Beyond Procurement - The Beyond Group

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Beyond Procurement Options for procurement to drive company-wide productivity Survey report Matthias Kaesser Sammy Rashed With contribution of: Giles Breault Michael Henke Daniel Hollos

Beyond Procurement Options for procurement to drive company-wide productivity Survey report Giles Breault Michael Henke Daniel Hollos Matthias Kaesser Sammy Rashed

Beyond Procurement

Imprint Academia

Practitioners

Authors

EBS Business School, Institute for Supply Chain Management – Procurement and Logistics Dipl.-Ing. Matthias Kaesser External Doctoral Candidate (on educational leave at McKinsey & Company) Phone +49 89 5594 8586 [email protected] www.ebs.edu/iscm

Sammy Rashed, MBA Novartis Pharma AG Executive Partner for Corporate Research, Institute for Supply Chain Management Phone +41 79 593 9121 [email protected]

Contributors

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Prof. Dr. Michael Henke Head of Institute

Giles Breault, MBA, C.P.M., MCIPS Former CPO, Roche & Aventis, Head of Global Productivity and Business Services, Novartis Pharma AG Chairman of Advisory Board – Procurement Leader Network Phone +41 79 820 3706 [email protected]

Phone +49 611 7102 2100 [email protected] www.ebs.edu/iscm Dr. Daniel Hollos Project Manager for Industrial Research Projects Phone +49 611 7102 2138 [email protected] www.ebs.edu/iscm

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Bibliographic information from Deutsche Bibliothek (Central Archival Library and National Bibliographic Centre for the Federal Republic of Germany): Deutsche Bibliothek has registered this publication in the German National Bibliography; detailed bibliographic data can be found on the Internet at http://dnb.ddb.de. © Supply Chain Management Institute (SMI), Wiesbaden, 2012 Breault, Giles; Henke, Michael; Hollos, Daniel; Kaesser, Matthias; Rashed, Sammy Beyond Procurement, Options for procurement to drive company-wide productivity, Survey report Publisher:

EBS Universität für Wirtschaft und Recht EBS Business School Institute for Supply Chain Management - Procurement and Logistics (ISCM)

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Beyond Procurement

Preface Over the last three decades the procurement function has been one of the most progressive organizations within large companies, moving from a transactional “back office” activity to a vital element for ensuring smooth supply, risk reduction and profitability growth. Gains in these areas however eventually reach a point of diminishing return, which contrasts with the ever-growing pressure on the function to contribute more and play a greater role in driving productivity. Likewise, progressive practitioners in the Supply Chain and Procurement arena have become increasingly frustrated by the inability to “move the needle” with respect to their own contribution; while believing that they can deliver much more, they often feel “boxed in” by restrictive internal mandates and organizational barriers. Industry practitioners reached out to the academic community to assess the importance of this trend, and to evaluate which directions were considered by different companies as the best way to

steer their procurement resources to drive a new value proposition. In the course of this investigation seeking to establish a clear future direction, it was found that very little could be gained from the literature and that while certain trends could be gleaned from anecdotal interviews, no real body of thought had emerged as to how and where should a modern, globally distributed procurement function be directing its future efforts, and to what degree those efforts would be seen by their employers as providing a boost in real value. This survey and related research projects intend to bridge that gap in the literature, and most importantly to provide practitioners with a menu of possibilities on where to apply resources and further guide them towards what is seen by companies as most important – an endeavor likely to redefine the nature of the function, its direction and overall contribution.

Contents 1 Management Summary..............................................................................................................................................................6 2 Evolution of procurement..........................................................................................................................................................7 3 Survey method and sample.......................................................................................................................................................7 4 Future options to drive company-wide productivity...................................................................................................................9

4.1 The “top ten options”......................................................................................................................................................9



4.2 Survey results.................................................................................................................................................................10



4.2.1 Overall results...................................................................................................................................................10



4.2.2 Performance measures......................................................................................................................................10



4.2.3 Feasibility measures..........................................................................................................................................12



4.3 Deep dive on the “Innovation Sourcing” option.............................................................................................................13



4.4 Deep dive on the “Total Cost-Base Management” option...............................................................................................14

5 Outlook....................................................................................................................................................................................15 6 Literature.................................................................................................................................................................................15

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Beyond Procurement

1 Management Summary Where is procurement heading? Which contribution could the function make beyond its traditional territory? Which roles and responsibilities could it pursue in the future? In the course of the Beyond Procurement survey introduced here we asked CXOs and managers from procurement, finance and other business functions to share their opinion about ten short-listed options for procurement to drive firm-wide productivity. Furthermore we were interested in the professionals’ opinions about where the function should evolve to in the near future and which major obstacles it would face along the way. Overall we based our findings on 119 respondents working for companies of various industries selected mainly across Europe, North America and Asia. Our findings can be summarized as follows: Procurement is under constant and increasing pressure to deliver more, however the development of new solutions has evolved at a slower pace than the growing expectations. ≈ The contribution of the function could be significant to yield higher levels of firmwide productivity, yet is often confined within current mandate to drive compliance and cost savings. ≈ The survey aimed to identify “what‘s next” for the function, moving from securing supply to globally and holistically managing company spend, and specifically to validate the hypothesis that the biggest impact would come from the following options: a) Better leverage the supply base to spark greater innovation b) Apply and combine proven productivity approaches across the entire cost base

≈ In workshops, focus groups and discussions with professionals on CPO conferences throughout 2011 and 2012, the following 10 options were identified as the most promising for procurement to drive company-wide productivity: ≈ “Top-line Contributor” ≈ “Innovation Sourcing” ≈ “Total Cost-Base Management” ≈ “Global Business Services” ≈ “Comprehensive Risk Management” ≈ “Take Over Operational Activities” ≈ “Next Level Collaborative Buying” ≈ “Internal Consulting / Project Management” ≈ “Extended SRM” ≈ “Embed Function Into The Business” From the received responses, four options for growth stood-out: ≈ “Innovation Sourcing” and “Total CostBase Management” come out as the two most promising options in terms of performance and feasibility, which validates the survey hypothesis. ≈ “Global Business Services” is expected to continue delivering high returns, although the approach appears to be already implemented in many organizations. ≈ Looking forward, participants plan greater external involvement via “Extended SRM” (e.g. helping build lean management / sixsigma capabilities at suppliers) to deliver additional value. However the function may lack the required capabilities to drive such developments further at the moment.

Beyond Procurement

2 Evolution of procurement Professionals from the supply chain and procurement area repeatedly point out the paradigm shift that purchasing has gone through in recent decades: The function evolved from a rather administrative and operational “order-executor” to an organization with more strategic importance for their companies1. Many procurement organizations turned around completely when going through this progression by installing cross-functional or cross-business coordination, or even building up separate and centralized procurement organizations. These changes were mainly driven by increasing globalization that lead to a more fierce competition and a focus on productivity and costs, as well as higher levels of

outsourcing – adding more weight to the function as the share of purchasing volume on the total cost base increased – and the rise of E-Commerce2. As a consequence of this increased focus on the function, procurement organizations became more professional and managed to achieve higher returns then before, allowing Procurement to receive significant attention from top management; especially in these times of financial crises and high economic volatility. As much as this development is a reason for procurement professionals to celebrate, it cannot be seen as a guarantee for enduring prosperity of the function. For example,

purchasing departments are not immune to the increasing levels of outsourcing themselves. The most operational activities are especially bound to be outsourced to a shared services center or even externally, and the current trend to spin out separate procurement companies could just as well be an interim step in that direction. As a consequence there is an ongoing lively debate on the future of Procurement3. This leaves us with the question on where the function is heading and whether there are realistic options for procurement to enhance the overall performance of their companies – beyond driving savings from third party spend.

3 Survey method and sample The structure of the Beyond Procurement survey is illustrated in figure 1. The survey contains two main sections: The first focusing on “Performance” of the respondents’ procurement organizations in regard to the ten pre-defined options, the second one

focusing on the “Feasibility” of a respective implementation. The first part – “Performance” – is furthermore divided into two different time-wise perspectives – past performance and future expectations – each time asking for the actual or planned im-

plementation priority as well as the actual or expected return by option. The second part focuses on two separate dimensions of implementation feasibility: i) the readiness of the whole organization in regards to the implementation of each option, and ii) the

Fig. 1 Survey structure and questions

FEASIBILITY

PERFORMANCE

Section

Survey Questions

Status quo – “looking back”

In the past two years: • Please indicate which of top ten options have been implemented? • What return was achieved for each option implemented? • What function was responsible for driving the implementation / taking the option over?

Future expectations – “looking ahead”

In the next two years: • Please indicate which of top ten options are planned to be rolled-out? • What return is expected for each option that will be implemented? • What function will be responsible for driving the implementation / taking the option over?

Organizational readiness

Please answer for each of the top ten options: • What is today the level of organizational readiness (i.e. the willingness of your company to implement it)?

Capability proficiency

Please answer for each of the top ten options: • What is today the capability proficiency (i.e. skill / ability of the procurement function to successfully drive)?

1 Cf. Carr & Smeltzer (1997); Lamming et al. (2000); Handfield & Nichols (2002); Knudsen (2003); Paulraj, Chen & Flynn (2006); Zheng et al. (2007) 2 Cf. Gadde & Hakansson (1994); Carter et al. (2000), 3 Cf. van Weele & Rozemeijer (1996); Harland, Lamming & Cousins (1999); Zheng et al. (2007)

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Beyond Procurement

capability of the procurement function itself to successfully deliver on this offering. Participants responded by selecting their level of agreement regarding the implementation priority as well as the feasibility dimensions by option on a scale from “1” (very low) to “5” (very high) and selected the return figure in percent on a scale from “0%” to “9%+”. The survey was conducted online to provide quick access and maximum convenience for participants. In order to ensure representative results we targeted a broad respondent base in terms

of functional expertise, seniority, industry affiliation, company size, and geography. The respective distributions of the 119 total participants are illustrated in figure 2. Taking all 119 respondents into account, the survey sample features a quite even distribution of different company sizes and incorporates the major industries of interest. The significant representation of pharmaceutical companies can be explained by the affiliation of a part of the group of survey issuers whose professional networks are respectively composed of high numbers of contacts within this industry. The same

Fig. 2 Sample statistics of survey participants and their companies Company revenue [EUR bio]

Industry

26

28

Other 24

40 Pharma

Telecom 6

18 10

18

11 - 25

6 - 10

Geography

6 Utilities 7 7 10 Business Services Engineering/ FMCG Manufacturing

Function/Seniority

Asia Other 10 2

Business Finance stakeholder 8 10 COO/ CEO 10

North America 23 65

Europe

72

Sample statistics of survey participants and their companies

Procurement

is true for the dominance of participants from the procurement function, including procurement managers and CPOs. Finally we focused geography-wise on the major “developed” markets – as characterized by the level of development of large corporations –Europe, North America, and Asia. In general we did not find significant differences between industry-related, geographyrelated or functional groups. That is why we do not expect any major respondent bias that could negatively influence the meaningfulness of the survey results.

Beyond Procurement

4 Future options to drive company-wide productivity 4.1 The “top ten options” 1. Top-Line Contributor: Companies could leverage Procurement’s transferable skills, capabilities, and process expertise to impact sales growth. Examples of this include training the sales team on negotiations, applying procurement’s mastery of contract management in the areas of business development or licensing, using SRM best practices to better manager relations with key customers, or creating a new offering all together which can then be offered to external parties.

5. Risk Protection & Management: Beyond the specific role of ensuring compliance when committing funds to 3rd parties, this option targets a more comprehensive and proactive approach to mitigating risks for the company. For example, moving from traditionally having key categories supported by back-up suppliers to a full supply risk management and business continuity plan – that may also involve sharing risks from the customer side with the supply base.

9. Extended SRM (building lean management / six-sigma capabilities at suppliers): Variation of some other options above, this applies the lean / six-sigma process early in the production cycle by ensuring a clear and relentless focus on the ’voice of customer’, removing all activities considered non-value-add and which bring unnecessary costs. There have been many good examples of this in the direct areas, but not as many in the indirect categories so far.

2. Innovation Sourcing: The supply base’s potential to drive product and process innovations seems to be under-leveraged in many firms. By recognizing and even creating “innovation sparks” as well as developing those through a well-managed and replicable process companies could improve overall innovativeness. Since innovation is best triggered not only by adding money but also when facing financial constraints, the pressure to realize savings can represent a useful burning platform.

6. Take Over Operational Activities: Often as a result of category projects, procurement can be left holding the operational responsibilities when the function – which previously owned it – is reduced or in some cases outsourced (e.g., travel, fleet, facility management). This option extends the Procurement function agent role beyond leading the acquisition process and adds a service-delivery responsibility for supporting the internal users with their operational needs.

10. Embed Function into Business: Take a critical look at procurement’s scope and identify which categories of spend are better managed centrally (typically general and corporate spend), as well as infrastructure-related activities (guidelines, training, talent development), and consider embedding the procurement resources for more customer –focused categories directly in the line-functions.

3. Total Cost-Base Management: By combining proven approaches and processes such as demand management, lean management / six-sigma, and offshoring & outsourcing, procurement could offer a broader range of solutions to internal stakeholders. This also allows to expand procurement’s scope beyond 3rd party spend. 4. Global Business Services: An approach adopted by many leading global organizations, to reduce costs and free-up time and resources, allowing management to focus on customers and growing the business. It streamlines non-customer facing activities (such as HR, finance, IT, facilities, legal services, etc.) and aggregates them into an internal unit that services the rest of the business.

7. “Next Level” Collaborative Buying: In contrast to the various current forms of consortium buying, this approach recognizes the risks of collaborative sourcing and capitalizes on procurement’s ability to scan joint-buying opportunities but de-risk the benefit stream through the creation of individual joint ventures focused at narrow categories of spend. 8. Internal Consultant/Project Managers: Since most category initiatives are usually complex initiatives that require crossfunctional leadership skills and strong stakeholder engagement, procurement could take these skills to the next level and turn them into an internal capability, which offers an alternative to external consultants.

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4.2 Survey results 4.2.1 Overall results Overall the survey results suggest focusing on four options for procurement to develop further: “Innovation Sourcing”, “Total Cost-Base Management”, “Global Business Services”, and “Extended SRM”. Whereas

the first two come through as the preferred options today as well as the foreseeable future, the appeal of “Global Business Services” diminishes somewhat (perhaps because it has already been implemented

to a large extent) while “Extended SRM” is expected to become a more compelling approach in the future (cf. figure 3). In the next two sections we will discuss the results by option in more depth.

Fig. 3 Overall findings based on survey results Four main productivity options to pursue

“Top 3” options voted1

Sourcing Innovation Importance1 today

TCBM2 Global Business Services

Sourcing Innovation Importance1 in the future

TCBM2

THE CHAMPIONS Both options Sourcing Innovation and TCBM2 rank amongst the highest in terms of implementation priority as well as actual / expected return (ranging from 4 – 5 %); today as well as in the future THE VETERAN Continuing to deliver high returns of ~5%, participants still highly value GBS, but do not expect further implementation efforts THE NEWCOMER Extended SRM3 shows the highest increase in importance. An average return of ~5% ist expected from this option

Extended SRM3

1 Based on implementation priority and return performance 2 Total Cost Base Management 3 Extend SRM building up lean management / six-sigma capabilities at suppliers

Overall findings based on survey results

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4.2.2 Performance measures The survey results suggest to clearly distinguish between two major groups regarding the performance of the options. Figure 4 provides an overview of the respondents’ voting regarding today’s as well as expected future implementation priorities and return by option. Looking at the status quo, the group of options that currently delivers high returns of around 4 to 5 percent – “Innovation Sourcing”, “Global Business Services”,

“Top Line Contributor”, “Total Cost-Base Management”, and partly also “Internal Consultant” – also expel the highest implementation scores. In that regard companies have apparently prioritized the implementation of options that help to deliver the highest returns or they are executing the implemented ones very well and do not spend too much focus on others. The only exception from this observed pattern is the option of “Risk Protection & Management” which is very well implemented in the

majority of companies that participated, however does not seem to yield particularly high returns. This might be the case due to the original nature of risk mitigation where an immediate positive return is more difficult to measure because it helps to protect from exceptional negative effects. In our context, however, we also see risk management as a way to increase productivity by sharing risks not only from the supply, but also from the customer side with all parties involved in the supply chain. In that

Beyond Procurement

regard we assume that most organizations still approach risk management in terms of mitigating exceptional events. In summary, it seems that there are three top performing options already present in procurement today – based on a combination of implementation status and returns (cf. “total performance score” in figure 4): “Innovation Sourcing”, “Total Cost-Base Management”, and “Global Business Services”. Regarding the participants’ future expectations this “top 3” list does not change too much interestingly: Looking forward there is no clear picture regarding the implementation priorities in comparison to the status quo; the spread between the different options is quite low compared to the “status quo situation” (51 percentage points spread in “status quo” situation vs. 30 percentage points spread in the “future outlook”). However, the overall expected

return increases (from 3.5% to 4.3% average return across all options) most probably factoring in increasing levels of expectation. Applying the same reasoning described above, that implementation prioritization should follow high-level returns, a group of 6 options with an expected return of 4.5% and higher emerges from the picture of results. Amongst these, the “top 3” options of the “status quo” situation are also expected to deliver the highest returns in the future; all at or above 5%. Conversely, it appears that “Global Business Services” has been implemented already to a large extent as its implementation priority number decreases. This makes the option “Extended SRM” a newcomer in the “future top 3” options to consider – alongside with “Innovation Sourcing” and “Total Cost-Base Management” as in the “status quo” situation.

In summary these results suggest that professionals are open and may welcome Procurement’s contribution beyond its traditional remit - the management of the entire cost base, as well as the stark involvement in increasing the company’s innovativeness being the two most popular over time (cf. figure 4). Secondly the results also suggest that risk management – despite its obvious “shortfall” of not being applicable to the measurement in percentages of return – is and remains a core responsibility of the procurement function. On the other side of the scale, the two options of “Taking Over Operational Activities” as well as “Next Level Collaborative Buying” appear to be – in terms of implementation as well as return – relatively less attractive options from responding companies.

Fig. 4 Detailed performance measures by option Option

Implementation priority3 Positive answers in percent

70

TCBM1

68

GBS2

77

Take Over Op. Activ.

56 26

4,4

67 43 52

5,2

62

3,3 3,2

4,8 5,3

55 74 44

2,6 2,9

59

3,7

5,0

74

2,5 2,9

Total performance score5 Illustrative

Estimated return4 In percent

56

4,0

2,3

Int. Consultant

Embed func. into bus

Implementation priority3 Positive answers in percent

4,8

62

Risk Protect. /Mmgmt.

Total performance score5 Illustrative

4,2

Sourcing Innovation

Extended SRM

Estimated return4 In percent

60

Top-Line Contributor

Next Level Collb. Buying

Future outlook

Today / status quo

70 65 55

3,6 3,7 4,8 4,5

1 Total cost base management 2 Global business services 3 Number of “yes” answers compared to total answers of whether option is (currently being) implemented or will be implemented in the future 4 Actual or expected/estimated return per option as implemented or planned 5 Importance score (index) combining indices of the prior two questions – implementation priority and return

Detailed performance measures by option

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4.2.3 Feasibility measures Focusing first on the “top 3” options identified above, procurement needs to continue working on the required skills internally. “Total Cost-Base Management” and “Innovation Sourcing” seem to entail some additional capabilities that are currently not yet present; both ranking between around the “medium” position (voted around “3”; right in the middle between “1” – “low capability proficiency” and “5” – “high capability proficiency”). The skills to perform a global business service center, the third top option, seem to be even less developed in procurement organizations at the

moment. Still, compared to the rest of the options, the “top 3” performing options are amongst those where procurement can provide a rather developed capability profile. As important as the development of skills and capabilities is the results also suggest the need to continuously engage internal stakeholders and raise their awareness & acceptance of procurement’s contribution clearly stood out, as most of the options presented rank below average in regards to the respective organizational readiness. Taking a closer look, it becomes apparent that the options of “Innovation Sourcing”

as well as “Risk Protection” are by the far the most “desired” ones from the business side. A clear coincidence with the very high implementation importance scorings of these two options discussed above. As for the capability dimension, procurement seems to have already started to either respond to the request from the business or promoting its future areas of responsibility already; nonetheless further work is needed to get full account and trust from the organization as a whole (cf. figure 5).

Fig. 5 Detailed feasibility measures by option Organizational readiness Grades: 1 (low) to 5 (high)

4

RPM TLC

3 ESRM

IS TCBM

GBS EFIB

TLC – Top-Line Contributor IS – Innovation Sourcing TCBM – Total Cost Base Management GBS – Global Business Services RPM – Risk Protection & Management TOA – Take Over Operational Activities NLCB – Next Level Collaborative Buying IC – Internal Consultant ESRM – Extended SRM EFIB – Embed Function into Business

IC

TOA

NLCB

2 2

3

4 Capability proficiency Grades: 1 (low) to 5 (high)

1 Willingness of the respondents’ company to implement 2 Skills / ability of the procurement function to successfully drive the respective option forward

Detailed feasibility measures by option

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Beyond Procurement

4.3 Deep dive on the “Innovation Sourcing” option Innovation has always been and remains a key area of interest for businesses as it has been identified as a key resource for competitive advantage. And as suppliers now take over more responsibilities for product as well as process innovations – given the higher levels of outsourcing – and do engage in closer collaboration with their customers, this leads to innovation alliances and “open innovation” networks, which can nicely leverage the procurement function’s natural interface to the supply base. However innovations come at a price; or more precisely, implies a series of challenges that are difficult to address: How to trigger, how to replicate, how to sustain and how to measure innovations?

capabilities seem to be present and developed already (cf. figure 6). Following the conversations we had around this topic in our focus groups and with survey participants, the identification and promotion of innovations to bring them to success is the achievement of tenacious individuals within procurement, sometimes supported by a loose structure of incentives for innovative suppliers (e.g., yearly supplier innovation awards) and the incorporation of an innovations dimension in supplier assessments. So far we have not yet encountered a procurement organization that has rigorously defined processes and systems that allow for a broader screening of the supply base for innovations and that provide a basis for innovations to be driven through their various stages of development against internal resistance. This makes innovativeness based on the suppliers great knowledge base rather accidental than intentional.

The results of the survey clearly show that procurement nowadays and in the future already focuses on the sourcing of innovations. Still not all of the required

In order to give the function enough space to better identify where sparks happen and ensure we are the first customer with whom suppliers share their innovation, it might be fruitful to allow the function to focus on areas other than for example process compliance and/or cost savings. Furthermore it is essential and a prerequisite to expand the procurement team’s mindset beyond the pure cost management focus. For example, there will be only little motivation to buyers for bringing innovation that drives top-line growth if they are only measured on bottom-line impact. Here, procurement can create a huge opportunity and leverage its supplier management to help grow its contribution beyond cost performance resulting in a competitive edge for the company. In that sense, as, procurement could be just as important a source for innovation as R&D - and may even get results faster.

Fig. 6 Deep dive information on “Innovation Sourcing” Upcoming research on…

Description of productivity option • Better leverage the supply base’s potential to drive product and process innovations by defining a well-managed and replicable process • Recognize and incentivize for “innovation sparks” at suppliers through a burning platform that considers elements of close relationship as well as extraordinary pressure • Preserve disruptive innovations from getting rejected in their early development phase through internal skepticism and biased review process

Average level, today

future

 How can procurement ensure to “trigger and spot innovation sparks”?  What is the right supplier management / relationship / governance to improve suppliers‘ innovativeness?  How can the function overcome allergies to disruptive change internally?

Survey results – high level overview Survey item

…how to leverage potential:

Comment

Implementation priority

Very high

Very high

Respectively ranking #2 (today) and #1 (future) – out of 10

Actual / expected return

Very high

Very high

About 5% annual productivity increase expected

Organizational readiness

Average to high

n/a

One of 3 top options that are supported / required by the org.

Capability proficiency

Average

n/a

Currently only some professionals show the required capabilities

Deep dive information on “Innovation Sourcing”

…how to increase procurement‘s capabilities:  Which profile of a procurement professional required for innovation sourcing?  What are appropriate performance measures for sourced innovations?

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4.4 Deep dive on the “Total Cost-Base Management” option “Total Cost-Base Management” (TCBM) is a comprehensive end-to-end way of looking at the spend base. Its basic tenet suggests that integrating all of the functions normally associated with creating value and driving productivity will generate higher and compounded levels of benefits if properly tasked, targeted and rewarded for that effort. This approach views costs across organisation boundaries and not just as discrete components but also as systems that drive demand and expenditure. By combining functions and processes such as Procurement, Offshoring & Outsourcing (O&O), and Lean / Six Sigma (LSS), with a robust global project management approach, an end-to-end cost management team is created. This helps organizations diagnose, evaluate and implement measures that focus on the sources of costs to create more durable solutions and deliver savings above average levels.

The basic principle on which it builds is that any activity that leads to a cost whether internal or external is a product of a system of business needs. When those needs are evaluated by traditional structures these costs are treated suboptimally because they are considered independently. By recognizing this segregation, creating a powerful systemic costs analysis, and applying related comprehensive solutions, cost management moves out from independently managed budget cuts to root-cause based solutions that are consistent with business objectives. Results from the survey indicate a sustained interest in the TCBM approach, based on past performance and future expectations which reflect a 20% increase in targeted savings (cf. figure 4). From the feasibility perspective, this option is positioned amongst the top ones in terms of the organization appetite to receive it,

and the procurement department’s ability to deploy it (cf. figure 7). The above average performance return expected, combined with the limited risk to rolling it out (as it is comprised of existing functions being pulled together) explain why TCBM is one of the top contemplated options for driving additional value. Interviews and outcomes of the focus groups also indicate that Procurement practitioners had a strong feeling that this collaborative approach would drive new value. Experience with LEAN / Six Sigma and similar problem evaluation models had given participants a strong belief that when a more comprehensive approach would be applied across larger organisations, the opportunity to get at the root cause of costs would provide much greater insights and visibility that could be successfully mined for new value.

Fig. 7 Deep dive information on “Total Cost Base Management” Description of productivity option

Upcoming research to…

• Comprehensive method of managing all costs, both internal and external.

… better understand:

• Combines existing functions like Procurement, Offshoring & Outsourcing (O&O), and Lean / Six Sigma (LSS) into a single organization, with robust project management approach

• What industries and areas (F&A, Commercial, Production,…) are best suited for TCBM?

• Offers end-to-end cost management team which help organizations diagnose, drive, and deliver optimization projects

• Key drivers and initiators behind adopting approach? • Which processes / functions other than Procurement, LSS, and O&O are typically included in TCBM?

Survey results – high level overview Average level, Survey item Implementation priority Actual / expected return Organizational readiness Capability proficiency

today

future

Comment

Very high

High

Respectively ranking #3 (today) and #5 (future) – out of 10

High

Very high

Expected return increases from ~4% to ~5%

Average

n/a

Amongst top 60% of options that are supp. / required by the org.

n/a

Average proficiency level of procurement professionals

Average

Deep dive information on “Total Cost Base Management”

• Major organizational barriers and how they were overcome? … validate: • Actual % savings returns generated by TCBM • What other KPIs/metrics are used to demonstrate versatility of new combined organization • Increase in Sr. Execs in organizations who’s career included TCBM

Beyond Procurement

5 Outlook The procurement function has come a long way since its humble beginnings. Where it was once a necessary enabler, it has moved beyond the transactional world to become a function that has broad impact on business continuity, risk, and profitability. Yet even this broader mandate has its limits and it is reasonable to infer that without seeking mandate beyond its historical boundaries and use of traditional tools, the function has done as much as it can. Today, procurement groups are seeking ways to further impact the organizations they serve, and this will require new capabilities and enlightened organizations that will allow procurement to further integrate it more intensely into the business at large. While that direction will need to be aligned with the actual business needs and strat-

egy for each company and industry, the choices that are more meaningful involve Procurement collaborating and integrating with organizations beyond it own doors. The research team comprised of Academia and industry practitioners, through this survey gained a unique insight into the aspirations of contemporary procurement functions across a broad spectrum of industry. Additional research will build on the foundation created here, focusing more narrowly on the choices that seem to be preferred throughout industry. This later research will evaluate and quantify the benefits that organizations accrue when they develop the internal capability offering and grow the organizational readiness to break from old mandates and expectations.

On a final note, many participants in this survey as well as others who have become acquainted with these results expressed their desire to stay in contact with the authors and participating contributors as a way of evaluating their own company direction and benefit. In all of the focus groups that were conducted as a part of the research, participants looked eagerly to the results and many have subsequently sought guidance in furthering their own efforts. We recognize this need and have established a communication & exchange platform allowing the researcher and respondent community to participate in an even broader discussion on this topic.

6 Literature Carr, A.S., Smeltzer, L.R. (1997). An empirically based operational definition of strategic purchasing. European Journal of Purchasing and Supply Management, 3 (4), 199-207.

Knudsen, D. (2003). Aligning corporate strategy, procurement strategy and procurement tools. International Journal of Physical Distribution and Logistics Management, 33 (8), 720-734.

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Carter, P., Carter, R., Monczka, R., Slaight, T., Swan, A. (2000). The future of purchasing and supply: A ten-year forecast. Journal of Supply Chain Management, 36 (1), 14-26.

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Institute for Supply Chain Management Procurement and Logistics (ISCM) EBS University for Economics and Law Konrad-Adenauer-Ring 15 65187 Wiesbaden GERMANY Tel.: +49 (0) 611 - 7102-2100 Fax: +49 (0) 611 - 7102-1990 [email protected]

www.ebs.edu/iscm