplier segmentation model.
Figure 3: SUPPLIER SEGMENTATION
STRATEGIC Type: High criticality, high collaborative value opportunities Approach: Supplier Relationship Management (SRM) + SPM + CM
STRATEGIC
PREFERRED Type: High criticality, low collaborative value opportunities Approach: Supplier Performance Management (SPM) + CM
PREFERRED
APPROVED
Type: Medium criticality, low collaborative value opportunities Approach: Contract Management (CM) + MBE
APPROVED
TACTICAL
Type: Low criticality, easily switched
Approach: Management by Exception (MBE)
TACTICAL
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The objective of Supplier Management is to ensure that the appropriate level of management is used for all suppliers to ensure that contracts deliver the agreed quality and value of the products or services, supplier performance is meeting or exceeding the organisation’s requirements, and that relationships with critical suppliers facilitate a collaborative means of maximising business value. While suppliers are the focus of Supplier Management, at the Category Management level the focus is on groups or categories of interrelated products and services. Spend categories are managed collectively to maximise the value of spend on these categories, minimise the risk and ensure control and consistency by effective management of all contracts in the category. Good Category Management practices suggest that each category of products or services requires different approaches and management strategies according to both profit and risk considerations (Figure 4). In order to effectively manage a category, organisations should be assessing their competency at managing these categories according to elements such as category knowledge, commercial understanding / awareness, business need management, compliance, contract and supplier relationship management and the motivation for category management.
Figure 4: CATEGORY PORTFOLIO
High
Leverage
Strategic
Bottleneck
Non-Critical
Low
Low
High
Supply Risk / Complexity
The overarching discipline that brings all of these levels together and provides the basis of our Procurement Building Blocks framework is Governance . Procurement Governance provides the guiding light with which a procurement and supply chain function operates and manages resources to ensure control, visibility and compliance to the procurement process. Procurement Governance sets the objectives of a procurement function and defines the role and positioning of procurement within an organisation. At all levels of the Procurement Building Blocks, organisations should be developing a clear strategy , embedding rigorous processes that support the execution of the strategy, upgrading people’s skills and adopting technology in order to implement these processes.
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Strategy
Procurement Building Blocks
Process
People
Technology
Purpose of this report This report explores in detail how procurement and supply chain functions in Greece operate within each of the levels of the Procurement Building Blocks. Our intention is to illustrate good practices, show what good looks like, and highlight the missed opportunities and shortfalls that may result from poor practices. We hope that this study will provide procurement and supply chain professionals with useful insights, benchmarking data and enable them to launch or support their journey to best practice procurement and supply chain management.
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SECTION ONE Procurement Governance 1 HIGHLIGHTS SECTION SUMMARY
During our post-survey workshops, participants pointed out that the economic downturn has increased their profile as organisations start to look at their supply chain for delivering bottom-line results and gaining competitive advantage. A key ingredient for leveraging the increased attention that procurement and supply chain experiences is well-structured Procurement Governance. Overall, we see a lack of central accountability for procurement as only half of the organisations have a central procurement function to manage all spend on third-party products and services. Formal objectives are primarily linked to cost savings and a set of agreed key performance indicators (KPIs). However, about one in three organisations cannot effectively measure the performance of their procurement and supply chain functions. The majority of the organisations do not seek feedback from internal stakeholders and even fewer organisations (6.7%) are formally assessed by their suppliers. We recommend that organisations start capturing the “voice of the supplier” and adopt a more joined-up approach with their suppliers in delivering results. Contrary to the current volatile environment, organisations appeared not to address risk management in their formal objectives and processes. If cost savings are definitely the top priority of procurement professionals, then risk management should climb up an organisation’s agenda too. We believe this will distinguish the leaders from the followers in the long term. The adoption of procurement processes is high mainly for the operational areas of procurement such as spend authorisation and procurement-to-pay, and less for the adding-value processes such as category management, contracts management and risk management. It has been interesting to note that organisations recognise that business results come through people’s capabilities and consider this a key area to improve in the next two years. We would also argue that procurement should become a good salesman of its services internally and with suppliers in order to revive its positioning in the organisation and exploit its true potential.
• 44.3% of the organisations do not have a central procurement and supply chain function that manages all third-party spend. • Cost savings is by far the most popular objective, followed by efficient sourcing and improvement of procurement processes. • Only 28.4% of the organisations have an objective to mitigate the risks in their supply chains. • One in three organisations has difficulties in measuring the benefits delivered by procurement.
• Performance of procurement is primarily based on the achievement
of cost-saving targets and assessment against KPIs.
• Only 6.7% of the organisations seek feedback from their suppliers regarding the performance of the procurement function.
• The biggest challenge is low (or cuts to) procurement budgets.
• Improving people’s capabilities is the key improvement area for most organisations. Market and commodity knowledge is considered in most need of improvement. • The majority of organisations have put in place basic operational procurement processes such as spend authorisation, procurement- to-pay and procurement policy. • Less than half of respondents work regularly with functions other than finance and warehouse / logistics.
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13
SECTION 1 - PROCUREMENT GOVERNANCE
In the first section of the survey, we asked respondents to describe the current status of Procurement Governance in their organisations.
Procurement Governance is the definition of procurement policies and procedures that provides a framework or guidance to the organisation when procuring products and services.
Procurement Governance provides the basis upon which an organisation sets its procurement strategy and then aligns the processes, people and technology to execute that strategy. Ensuring that this is consistently adopted requires an accountable function and / or individual who acts as the gatekeeper of Procurement Governance. Organisational structure for procurement More than half (55.8%) of organisations have a central procurement function that is responsible for managing all spend on products and services. This is followed by 30.8% of organisations where management of spend occurs at the department level (e.g. marketing), and 13.5% of organisations where spend management occurs at the business unit level.
Figure 5: WHICH OF THE FOLLOWING DESCRIBES BEST THE FRAMEWORK BY WHICH THIRD-PARTY SPEND IS MANAGED IN YOUR ORGANISATION?
Each department manages its third-party spend A central procurement function manages all third-party spend
55.8%
30.8%
Each business unit manages its third-party spend
13.5%
0
10%
20%
30%
40%
50%
60%
For many organisations, centralisation versus decentralisation of spend management is a grey area and there is no right or wrong answer. Procurement is sometimes perceived as a function that can spend the organisation’s money better than anyone else, which is not always true. Departments or business units may often be equally effective in procuring products and services, owing to their domain expertise. At the same time, however, they may miss potential opportunities that could be sought if they had a view of enterprise-wide spending. Procurement has a facilitating role that should combine the subject matter expertise of business users with the skills of procurement in effectively managing supplier selection, engagement, commercial negotiation and contracting. Even when not procuring products and services on behalf of business users, procurement and supply chain should provide guidance and help, ensure consistency, and leverage the buying power across the organisation. Procurement can highlight similar work that has been done in other parts of the organisation, good agreements that are in place, and the record of particular suppliers in meeting the organisation’s performance expectations.
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1
Organisations that are using decentralised procurement models because of their rapid growth, merger and acquisition activity, and so on may face the following challenges:
· use of the same suppliers in different departments or business units; · non-standard terms and conditions in supplier contracts; · too many suppliers used for the provision of the same category of product or service; · missed opportunities to leverage the organisation’s power in negotiations. In decentralised structures, the lack of central or co-ordinated accountability makes the documentation of procurement processes necessary for the adoption of consistent practices across the organisation. However, our survey results suggest that these types of organisations actually have less structure around their procurement policies and processes than those that are centralised. The procurement director of a group of consumer products companies highlighted the need for “ increasing the spend that is managed by the central procurement function and the synergies between the companies in the group ”. He continued by saying that “ pockets of good management should be shared between the various business units and the ones that have recently been acquired ”. Accountability in procurement The facilitating and guardian role of procurement is typically represented by an individual who has overall accountability for the procurement of products and services. Six out of 10 organisations have appointed a chief procurement officer (CPO) to undertake this role. In the absence of a dedicated role for managing the procurement and supply chain function, this role is fulfilled by COOs (10%), heads of departments / business units (9.1%) or CEOs (9.1%). For only 2.7% of the respondents is accountability not clearly defined.
Figure 6: WHO IN YOUR ORGANISATION IS ULTIMATELY RESPONSIBLE FOR PROCURING THIRD-PARTY PRODUCTS AND SERVICES?
Chief Procurement Officer (CPO) Chief Operating Officer (COO) Head of Departments / Business Units
60%
10%
9.1%
Other Procurement Committee Not clearly specified Chief Executive Officer (CEO) Chief Financial Officer (CFO)
9.1%
4.5%
2.7%
2.7%
1.8%
0
10%
20%
30%
40%
50%
60%
We didn’t find any significant correlation between the size of the organisation and the accountability of procurement, other than the fact that in smaller organisations (less than € 100m turnover) the CEO is twice as likely to be ultimately accountable for procurement as in larger organisations. Accountability, whether in the form of a part-time or full-time role, is crucial in ensuring that procurement governance exists and is monitored for compliance. In many cases, the existence of a CPO role is an indication of the focus that is given to procurement in an organisation or the size of spend that has to be managed (so that it necessities a dedicated
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individual to manage it). We would therefore question whether it is achievable for the 40% of our sample that do not have a full-time, dedicated individual heading the procurement function to maximise the benefits they can gain from adequately managing the supply chain. Targets, objectives and performance measurement Procurement Governance sets the direction in which procurement in an organisation is heading. Aligned with corporate planning, an integral element of Procurement Governance is the strategy which, at a high level, is reflected by a set of targets and objectives. Cost savings is the top target for the majority of the organisations (87.2%), followed by sourcing at the right price (71.6%) and improving procurement practices and methods (67%). For less than one in 10 organisations (7.3%), targets for procurement are not sufficiently set.
Figure 7: WHICH OF THE FOLLOWING TARGET(S) OR OBJECTIVE(S) ARE FORMALLY SET FOR THE PROCUREMENT AND SUPPLY CHAIN FUNCTION IN YOUR ORGANISATION?
Increase the adoption of technology internal stakeholders of your organisation Improve the role of the procurement and supply chain function in the organisation Improve the capabilities and knowledge in procurement management Cost savings Source products and services at the right price Improve the procurement management practices and methods Improve the degree of collaborationwith suppliers Provide high quality service to the
87.2%
71.6%
67%
51.4%
44%
40.4%
33%
29.4%
Other Targets are not well or formally set Mitigate risk in the supply chain
28.4%
7.3%
5.5%
0
10%
20% 30% 40% 50%
60%
90%
70% 80%
For a lot of organisations, cost savings are equally important to quality and the impact that the purchased products and services have on the end customer. Showcasing the market face of procurement and the fact that it can have a direct effect on sales and end-customer satisfaction, the procurement and supply chain manager of a retail organisation noted that “ a main target of our function is to procure products and services that are not only acceptable by the internal stakeholders but the end customers as well ”. Improving the role and positioning of procurement is a target for 40.4% of our sample but, based on the discussions during the workshops, we believe this is undermined in the survey results. The majority of workshop participants described how their job has attracted a lot of attention recently and how the economic downturn has raised their profile in the organisation. The head of procurement at a consumer electronics company argued: “ I t is now time for procurement professionals to show the value of procurement. ” One finding that has surprised us was the fact that management of risks in the supply chain was mentioned by less than a third of organisations (28.4%). This suggests either that organisations do not feel they are threatened by potentially disruptive events, which may be dangerous in the current volatile environment, or that risk mitigation targets are difficult to measure and therefore not formally set.
What gets measured gets managed (and done) The value of setting formal targets is only realised when performance against these targets
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1
is measured and corrective actions are taken. For the majority of survey respondents (69.5%), the performance of procurement is measured against the cost-savings target, followed by measurement against an agreed list of KPIs (62.9%).
Figure 8: HOW IS PERFORMANCE OF THE PROCUREMENT AND SUPPLY CHAIN FUNCTION MEASURED IN YOUR ORGANISATION?
Achievement of the cost-saving target Assessment of performance based on agreed Key Performance Indicators (KPIs) There is no formal assessment of the performance of the procurement function Formal assessment by internal stakeholders
69.5%
62.9%
20%
17.1%
Formal assessment by suppliers
6.7%
Don’t know
1%
0
10%
20%
30%
40%
50%
60%
70%
One in five (20%) do not formally measure the performance of the procurement function, which suggests that these organisations are missing opportunities to align its value to corporate strategy and objectives and / or take corrective actions to improve the way their supply chains are managed. Interestingly, only 6.7% of respondents said that they seek feedback from their suppliers regarding their performance as a customer. Without this information, organisations will inevitably miss opportunities to improve processes and efficiency, reduce waste (and therefore cost), manage risks more effectively, and so on. In addition, the typical feedback that we receive when we conduct “Voice of the Supplier” surveys on behalf of our clients is that the suppliers usually have great ideas and innovations that they want to propose to their customers, but they often don’t get heard. Suppliers can be a great source of improvement ideas, but ineffective communication can hinder the realisation of these opportunities. We recommend that, if they haven’t already done so, organisations should start looking for valuable information and ideas from their trusted partners. We would also recommend that measurable objectives should be included in people’s personal development plans (PDPs) to drive the right behaviours and make the assessment of the procurement team more relevant to their work. Challenges A sign that the area of performance measurement is one that requires attention is the fact that the difficulty in measuring benefits delivered by procurement represents the second biggest challenge that organisations face. Unless the benefits that procurement delivers are measured, it is not possible to lift the role of procurement in the organisation and obtain sufficient attention and internal commitment (a challenge faced by about one in four organisations). The top challenge, identified by 39.6% of survey respondents, is the low (or diminishing) budget of the procurement department, while 32.7% mentioned their difficulty in adopting rigorous procurement processes.
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Figure 9: WHICH OF THE FOLLOWING CHALLENGES DOES THE PROCUREMENT AND SUPPLY CHAIN FUNCTION IN YOUR ORGANISATION FACE?
Low (or cuts to) procurement budget Difficulty in measuring the benefits delivered
39.6%
34.7%
by the procurement function Difficulty in adopting rigorous procurement processes
32.7%
Low support and commitment in implementing improvements in procurement management Lack of a central procurement function that manages all third-party spend
23.8%
20.8%
Other Effect of the external environment Difficulty in securing resources to support an improvement programme Difficulty in adopting technology
16.8%
15.8%
5%
1%
0
10%
20%
30%
40%
Improvement areas In order to achieve their long-term objectives, more than half (55.7%) of all respondents said that improving the capabilities of the procurement team is key, followed by improving the role and profile of the procurement function in the organisation (42.5%), designing and executing a procurement strategy (41.5%) and adopting enabling technology (40.6%).
Figure 10: WHICH OF THE FOLLOWING AREAS WOULD YOU BE LOOKING TO IMPROVE IN THE NEXT TWO YEARS IN ORDER TO MEET THE TARGETS OR OBJECTIVES OF THE PROCUREMENT AND SUPPLY CHAIN FUNCTION?
Capabilities of the procurement and supply chain team Role / positioning of the procurement and supply chain function in the organisation Design and implementation of procurement strategy
55.7%
42.5%
41.5%
Use of technology
40.6%
Design and implementation of rigorous procurement processes
34.9%
Other
1.9%
0
10%
20%
30%
60%
40%
50%
This emphasises the need for investment in training programmes and raising awareness of the latest developments in procurement (one of the main objectives of this report).
Ultimately, business results are delivered through people. Organisations should be designing training that covers the right blend of technical capabilities, behavioural and communication skills that today’s new breed of procurement practitioner needs to manage and develop supply chains effectively. The most important skill, mentioned by 46.2%, is market and commodity knowledge. By becoming better informed about market trends, key players and the latest innovations, procurement professionals are better placed to develop sourcing strategies that tap the capabilities, resources and ideas that exist in their supply bases. This is followed by negotiation skills (42.3%) and eSourcing skills (41.3%).
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1
Figure 11: WHICH OF THE FOLLOWING CAPABILITIES DO YOU BELIEVE NEED IMPROVEMENT IN THE PROCUREMENT AND SUPPLY CHAIN TEAM OF YOUR ORGANISATION?
Market and commodity knowledge
46.2%
Negotiation skills
42.3%
eSourcing
41.3%
Supplier performance management
38.5%
Project management
35.6%
Supply chain risk management
31.7%
Contract management
30.8%
Category management
26%
Commercial awareness
25%
Supplier relationship management
23.1%
Sourcing skills
17.3%
Other
3.8%
0
10%
20%
30%
40%
50%
Aside of the technical and process capability of a procurement function, we believe that interpersonal skills are equally important. Procurement professionals interact with multiple departments within an organisation and skills such as building trust and good relationships internally and with suppliers are essential. We also believe it is necessary to recognise the importance of context when delivering training. Skills should be taught using realistic day-in-the-life scenarios to make training relevant, meaningful and immediately transferable to the job. Procurement processes Procurement Governance is based on a set of policies and procedures that ensure consistency in the application of standard processes and provide guidance to internal users. Documented procurement policies can prove very useful in the event of staff turnover and for training purposes, as well as for reference. Furthermore, written policies provide the basis for mandating certain practices and behaviours and monitoring compliance against them. Procurement processes should not be restricted to the purchase of products and services, but include the management of spend and commodities, the management of contracts and risks and the through-life management of suppliers. The majority of the organisations in our survey have put in place the basic operational processes such as a spend approval policy (88.7%), a procurement policy (75.5%) and a procurement-to-pay process (71.7%).
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Figure 12: WHICH OF THE FOLLOWING PROCESSES HAVE BEEN SET AND ADOPTED IN YOUR ORGANISATION?
Spend authorisation process Procurement policy
88.7%
75.5%
Procurement-to-Pay (P2P) process
71.7%
Sourcing process
58.5%
Travel expenses process Supplier management process Contracts management process
56.6%
50%
45.3%
Expenses policy
39.6%
Other Risk management process Category management process
34%
22.6%
1.9%
0
10%
20% 30% 40% 50%
60%
70% 80%
90%
Supplier management, contracts management and category management are less commonly embedded processes, however. It also worth noting that less than a quarter of organisations (22.6%) has documented a policy for managing risks. Processes such as those discussed above need, of course, to be updated as business requirements change, otherwise they become out of date and of no value. Additionally, procurement processes and procedures have to be readily accessible and effectively communicated to internal stakeholders, who also need to understand – and accept – the benefits of complying with these policies. This is an ongoing task for the procurement function and its leaders. Procurement as a facilitator Procurement is a multi-faceted function that acts as a facilitator to various stakeholder groups. Isolated departments reflect either the positioning of procurement as a transactional or order-processing function or the failure of procurement personnel to engage their stakeholders effectively. The results of our survey reveal that, aside from the finance and warehouse / logistics departments, which procurement typically works with (87.7% and 76.4% respectively), less than half of respondents regularly interact with other departments in their organisations.
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