Chasing the Cheese in the Ever-Changing World of Procurement
Finding long-term success in the ever-changing world of Procurement can be a difficult task and often a moving target: markets, suppliers and internal business needs constantly shift, quickly making the winning methods of the past obsolete for maintaining future success. Many organizations have matured beyond traditional procurement measures that produced big wins via low-hanging fruit opportunities, however many still lag behind wondering, “who moved the cheese...again?” Today’s continuously evolving marketplaces demand a fresh perspective, sharp eyes, and the ability to adapt to change. Just as Spencer Johnson’s infamous book teaches us to “move with the cheese,” for Procurement leaders this same philosophy remains true: Adapt. We’ve compiled the top questions every CPO should be asking as they navigate the procurement maze to get and keep the cheese (also known as best total value) for their organizations.
1) Do I really know and understand my company spend and is it helping drive best total value?
It’s not just knowing what you buy, from whom, and how much; procurement must dig deeper to understand how spend data can be leveraged to inform and drive strategic decisions. How?
- Step 1: Determine if there is a reliable data source that allows for extraction and/or analysis of spend data. If not, this should be the first gap to remedy; either through technology improvements, data cleansing efforts, or utilizing procurement software that includes spend analysis capabilities.
- Step 2: Data must be enriched and analyzed to determine value opportunities:
- Separate addressable vs. non-addressable spend to determine what can truly be actioned or impacted. Non-addressable spend that has been recently sourced, is under contract, or regulatory/tax/employee-benefit related spend may be truly non-actionable. However, often times the limits aren’t pushed to test whether there could be opportunity in other areas marked as non-addressable spend with a bit of additional work. For instance, if there are out clauses in the agreements, assessing whether the last sourcing effort left money on the table, or if demand management tactics can be introduced to control spend out the door.
- Drive a clear breakout of spend by location/region, supplier, acquisition type, spend under contract, and buying channel. Understanding all breakouts of spend will lead to different data views that often drive questions as to why spend has been utilized a certain way. Asking “why” leads to potential opportunities to pursue, as this activity spurs creative solutioning and challenges the status quo.
- Finally, segment spend into relevant categories that are specific to your organization. Mature organizations should have at least a 4-level category taxonomy or hierarchy that groups like goods or services. Analyzing spend from a multi-level category view is vital to identifying internal spending trends, differences in approach/strategy execution, and can be used to further drive effective category management and strategic sourcing activities.
2) Are we strategically managing categories or simply tactically sourcing?
Let’s see if your organization passes the sniff test. Which group best describes your current state of procurement?
Group A: When suppliers propose price increases, we approach the market via RFP or negotiate. We RFP our larger categories each year when previous pricing agreements expire and either take the lowest bid or negotiate with incumbent suppliers to drive them to the price we think is fair. We rely on existing suppliers to know and meet our business needs
Group B: We tier and segment spend categories to identify the category management approach. We research/assess the market to build deep category and market knowledge. We have a clear multi-year vision for each primary category and a portfolio of detailed strategic projects identified. We continually and proactively assess market dynamics, internal business requirements, external supplier profiles/offerings, incumbent supplier performance, and overarching risks to drive how the category is managed, not just when a need arises from the business to procure/contract for a good/service.
If your honest assessment lends you more towards Group A, your organization is tactically sourcing at the ad-hoc project level vs. strategically managing categories that proactively create value opportunities to be captured over several years, allowing for a foreseeable pipeline of well vetted opportunities. So, how do you shift on the continuum?
- Step 1: Conduct a Category Assessment: Develop and retain internal and external business relationships. Internal engagement is the foundation for understanding business requirements and external relationships allow for assessment of suppliers and market dynamics that will drive critical decisions on how to successfully manage the category. Specific actions within this phase are:
- Stakeholder engagement
- Map the category
- Assess existing suppliers
- Assess the marketplace (supplier & demand)
- Perform a strategic review
- Develop vision and strategy
- Brainstorm then assess opportunities
- Develop a portfolio of projects
- Step 2: Portfolio Management and Annual Review: Once an overarching vision is established, a well defined category strategy will produce a list of projects and activities (vetted and agreed by stakeholders) that will bring the vision to life, including but not limited to: volume leverage, focused negotiation, demand management, process improvement, and supplier collaborations. Portfolio management enables enterprise wide planning and resource allocation. Once in place, annual reviews will ensure the value is achieved and necessary improvements are identified.
- Step 3: Deploy a clearly defined strategic sourcing process:
- Define a robust project plan
- Determine the baseline spend and Total Cost of Ownership
- Develop an External Market Analysis at the the project / sub-category level
- Define Business Requirements and Key Performance Indicators with stakeholders
- Determine the approach to market (RFx, Negotiation, etc.)
- Develop/document the sourcing event
- Analyze proposals
- Negotiate business terms
- Select a supplier / option
- Calculate and report value
- Conduct annual supplier reviews and track value
3) Are we retaining the sourcing value achieved with well-executed contracts and compliance?
You’ve done all this great work to define the category strategy and implemented a robust sourcing effort to gain optimal terms. Now what? Without a well-executed agreement to lock in those terms and systematic methods in place to monitor compliance to those terms, it all goes out the window. Research indicates that 20 – 30% of contract value is lost through non-compliance. Well-executed contracts clearly and accurately capture business terms and intent, are executed in a timely manner to enable value realization, and incorporate appropriate risk mitigation. Contract compliance encompasses an efficient method to monitor actual prices vs. agreed price and total cost (which includes elements beyond unit cost, such as freight, ancillary expenses, etc.) in line with the parameters of the agreement. How is this achieved?
- Step 1: Ensure the appropriate agreement types and templates are established with Procurement and Legal to enable accurate utilization and ease of use.
- Step 2: Ensure Legal empowers Procurement to efficiently execute agreements via the use of pre-defined contracts, clause libraries with business rules, and a system interface that allows for easy authoring, approval, notification, and repository capabilities.
- Step 3: Report on contract meta-data and ERP transactional data so the two can be married to compare and monitor planned contracted costs vs. real costs.
4) Are the right people doing the right procurement work?
You may be thinking, my organization is already understaffed and overworked, how can we perform deeper spend analysis, build out robust multi-year category strategies and sourcing project portfolios, then drive contract compliance when we are already under resourced? The real question you should be asking is if you aren’t doing 1, 2, and 3, what are you doing and is it the right work?
- Step 1: Measure your organization’s procurement Return On Investment. Here are three helpful benchmarks:
- Cost of procurement as a % of total spend – If your organization is above .5%, you may not have adequate spend to justify the cost of supporting your organization. Costs should include more than just salary, but also training, benefits, and all other costs associated with supporting the organization.
- Ratio of annual savings to annual cost of procurement – This efficiency measure assesses the benefit generated by Procurement based on the cost to operate the organization. A solid goal is at least 3:1.
- Percent of spend managed by Procurement – Managed means long-term category plans, strategic sourcing initiatives, contract execution and compliance monitoring; otherwise, you are more likely influencing the spend as opposed to managing it. Anything below 70% potentially indicates significant room for improvement.
- Step 2: Redistribute and reallocate meaningful work accordingly. If the current organizational structure does not support the level of strategic management outlined, it may be time to reassess roles, outsource certain functions, improve processes, or employ technology to streamline work efforts to deliver a higher output.
5) Is supplier management an afterthought?
Supplier Management ensures that suppliers who are critical to operations are identified, classified, assessed and appropriate plans are developed to manage risk, performance and relationship issues. This all sounds good, however less than 20% of procurement organizations have an established SRM program.
Why should Supplier Relationship Management be at the forefront of Procurement practices? It raises the profile and value proposition of the Procurement function within the business, allows for proactive mitigation plans and continuous improvement. So, where to begin?
- Step 1: Stratify the supply base into tiers through defined thresholds
- Step 2: Properly segment supplier relationships to enable performance and risk management
- Step 3: Utilize balanced supplier scorecard reports for objective reporting, issue resolution, and overall performance management
The notion of Who Moved My Cheese is intended to warn against complacency. We’ve got to move in order to keep up with the cheese. Leading your Procurement organization to embrace the five concepts outlined here will equip your organization with the necessary tools to not only embrace the inevitable changing dynamics of achieving procurement value, but foresee and capture all the cheese the maze has to offer! For more information, please visit nitorpartners.com.