making procurement performance count - a 3 step approach
DESCRIPTION
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.TRANSCRIPT
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
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
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
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
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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
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
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
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.
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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