This final installment in the firm’s procurement trilogy shows companies how to save time and money—and gain a competitive advantage—by working strategically with suppliers.
- Supply Chain Management Review, July–August 2014
Just as marketing leaders have tapped into “customer energy” to shape the brand promise, procurement is tapping into “supplier energy” to improve and sustain its longer-term competitive advantage.
Is your company ready to change its procurement approach and gain competitive advantage?
Indian companies should embrace e-auctions as part of an advanced procurement strategy to increase business efficiency.
Leading procurement organizations engage key suppliers in a strategic dialogue that is focused on long-term creation of mutual value.
People want and need more of everything—products, services, information—faster and through more channels than ever before. Worldwide demand for water, food, and energy is soaring and is already depleting natural resources and putting pressure on preservation and sustainability. Add in more financial volatility from global capital imbalances and geopolitical volatility and you’re talking about real challenges.
So it is no surprise that procurement organizations are becoming more complex and difficult to manage. CXOs expect more from procurement. Procurement must continue to do its “day job” and drive cost reductions while simultaneously becoming more strategic by delivering value beyond cost to the organization.
Leading procurement organizations have expanded the traditional view of procurement, moving beyond its role as a transaction center between the organization and its suppliers, to the role of strategic partner and steward for the organization. They no longer simply engage suppliers through tactical negotiations focused on cutting margins. Rather, they leverage and engage key suppliers in a strategic dialogue focused on long-term creation of mutual value. These leaders are fully unleashing supplier resources and energy and, as such, consistently appear in the upper echelons of our Assessment of Excellence in Procurement (AEP) study. Much like marketing leaders have tapped into “customer energy” to help shape the brand promise, procurement is tapping into “supplier energy” to improve and sustain their longer-term competitive advantage.Close
This paper introduces the concept of supplier energy as the next frontier in strategic supply management.
For procurement professionals feeling the pressure to produce greater value, analytics offers myriad benefits.
Analytics. It is a word that strikes procurement professionals in different ways. For some, it is the must-have tool for taking procurement into the future. For others, just how it will help sourcing is unclear. And for many, it is a source of anxiety: How do I acquire the analytics I need when I don’t understand analytics in the first place?
Indeed, as companies beef up their competitiveness, leadership expects procurement to generate additional value beyond cost. In turn, procurement is contributing more to strategic differentiation. Analytics is key to that growth: Spend analytics vastly improves visibility on purchased goods, services, and opportunity identification. Advanced bid analysis helps sourcing experts deftly juggle conditional discounts and alternative bids. And cost regression analysis pinpoints unusually high vendor pricing for a negotiating advantage.
So what holds back some groups from acquiring these capabilities while others surge ahead? Leadership may not yet see analytics’ value to procurement. Staff may not have the resources to produce reliable data or may worry about lacking analytics knowledge. Finally, the path to developing analytical capability may be unclear. This paper discusses how to overcome these hurdles and offers three strategies for acquiring analytical know-how.Close
- 23rd CPO Executive Roundtable
Procurement can obtain greater value from the supply base in the IT category by partnering with other internal areas.
The procurement function increasingly provides value beyond cost.
Day One of our 23rd CPO Executive Roundtable focused on how procurement can contribute by linking innovation-focused suppliers with the business. Creating the right incentives for suppliers to innovate, however, can be difficult. Companies that have traditionally been aggressive with vendors may find it hard to earn their trust. Moreover, a number of thorny questions must be resolved, such as who owns intellectual property and patents from joint efforts. Those companies that get it right can reduce time to market and execution risk, while raising quality and sales profitability.
The sessions on Day Two dealt more specifically with the IT category. Because IT evolves so rapidly, sourcing succeeds best when handled as an ongoing activity rather than a periodic one. Furthermore, the IT category easily encompasses more than 50 different spend areas, and the supply management framework typically involves multiple stakeholders from around the company—all in all, a very complex environment.
While mega-supplier deals gone bad have made many companies hesitant to put too many IT eggs in one basket, proven strategies can still yield value in IT sourcing, and IT transformation efforts can bring about a step change in both cost and capability.Close
Striking the right balance between capital expenditures and financing options is key to maximizing return on investment in large capex projects.
Large-scale capital expenditures (capex) all face a crucial challenge: finding the right trade-off between capex cost and financing options to optimize return on investment (ROI). They also share many characteristics, including, for example, complexity, multiple stakeholders, and bankruptcy risks.
Generating the best possible ROI is arguably the main objective of a large capex project. One of the toughest challenges in reaching that objective is meeting the expectations of stakeholders—financial and commercial stakeholders, procurement experts, engineers, project managers, lawyers—who have their own concerns and expertise. Some of their expectations are in direct conflict with others. Every expectation has the potential for conflicts and contradictions.
Managing total capex is the key to carrying out a successful project. After all, the most important criterion for potential owners to evaluate a project is its ROI, and a good ROI depends on the project’s commercial attractiveness, which depends on financing costs, which influence capital structure and capex, which must meet all stakeholders’ quality and time requirements. Furthermore, different financing options assert different influences on large capex projects, primarily because large projects require multisource funding. These options include stakeholder equity, ECA-guaranteed debt, International Financial Institutions (IFI) guaranteed debt, and commercial debt. The larger the project, the likelier it is to depend on ECA and IFI financing, especially if the project lacks a major shareholder.
Our approach to successfully managing large capex projects is executed in four phases:
Phase 1: Define data and constraints.
Phase 2: Develop different scenarios.
Phase 3: Discuss output and adapt scenarios accordingly.
Phase 4: Evaluate and select final procurement scenarios.
Collaborative optimization is an excellent tool for navigating the process of finding the best procurement strategy. It is an innovative sourcing technique that creates value through bidding and business-award optimization, and helps identify the best combination of lots and suppliers to meet buyer requirements and supplier strengths.
Collaborative optimization allocates bidders according to the constraints detailed in Phase 2. For each scenario the goal is to minimize the following: adjusted payment to bidders, including optional discounts and penalties; penalties for violating rules related to constraints; and prices of lots that don’t get allocated. We add constraints such as minimum contract value and national content requirements to create further scenarios to help find a solution.
In most cases there are many possible procurement scenarios to analyze, and A.T. Kearney has developed a three-pronged “filter” approach to paring down the number of scenarios until the best one is left standing.
The first filter aims to eliminate scenarios that offer a poor supply-market situation—the goal here is to identify scenarios that don’t involve materials, products, or components that might become bottlenecks in times of high demand.
Filter two is crucial, since it focuses on ROI—here, scenarios are filtered according to the impact of their financing costs and capex on the project’s ROI.
Finally, filter three is a basic risk assessment to determine operational risks, contracting risks, and the risk of limited level of competition among potential bidders during the tendering process.Close
An integrated approach to commodity risk management separates those who react to volatility from those who manage it.
When volatility hits the financial markets, investors shudder. When volatility hits the commodities markets, corporations shudder. The recent U.S. drought reinforced this message as it affected the price of corn, soybeans, animal feed, and other inputs to the food supply. The drought and its impact on future commodity prices are expected to have serious repercussions on all food prices.
We recently surveyed 21 chief procurement officers (CPOs) and heads of the commodity risk management functions of major food and beverage companies. This is the first in a series of studies to assess the impact of rising commodity prices and gauge corporate approaches to commodity risk management. Study participants were asked a range of questions, including: What impact is the rise in commodity prices having on your company? What are your expectations for the future? How do you approach and manage risk? How is your company positioned for the future if commodity prices remain volatile for the next several years?
Overall, our participants know that increased volatility in commodity pricing is not a short-term phenomenon. In a global marketplace, weather shocks—hurricanes, tsunamis, floods, or drought—are recurring events that will increase price volatility. Other factors such as increased global demand, geopolitical conflicts, and biofuels are causing a host of new headaches.
They have largely relied on hedging to manage their risk, maintain costs, and ensure a more predictable source of supply. Now, however, given the size and scope of the influencing factors and recognizing that commodity volatility cannot always be controlled, they say hedging alone is no longer a sufficient risk management approach.
Most CPOs believe volatile commodity prices will affect consumer pricing, and 43 percent believe the volatility will also impact company profitability (see figure 2). Most believe that the impact will not go away anytime soon—80 percent think the price hit will last more than a year, and 60 percent say they should increase their buying coverage. Tight supplies at the end of 2011 and lower than expected yields mean that stock will be depleted going into the 2012-2013 marketing year.
No good risk management strategy begins without discussions with senior executives about expectations and appetite for risk. Is the company inclined to ride out the market or more interested in predictable costs? Is the objective to beat the competition or to dominate the market? In our work with clients, we often recommend the following:
- Understand market dynamics and what “value” is at risk. Know your markets, your position in them, and your value drivers.
- Have a mitigation strategy in place. Have a plan in place that outlines the potential risk mitigation strategies—deflect, transfer, hedge, or operate—for all commodities.
- Reach market-driven decisions. Make decisions about risk factors and mitigation tactics with your markets in mind.
- Manage execution and governance. Manage major risks cost-effectively while also considering the residual risks, such as foreign exchange.
The secret to building a prosperous, value-driven procurement organization is a procurement transformation.
During the 1980s, procurement's main focus was on building a well-structured strategic sourcing process. Since then, procurement has made great strides in developing sophisticated strategies, working across functions, and delivering value to the larger organization. However, while procurement leaders in a variety of industries have tested and applied many of the popular business models and frameworks to further improve this function, only a few have succeeded.
We decided to look more closely at the best practices of the procurement leaders—those we call Procurement Champions—and compare their strategies to the "also-rans," companies that simply do not measure up. We found three main areas that influence power and success: the procurement function, which serves as the main anchor point for internal and external effectiveness, and which must build a powerful departmental structure, particularly internationally; other functions that must be closely interlinked with purchasing, including R&D, finance, and production; and, finally, suppliers, whose importance is dictated by their market power and a need for their products. The Procurement Champion must be strong in all of these areas to achieve both internal and external effectiveness.Close
- Assessment of Excellence in Procurement Study, 2011
Procurement professionals are more important to business strategies than ever.
Value chains are bending so rapidly that procurement professionals are more important to business strategies than ever before. It's not only volatility in commodities but also dramatically new ways of working that are creating challenges.
That's what 185 leading companies told us in this year's Assessment of Excellence in Procurement (AEP) study. But if there is one place we all know we can drive real money to the bottom line, and value to the top line, it's through procurement—and the AEP results show seven ways the leaders produce results. It's not just business as usual, it's business as unbelievable. There is another wave of new thinking on the way.
A.T. Kearney's 2011 Assessment of Excellence in Procurement (AEP) study finds corporate procurement functions becoming a more vital, strategic corporate player. In the past three years, 90 percent of study participants—procurement and supply chain executives from more than 185 leading companies across 32 different industries—have increased procurement's role in developing and executing business strategies. At the same time, procurement leaders are extracting more benefits and using better governance to improve performance both internally and externally.
The findings are clear: Procurement has greater stature, more influence and a wider reach than ever before.Close
The AEP study provide insights into how procurement and supply chain leaders can produce results.
A new metric, Return on Supply Management Assets (ROSMA©), measures procurement performance.
Procurement is the last best place to gain professional stature, increase management visibility, and improve bottom line results. With purchased goods and services comprising the lion's share of the value chain across most industries, why isn't procurement laying the groundwork for supply management optimization and driving enterprise economic performance? How do we replace those awkward moments of silence on analyst calls with discussions of how procurement is a critical indicator of corporate performance? How do we build a performance-driven procurement organization?
The answers, in part, lie with a new framework called the Return on Supply Management Assets or ROSMA©, which provides procurement professionals with the ability to finally—and fully—tap into opportunities that have largely been hidden.
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