Post on 07-Aug-2015
An approach to Building Corporate Strategic Sourcing Capability
Todd Kyriss
Strategic Sourcing as an Enabler to Growth
Utilize Strategic Sourcing Process and Infrastructure as an Enabler for Top Line
Growth by Generating New Demand Creation $’s for your company.
What could $30, $60 or $90 Million in Demand Creation $’s mean to Top Line Growth?
Direct Sourcing Today
• Decentralized Sourcing Process – Managed by BU’s• Managed mainly by the business units with no common
process or strategy• Corporate SME’s in place for transportation, metals, resin and
packaging– Little involvement across BU’s outside of Resin
• No global integrated management reporting structure linked to P&L
• Limited focus on process and cost mgt efficiencies through implementation e-sourcing tools – portal, EDI, etc
No common practices or disciplines across the business units
Indirect Sourcing Model
Focused on the centralization of processing PO’s
Draft – TO BE Process
Expanded Focus on the centralization of processing PO’s and Management of P-Card and Catalogue Orders
Five Aspects of Capability Development
• Approach
• Strategy
• Process
• Organization / People
• Systems / Technology
© Dan Enneking 2003
Best Practice Procurement Capabilities
Approach• Procurement is managed as a virtual line of business complete with an integrated Management Reporting System• Spend is managed by category, cost reduction tracking methodology is deployed and linked to business unit P&L /demand creation spend and top line growth
Procurement Managed as a Line of Business
Traditional Line of Business
Procurement as a Line of Business
Key Financial Measures P&L
Revenue
Profit
Dashboard
Spend
Cost Reductions
Key Record of Reference General Ledger Accounts Payable
Leading Indicators Customer Base
Sales Activity Funnel
Supplier Base #
RFI/RFP Funnel
Productivity Funnel
Procurement Summary Dashboard
Category Spend
Total 2013 Spend ($M)
$48.0
Year to Date Spend (Actual $M)
YTD 2013 (Q3) YTD 2012 (Q3)
$25.0 $36.0
Spend Change ($M)
YTD 2013 (Q3) % change
($11.0) (31%)
Key Drivers
Year to Date Spend (Actual $M) % Change
Exchange Rate $NA NA%
Natural Demand ($9.0) (25%)
Cost Reduction ($2.0) (6%)
Total ($11.0) (31%)
Cost Reduction Levers(Actual $M) Year to Date Change
YTD 2013 (Q3) YTD 2012 (Q3)
Rate ($1.7) $XX
Demand Mgmt. ($0.1) $XX
Compliance Mgmt. ($0.2) $XX
Engineering & Specs $0.0 $XX
Total ($2.0) $XX
% (6%) (XX%)
Supply Base Optimization
Year to Date (Actual #) 2013 vs. 2012
YTD 2013 (Q3)
YTD 20012 (Q4)
+/(-)
Baseline # of Suppliers
200
Top 80% of Spend 50
Spend with Preferred Suppliers
Year to Date Spend (Actual $M and %)
YTD 2013 (Q3) YTD 2012 (Q3)
TBD TBD NA NA
Key Activities
Description
Status (Planned/ In Progress/
Completed)
Results
What is a Spend Category?
• Spend Category - Three characteristics– Significant dollar spend
– Common Supply Market» Similar materials/Services
» Product life cycles
» Industry economics
– Common supply line management levers» Rate
» Demand management
» Compliance
» Process efficiencies/Spec Changes
Cost Reduction Measurement
There are four primary cost reduction/productivity levers:
Lever Definition Formula
RateNet reductions in prices paid for items procured when compared to prices in place for the prior 12 months
[Old price - New price] * Volume
Demand ManagementProactive programs to reduce usage or change to lower cost alternatives
[Volume reduction] * Price.
Compliance
Driving demand to approved programs or preferred suppliers and eliminating the premium paid when "outside" of the program
Calculations vary depending on the commodity and type of cost reduction
Engineering and SpecificationProactive programs which change the manufacturing product specifications and designs
[Old bill of materials –New bill of materials] * Volume
Best Practice Procurement Capabilities
Strategy
Approach• Procurement is managed as a virtual line of business complete with an integrated Management Reporting System• Spend is managed by category, cost reduction tracking methodology is deployed and linked to business unit P&L
• Sourcing strategies are defined through a combination of internal requirements and supply market characteristics• Strategy selected determines sourcing decision criteria and sourcing program development
Category Strategy Development
Leverage
Shop
Partner
Manage Risk
High
Value of Spend
Low HighComplexity of Sourcing
Category Program Characteristics
Leverage• Important customer relationships• Medium term agreements (1-2 yrs)• Potntial use of reverse auctions• Few suppliers - avg spend/supplier over $1M or
80% of a category• Supply base optimized, worldwide sourcing
concepts deployed, supplier performance mgt. in place, may deploy some supplier development activity
Shop• Arms-length relationships• Short-term agreements (max 1 yr.)• Extensive use of reverse auctions• Number of suppliers need to be held to a level that
spend is large enough to be auctioned• Supply base optimization strategies in place and
supplier performance expectations in place
Partner• Highly collaborative relationships• Long-term agreements• One partner supplier, maximum of three others• All supplier strategies are important and deployed• High impact supplier development activities in place
Manage Risk• Important customer relationship• Medium term contracts (1-2 yrs)• Few suppliers due to nature of supply market and
need to manage result• Supply base optimized, supplier performance mgt. in
place, worldwide sourcing and supplier development strategies deployed where appropriate
Best Practice Procurement Capabilities
• Procurement Process is well documented and consistently deployed across all businesses for all spend categories
• Strong Purchase-to-Pay Sub Processes are in place that effectively establishes control over payments to suppliers
Strategy
Approach
Processes
• Procurement is managed as a virtual line of business complete with an integrated Management Reporting System• Spend is managed by category, cost reduction tracking methodology is deployed and linked to business unit P&L
• Sourcing strategies are defined through a combination of internal requirements and supply market characteristics• Sourcing Strategy selected determines sourcing decision criteria and sourcing program development
The Sourcing Process
Vendor Identified for negotiating Volume Discount
Completed RFP Evaluation Criteria Matrix
Supplier Selection
Supplier Selection
Contract Negotiated and Announced
Legal Contract
Implementation Plan
Supplier T&C Metrics Definition
SupplierNegotiation
Business Units begin to place orders
Purchase Order Process
Payment Process
Financial Reports
Supplier T&C Metrics Data
Purchaseto PaymentTransaction
ProcessDefinition
Supplier Report Card
Supplier Performance Evaluations
Supplier Corrective Action Requests
SupplierPerformanceEvaluation
CompletedSupplier Corrective Action Plans
Supplier Development Plans
SupplierManagement
&Development
CommodityStrategy
Development
CategoryStrategy
Reverse Auction Assessment
RFI
Completed RFI Evaluation Criteria Matrix
NeedsSpecification
Definition
Requirements Document Spend Profile
TCO
List of Current Contracts
Supply Market Scan
Traditional Approach:
New Approach:
Purchase -to-Pay Sub-Processes
• Category Spend Director controls all sourcing decisions
• Signature Authorization Policy establishes required approval signatures
• Master purchasing agreement contracts generally must be put in place for spend of $1M or more
• Only approved suppliers are paid
• Four Purchase-to-Pay Sub Processes are available:– Purchase order process
– Specific alternative processes put in place by the category director
– Travel & entertainment reimbursement process
– Purchasing card process
Establishes the Internal Control Environment for the Purchase-to-Pay Process
Best Practice Procurement Capabilities
• Procurement Process is well documented and consistently deployed across all businesses for all spend categories
• Strong Purchase-to-Pay Sub Processes are in place that effectively establishes control over payments to suppliers
Strategy
Approach
Processes
Organization
• Procurement is managed as a virtual line of business complete with an integrated Management Reporting System• Spend is managed by category, cost reduction tracking methodology is deployed and linked to business unit P&L
• Sourcing strategies are defined through a combination of internal requirements and supply market characteristics• Sourcing Strategy selected determines sourcing decision criteria and sourcing program development
• A center-led organization drives standard procurement and processes linked to the “natural owners” of the spend categories• Company-wide governance capability (Sourcing Council) directs sourcing initiatives, priorities, and driving results
Potential Governance Models
CentralizedHybridDecentralized
A centralized procurement team owns all
aspects of company-wide procurement
Central authority delivers standardized process and
policy best practices Business units control select
aspects of the procurement processes
Businesses operate
independently
Today Controlling and Costly
Corporate Procurement – “Doing it with the Business Units, not to them”
Global Indirect Spend: Overview
Office supplies, small vendors, …
Gas, electric, …
Insurance, P-Card, Treasury
Temp staffing, recruiting, …
Customs, property, S&U
Audit, Legal, Consulting
Leases, temp whse, …
SAP, Hdwe, Software, Services, …
Air, hotel, car, AMEX, …
PPE, …
R&D, A&P, POS, Research, …
Health, welfare & other benefits
Transportation (Oceanic, LT, LTL, …)
Includes
1,350
80
40
50
30
50
50
100
100
75
175
175
175
250
Est. 09
Spend(US$ MM)
78%1300100IT / Telecom
245001,600
< 5%12150100All Other
82%20050Energy / Utilities
80%30050Financial Services
88%20050Staffing & recruiting
77%70075Government
64%80075Professional Services
75%250100Real Estate / Whse
91%400100Travel
30%4700200MRO
37%1500200Mar-com
94%500200Personnel-related
77%1500300CTS & Logistics
Top 25 Vendors
Vendor
Count
2008
Spend(US$ MM)
Category
Office supplies, small vendors, …
Gas, electric, …
Insurance, P-Card, Treasury
Temp staffing, recruiting, …
Customs, property, S&U
Audit, Legal, Consulting
Leases, temp whse, …
SAP, Hdwe, Software, Services, …
Air, hotel, car, AMEX, …
PPE, …
R&D, A&P, POS, Research, …
Health, welfare & other benefits
Transportation (Oceanic, LT, LTL, …)
Includes
1,350
80
40
50
30
50
50
100
100
75
175
175
175
250
Est. 09
Spend(US$ MM)
78%1300100IT / Telecom
245001,600
< 5%12150100All Other
82%20050Energy / Utilities
80%30050Financial Services
88%20050Staffing & recruiting
77%70075Government
64%80075Professional Services
75%250100Real Estate / Whse
91%400100Travel
30%4700200MRO
37%1500200Mar-com
94%500200Personnel-related
77%1500300CTS & Logistics
Top 25 Vendors
Vendor
Count
2008
Spend(US$ MM)
Category
Actual = $1,362
All Indirect Spend Categories should be in scope and managed by Corporate Procurement Strategy
Illustrative Hybrid Model
Business Unit A Business Unit B Business Unit C Business Unit D
Demand & Compliance Mgr.
Demand & Compliance Mgr.
Demand & Compliance Mgr.
Demand & Compliance Mgr.
Demand & Compliance Mgr.
Demand & Compliance Mgr.
Demand & Compliance Mgr.
Metals
Resins
Transportation and Logistics
Specialized Services
Travel & Events
Energy and Utilities
Category Director
Category Director
Category Director
Category Director
Category Director
Category Director
Category Director
Demand & Compliance Mgr.
Demand & Compliance Mgr.
Demand & Compliance Mgr.
Demand & Compliance Mgr.
Demand & Compliance Mgr.
Demand & Compliance Mgr.
Demand & Compliance Mgr.
Demand & Compliance Mgr.
Demand & Compliance Mgr.
Demand & Compliance Mgr.
Demand & Compliance Mgr.
Demand & Compliance Mgr.
Demand & Compliance Mgr.
Category Director
Demand & Compliance Mgr.
Ownership of procurement function is centralized
Processes and policies are standardized across the company to leverage best practices, incumbent
systems
Category Directors located in organizations with strong SME or
greatest spend
Demand & Compliance Managers located in business units with
similar requirements or according to SAP compatibility
SAP/Bex/SPM enables aggregate spend reporting and analysis
Illustrative
Packaging
Category Director
Illustrative Org Chart
VP Corporate Procurement
Indirect Sourcing Direct Sourcing VP of GSA Sourcing IT Support FunctionFinance Support
Function
Development &Training
Support Function
Corporate role – direct line
SME’s – dotted line
Corporate role – direct line
SME’s – dotted line
VA/VE Support Function
Inclusion and DiversitySupport Function
Sub Support Functions from Legal, Sustainability, PMO, etc
Difficult to propose a definitive organizationalstructure without spend and needs analysis
Role of the Sourcing Council
Provides Executive sponsorship to Procurement’s strategic initiatives
Sets overall direction, establishes priorities, and assists in conflict resolution
Visibly supports the deployment of the Procurement process, the Purchase-to-Pay sub-processes, and the resulting governance changes
Assigns ownership of key supplier relationships when it is not clear who should own them
Provides feedback on and approves category spend cost reduction targets
The Sourcing Council is Senior Line Management’s opportunity to provide direction to the Procurement organization’s efforts on a category-by-category basis.
The goal is to navigate these strategic changes with key stakeholders, not to impose unilateral changes upon them.
Quarterly Sourcing Council Meeting Objective
The objective of the Sourcing Council (SC) is to:1. Report on progress made against Procurement’s
Initiatives
2. Provide a category-by-category overview including key performance indicators (spend, # of suppliers, savings) and project status
3. Inform and solicit feedback from Executive business stakeholders to ensure Procurement’s alignment with operational and strategic goals
Best Practice Procurement Capabilities
• Procurement Process is well documented and consistently deployed across all businesses for all spend categories
• Strong Purchase-to-Pay Sub Processes are in place that effectively establishes control over payments to suppliers
Strategy
Approach
Processes
Organization
Systems
• Procurement is managed as a virtual line of business complete with an integrated Management Reporting System• Spend is managed by category, cost reduction tracking methodology is deployed and linked to business unit P&L
• Sourcing strategies are defined through a combination of internal requirements and supply market characteristics• Sourcing Strategy selected determines sourcing decision criteria and sourcing program development
• A center-led organization drives standard procurement and processes linked to the “natural owners” of the spend categories• Company-wide governance capability (Sourcing Council) directs sourcing initiatives, priorities, and driving results
• Technology is leveraged to access spend data, increase sourcing productivity, track cost reductions, and drive results
E-Procurement Dashboard – Spend Category
Supplier Count
# of Suppliers
# on electronic POs
%
# on electronic invoicing
%
# on electronic payment
%
Transaction Count
# of POs
# of electronic POs
%
# of Invoices
# of electronic invoices
%
E-Procurement Dashboard
Self Service Procurement
# of employees -
# with access to Connect/ Know How -
%
Average # of monthly hits -
P-Card Activity
# of users -
YTD Spend
Three Areas of Capability Development Tools
• Organization/Governance Model (5)
• Talent Management Methodology/Tools(5)
• Process Training Modules(4)
The Business Case
© Dan Enneking 2003
We manage S&OP with Corporate Compliance…..Why not Procurement?
The approach of managing Procurement as a Line of Business… will enable us as a business to build a strategic sourcing capability…. that delivers an annual cost reduction of 3-10% of our total Accounts Payable spend…..to become an enabler for Demand Creation to drive Top Line Growth.
Next Steps
• Present in Breakout Session to Key Sourcing Leaders at Supply Chain Forum in October– Objective: (answer the following questions)
• Does hybrid sourcing model have merit and provide value to Newell and the BU’s?
• What are the Pro’s and Con’s of this model for your company?
• Is there a better model?
• Can this model be rolled out into a group to test its validity or presented as a corp model to Group Presidents and Executive team?
• What work needs to be done to develop infrastructure model and expense for agreed upon rollout model?
– Who can do it?
• What are the next steps?
Appendix
Organizational/ Governance Model Tools
• Organization Model and Position Descriptions• Procurement Capability Assessment Tool• Quarterly Management Review Process
Framework• Procurement Policies and Governance Rules• Monthly Procurement Process Improvement
Council Framework
Talent Management Methodology/Tools
• Organizational Skills Assessment Tool
• Targeted Selection Interview Guides
• Peer Ranking Process
• Incentive Compensation Framework
• Annual Performance Management Framework
Training Modules/Tools
• Procurement Process Training
• Supplier Performance Management
• Cost Reduction Tracking Methodology
• Advanced Supply Market Scanning and Total Cost of Ownership Concepts