2017 Global SRM Research Report - Solving the value Puzzle

State of Flux 2017 Global Supplier Relationship Management Research Report focuses on entrepreneurial SRM. 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.

2 0 17 G L O B A L S RM R E S E A R C H R E P O R T

REPORT THEME TITLE HERE ENTREPRENEURIAL SRM: SOLVING THE VALUE PUZZLE

CURRENTSTATEOFSRM INT ODUCTION

INTRODUCTION

CONTENTS

FOREWORD

PROCUREMENT’SPATHTO ENTREPRENEURIAL SRM

FOREWORD

ENTREPRENEURIAL SRM: EXPANDING HORIZONS IN PROCUREMENT

ARTICLE 01: WHY BE ENTREPRENEURIAL?

05 06 07 08 09

ARTICLE 02: WHAT DOES IT MEAN TO BE ENTREPRENEURIAL?

ARTICLE 03: WHAT RESOURCESWILL SUPPORT PROCUREMENT ENTREPRENEURS? ARTICLE 04: IS THIS VISION OF ENTREPRENEURIAL PROCUREMENT REALISTIC?

ARTICLE 05: IF YOU ARE NOT AN ENTREPRENEUR, WHAT ARE YOU?

ABOUT SRM, STATE OF FLUX ANDOURRESEARCH

SUMMARY OF KEY FINDINGS

SIX PILLARS OF SRM

Procurement is at a crossroads. Over the past two or three decades, the diligent application of tried and tested techniques has produced results, usually by reducing input prices. Although the procurement profession has talked about supplier innovation, cost has always been front and centre. It will remain so, but increasingly businesses can reduce supply costs without the help of the procurement department.

fuels company, are already benefiting from SRM by being more innovative and improving speed to market (see case studies on pages 24 and 76). But innovation in SRM does not only support growth. The financial crisis, and the 10 years since, have revealed the interdependent and complex nature of business relationships. On page 38, we see how a leading global manufacturer is using SRM to manage these risks. Procurement’s leadership in entrepreneurial collaborationwill not come automatically. For nine years, we have used the six pillars of SRM to showbusinesses how to create relationships that add value. Over that time, we have recorded huge shortfalls in investment in technology and people. Organisations need to address these shortfalls, in particular if they are to innovate and grow. The alternative is to watch the competition snatch opportunities fromyour business and see procurement’s influence wane. I knowwhich I would choose.

01 VALUE

CASE STUDY: KELLOGG

CASE STUDY: AEP

02 ENGAGEMENT

other cross business relationships the procurement function has the opportunity to expand its role and become expert in managing these vital supplier relationships. But it can domuchmore. Businesses do not want to do the same things they have always done. They see digital technologies transforming markets and relationships with customers. Companies are alert to disruption. Low capital costs mean innovators can enter markets quickly and forever change them: Uber did so without owning any taxis; Airbnb without owning any hotels. Organisations know the way to compete is through collaboration. With a strong grasp of SRM, procurement can provide the answer. It can find organisations with which to collaborate, form trusted relationships and then use those relationships to innovate at speed. This is entrepreneurial procurement, and it is the theme of our 2017 State of Flux SRM report. It is not some far-off vision. Global leaders such as the Kellogg Company in food production and Caltex, the transportation

In our SRM report last year, State of Flux pointed out the potential for technology to be a key enabler in procurement. This year, others are picking up on the trend. “Analytics, automation, cloud, mobile, social media, blockchain and cognitive and artificial intelligence technologies are being used to create a touchless procurement ecosystem,” says research firm Everest Group. At the same time, it reports that the $2.4 billion global procurement outsourcing market is growing at a solid 9% annually, while providers who invest heavily in digital technologies achieve growth of up to 15%. If procurement departments and practitioners do not wake up and see what these trends mean, their future will be decided for them. They could be commoditised, outsourced and in the end replaced by automation. But there is another road for procurement to follow. The trend that is commoditising procurement is affecting other departments too. HR and IT aremoving away from owning teams to owning outsourced service provider relationships. With these as with

CASE STUDY: INDUSTRIAL

03 GOVERNANCE

CASE STUDY: AUSTRALIANDEFENCE FORCE

INTERMISSION - THE SRMJOURNEY

04 PEOPLE

CASE STUDY: COOP

05 TECHNOLOGY

CASE STUDY: CALTEX

06 COLLABORATION

Alan Day Chairman, State of Flux

CASE STUDY: CARGILL

SUMMARY AND CALL TO ACTION

OUR PARTNERS

ABOUT STATE OF FLUX

STATEOFFLUX 2017GLOBAL SRMRESEARCHREPORT

CURRENTSTATEOFSRM

ARTICLE 01/05

ENTREPRENEURIALSRM: EXPANDINGHORIZONS IN PROCUREMENT

Business is in flux. All sectors of the economy are looking for new ideas to help avoid becoming victims of disruption from outside. With the right approach, procurement is well-positioned to play a major role. Why be entrepreneurial?

But these changes are set against more fundamental transformations across the globe: ageing demographics in the West, Japan and China; rapid urbanisation in many developing nations; barriers to entry falling away due to internet technologies. Consumers are changing too. Constantly plugged into social media and online networks, they can sniff out deals and massage relationships to their advantage. Consumer-facing businesses are aware of these trends and are adapting their offers to become more akin to services, often managed online, rather than ones based purely on retailing or products. The World Economic Forum estimates digital transformation in retail and consumer products industries over the next decade (2017-26) will create $2.95 trillion of potential value for the industry and consumers. It says four business models will emerge to transform the industry. They are: → T he next-generation sharing economy Product rental for a fraction of the retail price, in lieu of ownership; this includes resale of used goods. → The personalisation economy Expertly curated products, based on an individual’s preferences, are automatically ordered and delivered on a consistent schedule. → On-demand economy Automatic reorder (eg, via sensors and a replenishment program) of a product when the level is low.

Companies successful in building these models will do so in partnership with other organisations. “To effect this transformation, retail players will need to form ecosystems or ‘coalitions of the willing’ to both provide full consumer solutions and secure key capabilities,” the report says. Again, it is not just consumer industries. New business models are cropping up across industry sectors. For example, tyre manufacturer Michelin uses a combination of connected sensors and analytics to help truck fleet customers reduce fuel consumption and costs, and allows them to pay for tyres on a kilometres-driven basis.

In December 2016, the eyes of the business world rest on the corner of 7th Avenue and Blanchard Street, in the US city of Seattle. Here, a shopper leaves a store without queueing or paying for her groceries. She just walks out. The reason she attracts the attention of international commerce, rather than the police, is her employer, Amazon, owns the store. It is trialling a combination of artificial intelligence, sensor and near field communication to allow products to be automatically debited froman Amazon account as the shopper leaves, without other means of payment. The online retailer expects to open the store to the public later this year in amove seen as a physical sign of the changes already sweeping through consumer industries, changes to which procurement must find a response. But it is not only consumer industries in the throes of dramatic transformation. Digital technologies, and the business models they support, promise to transform all sectors. In automotive, for example, 20 percent of profits will come through sharedmobility, via services such as Uber, by 2030, according to research from PwC. But the share of industry profits available to automotive original equipment manufacturers (OEMs) will fall from 70 percent in 2017 to less than 50 percent by 2030. At the same time, the share of profit available to digital services, mobility services, new technology supply, fintech companies and start-up electric vehicle suppliers will grow to 60 percent. “Clearly, the traditional carmakers and suppliers need to significantly accelerate their transformation capability. Their current rate of innovation is too slow to keep up with all the new players entering the field. This is particularly true in the areas of new technology capabilities, piloting and launching new products, and overcoming legacy mind-sets and functional silos”, PwC says.

Airbnb was founded in 2008 by Joe Gebbia, Brian Chesky and Nathan Blecharczyk, three young entrepreneurs in San Francisco, as an online service offering short-term living spaces, bed and breakfast and business networking opportunities. The company now boasts an estimated market valuation in excess of $30 billion, making it the world’s largest hotel group —without owning a single hotel. The trend propelling companies like Airbnb has acquired a name: Uberisation. It’s an ugly word, but a powerful one. It captures the idea that, with little capital investment, an entire sector can be dismantled and reassembled by adopting a business model which offers services on demand through direct contact between customers and suppliers, usually

via an online platform and mobile technology. Regardless of any setbacks Uber itself is facing, the trend it has given a name to strikes fear into established industries. Yet none of the technologies companies like Airbnb and Uber exploit are exclusive to them. What makes them different is the way they think and act. To rise to the challenge that these disruptive start-ups represent, chief executives are looking for senior management to think and act differently: to be more entrepreneurial. Organisations that can rapidly whip up innovation with trusted suppliers and partners will be the ones who succeed. The question is, what does this mean for procurement? In the following pages, we aim to provide some answers.

PROCUREMENT’S EXPANDING HORIZONS

The procurement function cannot wait for a top-down prescriptive blueprint before forming alliances to help the business grow. There is a sense that successful procurement leaders are already becoming entrepreneurs, looking for and seizing opportunity both within and outside their companies. They are looking to change the value that procurement offers the business. Instead of savings, the focus is on growth, newmarkets and profit. This couldmean more innovation in cost reduction, speed to market, access to skills or resources. Entrepreneurialismwill play a role in each of our six pillars of SRM: value, engagement, governance, people, technology and collaboration. Look out for the State of Flux Opinion at the end of each Pillar section to find out how. To make these changes, procurement needs to know what resources it can exploit, what can be realistically achieved and what the alternatives are. But let’s start by examining what we mean by entrepreneurial procurement. 

Article 01: Why be entrepreneurial?

Article 02: What does it mean to be entrepreneurial?

Article 03: What resources will support procurement entrepreneurs?

→ Service economy

Article 04: Is this vision of entrepreneurial procurement realistic?

Instead of a basket of products, customers buy a service that meets their basic or aspirational needs.

Article 05: If you are not an entrepreneur, what are you?

STATEOFFLUX 2017GLOBAL SRMRESEARCHREPORT

ARTICLE 03/05

ARTICLE 02/05

What does it mean to be entrepreneurial? Entrepreneurs do not only work for start-ups. They can also work in procurement, linking supplier innovation to strategic business goals. But only if businesses optimise supplier relationships.

What resources will support procurement entrepreneurs?

Entrepreneurs will need support. Tools, skills and fellow professionals will be vital in creating opportunity from supply-side markets. It will require a subtle re-examination of procurement teams and the roles within them.

Entrepreneurs need to understand sources of funding and resources to get projects off the ground quickly. They need a set of governance rules that help launch projects at short notice without undue risk. It means being prepared to fail fast, learn quickly and move on to success. Above all entrepreneurship is about procurement thinking outside of its traditional remit. It needs to knock on doors and connect with leaders of marketing, finance, product development, IT and HR to understand the existential challenges facing the business. Procurement leaders need to ask themselves which long-term issues most concern the CEO and how can they bring their understanding of the supply economy to bear on solving these problems. It might end with finding a supplier and signing a contract. But equally it could result in a joint venture, amerger or partnership. That said, the day job has not ended. Procurement will still be expected to achieve incremental benefits in pricing, efficiency and value. But to expand into entrepreneurship, it will need new tools and skills, which we examine next. 

Finding suppliers, cutting deals and managing risk and performance: we seemany procurement professionals innovating in these areas, but that does not make thementrepreneurs. It is not about improving the way procurement works; it’s about expanding procurement’s horizons. Understanding the changing customer expectations and competitivemarket, procurement can look to serve the business by finding new opportunities for growth. They might not be on the narrow path that runs fromRFP to contract. Instead, procurement might ask, would it work for us if we bought this supplier? Would that supplier enter a partnership in which we jointly engage customers with a new service? Procurement needs to remove its blinkers to see what additional opportunities it can offer the business. But to work in a newway will require new habits. Procurement needs to understand where opportunities for growthmight lie for the whole business. It means building networks of like-minded entrepreneurs – inside the business with key stakeholders and outside the business with suppliers and customers.

Procurement as we know it is analytical in understanding supply markets, shaping tenders and contracts and negotiating deals. Although these skills will remain vital to procurement, the function needs to adopt new skills, attitudes and technologies if it is to become entrepreneurial. The newworld of procurement will rely more heavily on creative thinking, passion for finding new solutions and the ability tomeet and sell to new stakeholders. Teams leading in these developments will look to adapt their mix of skills and personality traits to become more extrovert. They will need people able to spot opportunities and think outside the established procurement paradigm. Entrepreneurial procurement may need to react at speed, but not without evidence or awareness of risk. As well as the right skills and traits, it will need the governance models and data to ensure newways of working are well informed. Leaders in the field will build a platform for entrepreneurs based on sound data accessible to all stakeholders. They will have networks of the best suppliers in place for the right projects. They will have templates for business projects ready, with the appropriate measure of business value in place. 

STATEOFFLUX 2017GLOBAL SRMRESEARCHREPORT

ARTICLE 05/05

If you are not an entrepreneur, what are you? Early adopters are already exploiting intelligent technologies to automate complex business processes. But what will be left for the procurement profession once automation is mainstream?

The robots are coming. Not just the shiny metal variety, but algorithms and artificial intelligence embedded in software able to automate all kinds of processes. Procurement has built up its value on analytical decision-making in supply markets, operational supply risk and demand forecasting. In these areas, artificial intelligence and analytics will play an increasing role. As we discussed in last year’s report, Digital SRM: Supplier Relationships in the New Technology Landscape, the advent of cloud computing and rapid software development cycles means that the business can quickly access these tools with little up-front cost. Much of the numerical decision-making that makes up procurement can becomemore efficient and effective by applying these technologies. That means fewer people are required, which potentially creates more value for the business. If numerical decision-making is a large part of what the procurement department does, then what does it do the rest of the time? If the answer is attending meetings and serving business-as-usual, then it can look forward to shrinking in size and influence (see People section on page 56 for more detail). But the same technologies that are now available to procurement are being

exploited by rival companies, even by start-ups and interlopers looking to grab market share. Companies are desperate to find new products and services that continually engage their customers and build loyalty in a world with ever increasing choice. Procurement leaders who understand where those opportunities lie and how the supply economy can be developed to take advantage of themwill be rewarded with greater influence in the business. It may be the best option for surviving the robot revolution. 

ARTICLE 04/05

Is this vision of entrepreneurial procurement realistic? It is important not to ask the impossible. Yet examples from a broad set of industries provide evidence that entrepreneurial thinking in business relationships provides a path to growth.

how they could work tomutual advantage, they developed a store in the software giant’s UK campus. It offers the Co-op first glimpse of the latest retail technologies, and Microsoft a real-world environment in which to showcase them. Global consumer foods firmKellogg says suppliers are contributing to strategic growth as it improves how it manages relationships with them, while food and agricultural supplier Cargill shows how it can help customers innovate, if the relationship with them is right. Procurement may still say it is not within its remit to come up with new ideas for the business. If that is the case, then it’s fair to ask what the future holds for procurement as the world changes. 

It’s not unusual for organisations to try to dreamof new, more efficient ways of doing business. The question is, is it realistic for procurement to take on a radical new role in the business? It will meet barriers to change: company hierarchy and stakeholders in other functions might not get the idea and feel threatened by procurement encroaching on their roles. Procurement may not have been “told” to be entrepreneurial so, inside the department, it might be a struggle to buildmomentum. But look closely, and businesses all over the world are changing their operating models and the way they serve customers to adapt and thrive in the new technological and economic landscape. For example, Brammer, a distributor of maintenance,

repair and overhaul products to industry, hit on a novel way to prevent customers “rogue stock-piling” products. It installs vending machines in customers’ premises which allow their employees to “buy” products using a code. It means the customer consumes less, while inventory is more tightly controlled and demandmore easy to foresee. Some customers have achieved a 45% cost saving with this approach, the company says. In this report, we see evidence of how relationships between suppliers and their customers can bemore entrepreneurial. When The Co-op looked for better value from IT suppliers, the UK retailer began to change its relationship with Microsoft. Once the two parties started to explore

“Agility, speed and value come from relationships that are open and strategically focused – whether it’s being first to have a new idea, product innovation, or service enhancement.” Shelly van Treeck Kellogg Company Chief Procurement Officer (see page 24)

STATEOFFLUX 2017GLOBAL SRMRESEARCHREPORT

ABOUTOURRESEARCH

ABOUTSRM, STATEOFFLUX ANDOURRESEARCH

Follower

Other

Fig 1. Assessment of 2017 global SRMmaturity*

2017 SRM Index

Advanced

Leaders

4.3

37 companies (10%)

Established

Followers

3.4

Developing

58 companies (16%)

Others

Undeveloped

2.3

277 companies (74%)

Value

Collaboration Technology

Governance Engagement

People

*Maturity is assessed by examining responses to selected survey questions.

ABOUTOURRESEARCH

LEADERS, FOLLOWERSAND OTHERS

YOURSRMBENCHMARK AND INDEX

ABOUTSRM

ABOUTSTATEOFFLUX

STATEOFFLUXSRMBENCHMARK AND INDEX

This research is now in its ninth year. In that time a body of knowledge about global SRM practice and experience has been compiled that includes feedback from over 1800 companies and over 1 million data points. This year we have analysed data collected from 575 respondents representing 372 global companies across more than 25 industry sectors. In addition to this we have collated revealing case studies from food manufacturing giant Kellogg, leading US energy firm AEP, diverse UK retailer the Co-op Group, the Australian Department of Defence and Caltex, Australia's leading transportation fuels company.. They show what these firms are achieving and how they are progressing on the SRM journey. We also hear fromCargill, one of the world’s largest suppliers of agricultural products and food ingredients, to gain a supplier’s perspective on how customers can get more from them, if they manage the relationship in the right way.

Supplier relationship management or SRM is a concept that continues to confound its advocates by the apparent difficulty that organisations have, firstly to understand and accept its benefits and then adopt the change that will deliver those benefits. SRM at its most simple is the acceptance that firstly all suppliers are important to an organisation, but not equally so. SRM defines a differentiated approach to supplier management based on the importance of each supplier to the organisation. Once this is established differentiated treatment strategies can be adopted that optimise relationships to maximise the joint value they can create. This manifests itself in many ways ranging from ensuring that the value already contracted for is delivered, to the improved management of risk, creation of brand new value via supplier innovation and collaboration.

State of Flux is a specialist procurement and supply chain consultancy with clients in the UK and Europe, USA and Australasia. Over the past 13 years we have combined our research findings and practical experience to develop a deep understanding of SRM and have helpedmany businesses to explore and improve their supplier management capability. This experience has enabled us to develop amodel for SRM best practice based on six pillars of capability that when implemented effectively enable the journey to SRM and value.

In our research, we break down the response sample into leaders, followers and others according to how they perform on key SRM criteria. LEADERS: Leaders are companies that we believe have developed more mature and successful SRM programmes. This year we have identified 37 companies as leaders against more challenging criteria. This compares to 29 in 2016. The leaders represent 10% of the total respondents. FOLLOWERS: Followers are in a group of 58 companies representing 15% of total respondents. This is a reduction from 2016 when 101 companies were in this category. This results frommore stringent criteria to qualify as a follower and what we believe is an increasing gap between leaders and followers. OTHERS: Others represent 277 companies (75% of respondents) ranging from those where their SRM ambition is limited and reflects mostly contract and performance management to those with genuine SRM ambition but are at the start of their journey. These companies may well represent pockets of good practice but they will lack a clear strategy, senior leadership support and a consistent approach.

Participants of our SRM research are able to request a complimentary benchmark and index score which will benchmark your organisations SRM activities against best practice and your industry peer group. If you would like to obtain a benchmark and index score, please contact: enquiries@stateofflux.co.uk

The State of Flux SRM benchmark and index is designed to make it easier for businesses to establish a baseline for their performance and set targets for improvement. The index score is calculated based on the responses received to specific questions within our 2017 SRM survey. These questions are selected to reflect what organisations are actually doing and experiencing, and are weighted to reflect their importance to an effective overall approach to SRM.

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STATEOFFLUX 2017GLOBAL SRMRESEARCHREPORT

2017GLOBAL SRMRESEARCHREPORT

SUMMARYOFKEYFINDINGS

Fig 2. Primary sources of SRMvalue in the last 12months*

Cost reduction/avoidance

Regulatory compliance

SUMMARYOF KEYFINDINGS Leaders showwhere to get themost value fromSRM and where everyone can improve.

Riskmanagement / reduction

Suppliersmorewilling to accept andmanage risk

Service level improvement

Secured the best supplier resource

General increased commitment ('going the extramile')

Preferential pricing that was not an existing contractual obligation

→ 90%of leaders have a value proposition for SRM; only 40%of other businesses do → 95%of SRM leaders report both financial and non-financial benefits → 46%of leaders achieved post contract signature financial benefits of more than 4% → Leaders have good support for SRM fromsenior leadership at 84%but is could be stronger → Other business priorities aremost often cited as a barrier tomore senior engagement → Leaders are the only group where the majority have gathered structured supplier feedback → 66% report improved collaboration as a direct result of their SRM programme → 8 in 10 companies are actively seeking more supplier innovation → Leaders are twice as likely to have a process in place tomanage innovation → Across all respondents a lack of time and resource is the seen as the biggest barrier tomore supplier innovation

→ While 90%of respondents have segmented suppliers only 21%have fully implemented differentiated treatment strategies → 39%of leaders have contract and performancemanagement in place for less than half of their key suppliers → Around 30%of respondents have good governance in place for less than half of their key suppliers

More supplier innovation

Help achieving your sustainability and CSRgoals

Improved account management

Improved speed tomarket

Pro-active ideas for continuous improvement

Gaining competitive advantage in yourmarket

Quality improvement

Priority access to access to scarcematerials and / or manufacturing capacity

→ Only around a third of companies have defined their SRM role

Improved internal or end customer experience

→ 21%have identified the requisite skill set

*This analysis is for all respondents.

→ Just 11%have carried out a skills and competency assessment → 20%have implemented some formof SRM training

Fig 3. Themost important source of SRM value required in the next 12months*

Other (please specify)

Cost reduction/ avoidance

Cost and risk stay central to SRM value While cost reduction and risk management remain the primary sources of SRM value (see Fig 2.) it’s evident that a broad value proposition is being pursued by some companies. Fifteen percent of respondents identify the need to gain competitive advantage in their market as their primary source of SRM value in the next 12 months (see Fig 2.).

Regulatory compliance

Riskmanagement / reduction

→ 43%of respondents describe current IT systems support for SRM as poor or very poor → Performancemanagement is seen as to biggest benefit of SRM technology by 80% → 57%believe that supplier innovation would be easier to capture with help from technology

Service level improvement

Gaining competitive advantage in yourmarket

Quality improvement

Improving your internal / end customer experience

Improving speed tomarket

Improving supply chain efficiency

Helping achieve your sustainability and CSR goals

More supplier innovation

*This analysis is for all respondents.

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2017GLOBAL SRMRESEARCHREPORT

CURRENTSTATEOFSRM

01 VALUE

02 ENGAGEMENT

03 GOVERNANCE

04 PEOPLE

05 TECHNOLOGY

06 COLLABORATION

SIXPILLARSOFSRM

The State of Flux six pillars of SRM is amodel for SRM excellence, developed and refined over the past 11 years. Many of the global businesses we have helped get value fromSRMhave adopted this approach. While there is the suggestion of a sequential approach, fundamentally each pillar is linked and dependent on the other so they are best approached in parallel andmust all be tackled to get themost out of SRM.

02 ENGAGEMENT How do you get the C-level teambehind SRM? How do you get buy-in frombusiness and operational managers who deal with suppliers day-to-day? Howwill you engage suppliers more in the process? The answer to all three questions lies in a strategy for stakeholder engagement and support. Readmore on p30

06 COLLABORATION Value fromSRM does not flow automatically when the other five pillars are in place. Businesses need to decide how to develop the relationship to get themost out of it. Relationships need to be explored and developed and specific initiatives identified that will drive value. Both supply-side and buy-side businesses may need to adopt changed behaviours and collaborate more to get there. Readmore on p80 03 GOVERNANCE Business cannot invest time inmanaging all their suppliers in a strategic fashion. How they decide which ones are worth investing in is part of the governance process that underpins SRM. This in turn will drive the approach to creating value, level of engagement, meetings etc. It will also put in place a structure that ensures relationships are sustained over the long term. Readmore on p42

01 VALUE How do suppliers help your business reach its strategic goals? And what more could they do? That’s the value proposition. Then it’s a question of measuring both the financial and non-financial value created. Maintaining a clear line of sight between the business drivers (your company’s strategic objectives) and the value that SRM is creating is crucial. Readmore on p16 04 PEOPLE People in all areas of the business, as well as in procurement and supply chain management, will contribute to SRM. Businesses need to make sure that the necessary skills are developed and maintained to deliver successful SRM outcomes. Readmore on p56

05 TECHNOLOGY Successful SRM will be built on reliable, accurate, up-to-date information and working effectively, efficiently and in collaboration with internal stakeholders and suppliers. Getting information and managing collaboration using legacy IT is tough, but new software tools can help. They are cheaper and quicker to roll out than many businesses think. Readmore on p68

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STATEOFFLUX 2017GLOBAL SRMRESEARCHREPORT

2017GLOBAL SRMRESEARCHREPORT

VALUE

ENTREPRENEURIAL PROCUREMENT AIMS TO BRING BROADER VALUE TO THE BUSINESS, NOT JUST IN CONTRACT PRICE AND SUPPLIER PERFORMANCE, BUT IN SUPPLIER INNOVATION. THROUGH SRM, PROCUREMENT BECOMES THE CONDUIT FOR THE BUSINESS TO ACCESS THAT SUPPLY- SIDE VALUE.

17 VALUE STATEOFFLUX

VALUE STATEOFFLUX 2017GLOBAL SRMRESEARCHREPORT

2017GLOBAL SRMRESEARCHREPORT

VALUE

90% of leaders have a value proposition for SRM; only 40% of other businesses do 95% of SRM leaders report both financial and non-financial benefits 46% of leaders achieved financial benefits of more than 4%after signing supplier contracts

One third of survey respondents see the value of SRM, not just in direct supply-side benefits of reduced cost and risk, but also in the broader corporate objectives of innovation, competitive advantage and customer experience. However, discounting SRM leaders and followers, only half of organisations are able to build a value proposition to link SRMwith broader benefits. Leaders and followers are seeing SRM’s benefits spread outside the core goals of reduced cost and risk to include innovation, speed to market and access to scarce resources. The remainder are clearly at a disadvantage in their market place. SUMMARY

COMPETITIVE ADVANTAGE BECOMES THE THIRD RANKED DRIVER FOR SRM

Fig 4. Which business driver is themost important reason you are implementing / developing SRM in the next 12months?*

Cost reduction / avoidance

Riskmanagement / reduction

Gaining competitive advantage in yourmarket

TYPICAL SUPPLY-SIDE BENEFITS ARE NO LONGER THE PRIMARY MOTIVATION FOR INVESTING IN SRM Managed in the right way, suppliers can determine how quickly a business gets products to market. In doing so, they can provide a competitive advantage, justifying investment in SRM. But is it worth the effort? Although time to market is one of the many potential benefits of SRM, it is not a high priority for all businesses at all times. Exactly which business objective SRM should support will depend on the business priorities. By developing a deep, up-to-date understanding of these priorities, procurement teams can determine the kind of value SRM should create, ultimately providing a business case and sustained investment. Looking at a broad sweep of business drivers, State of Flux’s 2017 survey shows cost avoidance and risk reduction were the most likely benefits procurement teams expect to derive from SRM. For the first time, we asked respondents to choose just one business driver as their most important, and their answers are particularly interesting. A quarter of respondents say they either want to gain competitive advantage in their market or improve internal or external customer experience. In effect, they are saying that typical supply-side benefits no longer constitute the primary motivation for investing in SRM.

VALUE PROPOSITION REMAINS ABSENT IN TOO MANY SRM STRATEGIES The business drivers for SRM are followed by the value proposition. The value proposition creates the link between an organisation’s strategic and performance objectives and the vital work being carried out by suppliers. Using the value proposition, SRM teams can identify all potential benefits, not just in traditional supply-side value but also the broader value that the organisations can achieve jointly. The value proposition can be used as the ‘sales pitch’ for SRM and the basis of any business case to invest in process, people and technology. It is also a clear leader attribute. Nearly nine out of 10 leaders in SRM have a value proposition for the strategy compared with around seven out of 10 followers and four out of 10 other businesses. Leaders and followers are twice as likely than other organisations to have developed and documented a clear value proposition and/or business case for SRM that links it to the organisation’s strategic and performance objectives.

Improving your internal / end customer experience

Improving supply chain efficiency

More supplier innovation

Regulatory compliance

46% of "other" businesses and 40%of followers do not know the financial benefits of SRM SNAPSHOT ANALYSIS SRM leaders’ approach to value set themapart from the rest of the field. They aremore likely to create a value proposition andmore likely to see both financial and non-financial benefits from their work. And the scale of the financial benefits they accrue is also much greater than any other group. Defining value in an SRM plan is vital to its success.

Service level improvement

Quality improvement

Improve speed tomarket

Achieving CSRgoals

LEADERS AND FOLLOWERS SEE NON-FINANCIAL ASWELL AS FINANCIAL BENEFITS IN SRM

Other

Whether or not organisations have a clear value proposition for SRM, it is still vital they capture and report benefits. This applies as much to non-financial benefits as it does to financial benefits. In fact, as broader value becomes more of a business driver for SRM being able capture non- financial benefits becomes more important.

*This analysis is for all respondents

19 VALUE STATEOFFLUX

VALUE STATEOFFLUX 2017GLOBAL SRMRESEARCHREPORT O FL X GL AL SR RESEARCHREPORT

2017GLOBAL SRMRESEARCHREPORT

VALUE

SRM LEADERS ARE MORE LIKELY TO BUILD A VALUE PROPOSITION

LEADERS ARE MUCHMORE LIKELY TO SEE HIGHER SRMBENEFITS

COST REDUCTION AND AVOIDANCE REMAIN THE MOST LIKELY BENEFIT OF SRM

% of respondents

Fig 7. What is the average post-contract financial benefit you have achievedas a result of SRMactivity with your key suppliers?

Fig 8. In which of these areas have you seen benefits from your SRMprogramme / activities so far?*

Fig 5. Have you developed and documented a clear value proposition and/or business case for SRM that links it to your organisation's strategic objectives?

Other Follower Leader

Cost reduction/avoidance

Regulatory compliance

Yes

Leader

Follower

Other

Riskmanagement / reduction

Suppliersmorewilling to accept andmanage risk

More than 6%

Service level improvement

Secured the best supplier resource

Don’t know

4.1% to 6%

General increased commitment ('going the extramile')

Preferential pricing that was not an existing contractual obligation

More supplier innovation

Help achieving your sustainability and CSRgoals

LEADERS ACHIEVE BOTH FINANCIAL AND NON-FINANCIAL BENEFITS

2.1% to 4%

Improved account management

Fig 6. What type of benefits has your SRMprogramme delivered?

Leader

Follower

Other

Improved speed tomarket

100

Pro-active ideas for continuous improvement

Gaining competitive advantage in yourmarket

Both financial and non-financial benefits

0.1% to 2%

Quality improvement

Financial benefits only

Priority access to access to scarcematerials and / or manufacturing capacity

Non-financial benefits only

Improved internal or end customer experience

Don’t know

Neither

*This analysis is for all respondents

21 VALUE STATEOFFLUX

VALUE STATEOFFLUX 2017GLOBAL SRMRESEARCHREPORT

2017GLOBAL SRMRESEARCHREPORT

VALUE

Companies still fail to treat suppliers as partners: the benefits of joint working flow just oneway In the type of benefit derived from SRM, we see a distinct difference between leaders, followers and others in our sample. Although non-financial benefits can be particularly difficult to quantify, 95% of SRM leaders report both financial and non-financial benefits, while 72% of followers do the same. Only 23% of other businesses report these benefits. Of the others, 42% do not record and report any benefits. Despite SRM leaders’ focus on non- financial benefits, they are still more likely to demonstrate post-contract financial benefits than other groups. Twenty-seven percent of leaders achieved financial benefits of more than 6% after signing supplier contracts. Only 13% of followers did the same. Over several years our research has shown an increasing gap between leaders and followers in outcomes they achieve through SRM. Average post-contract financial benefit is the headline number that companies will look for to test the effectiveness of their SRM approach and justify ongoing investment in it. It is alarming then that the followers and others combined, which

improved speed to market, and persuade suppliers to take on and manage more risk. These benefits represent increasing maturity in SRM. Businesses ignoring them are almost certainly losing ground against the competition. SHARING REACHES LIMITS Some organisations share the benefits of joint activities with suppliers to encourage their participation. Compared with other groups, leaders in SRM are more likely to frequently, or at least occasionally, share the benefits of SRM programmes with suppliers. At the same time, they are much less likely to never share the benefits than other respondents. However, in the overall result we still see reluctance among survey respondents to share the benefits. Companies can’t expect suppliers to be committed and motivated to create new value if they do not get to see some of the benefits. Companies still fail to treat suppliers as partners and the benefits of joint working flow just one way. This pattern has shown no real change over the years. However, 88% of SRM leaders offer suppliers non-financial rewards for engaging in SRM programmes. Around half of all companies recognise suppliers’ contribution in ways other than directly sharing benefits, such as through supporting the supplier’s brand promotion.

make up 86% of respondents do not know the financial benefits of SRM. Even among the leaders, one in five does not know the financial benefits of SRM. While organisations that are highly committed to SRMmay not make the same demands for clearly quantified benefits, at some point their investment in time, effort and resource to support SRM will come under the spotlight. Organisations that cannot point to tangible validated benefits will come under pressure to do so or risk losing the vital support and commitment of senior managers. Clearly, an inability to capture and report financial benefits remains a challenge for all organisations. SRMHELPS REDUCE AND AVOID COST, MANAGES RISK ANDMUCHMORE A detailed examination of the benefits from SRM programmes shows that, aside from direct financial benefits and risk reduction, they include a raft of indirect wins which can ultimately make a lasting impact on not only the bottom line but also the top line. The most common and tangible of these is an improvement in service levels, reported by 55% of respondents, and more supplier innovation reported by 41%. While less tangible, but potentially of equal value, increasing supplier commitment (‘going the extra mile’) is indicated by almost half of respondents and improved account management being enjoyed by 41%. SRM leaders and followers also say SRM is helping them gain competitive advantage,

LEADERS ARE MORE LIKELY TO SHARE SRMBENEFITSWITH SUPPLIERS

LEADERS ARE MORE LIKELY THAN OTHER GROUPS TO OFFER SUPPLIERS NON-FINANCIAL BENEFITS

SNAPSHOT ANALYSIS Not only are leaders likely to benefit fromSRM, they are alsomore likely to share those benefits, both financially and non-financially. Since much of the value generation of SRM comes through collaborative working, sharing benefits is an important tool in engaging suppliers. Those that do are also likely to see greater benefits themselves.

Fig 10. Do you recognise suppliers in other ways?

Fig 9. Do you share financial benefit derived from joint SRM activities with your suppliers?

Leader

Yes 12%

Leader

Follower

Other

No 88%

Always

Follower

Often

No 24%

No 76%

Occasionally

Other

No 46%

Yes 54%

Never

Businesses that can align a value proposition with the strategy of the business will be at a considerable advantage when they start to build the business case for an SRM programme compared with those who do not. Entrepreneurial procurement aims to bring broader value to the business, not just in contract price and supplier performance, but in engineering new processes and creating newmarkets from innovation among suppliers. Procurement becomes the conduit for the business to access that supply-side value.

IN THE NEXT SECTION... Understanding the value SRM can offer in all its various guises is one thing. Turning that value into reality is quite another. To do so, procurement needs to engage stakeholders, senior management and suppliers in SRM. In the next chapter, we look at this topic.

Don’t know

Typical supply-side benefits no longer constitute the primary motivation for investing in SRM

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2017GLOBAL SRMRESEARCHREPORT

ATKELLOGG SRMAIMS TOUNDERPIN GROWTH

CASE STUDY KELLOGG

Kellogg’s brands are household names across the globe, but it faces intense competition. To fully leverage supplier innovation and to be more agile in response to market opportunities, it decided to relaunch its SRM programme, as Shelly van Treeck, Chief Procurement Officer, Kellogg Company, explains.

discussions, with the right people, at the right level, in support of Kellogg’s 2020 Growth Plan. Earlier this year, we launched K Partners Advantage at our Supplier Day. K Partners Advantage is the culmination of cross- functional feedback, external benchmarking, supplier segmentation and stakeholder input into the design, planning and governance of a re-energised SRM programme. The approach moves us beyond traditional performance management and scorecards, and it was further enabled by globalising roles (and the programme) for scale, and organising work under the umbrella of ‘supplier engagement and development’ (SE&D). SE&D encompasses SRM, supplier diversity and responsible sourcing. It provides a ready way to integrate and connect suppliers to strategies, processes, goals, and activities more effectively, and with mutual benefits. In the year leading up to the launch of K Partner Advantage, supplier segmentation was completed and various pilots were conducted to validate the business case and ensure the programme would deliver value and benefits for all parties.

While Kellogg Company had had a supplier relationship management programme for more than 15 years, given marketplace changes and in the spirit of continuous improvement, we decided in 2015 that we could drive greater end-to-end value through a broader supplier engagement and development approach. We could do this by expanding category coverage and thinking bigger and beyond traditional performance management. When you’ve managed costs, innovation, and supplier service performance — and done that well for years — it was time to ask ourselves how we could increase the benefits, relevance, and impact for all players in our supply chain, internally and externally. The answer was that we needed to partner differently, change the conversation, include all spend and build the case for how better supplier relationships could achieve greater value and returns for all involved. ‘Playing to win’ is part of our culture, and that’s why it became increasingly important to pursue a different level of strategic engagement with our supply base. It underpins our new-and- improved SRM programme: improving supplier relationships by having the right

Kellogg has ambitious growth plans and we are simultaneously making significant changes to our business. We need to have suppliers who understand and are aligned to our objectives.” Shelly van Treeck Kellogg CPO

Tony the Tiger was introduced in 1952 and is a popular character in Kelloggs’ globally recognised branding.

CASE STUDY STATE OF FLUX 2017 GLOBAL SRMRESEARCHREPORT

CASE STUDY KELLOGG

WHETHER YOU’RE STARTING AN SRM PROGRAMME OR MEASURING PROGRESS, OUR SRMDIAGNOSTIC WILL PROVIDE YOUWITH A SNAP SHOT OF THE CURRENT STATE OF SRM IN YOUR ORGANISATION AND IDENTIFY OPPORTUNITIES TO CREATE MORE VALUE.

operational improvements and CSR enablement. Done well, this partnership demonstrates to internal business stakeholders, external suppliers and others that there is untapped value within our supply web that can be realised through a different approach to supplier relationships – relationships that help the business grow.

comes up, we are able to leverage the right partner right away, without questions or renegotiating the basics. We can be agile and deliver value for the business with the right partners, as we will be focusing on the future and growth, in addition to the urgent here and now. Being a customer of choice with top tier suppliers is an absolute priority of K Partners Advantage, and executive sponsorship of the programme is strong. Agility, speed and value come from relationships that are open and strategically focused – whether it’s being first to have a new idea, product innovation, or service enhancement. It’s equally important that we’re open to dialogue so that suppliers are able to tell us what we are doing to slow them down, what we’re missing, or what we could do to be a better customer. Supplier engagement and development is a team sport, and we’re doing all we can to make K Partner Advantage a recipe for shared success. It’s early days in our programme but we’ve completed over 50 joint business plans with key suppliers and the expected outcomes include product innovation, cost reduction and avoidance,

We selected several supplier relationships from across our business with cross- functional ‘owners’. We secured 360-degree feedback from stakeholders and suppliers alike before proceeding with any new activities. Change management was at the forefront of our approach as well, as we looked at who would be affected and openly involved them in the change process. We worked with our procurement category managers to lead the new supplier relationship programme, just as they did before, but to a different standard. Now they were leveraging skills that went beyond traditional category or subject matter expertise: for example, marketing, and leadership to create a more long-term, strategic and value-creating path forward, with the intent of embedding and integrating the new ways of working to deliver the future needs and requirements of our business. Kellogg has ambitious growth plans and we are simultaneously making significant changes to our business. Therefore, we need to have suppliers who understand and are aligned to our objectives, and who are ready to go when we are. The foundation needs to be fully established so when a new project

We can be agile and deliver value for the business with the right partners, as we will be focusing on the future and growth, in addition to the urgent here and now.” Shelly van Treeck Kellogg CPO

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26 CASE STUDY STATE OF FLUX

2017 GLOBAL SRMRESEARCHREPORT

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