making procurement performance count - a 3 step approach

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Making Procurement Performance Count - A 3 Step Approach

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This whitepaper will focus on problems prevalent in the process followed to measure procurement performance and how technology can be leveraged to improve procurement performance.

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Page 1: Making Procurement Performance Count - A 3 Step Approach

Making Procurement Performance Count - A 3 Step Approach

Page 2: Making Procurement Performance Count - A 3 Step Approach

Procurement has always been integral to the performance of an organization. However, it

is now with increasing unpredictability in the market, cut throat competition and looming

recession fears that procurement has become a highly topical area for the senior level

management.

Let's have a look at how procurement has evolved over a period of time.

Prior to World War I, purchasing was regarded as primarily clerical.

During World War I & II - The function increased due to the importance of obtaining raw materials,

supplies, and services needed to keep the factories and mines operating.

1950s & 1960s - Purchasing continued to gain stature as the techniques for performing the

function became more refined and as the number of trained professionals increased. The emphasis

became more managerial. With introduction of major public bodies and intergovernmental

organizations, such as United Nations, procurement becomes a well-recognized science.

1970s & 1980s - More emphasis was placed on purchasing strategy as the ability to obtain needed

items from suppliers at realistic prices increased.

1990s - Procurement starts to become more integrated into the overall corporate strategy and a

broad-based transformation of the business function is ignited, fueled strongly by the development

of supply management software solutions which help automate the source-to-settle process.

2000s - The leader of the procurement function within many enterprises is established with a C-

Level title - the Chief Procurement Officer. The global recession of 2008-2009 places

procurement at the crux of business strategy.

2010s - The elevation of the function continues as Chief Procurement Officers are recognized as

important business leaders and begin to take on broader operation responsibility

Prior World War

During World War I & II

1950s & 1960s

1970s & 1980s

1990s

2000s

2010s

Making Procurement Performance Count - A 3 Step Approach

Page 3: Making Procurement Performance Count - A 3 Step Approach

Procurement is now being considered as a strategic business function. The increasing

share of material costs and purchased services in major global organizations Profit & Loss

account highlights its growing significance. The need to align procurement objectives with

that of the organization is becoming a necessity.

This can be understood with the help of the chart below

This whitepaper will focus on problems prevalent in the process followed to

measure procurement performance and how technology can be leveraged to

improve procurement performance.

As seen above, for a CPO the top metrics is Identified Savings whereas at the

enterprise level the top metrics is Implemented Savings. Thus there is a stark

difference in the priorities which need to be aligned.

Identified Savings

Spend under management

Implemented savings

Cost avoidance

48%

44%

41%

30%

The CPO's Top Metrics

Implemented savings

Booked saving

Identified savings

Cost avoidance

Spend under Management

53%

43%

38%

38%

Enterprise's Top Procurement Performance Metrics

36%

Source : Ardent Partners 2012

Page 4: Making Procurement Performance Count - A 3 Step Approach

Neil Deverill former CPO of Anglo American and

Royal Philips quoted in Procurement

Intelligence Unit (PIU),

. It literally conveys that it in order

to improve efficiency of any process it is

mandatory to have the correct metrics to

measure it.

Procurement is largely judged by the savings it

generates. Measuring procurement should be a

part of an improvement process. The key is not

to measure for measurement's sake, but to

indentify gaps which can be filled timely to

prevent any kind of savings leakages.

Procurement is a complex function with tiers of

suppliers and stakeholders spread across

geographies. The performance measurement

process should thus consider the key aspects,

agreed upon by all the stakeholders and give

results that are widely in line with the

organization goals.

"what gets measured

gets done"

Let us understand the procurement performance measurement woes with

the help of an example.

Mr. John has been newly appointed as CPO of a manufacturing company with

workforce of 10,000+ employees. The company has its offices spread across

the globe. John has an upcoming meeting with the CFO where he needs to

present the performance of his function. However with the present process of

measuring procurement performance involving data spread across excel

sheets, John was unable to comprehend the existing state of performance.

Measuring the performance of a procurement department can be a very complex process but, in 2013, more CPOs will work aggressively and proactively to define the performance criteria (and the methodology used to track it) that will be used to measure procurement department performance.

-Ardent partners 2012

Page 5: Making Procurement Performance Count - A 3 Step Approach

Some of the key pain areas for John were;

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Difficulty in tracking procurement savings due to multiple stakeholders across

commodities and divisions

Lack of transparency in maintaining and comparing forecasted and actual savings

Difficulty in collating all procurement savings from different sources and generating

savings report for top management

No visibility into procurement savings obtained from supplier negotiations

Overcoming disconnect with finance division over savings definition

Difficult to demonstrate procurement's impact on company's bottom-line

Difficult to shift focus from cost savings to growth

What John needed was an effective measurement process that would overcome these

odds and ensure overall sustainability and success of the procurement function which is

aligned with the organizational targets.

Using tools like excel sheets to track savings results in disparate data spread across the

globe or having homegrown tools are most likely to put one in John' position. Apart from

being difficult to manage data, these tools also suffer from other issues like lack of or

expensive upgradation, inability to configure with the spend analysis tool, lack of security,

lack of collaborative platform or user role definition mandating the use of an advanced

technology to manage procurement performance.

Having seen the challenges the following section will focus on the process that

procurement needs to adopt for having a better performance tracking system in place.

Organizations need to

Develop a into individual projects and associated savings. This

increases the visibility into organization wide savings a key to improving resource

planning

Establish a and baseline agreed upon by finance and

procurement savings is an important factor for defining success for both

Procurement and Finance. However, there has always been disconnect between the

functions as savings generated by procurement is not reflected in the financial

statements

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function-specific view

common savings definition

Page 6: Making Procurement Performance Count - A 3 Step Approach

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Map the impact of procurement savings by team

Streamline savings approval process thus ensuring the

Track savings at a

Map forecasted savings to budgets - Project have multiple stages. It is important to be

able to against the fixed budget at every stage

In this section we will focus on how technology can be leveraged to streamline the entire

process of mapping procurement performance. In this whitepaperwe propose a 3 step

process to mapping procurement performance.

This is the basic step which starts with defining the structure and boundary of the

project.

The procurement team along with the other stakeholders needs to decide the project

type. For instance, cost avoidance, cost reduction, CAPEX, inflation management,

revenue returns etc. Benefit types expected from the category i.e. various categories

of savings whether it impacts P&L directly or indirectly, savings by cost avoidance

etc.

Performance measurement tools/systems cannot adopt one for all strategy. It will

vary depending on the organization structure, business and the industry it is

functioning in. Thus it is necessary to have an option of customizing the fields as

necessary. For instance track savings as per different business units, functions, plants

etc.

collaborating with the finance

right information reaches the

right authority

multi-dimensional level

track forecasted savings vs. actual savings

Process

1. Project type

2. Customization

Step 1: Configuration

ReportsReportsConfigurationConfiguration ExecutionExecution

Page 7: Making Procurement Performance Count - A 3 Step Approach

3. Defining user roles

4. Customized approval workflow

5. Project stages

The data used to measure and manage the procurement performance is highly

confidential to the organization. Thus care should be taken that right people have the

right access. Technology enables defining user roles i.e. the access rights for the

users. For instance, some users can have the right to create and edit the project

while some users can only view the reports etc.

In order to align the procurement function objectives with that of the organization,

high level of collaboration is needed amongst the stakeholders of any given project.

Building a workflow ensures the information is passed through the correct channel

i.e. set of individuals and the end result is accurate and relevant. Multi level workflow

is required to ensure correct flow of most relevant information. For instance,

A project has multiple stages. Typically 5 viz.

Supplier discovery

Creating a sourcing event

Negotiating a contract with the selected supplier

Managing and building supplier performance

Spend analysis

The project will have a fixed overall budget. Savings should be forecasted at every

stage. This forecasted savings should be compared with the actual realized savings.

This helps the organization to track the status and success of project at every stage.

1.

2.

3.

4.

5.

Level 1 Level 2 Level 3Reporting Manager

ReviewerCommodity Leader

ApproverFinancial Controller

Approver

Page 8: Making Procurement Performance Count - A 3 Step Approach

6. Customized savings formula

7. Configure savings target

1.

Just like flexibility is needed in defining the required fields and approval workflow,

savings formula used to calculate the performance of procurement should also be

customizable. Different projects have different requirements and so a rigid savings

formula will not do justice to the procurement evaluation.

In order to ensure clear communication of savings target to the teams/individual, top

management should have the ability to configure targets on any parameter - for

instance an individual, a team, unit, geography etc. so that they can plan the

resources accordingly.

After the project basics have been defined and configured, the next step is to execute it.

Execution involves 2 stages.

Manage savings

As the project goes through different stages, savings also has multiple stages. At

each stage there is a fight between forecasted saving vs. actual savings.

The savings are calculated as per the agreed savings formula and its impact is

mapped on the relevant financial statement.

Step 2: Execution

Stage 1Potential Savings

Stage 2Target Savings

Stage 3Negotiated Savings

Saving Stages

Stage 5Realized Savings

Stage 4Implemented Savings

Page 9: Making Procurement Performance Count - A 3 Step Approach

In case of any changes at any stage, the user should have the option, depending

upon the access rights to add comments or add an attachment or revise the data.

2. Approve savings

Savings approval follows the path defined by the multi level workflow. The

reviewer/approver checks the savings and its impact on the financial statements

and accordingly approves them or otherwise.

Once the savings have been approved, the last step involves reporting them.

Reports help in analyzing the reasons for project success or failure. An ideal reporting

system should be customizable and provide an in-depth analysis of where and how

savings were generated. Dashboards with ability to track target v/s forecasted v/s actual

savings provides the necessary visibility to the top management for actionable decision

making.

Step 3: Report Savings

Conclusion

Thus we see that for procurement to successfully measure and manage

performance, the key is to effectively leverage technology which is less time

consuming and gives accurate savings while maintaining a single version of truth,

and at the same time ensuring transparency. Auto conversion of procurement

savings to show its impact on P&L and balance sheet gives the company valuable

insights and opportunities to grow which is the need of the hour today.

Page 10: Making Procurement Performance Count - A 3 Step Approach

At Zycus we are 100% dedicated to positioning

procurement at the heart of business performance. For

more than a decade we have been the world's most

trusted leader in Spend Analysis. With our spirit of

innovation and a passion to help procurement create

even greater business advantages, we have evolved our

portfolio to a full suite of Procurement Performance

Solutions — Spend Analysis, e-Sourcing, Contract

Management, Supplier Management, and Financial

Savings Management.

Behind every Zycus solution stands an organization that

possesses deep, detailed procurement expertise and a

sharp focus on being responsive to customers. We are a

large — 600+ and growing — company with a physical

presence in virtually every major region of the globe. We

see each customer as a partner in innovation and no

client is too small to deserve our attention.

With more than 200 solution deployments among Global

1000 clients, we search the world continually for

procurement practices proven to drive competitive

business performance. We incorporate these practices

into easy-to-use solutions that give procurement teams

the power to get moving quickly — from any point of

departure — and to continue innovating and pushing

business and procurement performance to new heights.

Z

AboutZycus

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NORTHAMERICA

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EUROPE

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