Breaking the ceiling through effective procurement transformation 19 oct13

Breaking the Ceiling through

Effective Procurement

Transformation

CPO Forum, Delhi, 19Oct13

2

Do you face these situations?

Constant pressure from Management to reduce material costs

My team doesn’t have full visibility of spend across the supply chain

We initiate many cost reduction initiatives but they linger on for long

before implementation

We have lot of ideas but our daily routine activities keep us from

focusing on them

3

Contents

How Companies respond to today’s reality

How can we make Procurement transformation

programs effective?

Case : Delivering Procurement transformation

program at leading EPC company

4

Many Internal & External factors affect the industry dynamics and increase

pressure on company’s margins

My

Organization

Strategic and Bottleneck

Suppliers Have more buying power

Limited supply base

Significant P&L impact

Unique specifications

Leverage and Routine

Suppliers Have higher COGS, low

profitability

Quality inconsistencies

Weak Management Controls

Poor working capital conditions

5

Many Internal & External factors affect the industry dynamics and increase

pressure on company’s margins

My

Organization

Competition Merger and acquisitions

consolidating industry

Increase in global supply bases

Rapid innovation pace

Intense fight for Market Share

Blurring product segments

Customer Has More choices

Wants More convenience

Rising costs of customer

acquisition

Wants more value for money

Higher disposal income

Strategic and Bottleneck

Suppliers Have more buying power

Limited supply base

Significant P&L impact

Unique specifications

Leverage and Routine

Suppliers Have higher COGS, low

profitability

Quality inconsistencies

Weak Management Controls

Poor working capital conditions

6

Companies take host of measures to maintain and improve the bottom-line…

Specialist

Team

Suppliers

Procurement

R&D

Manufacturing

LogisticsQuality

Sales

Standard

Polymers

For new

products

Not for new products

Standard Polymers

Non standardised

Polymers only used locally

What Companies typically do?

Take Annual Targets for

cost reduction

Consolidate initiatives

product wise, category

wise or BU wise

Form Cross Functional

Teams

Engage with suppliers

for cost reduction

initiatives

Plan for implementation

Monitor and report

results

Realisation

plan

7

Companies take host of measures to maintain and improve the bottom-line…

Specialist

Team

Suppliers

Procurement

R&D

Manufacturing

LogisticsQuality

Sales

Standard

Polymers

For new

products

Not for new products

Standard Polymers

Non standardised

Polymers only used locally

What Companies typically do?

Take Annual Targets for

cost reduction

Consolidate initiatives

product wise, category

wise or BU wise

Form Cross Functional

Teams

Engage with suppliers

for cost reduction

initiatives

Plan for implementation

Monitor and report

results

Realisation

plan

But what eventually happens…

“Our product mix

changed by the

time of

implementation” “Procurement

department claims

cost reduction but it

doesn’t show in the

balance sheet”

“Many of our

initiatives are stuck

in approval stages.

What is the result of

so much effort?” “We realized that the

cost reduction initiative

created more complexity

and cost leakages in

other areas”

The results are not as effective….

“We implemented

the savings but it

looks like we are

back on the original

condition now”

8

Contents



programs effective?



9

Procurement leaders strive for achieving excellence in procurement and not

only cost reduction

People and Skills Organization Structure

KPIs, Rewards and

Recognition

Skill set for Procurement

Professionals

Cross Functional Teams

Effectiveness

Strategy Tailored Category Sourcing

Strategy

Supplier Relationships and

Alliances

Supply Risk Management

Make v/s Buy Decisions

Process Performance Process checks and

balances

Timelines adherence for

initiatives

Adequate IT systems

Supplier payment process

Supplier development

Innovation Simplifying/Optimizing

supply chains

Backward integration

Joint R&D with suppliers

Product Innovation

Use of alternate materials

PROCUREMENT

EXCELLENCE

10

Procurement Excellence can be achieved by undertaking initiatives

systematically & in a phased manner

BEST PERFORMANCE

WITH CURRENT

PRACTICES

CURRENT

PERFORMANCE PROCUREMENT

LEADER

11

Procurement Excellence can be achieved by undertaking initiatives

systematically & in a phased manner

BEST PERFORMANCE

WITH CURRENT

PRACTICES

CURRENT

PERFORMANCE

• Design, Plan and execute

procurement cost reduction

programs

• Stress on strategic sourcing

initiatives

• Restructure procurement team

• Implement robust management

controls to achieve yearly targets

• Closer integration with R&D and

supplier development teams…

• Invest in upgrading skills and train

procurement team

• Invest in upgrading IT systems across

supply chain

• Integrate procurement strategy as part

of business strategy

• Mapping supply chain risks

• Enter into strategic alliances with key

suppliers

• Invest into product innovation and

Joint R&D with suppliers…

PROCUREMENT

LEADER

12

An Effective Procurement Transformation Program must be holistic to deliver

the targeted benefits

DESIGN PLANNING EXECUTION

13



DESIGN

Establishing Strategic Goals

Mission & Vision

3- Year, 5-YearPlans

Annual Targets

Key Identifications

Current Challenges

Mindset issues

Organization restructuring

Core Team to drive change

Knowing the as-is current

procurement performance

Create the ‘bigger picture’ of

change

PLANNING EXECUTION

14



DESIGN


Mission & Vision


Annual Targets

Key Identifications

Current Challenges

Mindset issues






change

Conducting detailed diagnostic

study and identify opportunities

Detailed level target and

expectation setting

Documenting knowledge and

establishing SOPs

Identification of priority areas

Department level KPI setting and

program governance structure

Rolling out weekly, monthly

and half yearly plans

Setting up MIS to track

progress and achievement

Team formations and

communication platforms

Identifying right tools &

approach for initiatives

PLANNING EXECUTION

15



DESIGN

Motivate and re-enforce key

ideas and thoughts in team

members

Set-up reviews for progress

check

Train procurement professionals

on relevant tools & techniques

Handling Change Management

Course corrections and scope

expansion

Set-up audit mechanisms for

review

Sharing information and best

practices

Setting responsibility for

continuity

PLANNING EXECUTION

Each phase of the program is critical to the success of the program


Mission & Vision


Annual Targets

Key Identifications

Current Challenges

Mindset issues






change

Conducting detailed diagnostic

study and identify opportunities

Detailed level target and

expectation setting

Documenting knowledge and

establishing SOPs

Identification of priority areas

Department level KPI setting and

program governance structure

Rolling out weekly, monthly

and half yearly plans

Setting up MIS to track

progress and achievement

Team formations and

communication platforms

Identifying right tools &

approach for initiatives

16

DESIGN phase : Establish expectations and articulate the scope and

deliverables of the program

The management team identifies

and articulates its strategic goals

in procurement

What is our business

strategy for 3-Year, 5-Year

Horizon and how will it affect

procurement?

What are our key annual

targets and performance

measures?

What goals we are trying to

achieve through the

procurement transformation

program?

The CEO Agenda

What current challenges will

keep us from achieving our goals?

What are the team’s mindset

issues?

Do I need to restructure my

team?

Do I have the right skills and

adequate resources to carry out

the transformation?

Who will constitute the core team

to drive the change?

What is our as-is procurement

performance?

How do I drive the change?

The CPO Agenda

Identified

Areas for intervention

Broad level targets and

timelines

Core team to drive program

Setting performance

measures for the department

Challenges that will affect

the program and mitigation

measures

Agreement on additional

resources required

The Transformation Program

What we want to do? How do we execute?

17

PLANNING phase : Establish current performance and plan for implementing

the identified opportunities

Detailed level assessment of the

current procurement performance

Review and definition of

categories

Expenditure mapping

Current supply chain

processes review

Current Supply Chain

Metrics

Key Stakeholders taking part in

transformation program

Defining roles and

responsibilities

Target setting and identification

of priority areas

Setting Baselines

Identification of key opportunities

and improvement areas

Estimation of savings potential

on all important categories

Estimate ease of realization

Consider setup to enable

savings (e.g. organization, IT

support, KPIs/KRAs)

Identifying ‘quick-wins’ to create

excitement

Identify necessary functional

intervention from teams such as

R&D and Quality

Opportunity identification

Established

Weekly, Monthly, Half Yearly

Plans

Teams for implementation

‘Benefit Tracker’ with

timelines

Priority Areas

Process formats, SOPs

Department performance

metrics, KPIs/KRAs

Governance structures

Plan for Roll-Out

Where are we at present? What are the opportunities?

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EXECUTION phase : Track and support to deliver sustainable benefits

Tracking actions for

implementation at project levels

Tracking of benefits accrual

Regular progress reviews at

management level

Risk mitigation measures in

projects

Roadblocks removal by senior

management

Establishing visual management

systems and stakeholder

management processes

Enabling course corrections and

scope expansions

Tracking Actions and Progress

Handling change management

Managing individual and group

communication

Creating motivation in teams by

reinforcing key ideas

Managing non-performance of

members/teams

Setting the right and adequate

Rewards and Recognition

Skill building of team on a need

basis

Ensure discipline in reporting and

adherence to process standards

Supporting Execution

Bringing projects to closure

Setting responsibilities and

ownership for continuity

Information and best practices

documentation

Ensure established processes

adherence

Establish platforms for generation

of future initiatives

Establish audit mechanisms to

avoid slippages

Closure and Continuity

Where are we headed? What are the support

mechanisms?

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CHALLENGES : Anticipate your challenges and plan to mitigate - than be hit

by them

No visibility of

company agenda

Pressures for focusing

on cost, cost and cost

Risk of ‘individual

agenda’ being driven

by top-management

members

Inappropriate/

inadequate long term

vision

…

Non-availability of data/

information

Non-committal people/

functions to targets and

objectives

Too many priorities

Everyone plans

Changing product mix

Sub-optimal plans –

generated based on

available skills/ resources

Lack of awareness of

methodologies/ tools

…

Delays in management

approvals for resources/

investments

X-functional coordination

failures

Road-blocking by

‘stalwarts’

Discovery of ‘holy cows’

Vendor non-cooperation

Delivery disruptions

Data/ information non-

availability

Inadequate skill levels

…


20

TIPPING POINTS : Certain factors, if ignored, have the potential to derail the

entire program

KPIs/KRAs should be

designed carefully

People skills and

resource allocation

should be accounted

for

Look out for

management

commitment issue

…

Risks that might affect

project outcome should

be mapped and measures

should be taken

Sustenance measures

should be agreed at start

of projects

Look out of risk of active

or passive sabotage

possibility

Finance should be on-

board with benefit

calculations

…

Robust Change

Management

Look out of drop in

motivation levels during

the course of project

Negative Communication

should be carefully

delivered

Friction between teams

must be eliminated

quickly

Prevent people from

falling back on old

practices

…


21

Successful Transformation takes place only when all elements of change are

addressed in the journey

Successful Change

Vision Robust

Methodology Structure & Resources

Skills Motivation Action-plan

Confusion

Incremental Benefits

Frustration

Anxiety

Slow progress

False start

Vision Robust



Vision Robust

methodology Structure & Resources


Vision Robust



Vision Robust



Vision Robust



Vision Robust



22



Successful Change

Vision Robust



Confusion


Frustration

Anxiety

Slow progress

False start

Vision Robust



Vision Robust



Vision Robust



Vision Robust



Vision Robust



Vision Robust



23



Successful Change

Vision Robust



Confusion


Frustration

Anxiety

Slow progress

False start

Vision Robust



Vision Robust



Vision Robust



Vision Robust



Vision Robust



Vision Robust



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Successful Change

Vision Robust



Confusion


Frustration

Anxiety

Slow progress

False start

Vision Robust



Vision Robust



Vision Robust



Vision Robust



Vision Robust



Vision Robust



25



Successful Change

Vision Robust



Confusion


Frustration

Anxiety

Slow progress

False start

Vision Robust



Vision Robust



Vision Robust



Vision Robust



Vision Robust



Vision Robust



26



Successful Change

Vision Robust



Confusion


Frustration

Anxiety

Slow progress

False start

Vision Robust



Vision Robust



Vision Robust



Vision Robust



Vision Robust



Vision Robust



27



Successful Change

Vision Robust



Confusion


Frustration

Anxiety

Slow progress

False start

Vision Robust



Vision Robust



Vision Robust



Vision Robust



Vision Robust



Vision Robust



28



Successful Transformation

Vision Robust



Confusion


Frustration

Anxiety

Slow progress

False start

Vision Robust



Vision Robust



Vision Robust



Vision Robust



Vision Robust



Vision Robust



31

Contents



programs effective?



32

Client aimed to develop India sourcing center to support turnover growth by

1.5 times and increase profitability by 5% within 5 years

BUSINESS NEED

Client strategy in India was to increase turnover 1.5 times over the next 5 years

Competitive offering to customers was a pre-requisite for the winning the

volumes game

At the same time target was to increase EBIT rate by 5% over the current base

rate

Turnkey projects in combination with O&M contracts could deliver the desired hike

in turnover. The challenge was to win these orders and at the same time

increase profitability

Client’s supply chain had to more competitive than equivalent competitor’s China

based supply chain for gaining volumes in the market

Many global companies had started to develop alternative supply chain capacity

outside China. Client had a strong presence in India and was in a good position to

develop a world class sourcing centre in India

Client had already developed a global supply chain strategy. The challenge was

now to design the local supply chain setup for India that supports the global

strategy and at the same time delivers the elements that the global supply chain

cannot deliver

33

Program objective was to reduce procurement cost in India and increase

group spend sourced from India

SCOPE AND PURPOSE

India spend – driven by India supported by Group

Local Categories Group categories

Group spend – driven by Group supported by India

Group spend India sourced Group spend

Development of India supply chain

Reduced cost of equipment, e.g. reduced cost of

BOM items/tonnes plant output

Increased procurement productivity

(procurement spend/employee)

Improve supplier performance e.g. ontime

delivery

Optimize/implement process for systematic

category sourcing, supplier development and

operational procurement

Develop current

practice

Increase group spend through India sourcing

Lower Cost for group globally

Develop Indian Suppliers to support further

group spend sourcing from India (for example

improved quality, higher supplier capacity and

aligned QA setup)

Improve supplier performance for example

ontime delivery

Increase operational purchasing off-shored to

India

34

The objectives were further broken down into high-level actions to realize the

targets

Increase sourced

volume out of India

Expand sourcing categories

Identify & develop new vendors

Improve vendor competitiveness in

terms of quality and price

Reduce BOM Cost

5-step sourcing efforts

Identify & develop new vendors

Supplier development – help suppliers

lower costs

Costing analysis to benchmark & drive

down costs

Improve procurement

productivity

Integrate cement & minerals

procurement

Create lean processes in procurement

Improve supplier

quality & delivery

reliability

Supplier development – help suppliers

improve operations & quality (lean

suppliers)

Improve call off process

SCOPE AND PURPOSE

35 35

Supply chain optimization was carried out taking a comprehensive

approach covering all relevant areas of procurement

Programme

Management

1. Sourcing Waves

2. Organisation integration and

building

3. Process devp., standardisation

8. Building Perf. Management &

regular KPI follow-up

7. Spend management and

analysis

4. Supplier development

5. Develop global procurement

setup

6. Master data building and maintenance

APPROACH

Aimed at making

procurement:

BETTER

FASTER

CHEAPER

36

Volume Concentration

Coordinate volumes across the organization

Allocate volumes with selected suppliers

Explore if providing volume commitments could improve

pricing from suppliers

Assess risks involved

Import Substitution / Global Sourcing

Investigate use of local suppliers instead

of imports

Supplier development activities

Best Price Evaluation

Compare prices and terms across

divisions and leverage best prices and

terms

Assess price break-down from suppliers

to the extent possible to enable

transparency

Product /Service Specification Improvement

Identify cost drivers and use the info to standardise/

simplify specifications

Develop long-term relationship with vendors to

improve specifications for future

Integrate inputs from Procurement, Projects & site

team

Process Improvement

Process improvement across Source to contract

& Procure to Pay lifecycle

Improve productivity, costs & timelines

Relationship Restructuring

Consider splitting orders in the value chain

Consider making one supplier accountable for a

“basket” and reduce transactions

Consider entering into agreements with selected

suppliers

Product / Service

Specification

Improvement

Volume

Concentration

Best Price

Evaluation

Relationship

Restructuring

Import

Substitution /

Global Sourcing

Process

Improvement Sourcing Strategy

The project involved use of 6 ‘sourcing levers’ in varying degrees to create

value

Leverage Buying Power Create Value

APPROACH

37

Several business benefits accrued from the procurement

transformation program

37

BENEFITS

Cost Competitiveness - Enabled Annual Savings of INR 800+ Mn - Improved supplier payment terms and compliance. - New tools like “e-auction” introduced to accelerate savings - Significant reduction in Vendor Documentation errors-speeding

up invoicing.

Delivery Performance - Supply chain war rooms commenced for new projects for

monitoring projects even more closer. - On-time ordering is under focus by clubbing items of different

projects and negotiating rates during estimation phase itself. - A cross functional Lean initiative on speeding up Drawing

Approvals has enabled tackling challenges in reduction of delivery times for bought out items.

Supplier development - Supplier rationalisation carried out and 148 new vendors

approved; - 20000 T of capacity added in fabrication category. - More than 350 improvement actions implemented at key

vendors. - 5 critical vendors being run through a dedicated development

programme to improve their process and performance

Control - Structured category management focus. - Weekly internal project reviews for Delivery & Quality - Objective measurements(25 metrics established and being

tracked periodically)

System improvement and transparency - Uniform procurement process across divisions. - Planning and reporting systems strengthened. - Systematic sign off and tracking of savings - Data categorization to improve quality of spend analysis. - More streamlined and transparent interaction with estimation

Cultural/Competence - Way of working is changing – more cross-divisional, more

cross-functional and more fact-based - There has been an increased confidence in leadership and

the new way of working(Based on internal survey carried out) - Competency development programme under implementation

for key procurement staff based on assessment by Third party agency.

38

Efforts to consolidate volume yielded phenomenal savings to the

procurement organization

Product: Steel in various forms

Challenges: Purchase requests were generated by

different departments, at different points of time.

Orders were placed on both traders &

manufacturers, based on the best spot price

Organization lost on consolidation opportunities

Approach: Processes were installed to consolidate

various purchase requests.

Agreements were made with steel manufacturers

for annual discounts based on turnover, and bulk

discounts based on volume.

Spend was moved from high-cost traders to low-

cost manufacturers; traders were used only in

emergency

Benefits: The organization reduced the steel

procurement cost by 5%.

AFTER

Consolidated Vendor Base

55

45

34

36

10

8

7

6

4

3

3

3

2

2

2

2

2

2

1

1

BEFORE

Fragmented Vendor Base

65

40

30

35

20

10

Vendor

1

Vendor

1

Vendor

6

Vendor

20

Spend Break-up across vendors

CASE

39

By setting up best-in-class procurement processes, the company gained

immensely on cost and delivery

Product: Key equipment for bulk material handling

Challenges: The equipment that constituted 40% of

the category spend, was procured by two divisions in

two different ways.

One division fully designed the equipment in-house,

and also split the component orders on suppliers.

The other division relied on supplier design, and

consolidated component orders on one supplier

Approach: The two different processes were

separately analyzed for cost & delivery

We considered cost of material, cost of logistics,

cost of co-ordination & cost of design

We found that the cost of procurement could be

cheaper, and delivery time faster by deploying the

latter method.

The best process was implemented.

Benefits: Cost of procurement reduced by 40%, and

lead time improved by 20% , for both divisions

High

Low

High Low

Co

st

Process Lead Time

High

Low

High Low C

ost

Process Lead Time

Before Process Improvement

After Process Improvements

Process Mapping on Cost & Lead Time

CASE

40

The engagement was not limited to procurement department – it extended to

engineering and other departments to improve process and product designs

Product: Bearing liners for an equipment

Challenges: As per original design, bearing liners were

specified to be manufactured through centrifugal

casting process. This posed following challenges

No reliable suppliers for centrifugal casting in India,

hence company was forced to import

High cost of procurement

Delivery delays

Approach: By co-ordinating with engineering & quality

teams, it was found out that sand casting could be

used in place of centrifugal casting.

Hypothesis was validated by cross-functional team

Sand casting suppliers were identified & qualified

Jointly with the client, prototype was made & tested

okay. Specification was hence changed.

Benefits: Cost reduced by 50%, delivery improved by

20%

BEFORE AFTER

High cost of

procurement

Procurement cost

reduced by 50%

High Lead time

for delivery

Lead time reduced

by 20%

No reliable

suppliers in India

Reliable suppliers

developed locally

Centrifugal casting

process

Sand Casting

process

CASE

41

Purchase cost of a material handling equipment was reduced significantly by

substituting imports at a system level

Product: Hydraulic system for material handling

Challenge: The market share of the company in an

equipment used in material handling was not

improving, in spite of a growing market

New players were entering the market and posed

significant threat

Approach: A complete BOM assessment to figure out

high cost items

The Hydraulic system constituted 30% of the total

equipment cost

Carried out a local supplier landscape assessment

Invited local suppliers for Product knowledge

sessions and encouraged them to respond to RFQ

Benefits:

The cost of the Import Substituted Hydraulic system

was 40% lesser than the Imported cost

It also brought down the service costs, since the

local supplier had service centers across project

sites

Indian manufacturers of equivalent Hydraulic

system bring down the Import cost significantly

Total

Procurement

Cost

Cost of

imported

Hydraulic

system

Total

procurement

after sourcing

Hydraulics

from India

Cost of

Indigenized

Hydraulic

system

BEFORE AFTER

CASE

Breaking the ceiling through effective procurement transformation 19 oct13

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Transcript of Breaking the ceiling through effective procurement transformation 19 oct13