BOOST YOUR PROCUREMENT VALUE ENGINE · Boost Your Procurement alue Enine I 5 Input Output Energy...
Transcript of BOOST YOUR PROCUREMENT VALUE ENGINE · Boost Your Procurement alue Enine I 5 Input Output Energy...
Boost Your Procurement Value Engine I wwwpool4toolcom
1
BOOST YOUR
How to upgrade effectiveness efficiency and sustainability
PROCUREMENTVALUE ENGINE
B Maltaverne amp M Lamoureux
Boost Your Procurement Value Engine I wwwpool4toolcom
2Table of Contents
Table of Contents
The Purpose of Your Procurement Function 3
The Procurement Value Engine 4
Effectiveness and Efficiency 5
The Productivity Plateau 5
Sustainable Productivity 7
Increasing the Value-for-Money (VfM) of Procurement 8
Definition of Value 8
Effective Procurement 9
Efficient Procurement 11
Sustainable Procurement 14
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3
The Purpose of Your Procurement Function
A modern Procurement function exists to identify and drive organizational value Long gone are the days when Procurementrsquos only role was to process the paperwork that allowed the manufacturing department to buy the parts it needed to make its product or the back office to continue the day-to-day accounting
However as we will discuss in this white paper the identification of organizational value which is the ultimate key to organizational success is not always straight-forward Every organization is different and every Procurement function has a different level of maturity
While every function exists to deliver results not every function takes the time required to understand the why Not only does this give purpose to the function (and a lot has been written on the importance of purpose in management) but it also defines the true role of the function within the organization the what
But now we live in times where the how also matters It is obvious that delivering results (the what) to achieve organizational value is key (the why) But how you achieve these results also matters In Procurement the how depends on the level of organizational maturity and what will have the greatest impact
Value mgmt
Price
Demand management
Supply assurance
Total cost of ownership
Source Hackett Group
Right goods services at the
right time and place
Buyerplanner
Right goods and services at the right right price
Negotiator
Shift from lowest price to TCO
Supply expert team leader project manager
Reduce demand activity com-pexity and variability
Spendbudget consultant and relationship manager
Increase business value derived from spend
Value Proposition Role of Procurement
Trusted business advisor and change agent
The Purpose of Your Procurement Function
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4
We can measure the maturity of the organization using the hierarchy of supply provided to us by Hackett But while this specifies what the Procurement function can do it doesnrsquot specify what the Procurement function should do
We can therefore define the raison drsquoecirctre of a Procurement function as what the Procurement function should do And what should the Procurement function do Simply put Procurement should reinforce a companyrsquos Unique Selling Points (USPs) or Unique Value Propositions (UVPs) and competitive advantage by managing external spend with the appropriate strategy In this paper we will define a process that can be used to both define and execute the right strategy for each Procurement event
Sustainability
Efficiency
Effectiveness
Efficient(Doing the things right)
Sustainability (Continuously)
Effective (Doing the right things)
The sweet spot
The Procurement Value Engine
To make a comparison with the ma-nufacturing world Procurement is analogous to an engine The purpose of the engine is to produce the fuel that powers the vehicle it is cont-ained within To do so Procurement requires Energy The energy among other things consists of the function itself (the people) and everything the Procurement function needs to work (time information systems etc) The less energy the engine needs the better
But this is not the whole story The engine must run and continue to
perform at an optimum level of pro-ductivity over time and do so in a sustainable manner
A best-in-class Procurement function is thus a function whose Value Engi-ne continuously delivers value (it is sustainable) to other departments stakeholders (it is effective) while requiring minimum energy (it is effi-cient)
The Procurement Value Engine
Boost Your Procurement Value Engine I wwwpool4toolcom
5
Input Output
Ener
gy
Process
Fail slowly Excel
Fail fast Survive
Effectiviness
Effic
ienc
y
Effectiveness and Efficiency
Now that we have defined the Procurement Value Engine it is important to understand what its key performance indicators (KPIs) are Like any engine the two main KPIs are effectiveness and efficiency
Effectiveness is about producing an expected result The gap between the target and the actual result defines the level of performance
Efficiency has nothing to do with the result itself but focuses on what is required in terms of resources to produce it Therefore ldquothe less the betterrdquo is definitely the objective of increa-sing efficiency
The Productivity Plateau
Now that we have identified the two primary KPIs for the Procurement Value Engine we can explore how they relate to each other and what best-in-class or-ganizations should aim for
As illustrated to the left the Holy Grail is to be effective AND efficient
It is no big surprise that the way a com-pany maximizes its return on invest-ment (ROI) for its Procurement function is to increase efficiency and effective-ness However as explained in a recent article on Spend Mattersrsquo website Chief Procurement Officer it is often difficult if not impossible to simultaneously ma-
ximize both Nonetheless as the article points out there is a symbiotic relationship between effectiveness and efficiency and a failure to grasp this could result in an organization pursuing a plateau that it might not be able to reach
The Procurement Value Engine
Effectiveness
Efficiency
Efficiency is doing things right
effectiveness is doing the right things
raquo
raquoPeter Drucker Austrian-born American manage-
ment consultant educator and author He has
been described as ldquothe founder of modern ma-
nagementrdquo
Like Drucker POOL4TOOL was born in Vienna
Austria so we consider him a real inspiration
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7
With a limited amount of energy (as defined earlier) your organization can only manage a cer-tain amount of input and produce a certain quantity of result This is where the organization reaches a productivity plateau To achieve an increase in results (or output) the only solution is to increase the level of energy which is very often translated as ldquomore peoplerdquo Another article from Spend Matters based on an APQC study on maverick buying illustrates this point
But is this really the only way to break the productivity plateau
There is another way As described in the article cited above you can ldquouse efficiency to fund ef-fectivenessrdquo Becoming more efficient will mean for example that people will do things faster The time freed up by an increase in efficiency can then be used to fuel effectiveness by being able to do and manage more In Procurement a typical example is using the newly available bandwidth to manage more spend and therefore produce new value incrementally But this is not enough to reach and maintain the optimal productivity plateau
Sustainable Productivity
The analogy of an engine again helps us to understand this because an engine needs constant care maintenance and fuel to run It is dynamic For many Procurement functions being self-aware is sometimes very difficult if not impossible because it requires
the right dashboard to measure changes in input output gap vs target
a lot of energy to gather data and perform the relevant analysis
Therefore in addition to effectiveness and efficien-cy the Procurement Value Engine must be sustain-able By sustainable we mean that Procurement should deliver value in the long run not just the short run This means ensuring that the triad of time cost and quality is always at its optimum and balanced
This third dimension of the Procurement Value Engi-ne has two main consequences
An approach and culture of continuous impro-vement (aka DMAIC)
An understanding of future impacts in all decisi-ons and actions (long-termism vs short-termism)
Time
Productivity
2 Cost
6 Talent4 Quality
3 Scope
1 Time
5 Risk
The Procurement Value Engine
Boost Your Procurement Value Engine I wwwpool4toolcom
8
Increasing the Value-for-Money (VfM) of Procurement
A better Procurement Engine is one that delivers more value-for-money (VfM) The Value-for-Money of Procurement can be defined as ldquoa utility derived from every purchase or every sum of money spent Value for money is based not only on the minimum purchase price (economy) but also on the maximum efficiency and effectiveness of the purchaserdquo1
Therefore VfM applied to Procurement is about maximizing value from each dollar invested in the Procurement functionrsquos people process and technology
At a high level the Procurement VfM can be described as
VfM levers = Reduce Input + Increase Output + Reduce Energy
Which leads us to the following breakdown
This means that an increase in effectiveness in any of these categories so long as it is not ac-companied by a decrease in effectiveness in another category will generally increase value for money But this breakdown doesnrsquot answer which increase will bring the greatest benefit or how Procurement can deliver the best value to organizational stakeholders
Definition of Value
Before you can deliver results you need to know what you are expected to deliver Or as the well-known negotiation concept puts it the receiving party defines what value is not the giver This means that value has to be determined by and with the ldquoend-userrdquo of the product or service that Procurement will be sourcing
As the CIPS model for Category Management shows this is a ldquotop-downrdquo approach that starts with a companyrsquos vision mission and values This then cascades to the level of the
Governance amp Category Mgmt SourcingSupply MgmtPurchase-to-Pay
Vfm = x x+ x x xReduce influence demand
Decrease contract
costs
Increase spend under management
Increase compliance
with contracts
Decrease order-to-pay
costs
Reduce usage costs
Reduce risk
Companyacutes Vision Mission amp Values
Procurement Strategy (Value)
Category Strategy
Category Strategy
Category Strategy
Companyacutes Overall Strategy
Finance
Supply Chain
HR
R amp D
Marketing
Technical
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
9
companyrsquos overall cross-functional strategy down to the category level at the end of the funnel
Obviously this is a function-specific exercise the outcome varies from company to company (as noted earlier the raison drsquoecirctre of Procurement is to reinforce a companyrsquos USPs) and as it is often said results may vary based on
Market and sector eg B2B B2C public private
Industry eg service manufacturing
Localization eg legal requirements
Nevertheless some common elements of relevance could be
Cost (performance profitability amp financials) eg price cost Total Cost of Ownership cash management growth
Agility contribute to supply chain rebalancing (buy where you sell) manage market dyna-mics (raw materials currencies etc) anticipate impact of disruptive technologies that may impact make-or-buy decisions andor supply markets contribute to time-to-market improvements etc
Risk reduction brand protection supply chain disruptions CSR etc
Effective Procurement
Effectiveness is where to start as illustrated in the quote above and in a recent Procurement book Procurement Mojo by Sigi Osagie
It is Procurementrsquos job to manage external spending so the key drivers of being effective are related to the Strategic Sourcing Processes A good start to assessing your current effectiveness is to look at AT Kearneyrsquos Strategic Sourcing Gemstone
McKinsey amp Company research has confirmed that procurement pays
Companies with high-performing procurement functions consistently
outperform their rivals on a range of financial indicators and the best
companies are building advanced talent management strategies into
the very heart of their procurement organizations Moreover procure-
ment will play a key role in helping companies cope with the new chal-
lenges and opportunities of our increasingly dynamic global economy
Industry Week ndash Jan 2014
raquo raquo
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
10
Consolidate number
of suppliers
Aggregate vo
lume accross u
nits
Redistribute vo
lume among
suppliers
Establish
develop key su
ppliers
Employ strategic
alliance
partnering
Examine strategic
ldquomake v buyrdquo
Conduct product value analysis
Optimise lifecycle costs
Rationalisestandardise
specifications
Substitute materials
Expand geographic supply base
Develop new suppliers
Exploit global supply demand
imbalances
Compare total costs
Model ldquoshould-costsrdquo
Renegotiate prices
Unbundle pricing
Hold an online auction
Re-engineer joint processes
Support supplier operations improvement
Share productivity gains
Develop integrated supply chain
To increase effectiveness as highlighted in the gemstone above the right measures aim to manage spend better and achieve more results by
Using historical spend to gain knowledge
Employing levers to reduce price or cost or eliminate cost and
Increasing spend under management to unlock new benefits
The following are examples of effectiveness levers based on the value for money formula presented earlier in this document
Demand Influence lifecycle cost analysis versus bonus potential
A full lifecycle cost analysis on similar product lines in a category might reveal that two al-most equal cellphone models have significantly different costs and one of the models should be retired with demand shifted to the other model But until sales understands the costs and how it impacts the bottom line and their bonus potential they might keep selling the higher cost model (instead of the higher profit model)
Spend Under Management (SUM) increase extendible on-line catalog for all types of requisitions
A big reason a lot of spend is not under management at many organizations is because there is no catalog for many one-off one-time or spot-buy purchase needs (such as extra office supplies not on the standard contract temporary services promotional items for events
Exercise Power Create Advantage
Volume
concentration
Product
specification
improvement
Product specification
improvement
Global sourcing
Joint process
improvement
Best-price evaluation
The strategic sourcing gemstone
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
11
travel services etc) and this spend ends up being requisitioned through e-mail requests made then is not entered in the Procurement system until the invoice comes in But if the organization has an extensive catalog where arbitrary items can be created by the or-ganization as needed all requisitions approval and spend gets recorded and gets under management
Contract Cost Decrease e-Signature options
Some organizations pay a lot of money couriering contracts back and forth for signature even when e-Signatures are just as legally binding A platform that is integrated with an e-Signature service can save the organization time and money allowing it to complete the contract cycle more expediently
Contract Compliance Increase alerts when documents are due (coming or past)
Organizations are at great risk when insurance certificates certifications releases or audits are not completed or submitted on time With a platform that tracks when documentary re-quirements are due the organization knows when to remind a supplier or take more severe action (such as halting all orders to the supplier until the issue is corrected) if the documen-tation needed is not received in a timely fashion
Usage Cost Decrease packaging improvements
In some industries such as food and beverage and pharmaceutical the packaging of a den-se liquid especially one with a tendency to stick to certain types of packaging can have a significant impact on the usage cost when there is high waste or expensive processes are needed to clean the containers for recycling Packaging improvements that use new types of non-stick packaging can reduce the overall lifecycle costs even if the packaging is more expensive
Risk Decrease in-transit visibility
A system that allows an organization to track its shipments from the time they leave the supplierrsquos warehouse to the time they hit the organizationrsquos warehouse with updates each time a waypoint is met or a (n intermodal) transfer is made with regular updates helps an organization not only track where itrsquos shipments are but whether or not they are likely to arrive at the expected time
Order-to-Pay Cost Decrease automatic payment on successful m-way match
Automated m-way match between a purchase order invoice and goods receipt not only increases efficiency but also increases effectiveness if the system can also automatically queue invoices that pass the m-way match for payment as this helps both Procurement and Accounts Payable be more effective in payment and cash flow planning
Efficient Procurement
As already mentioned efficiency can be invested into increasing effectiveness for example by enabling Procurement to address areas that have been left untouched or sub-optimized until now because of a lack of capacity In addition efficiency improvements allow Procurement to be more agile and pro-active
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
12
This leads to new capabilities and enhancements in cycle timesAnd allows for the following best practices to be employed which increase efficiency even more
Revisit sourcing lists (preferred suppliers) more than once a year to ensure continuous alignment between sourcing strategy and needs (especially critical for new product developments)
Manage market dynamics better the ability to identify and capture positive market changes (or mitigate impacts of negative ones) by dynamically going back to market
Improved cycle times in spend management processes that enable other support functions or positively impact the product lifecycle
Reduce savings leakage by transforming identified savings into actual savings realized because of improvements in contract management
Another aspect of efficiency lies in the tools used by Procurement to perform its activities Effi-ciency as stated earlier is about how Procurement works and in our technological era it is im-possible not to talk about technology Technology plays a key role in efficiency gains because it is an enabler simplifying a lot of administrative tasks and making process integration possible
Typical efficiency gains that are specific to using Procurement technology include
Automation impacting the level of resources needed and cycle times
Economies of scale from centralizing information and data management
Knowledge Management (KM) based on centralizing and securing information while making it more available across geographies (physical or functional)
Volatile markets opportunity or problem
The answer to this question depends on how you manage these challenges The fact
remains that Procurement must operate in the context of volatile markets
Therefore Procurement has to be equipped to cope with this
Part of this equipment is a mechanism to feed Sourcing events with real-time mar-
ket information This can be used among other things to track raw material prices
from external sources (eg London Metal Exchange) So when you have an RFQ in
addition to the suppliersrsquo conditions you can check the key price drivers against the
current market This is valuable information to ensure you do not ldquoleave moneyrdquo on
the table andor ask the right questions to suppliers to find ways to optimize condi-
tions for both parties
Plus having real-time market information allows you to constantly assess past agree-
ments against current conditions and if necessary go back to market easily
How Procurement responds to market changes is part of the broader idea of Procure-
ment agility that is a key differentiator in our world in constant change
For more see here
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
13
In addition to increasing efficiency in your Procurement organization technology also enables suppliers to be more efficient This means that Procurement can introduce efficiencies into the supply chain that it can benefit from This is also an important aspect of the business case for better supplier onboarding (supplier portals EDI e-Invoicing etc)
But not all technologies are equal when looking at efficiencies Some technologies are more cost effective than others Remember what Rudzki Smock Katzorke and Stewart said in Stra-ight to the Bottom Line An Executive Roadmap to World Class Supply Management
Also cost includes IT costs (infrastructure licenses fees etc) and usability costs In recent years SaaS and cloud solutions have transformed many functions Procurement included because they often maximize time-to-value vs on-premises solutions
In addition to reducing installation and operating costs most SaaS and cloud solutions rely on the philosophy of interoperability
System-to-system (interfaces and communication protocols)
Process-to-process (interdependence and integration)
People-to-people (collaboration)
All of this is in the context of a global economy and global supply chains Concepts like Enter-prise 20 are the new norm
Thanks to SaaS and cloud technologies Procurement can create a workspace containing all the data required for both strategic and tactical activities This workspace is ERP-agnostic mea-ning that it can be connected easily to multiple and various systems (ERPs and beyond PLMs BWs etc) internal and external systems This
centralizes key information in a single location making data collection and analysis easier
fosters collaboration with various partners and stakeholders as required by the various busi-ness processes running in the solution
streamlines data management by having data directly managed by the relevant data owner
simplifies master data management (MDM) by creating one set of master data that then dispatches the information to the operational systems and
Dont jump whole hog into technology Walk and then run if it works Establish meaningful metrics to measure its performance Make sure each piece fits into a long-term puzzle
Robert A Rudkzi Douglas A Smock Michael Katzorke and Shelley Stewart Jr
raquo raquo
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
14
increases agility and resilience by securing data and making it easily transferable (imagine an organizational change that results in changes in responsibilities and the resulting nightmare of transferring the data contained in mailboxes)
On top of that and as highlighted by the concept of interoperability cloud solutions usually live in an app ecosystem The capacity to connect to third party solutions is integrated into the solutionrsquos design and architecture For example this allows Procurement to enrich internal
data coming from internal systems with third party content to get a bigger picture than what was previously available or at least get the information faster by having the right information pushed to the right place and at the right moment
Sustainable Procurement
As noted earlier this obviously comes from having a culture of continuous improvement (DMAIC) However this isnrsquot everything Decisions your Procurement organization make today will impact operations tomorrow Therefore looking at the impacts (or future consequences) of todayrsquos decisions is a critical component of the Procurement Value Engine
This is the capability to influence the future by
Defining it (ldquoIFrdquo) - predictive analytics
Preparing for it (ldquoTHEN THATrdquo) - risk management
All of this is about anticipating and avoiding negative situations andor maximizing the occur-rence of positive ones This is the whole purpose of the broader discipline of risk management
Other Stakholder
Procurement
Masterdata 1
Masterdata 2
Masterdata n
Suppliers
3rd Party Sources Internal Information SystemsAccess Control amp Roles
Business Process 1
Business Process 2
Business Process n
Increasing the Value-for-Money (VfM) of Procurement
We need more standardized readily available third-party information shared amongst networked communities where people can pool data for operational assessment
raquoraquo
Gerard Chick amp Robert Handfield
Boost Your Procurement Value Engine I wwwpool4toolcom
16
As illustrated in the quote on the previous page current technologies are characterized by being able to gather more data thereby enabling deeper and more meaningful analysis But data alone means nothing It is what you do with it that creates value
A typical example in Procurement can be found in sourcing decisions Awarding business to suppliers must take into account the risks that the decision represents For example low-cost country (LCC) sourcing has been high on the agenda of many Procurement organizations for a while Most have now learned their global sourcing lessons and are now looking beyond LCC as simply a ldquocost downrdquo opportunity but also a ldquorisk uprdquo challenge
Increasing the Value-for-Money (VfM) of Procurement
How much do supply chain disruptions cost
Extract from a white paper by Zurich Insurance Group
Extensive research looked at thousands of company results whereby comments in
SEC reports were tied back to the stock performance of these companies The study
shows an average 25 percent reduction in share price and an impact which com-
monly lasts over two years as a result of supply chain disruptions Companies can
be simultaneously impacted by decreased sales and brand damage while incurring
significant extra expenses during recovery times following a business interruption
Historically supply chain disruptions can lead to an average of 9 percent lower sa-
les and 11 percent higher costs and many companies with extended interruptions
never recover
Perf
orm
ance
Preparation
TimeDisruptive event
Time of impact
Recovery
First response 9-30
Shareholder impact
Initital impact
Preparation for recovery
long term impact
Boost Your Procurement Value Engine I wwwpool4toolcom
17Increasing the Value-for-Money (VfM) of Procurement
Because supply chains are more and more global (ie complex) and regulations are constantly evolving the dimensions impacting sourcing decisions are becoming more and more complex Complexity includes process dependencies due to the DMAIC approach
and value analysis
Therefore having the big picture when analyzing bids and deciding an award is critical As exp-lained earlier this is where SaaS solutions and their app ecosystem can make life easier and re-present tremendous value in terms of time saved (data collection analysis) and value creation avoiding future issues is cost-avoidance that has value even if not measured in a PampL impact
The concept of ldquothe right information at the right time and the right placerdquo is illustrated below in the example of analyzing bids from suppliers In addition to the quotes a purchaser has all
Category Strategy
Company Strategy
Strategy per
Supplier
Risk amp Sus-tainabilityAnalysis
Supplier Integration
Supplier Controlling
Supplier De-velopment
Parameters for Sourcing amp
Award Decisions
From the TCO analysishellip hellip to the TVO analysis (Total Value of Ownership)
Supplier Selection
Supplier Selection
Supplier Connection
Supplier Controlling
Market Research
Category Strategy
eSourcing eSourcing
WebEDIEDI
Supplier Perf Rating
Supplier Profile
+ Supplierlsquos Production Costs
+ Supplierrsquos Production Costs
+ Evaluation of Results
+ Price Constraints + Price Constraints
+ Lead Buyer Stra-tegy
+ Supplierlsquos Material Costs
+ Supplierrsquos Material Costs
+ Process Costs given by the Supplier
+ Overhead + Overhead
+ Potential Evaluation
= TCO = TVO
Boost Your Procurement Value Engine I wwwpool4toolcom
18
Procurementrsquos role sitting between the enterprise and
supply markets means it will always be exposed to various factors outside the enterprise probably more so than any other function If itrsquos not commodity prices fluctuating crazily or natural disasters threatening supply continuity it will be something else like unethical practices in the supply pipeline giving the enterprise bad press
The Procurement leader must steer the team through the choppy waters of such challenges
raquoraquo
Sigi Osagie
Boost Your Procurement Value Engine I wwwpool4toolcom
19
TCO TVO information via various scores (bonus penalty) based on the key dimensions of the category
Moreover technology does not just limit itself to the passive role of making information availa-ble Technology can be proactive
The terms Big Data and Internet of Things are frequently used as buzzwords but they also illustrate the increased capabilities that new technologies enable in collecting and presenting data As always the real value is not in the data itself but in the actionable intelligence that you build and the actions decisions you take
Therefore algorithms will make the key difference and give companies a competitive advantage For Procurement this means technologies with capabilities
to allow an organization to act (or at least to propose a possible set of actions) based on data analyzed in real time and
to create new knowledge by identifying trends or correlations that have not been seen until now
will provide the sustainable value that Procurement is looking for
Our next paper will dive deeper into what these technologies are what they do and the many ways they enable efficiency and effectiveness but for now we will conclude that for a Procure-ment organization to have a sustainable Value Engine function Procurement will have to build and develop the right capabilities (people process and technology)
Supplier quote
TCOTVO (internal) based on various dimensions (risk
CSRhellip)
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
20
copy Copyright POOL4TOOL AG Altmannsdorfer Straszlige 9119
1120 Vienna | Austria Phone +43-1-80 490 80
Editor Bertrand Maltaverne Senior Project Manager
POOL4TOOL AG
Michael Lamoureux Sourcing Innovation
More information officepool4toolcom
wwwpool4toolcom
POOL4TOOL AGAltmannsdorfer Straszlige 9119 A-1120 Vienna Tel+43-1-80 490 80
officepool4toolcomwwwpool4toolcom
Vienna I Stuttgart I Munich I Belgrade I Detroit I Singapore I Dubai
Boost Your Procurement Value Engine I wwwpool4toolcom
2Table of Contents
Table of Contents
The Purpose of Your Procurement Function 3
The Procurement Value Engine 4
Effectiveness and Efficiency 5
The Productivity Plateau 5
Sustainable Productivity 7
Increasing the Value-for-Money (VfM) of Procurement 8
Definition of Value 8
Effective Procurement 9
Efficient Procurement 11
Sustainable Procurement 14
Boost Your Procurement Value Engine I wwwpool4toolcom
3
The Purpose of Your Procurement Function
A modern Procurement function exists to identify and drive organizational value Long gone are the days when Procurementrsquos only role was to process the paperwork that allowed the manufacturing department to buy the parts it needed to make its product or the back office to continue the day-to-day accounting
However as we will discuss in this white paper the identification of organizational value which is the ultimate key to organizational success is not always straight-forward Every organization is different and every Procurement function has a different level of maturity
While every function exists to deliver results not every function takes the time required to understand the why Not only does this give purpose to the function (and a lot has been written on the importance of purpose in management) but it also defines the true role of the function within the organization the what
But now we live in times where the how also matters It is obvious that delivering results (the what) to achieve organizational value is key (the why) But how you achieve these results also matters In Procurement the how depends on the level of organizational maturity and what will have the greatest impact
Value mgmt
Price
Demand management
Supply assurance
Total cost of ownership
Source Hackett Group
Right goods services at the
right time and place
Buyerplanner
Right goods and services at the right right price
Negotiator
Shift from lowest price to TCO
Supply expert team leader project manager
Reduce demand activity com-pexity and variability
Spendbudget consultant and relationship manager
Increase business value derived from spend
Value Proposition Role of Procurement
Trusted business advisor and change agent
The Purpose of Your Procurement Function
Boost Your Procurement Value Engine I wwwpool4toolcom
4
We can measure the maturity of the organization using the hierarchy of supply provided to us by Hackett But while this specifies what the Procurement function can do it doesnrsquot specify what the Procurement function should do
We can therefore define the raison drsquoecirctre of a Procurement function as what the Procurement function should do And what should the Procurement function do Simply put Procurement should reinforce a companyrsquos Unique Selling Points (USPs) or Unique Value Propositions (UVPs) and competitive advantage by managing external spend with the appropriate strategy In this paper we will define a process that can be used to both define and execute the right strategy for each Procurement event
Sustainability
Efficiency
Effectiveness
Efficient(Doing the things right)
Sustainability (Continuously)
Effective (Doing the right things)
The sweet spot
The Procurement Value Engine
To make a comparison with the ma-nufacturing world Procurement is analogous to an engine The purpose of the engine is to produce the fuel that powers the vehicle it is cont-ained within To do so Procurement requires Energy The energy among other things consists of the function itself (the people) and everything the Procurement function needs to work (time information systems etc) The less energy the engine needs the better
But this is not the whole story The engine must run and continue to
perform at an optimum level of pro-ductivity over time and do so in a sustainable manner
A best-in-class Procurement function is thus a function whose Value Engi-ne continuously delivers value (it is sustainable) to other departments stakeholders (it is effective) while requiring minimum energy (it is effi-cient)
The Procurement Value Engine
Boost Your Procurement Value Engine I wwwpool4toolcom
5
Input Output
Ener
gy
Process
Fail slowly Excel
Fail fast Survive
Effectiviness
Effic
ienc
y
Effectiveness and Efficiency
Now that we have defined the Procurement Value Engine it is important to understand what its key performance indicators (KPIs) are Like any engine the two main KPIs are effectiveness and efficiency
Effectiveness is about producing an expected result The gap between the target and the actual result defines the level of performance
Efficiency has nothing to do with the result itself but focuses on what is required in terms of resources to produce it Therefore ldquothe less the betterrdquo is definitely the objective of increa-sing efficiency
The Productivity Plateau
Now that we have identified the two primary KPIs for the Procurement Value Engine we can explore how they relate to each other and what best-in-class or-ganizations should aim for
As illustrated to the left the Holy Grail is to be effective AND efficient
It is no big surprise that the way a com-pany maximizes its return on invest-ment (ROI) for its Procurement function is to increase efficiency and effective-ness However as explained in a recent article on Spend Mattersrsquo website Chief Procurement Officer it is often difficult if not impossible to simultaneously ma-
ximize both Nonetheless as the article points out there is a symbiotic relationship between effectiveness and efficiency and a failure to grasp this could result in an organization pursuing a plateau that it might not be able to reach
The Procurement Value Engine
Effectiveness
Efficiency
Efficiency is doing things right
effectiveness is doing the right things
raquo
raquoPeter Drucker Austrian-born American manage-
ment consultant educator and author He has
been described as ldquothe founder of modern ma-
nagementrdquo
Like Drucker POOL4TOOL was born in Vienna
Austria so we consider him a real inspiration
Boost Your Procurement Value Engine I wwwpool4toolcom
7
With a limited amount of energy (as defined earlier) your organization can only manage a cer-tain amount of input and produce a certain quantity of result This is where the organization reaches a productivity plateau To achieve an increase in results (or output) the only solution is to increase the level of energy which is very often translated as ldquomore peoplerdquo Another article from Spend Matters based on an APQC study on maverick buying illustrates this point
But is this really the only way to break the productivity plateau
There is another way As described in the article cited above you can ldquouse efficiency to fund ef-fectivenessrdquo Becoming more efficient will mean for example that people will do things faster The time freed up by an increase in efficiency can then be used to fuel effectiveness by being able to do and manage more In Procurement a typical example is using the newly available bandwidth to manage more spend and therefore produce new value incrementally But this is not enough to reach and maintain the optimal productivity plateau
Sustainable Productivity
The analogy of an engine again helps us to understand this because an engine needs constant care maintenance and fuel to run It is dynamic For many Procurement functions being self-aware is sometimes very difficult if not impossible because it requires
the right dashboard to measure changes in input output gap vs target
a lot of energy to gather data and perform the relevant analysis
Therefore in addition to effectiveness and efficien-cy the Procurement Value Engine must be sustain-able By sustainable we mean that Procurement should deliver value in the long run not just the short run This means ensuring that the triad of time cost and quality is always at its optimum and balanced
This third dimension of the Procurement Value Engi-ne has two main consequences
An approach and culture of continuous impro-vement (aka DMAIC)
An understanding of future impacts in all decisi-ons and actions (long-termism vs short-termism)
Time
Productivity
2 Cost
6 Talent4 Quality
3 Scope
1 Time
5 Risk
The Procurement Value Engine
Boost Your Procurement Value Engine I wwwpool4toolcom
8
Increasing the Value-for-Money (VfM) of Procurement
A better Procurement Engine is one that delivers more value-for-money (VfM) The Value-for-Money of Procurement can be defined as ldquoa utility derived from every purchase or every sum of money spent Value for money is based not only on the minimum purchase price (economy) but also on the maximum efficiency and effectiveness of the purchaserdquo1
Therefore VfM applied to Procurement is about maximizing value from each dollar invested in the Procurement functionrsquos people process and technology
At a high level the Procurement VfM can be described as
VfM levers = Reduce Input + Increase Output + Reduce Energy
Which leads us to the following breakdown
This means that an increase in effectiveness in any of these categories so long as it is not ac-companied by a decrease in effectiveness in another category will generally increase value for money But this breakdown doesnrsquot answer which increase will bring the greatest benefit or how Procurement can deliver the best value to organizational stakeholders
Definition of Value
Before you can deliver results you need to know what you are expected to deliver Or as the well-known negotiation concept puts it the receiving party defines what value is not the giver This means that value has to be determined by and with the ldquoend-userrdquo of the product or service that Procurement will be sourcing
As the CIPS model for Category Management shows this is a ldquotop-downrdquo approach that starts with a companyrsquos vision mission and values This then cascades to the level of the
Governance amp Category Mgmt SourcingSupply MgmtPurchase-to-Pay
Vfm = x x+ x x xReduce influence demand
Decrease contract
costs
Increase spend under management
Increase compliance
with contracts
Decrease order-to-pay
costs
Reduce usage costs
Reduce risk
Companyacutes Vision Mission amp Values
Procurement Strategy (Value)
Category Strategy
Category Strategy
Category Strategy
Companyacutes Overall Strategy
Finance
Supply Chain
HR
R amp D
Marketing
Technical
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
9
companyrsquos overall cross-functional strategy down to the category level at the end of the funnel
Obviously this is a function-specific exercise the outcome varies from company to company (as noted earlier the raison drsquoecirctre of Procurement is to reinforce a companyrsquos USPs) and as it is often said results may vary based on
Market and sector eg B2B B2C public private
Industry eg service manufacturing
Localization eg legal requirements
Nevertheless some common elements of relevance could be
Cost (performance profitability amp financials) eg price cost Total Cost of Ownership cash management growth
Agility contribute to supply chain rebalancing (buy where you sell) manage market dyna-mics (raw materials currencies etc) anticipate impact of disruptive technologies that may impact make-or-buy decisions andor supply markets contribute to time-to-market improvements etc
Risk reduction brand protection supply chain disruptions CSR etc
Effective Procurement
Effectiveness is where to start as illustrated in the quote above and in a recent Procurement book Procurement Mojo by Sigi Osagie
It is Procurementrsquos job to manage external spending so the key drivers of being effective are related to the Strategic Sourcing Processes A good start to assessing your current effectiveness is to look at AT Kearneyrsquos Strategic Sourcing Gemstone
McKinsey amp Company research has confirmed that procurement pays
Companies with high-performing procurement functions consistently
outperform their rivals on a range of financial indicators and the best
companies are building advanced talent management strategies into
the very heart of their procurement organizations Moreover procure-
ment will play a key role in helping companies cope with the new chal-
lenges and opportunities of our increasingly dynamic global economy
Industry Week ndash Jan 2014
raquo raquo
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
10
Consolidate number
of suppliers
Aggregate vo
lume accross u
nits
Redistribute vo
lume among
suppliers
Establish
develop key su
ppliers
Employ strategic
alliance
partnering
Examine strategic
ldquomake v buyrdquo
Conduct product value analysis
Optimise lifecycle costs
Rationalisestandardise
specifications
Substitute materials
Expand geographic supply base
Develop new suppliers
Exploit global supply demand
imbalances
Compare total costs
Model ldquoshould-costsrdquo
Renegotiate prices
Unbundle pricing
Hold an online auction
Re-engineer joint processes
Support supplier operations improvement
Share productivity gains
Develop integrated supply chain
To increase effectiveness as highlighted in the gemstone above the right measures aim to manage spend better and achieve more results by
Using historical spend to gain knowledge
Employing levers to reduce price or cost or eliminate cost and
Increasing spend under management to unlock new benefits
The following are examples of effectiveness levers based on the value for money formula presented earlier in this document
Demand Influence lifecycle cost analysis versus bonus potential
A full lifecycle cost analysis on similar product lines in a category might reveal that two al-most equal cellphone models have significantly different costs and one of the models should be retired with demand shifted to the other model But until sales understands the costs and how it impacts the bottom line and their bonus potential they might keep selling the higher cost model (instead of the higher profit model)
Spend Under Management (SUM) increase extendible on-line catalog for all types of requisitions
A big reason a lot of spend is not under management at many organizations is because there is no catalog for many one-off one-time or spot-buy purchase needs (such as extra office supplies not on the standard contract temporary services promotional items for events
Exercise Power Create Advantage
Volume
concentration
Product
specification
improvement
Product specification
improvement
Global sourcing
Joint process
improvement
Best-price evaluation
The strategic sourcing gemstone
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
11
travel services etc) and this spend ends up being requisitioned through e-mail requests made then is not entered in the Procurement system until the invoice comes in But if the organization has an extensive catalog where arbitrary items can be created by the or-ganization as needed all requisitions approval and spend gets recorded and gets under management
Contract Cost Decrease e-Signature options
Some organizations pay a lot of money couriering contracts back and forth for signature even when e-Signatures are just as legally binding A platform that is integrated with an e-Signature service can save the organization time and money allowing it to complete the contract cycle more expediently
Contract Compliance Increase alerts when documents are due (coming or past)
Organizations are at great risk when insurance certificates certifications releases or audits are not completed or submitted on time With a platform that tracks when documentary re-quirements are due the organization knows when to remind a supplier or take more severe action (such as halting all orders to the supplier until the issue is corrected) if the documen-tation needed is not received in a timely fashion
Usage Cost Decrease packaging improvements
In some industries such as food and beverage and pharmaceutical the packaging of a den-se liquid especially one with a tendency to stick to certain types of packaging can have a significant impact on the usage cost when there is high waste or expensive processes are needed to clean the containers for recycling Packaging improvements that use new types of non-stick packaging can reduce the overall lifecycle costs even if the packaging is more expensive
Risk Decrease in-transit visibility
A system that allows an organization to track its shipments from the time they leave the supplierrsquos warehouse to the time they hit the organizationrsquos warehouse with updates each time a waypoint is met or a (n intermodal) transfer is made with regular updates helps an organization not only track where itrsquos shipments are but whether or not they are likely to arrive at the expected time
Order-to-Pay Cost Decrease automatic payment on successful m-way match
Automated m-way match between a purchase order invoice and goods receipt not only increases efficiency but also increases effectiveness if the system can also automatically queue invoices that pass the m-way match for payment as this helps both Procurement and Accounts Payable be more effective in payment and cash flow planning
Efficient Procurement
As already mentioned efficiency can be invested into increasing effectiveness for example by enabling Procurement to address areas that have been left untouched or sub-optimized until now because of a lack of capacity In addition efficiency improvements allow Procurement to be more agile and pro-active
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
12
This leads to new capabilities and enhancements in cycle timesAnd allows for the following best practices to be employed which increase efficiency even more
Revisit sourcing lists (preferred suppliers) more than once a year to ensure continuous alignment between sourcing strategy and needs (especially critical for new product developments)
Manage market dynamics better the ability to identify and capture positive market changes (or mitigate impacts of negative ones) by dynamically going back to market
Improved cycle times in spend management processes that enable other support functions or positively impact the product lifecycle
Reduce savings leakage by transforming identified savings into actual savings realized because of improvements in contract management
Another aspect of efficiency lies in the tools used by Procurement to perform its activities Effi-ciency as stated earlier is about how Procurement works and in our technological era it is im-possible not to talk about technology Technology plays a key role in efficiency gains because it is an enabler simplifying a lot of administrative tasks and making process integration possible
Typical efficiency gains that are specific to using Procurement technology include
Automation impacting the level of resources needed and cycle times
Economies of scale from centralizing information and data management
Knowledge Management (KM) based on centralizing and securing information while making it more available across geographies (physical or functional)
Volatile markets opportunity or problem
The answer to this question depends on how you manage these challenges The fact
remains that Procurement must operate in the context of volatile markets
Therefore Procurement has to be equipped to cope with this
Part of this equipment is a mechanism to feed Sourcing events with real-time mar-
ket information This can be used among other things to track raw material prices
from external sources (eg London Metal Exchange) So when you have an RFQ in
addition to the suppliersrsquo conditions you can check the key price drivers against the
current market This is valuable information to ensure you do not ldquoleave moneyrdquo on
the table andor ask the right questions to suppliers to find ways to optimize condi-
tions for both parties
Plus having real-time market information allows you to constantly assess past agree-
ments against current conditions and if necessary go back to market easily
How Procurement responds to market changes is part of the broader idea of Procure-
ment agility that is a key differentiator in our world in constant change
For more see here
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
13
In addition to increasing efficiency in your Procurement organization technology also enables suppliers to be more efficient This means that Procurement can introduce efficiencies into the supply chain that it can benefit from This is also an important aspect of the business case for better supplier onboarding (supplier portals EDI e-Invoicing etc)
But not all technologies are equal when looking at efficiencies Some technologies are more cost effective than others Remember what Rudzki Smock Katzorke and Stewart said in Stra-ight to the Bottom Line An Executive Roadmap to World Class Supply Management
Also cost includes IT costs (infrastructure licenses fees etc) and usability costs In recent years SaaS and cloud solutions have transformed many functions Procurement included because they often maximize time-to-value vs on-premises solutions
In addition to reducing installation and operating costs most SaaS and cloud solutions rely on the philosophy of interoperability
System-to-system (interfaces and communication protocols)
Process-to-process (interdependence and integration)
People-to-people (collaboration)
All of this is in the context of a global economy and global supply chains Concepts like Enter-prise 20 are the new norm
Thanks to SaaS and cloud technologies Procurement can create a workspace containing all the data required for both strategic and tactical activities This workspace is ERP-agnostic mea-ning that it can be connected easily to multiple and various systems (ERPs and beyond PLMs BWs etc) internal and external systems This
centralizes key information in a single location making data collection and analysis easier
fosters collaboration with various partners and stakeholders as required by the various busi-ness processes running in the solution
streamlines data management by having data directly managed by the relevant data owner
simplifies master data management (MDM) by creating one set of master data that then dispatches the information to the operational systems and
Dont jump whole hog into technology Walk and then run if it works Establish meaningful metrics to measure its performance Make sure each piece fits into a long-term puzzle
Robert A Rudkzi Douglas A Smock Michael Katzorke and Shelley Stewart Jr
raquo raquo
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
14
increases agility and resilience by securing data and making it easily transferable (imagine an organizational change that results in changes in responsibilities and the resulting nightmare of transferring the data contained in mailboxes)
On top of that and as highlighted by the concept of interoperability cloud solutions usually live in an app ecosystem The capacity to connect to third party solutions is integrated into the solutionrsquos design and architecture For example this allows Procurement to enrich internal
data coming from internal systems with third party content to get a bigger picture than what was previously available or at least get the information faster by having the right information pushed to the right place and at the right moment
Sustainable Procurement
As noted earlier this obviously comes from having a culture of continuous improvement (DMAIC) However this isnrsquot everything Decisions your Procurement organization make today will impact operations tomorrow Therefore looking at the impacts (or future consequences) of todayrsquos decisions is a critical component of the Procurement Value Engine
This is the capability to influence the future by
Defining it (ldquoIFrdquo) - predictive analytics
Preparing for it (ldquoTHEN THATrdquo) - risk management
All of this is about anticipating and avoiding negative situations andor maximizing the occur-rence of positive ones This is the whole purpose of the broader discipline of risk management
Other Stakholder
Procurement
Masterdata 1
Masterdata 2
Masterdata n
Suppliers
3rd Party Sources Internal Information SystemsAccess Control amp Roles
Business Process 1
Business Process 2
Business Process n
Increasing the Value-for-Money (VfM) of Procurement
We need more standardized readily available third-party information shared amongst networked communities where people can pool data for operational assessment
raquoraquo
Gerard Chick amp Robert Handfield
Boost Your Procurement Value Engine I wwwpool4toolcom
16
As illustrated in the quote on the previous page current technologies are characterized by being able to gather more data thereby enabling deeper and more meaningful analysis But data alone means nothing It is what you do with it that creates value
A typical example in Procurement can be found in sourcing decisions Awarding business to suppliers must take into account the risks that the decision represents For example low-cost country (LCC) sourcing has been high on the agenda of many Procurement organizations for a while Most have now learned their global sourcing lessons and are now looking beyond LCC as simply a ldquocost downrdquo opportunity but also a ldquorisk uprdquo challenge
Increasing the Value-for-Money (VfM) of Procurement
How much do supply chain disruptions cost
Extract from a white paper by Zurich Insurance Group
Extensive research looked at thousands of company results whereby comments in
SEC reports were tied back to the stock performance of these companies The study
shows an average 25 percent reduction in share price and an impact which com-
monly lasts over two years as a result of supply chain disruptions Companies can
be simultaneously impacted by decreased sales and brand damage while incurring
significant extra expenses during recovery times following a business interruption
Historically supply chain disruptions can lead to an average of 9 percent lower sa-
les and 11 percent higher costs and many companies with extended interruptions
never recover
Perf
orm
ance
Preparation
TimeDisruptive event
Time of impact
Recovery
First response 9-30
Shareholder impact
Initital impact
Preparation for recovery
long term impact
Boost Your Procurement Value Engine I wwwpool4toolcom
17Increasing the Value-for-Money (VfM) of Procurement
Because supply chains are more and more global (ie complex) and regulations are constantly evolving the dimensions impacting sourcing decisions are becoming more and more complex Complexity includes process dependencies due to the DMAIC approach
and value analysis
Therefore having the big picture when analyzing bids and deciding an award is critical As exp-lained earlier this is where SaaS solutions and their app ecosystem can make life easier and re-present tremendous value in terms of time saved (data collection analysis) and value creation avoiding future issues is cost-avoidance that has value even if not measured in a PampL impact
The concept of ldquothe right information at the right time and the right placerdquo is illustrated below in the example of analyzing bids from suppliers In addition to the quotes a purchaser has all
Category Strategy
Company Strategy
Strategy per
Supplier
Risk amp Sus-tainabilityAnalysis
Supplier Integration
Supplier Controlling
Supplier De-velopment
Parameters for Sourcing amp
Award Decisions
From the TCO analysishellip hellip to the TVO analysis (Total Value of Ownership)
Supplier Selection
Supplier Selection
Supplier Connection
Supplier Controlling
Market Research
Category Strategy
eSourcing eSourcing
WebEDIEDI
Supplier Perf Rating
Supplier Profile
+ Supplierlsquos Production Costs
+ Supplierrsquos Production Costs
+ Evaluation of Results
+ Price Constraints + Price Constraints
+ Lead Buyer Stra-tegy
+ Supplierlsquos Material Costs
+ Supplierrsquos Material Costs
+ Process Costs given by the Supplier
+ Overhead + Overhead
+ Potential Evaluation
= TCO = TVO
Boost Your Procurement Value Engine I wwwpool4toolcom
18
Procurementrsquos role sitting between the enterprise and
supply markets means it will always be exposed to various factors outside the enterprise probably more so than any other function If itrsquos not commodity prices fluctuating crazily or natural disasters threatening supply continuity it will be something else like unethical practices in the supply pipeline giving the enterprise bad press
The Procurement leader must steer the team through the choppy waters of such challenges
raquoraquo
Sigi Osagie
Boost Your Procurement Value Engine I wwwpool4toolcom
19
TCO TVO information via various scores (bonus penalty) based on the key dimensions of the category
Moreover technology does not just limit itself to the passive role of making information availa-ble Technology can be proactive
The terms Big Data and Internet of Things are frequently used as buzzwords but they also illustrate the increased capabilities that new technologies enable in collecting and presenting data As always the real value is not in the data itself but in the actionable intelligence that you build and the actions decisions you take
Therefore algorithms will make the key difference and give companies a competitive advantage For Procurement this means technologies with capabilities
to allow an organization to act (or at least to propose a possible set of actions) based on data analyzed in real time and
to create new knowledge by identifying trends or correlations that have not been seen until now
will provide the sustainable value that Procurement is looking for
Our next paper will dive deeper into what these technologies are what they do and the many ways they enable efficiency and effectiveness but for now we will conclude that for a Procure-ment organization to have a sustainable Value Engine function Procurement will have to build and develop the right capabilities (people process and technology)
Supplier quote
TCOTVO (internal) based on various dimensions (risk
CSRhellip)
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
20
copy Copyright POOL4TOOL AG Altmannsdorfer Straszlige 9119
1120 Vienna | Austria Phone +43-1-80 490 80
Editor Bertrand Maltaverne Senior Project Manager
POOL4TOOL AG
Michael Lamoureux Sourcing Innovation
More information officepool4toolcom
wwwpool4toolcom
POOL4TOOL AGAltmannsdorfer Straszlige 9119 A-1120 Vienna Tel+43-1-80 490 80
officepool4toolcomwwwpool4toolcom
Vienna I Stuttgart I Munich I Belgrade I Detroit I Singapore I Dubai
Boost Your Procurement Value Engine I wwwpool4toolcom
3
The Purpose of Your Procurement Function
A modern Procurement function exists to identify and drive organizational value Long gone are the days when Procurementrsquos only role was to process the paperwork that allowed the manufacturing department to buy the parts it needed to make its product or the back office to continue the day-to-day accounting
However as we will discuss in this white paper the identification of organizational value which is the ultimate key to organizational success is not always straight-forward Every organization is different and every Procurement function has a different level of maturity
While every function exists to deliver results not every function takes the time required to understand the why Not only does this give purpose to the function (and a lot has been written on the importance of purpose in management) but it also defines the true role of the function within the organization the what
But now we live in times where the how also matters It is obvious that delivering results (the what) to achieve organizational value is key (the why) But how you achieve these results also matters In Procurement the how depends on the level of organizational maturity and what will have the greatest impact
Value mgmt
Price
Demand management
Supply assurance
Total cost of ownership
Source Hackett Group
Right goods services at the
right time and place
Buyerplanner
Right goods and services at the right right price
Negotiator
Shift from lowest price to TCO
Supply expert team leader project manager
Reduce demand activity com-pexity and variability
Spendbudget consultant and relationship manager
Increase business value derived from spend
Value Proposition Role of Procurement
Trusted business advisor and change agent
The Purpose of Your Procurement Function
Boost Your Procurement Value Engine I wwwpool4toolcom
4
We can measure the maturity of the organization using the hierarchy of supply provided to us by Hackett But while this specifies what the Procurement function can do it doesnrsquot specify what the Procurement function should do
We can therefore define the raison drsquoecirctre of a Procurement function as what the Procurement function should do And what should the Procurement function do Simply put Procurement should reinforce a companyrsquos Unique Selling Points (USPs) or Unique Value Propositions (UVPs) and competitive advantage by managing external spend with the appropriate strategy In this paper we will define a process that can be used to both define and execute the right strategy for each Procurement event
Sustainability
Efficiency
Effectiveness
Efficient(Doing the things right)
Sustainability (Continuously)
Effective (Doing the right things)
The sweet spot
The Procurement Value Engine
To make a comparison with the ma-nufacturing world Procurement is analogous to an engine The purpose of the engine is to produce the fuel that powers the vehicle it is cont-ained within To do so Procurement requires Energy The energy among other things consists of the function itself (the people) and everything the Procurement function needs to work (time information systems etc) The less energy the engine needs the better
But this is not the whole story The engine must run and continue to
perform at an optimum level of pro-ductivity over time and do so in a sustainable manner
A best-in-class Procurement function is thus a function whose Value Engi-ne continuously delivers value (it is sustainable) to other departments stakeholders (it is effective) while requiring minimum energy (it is effi-cient)
The Procurement Value Engine
Boost Your Procurement Value Engine I wwwpool4toolcom
5
Input Output
Ener
gy
Process
Fail slowly Excel
Fail fast Survive
Effectiviness
Effic
ienc
y
Effectiveness and Efficiency
Now that we have defined the Procurement Value Engine it is important to understand what its key performance indicators (KPIs) are Like any engine the two main KPIs are effectiveness and efficiency
Effectiveness is about producing an expected result The gap between the target and the actual result defines the level of performance
Efficiency has nothing to do with the result itself but focuses on what is required in terms of resources to produce it Therefore ldquothe less the betterrdquo is definitely the objective of increa-sing efficiency
The Productivity Plateau
Now that we have identified the two primary KPIs for the Procurement Value Engine we can explore how they relate to each other and what best-in-class or-ganizations should aim for
As illustrated to the left the Holy Grail is to be effective AND efficient
It is no big surprise that the way a com-pany maximizes its return on invest-ment (ROI) for its Procurement function is to increase efficiency and effective-ness However as explained in a recent article on Spend Mattersrsquo website Chief Procurement Officer it is often difficult if not impossible to simultaneously ma-
ximize both Nonetheless as the article points out there is a symbiotic relationship between effectiveness and efficiency and a failure to grasp this could result in an organization pursuing a plateau that it might not be able to reach
The Procurement Value Engine
Effectiveness
Efficiency
Efficiency is doing things right
effectiveness is doing the right things
raquo
raquoPeter Drucker Austrian-born American manage-
ment consultant educator and author He has
been described as ldquothe founder of modern ma-
nagementrdquo
Like Drucker POOL4TOOL was born in Vienna
Austria so we consider him a real inspiration
Boost Your Procurement Value Engine I wwwpool4toolcom
7
With a limited amount of energy (as defined earlier) your organization can only manage a cer-tain amount of input and produce a certain quantity of result This is where the organization reaches a productivity plateau To achieve an increase in results (or output) the only solution is to increase the level of energy which is very often translated as ldquomore peoplerdquo Another article from Spend Matters based on an APQC study on maverick buying illustrates this point
But is this really the only way to break the productivity plateau
There is another way As described in the article cited above you can ldquouse efficiency to fund ef-fectivenessrdquo Becoming more efficient will mean for example that people will do things faster The time freed up by an increase in efficiency can then be used to fuel effectiveness by being able to do and manage more In Procurement a typical example is using the newly available bandwidth to manage more spend and therefore produce new value incrementally But this is not enough to reach and maintain the optimal productivity plateau
Sustainable Productivity
The analogy of an engine again helps us to understand this because an engine needs constant care maintenance and fuel to run It is dynamic For many Procurement functions being self-aware is sometimes very difficult if not impossible because it requires
the right dashboard to measure changes in input output gap vs target
a lot of energy to gather data and perform the relevant analysis
Therefore in addition to effectiveness and efficien-cy the Procurement Value Engine must be sustain-able By sustainable we mean that Procurement should deliver value in the long run not just the short run This means ensuring that the triad of time cost and quality is always at its optimum and balanced
This third dimension of the Procurement Value Engi-ne has two main consequences
An approach and culture of continuous impro-vement (aka DMAIC)
An understanding of future impacts in all decisi-ons and actions (long-termism vs short-termism)
Time
Productivity
2 Cost
6 Talent4 Quality
3 Scope
1 Time
5 Risk
The Procurement Value Engine
Boost Your Procurement Value Engine I wwwpool4toolcom
8
Increasing the Value-for-Money (VfM) of Procurement
A better Procurement Engine is one that delivers more value-for-money (VfM) The Value-for-Money of Procurement can be defined as ldquoa utility derived from every purchase or every sum of money spent Value for money is based not only on the minimum purchase price (economy) but also on the maximum efficiency and effectiveness of the purchaserdquo1
Therefore VfM applied to Procurement is about maximizing value from each dollar invested in the Procurement functionrsquos people process and technology
At a high level the Procurement VfM can be described as
VfM levers = Reduce Input + Increase Output + Reduce Energy
Which leads us to the following breakdown
This means that an increase in effectiveness in any of these categories so long as it is not ac-companied by a decrease in effectiveness in another category will generally increase value for money But this breakdown doesnrsquot answer which increase will bring the greatest benefit or how Procurement can deliver the best value to organizational stakeholders
Definition of Value
Before you can deliver results you need to know what you are expected to deliver Or as the well-known negotiation concept puts it the receiving party defines what value is not the giver This means that value has to be determined by and with the ldquoend-userrdquo of the product or service that Procurement will be sourcing
As the CIPS model for Category Management shows this is a ldquotop-downrdquo approach that starts with a companyrsquos vision mission and values This then cascades to the level of the
Governance amp Category Mgmt SourcingSupply MgmtPurchase-to-Pay
Vfm = x x+ x x xReduce influence demand
Decrease contract
costs
Increase spend under management
Increase compliance
with contracts
Decrease order-to-pay
costs
Reduce usage costs
Reduce risk
Companyacutes Vision Mission amp Values
Procurement Strategy (Value)
Category Strategy
Category Strategy
Category Strategy
Companyacutes Overall Strategy
Finance
Supply Chain
HR
R amp D
Marketing
Technical
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
9
companyrsquos overall cross-functional strategy down to the category level at the end of the funnel
Obviously this is a function-specific exercise the outcome varies from company to company (as noted earlier the raison drsquoecirctre of Procurement is to reinforce a companyrsquos USPs) and as it is often said results may vary based on
Market and sector eg B2B B2C public private
Industry eg service manufacturing
Localization eg legal requirements
Nevertheless some common elements of relevance could be
Cost (performance profitability amp financials) eg price cost Total Cost of Ownership cash management growth
Agility contribute to supply chain rebalancing (buy where you sell) manage market dyna-mics (raw materials currencies etc) anticipate impact of disruptive technologies that may impact make-or-buy decisions andor supply markets contribute to time-to-market improvements etc
Risk reduction brand protection supply chain disruptions CSR etc
Effective Procurement
Effectiveness is where to start as illustrated in the quote above and in a recent Procurement book Procurement Mojo by Sigi Osagie
It is Procurementrsquos job to manage external spending so the key drivers of being effective are related to the Strategic Sourcing Processes A good start to assessing your current effectiveness is to look at AT Kearneyrsquos Strategic Sourcing Gemstone
McKinsey amp Company research has confirmed that procurement pays
Companies with high-performing procurement functions consistently
outperform their rivals on a range of financial indicators and the best
companies are building advanced talent management strategies into
the very heart of their procurement organizations Moreover procure-
ment will play a key role in helping companies cope with the new chal-
lenges and opportunities of our increasingly dynamic global economy
Industry Week ndash Jan 2014
raquo raquo
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
10
Consolidate number
of suppliers
Aggregate vo
lume accross u
nits
Redistribute vo
lume among
suppliers
Establish
develop key su
ppliers
Employ strategic
alliance
partnering
Examine strategic
ldquomake v buyrdquo
Conduct product value analysis
Optimise lifecycle costs
Rationalisestandardise
specifications
Substitute materials
Expand geographic supply base
Develop new suppliers
Exploit global supply demand
imbalances
Compare total costs
Model ldquoshould-costsrdquo
Renegotiate prices
Unbundle pricing
Hold an online auction
Re-engineer joint processes
Support supplier operations improvement
Share productivity gains
Develop integrated supply chain
To increase effectiveness as highlighted in the gemstone above the right measures aim to manage spend better and achieve more results by
Using historical spend to gain knowledge
Employing levers to reduce price or cost or eliminate cost and
Increasing spend under management to unlock new benefits
The following are examples of effectiveness levers based on the value for money formula presented earlier in this document
Demand Influence lifecycle cost analysis versus bonus potential
A full lifecycle cost analysis on similar product lines in a category might reveal that two al-most equal cellphone models have significantly different costs and one of the models should be retired with demand shifted to the other model But until sales understands the costs and how it impacts the bottom line and their bonus potential they might keep selling the higher cost model (instead of the higher profit model)
Spend Under Management (SUM) increase extendible on-line catalog for all types of requisitions
A big reason a lot of spend is not under management at many organizations is because there is no catalog for many one-off one-time or spot-buy purchase needs (such as extra office supplies not on the standard contract temporary services promotional items for events
Exercise Power Create Advantage
Volume
concentration
Product
specification
improvement
Product specification
improvement
Global sourcing
Joint process
improvement
Best-price evaluation
The strategic sourcing gemstone
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
11
travel services etc) and this spend ends up being requisitioned through e-mail requests made then is not entered in the Procurement system until the invoice comes in But if the organization has an extensive catalog where arbitrary items can be created by the or-ganization as needed all requisitions approval and spend gets recorded and gets under management
Contract Cost Decrease e-Signature options
Some organizations pay a lot of money couriering contracts back and forth for signature even when e-Signatures are just as legally binding A platform that is integrated with an e-Signature service can save the organization time and money allowing it to complete the contract cycle more expediently
Contract Compliance Increase alerts when documents are due (coming or past)
Organizations are at great risk when insurance certificates certifications releases or audits are not completed or submitted on time With a platform that tracks when documentary re-quirements are due the organization knows when to remind a supplier or take more severe action (such as halting all orders to the supplier until the issue is corrected) if the documen-tation needed is not received in a timely fashion
Usage Cost Decrease packaging improvements
In some industries such as food and beverage and pharmaceutical the packaging of a den-se liquid especially one with a tendency to stick to certain types of packaging can have a significant impact on the usage cost when there is high waste or expensive processes are needed to clean the containers for recycling Packaging improvements that use new types of non-stick packaging can reduce the overall lifecycle costs even if the packaging is more expensive
Risk Decrease in-transit visibility
A system that allows an organization to track its shipments from the time they leave the supplierrsquos warehouse to the time they hit the organizationrsquos warehouse with updates each time a waypoint is met or a (n intermodal) transfer is made with regular updates helps an organization not only track where itrsquos shipments are but whether or not they are likely to arrive at the expected time
Order-to-Pay Cost Decrease automatic payment on successful m-way match
Automated m-way match between a purchase order invoice and goods receipt not only increases efficiency but also increases effectiveness if the system can also automatically queue invoices that pass the m-way match for payment as this helps both Procurement and Accounts Payable be more effective in payment and cash flow planning
Efficient Procurement
As already mentioned efficiency can be invested into increasing effectiveness for example by enabling Procurement to address areas that have been left untouched or sub-optimized until now because of a lack of capacity In addition efficiency improvements allow Procurement to be more agile and pro-active
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
12
This leads to new capabilities and enhancements in cycle timesAnd allows for the following best practices to be employed which increase efficiency even more
Revisit sourcing lists (preferred suppliers) more than once a year to ensure continuous alignment between sourcing strategy and needs (especially critical for new product developments)
Manage market dynamics better the ability to identify and capture positive market changes (or mitigate impacts of negative ones) by dynamically going back to market
Improved cycle times in spend management processes that enable other support functions or positively impact the product lifecycle
Reduce savings leakage by transforming identified savings into actual savings realized because of improvements in contract management
Another aspect of efficiency lies in the tools used by Procurement to perform its activities Effi-ciency as stated earlier is about how Procurement works and in our technological era it is im-possible not to talk about technology Technology plays a key role in efficiency gains because it is an enabler simplifying a lot of administrative tasks and making process integration possible
Typical efficiency gains that are specific to using Procurement technology include
Automation impacting the level of resources needed and cycle times
Economies of scale from centralizing information and data management
Knowledge Management (KM) based on centralizing and securing information while making it more available across geographies (physical or functional)
Volatile markets opportunity or problem
The answer to this question depends on how you manage these challenges The fact
remains that Procurement must operate in the context of volatile markets
Therefore Procurement has to be equipped to cope with this
Part of this equipment is a mechanism to feed Sourcing events with real-time mar-
ket information This can be used among other things to track raw material prices
from external sources (eg London Metal Exchange) So when you have an RFQ in
addition to the suppliersrsquo conditions you can check the key price drivers against the
current market This is valuable information to ensure you do not ldquoleave moneyrdquo on
the table andor ask the right questions to suppliers to find ways to optimize condi-
tions for both parties
Plus having real-time market information allows you to constantly assess past agree-
ments against current conditions and if necessary go back to market easily
How Procurement responds to market changes is part of the broader idea of Procure-
ment agility that is a key differentiator in our world in constant change
For more see here
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
13
In addition to increasing efficiency in your Procurement organization technology also enables suppliers to be more efficient This means that Procurement can introduce efficiencies into the supply chain that it can benefit from This is also an important aspect of the business case for better supplier onboarding (supplier portals EDI e-Invoicing etc)
But not all technologies are equal when looking at efficiencies Some technologies are more cost effective than others Remember what Rudzki Smock Katzorke and Stewart said in Stra-ight to the Bottom Line An Executive Roadmap to World Class Supply Management
Also cost includes IT costs (infrastructure licenses fees etc) and usability costs In recent years SaaS and cloud solutions have transformed many functions Procurement included because they often maximize time-to-value vs on-premises solutions
In addition to reducing installation and operating costs most SaaS and cloud solutions rely on the philosophy of interoperability
System-to-system (interfaces and communication protocols)
Process-to-process (interdependence and integration)
People-to-people (collaboration)
All of this is in the context of a global economy and global supply chains Concepts like Enter-prise 20 are the new norm
Thanks to SaaS and cloud technologies Procurement can create a workspace containing all the data required for both strategic and tactical activities This workspace is ERP-agnostic mea-ning that it can be connected easily to multiple and various systems (ERPs and beyond PLMs BWs etc) internal and external systems This
centralizes key information in a single location making data collection and analysis easier
fosters collaboration with various partners and stakeholders as required by the various busi-ness processes running in the solution
streamlines data management by having data directly managed by the relevant data owner
simplifies master data management (MDM) by creating one set of master data that then dispatches the information to the operational systems and
Dont jump whole hog into technology Walk and then run if it works Establish meaningful metrics to measure its performance Make sure each piece fits into a long-term puzzle
Robert A Rudkzi Douglas A Smock Michael Katzorke and Shelley Stewart Jr
raquo raquo
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
14
increases agility and resilience by securing data and making it easily transferable (imagine an organizational change that results in changes in responsibilities and the resulting nightmare of transferring the data contained in mailboxes)
On top of that and as highlighted by the concept of interoperability cloud solutions usually live in an app ecosystem The capacity to connect to third party solutions is integrated into the solutionrsquos design and architecture For example this allows Procurement to enrich internal
data coming from internal systems with third party content to get a bigger picture than what was previously available or at least get the information faster by having the right information pushed to the right place and at the right moment
Sustainable Procurement
As noted earlier this obviously comes from having a culture of continuous improvement (DMAIC) However this isnrsquot everything Decisions your Procurement organization make today will impact operations tomorrow Therefore looking at the impacts (or future consequences) of todayrsquos decisions is a critical component of the Procurement Value Engine
This is the capability to influence the future by
Defining it (ldquoIFrdquo) - predictive analytics
Preparing for it (ldquoTHEN THATrdquo) - risk management
All of this is about anticipating and avoiding negative situations andor maximizing the occur-rence of positive ones This is the whole purpose of the broader discipline of risk management
Other Stakholder
Procurement
Masterdata 1
Masterdata 2
Masterdata n
Suppliers
3rd Party Sources Internal Information SystemsAccess Control amp Roles
Business Process 1
Business Process 2
Business Process n
Increasing the Value-for-Money (VfM) of Procurement
We need more standardized readily available third-party information shared amongst networked communities where people can pool data for operational assessment
raquoraquo
Gerard Chick amp Robert Handfield
Boost Your Procurement Value Engine I wwwpool4toolcom
16
As illustrated in the quote on the previous page current technologies are characterized by being able to gather more data thereby enabling deeper and more meaningful analysis But data alone means nothing It is what you do with it that creates value
A typical example in Procurement can be found in sourcing decisions Awarding business to suppliers must take into account the risks that the decision represents For example low-cost country (LCC) sourcing has been high on the agenda of many Procurement organizations for a while Most have now learned their global sourcing lessons and are now looking beyond LCC as simply a ldquocost downrdquo opportunity but also a ldquorisk uprdquo challenge
Increasing the Value-for-Money (VfM) of Procurement
How much do supply chain disruptions cost
Extract from a white paper by Zurich Insurance Group
Extensive research looked at thousands of company results whereby comments in
SEC reports were tied back to the stock performance of these companies The study
shows an average 25 percent reduction in share price and an impact which com-
monly lasts over two years as a result of supply chain disruptions Companies can
be simultaneously impacted by decreased sales and brand damage while incurring
significant extra expenses during recovery times following a business interruption
Historically supply chain disruptions can lead to an average of 9 percent lower sa-
les and 11 percent higher costs and many companies with extended interruptions
never recover
Perf
orm
ance
Preparation
TimeDisruptive event
Time of impact
Recovery
First response 9-30
Shareholder impact
Initital impact
Preparation for recovery
long term impact
Boost Your Procurement Value Engine I wwwpool4toolcom
17Increasing the Value-for-Money (VfM) of Procurement
Because supply chains are more and more global (ie complex) and regulations are constantly evolving the dimensions impacting sourcing decisions are becoming more and more complex Complexity includes process dependencies due to the DMAIC approach
and value analysis
Therefore having the big picture when analyzing bids and deciding an award is critical As exp-lained earlier this is where SaaS solutions and their app ecosystem can make life easier and re-present tremendous value in terms of time saved (data collection analysis) and value creation avoiding future issues is cost-avoidance that has value even if not measured in a PampL impact
The concept of ldquothe right information at the right time and the right placerdquo is illustrated below in the example of analyzing bids from suppliers In addition to the quotes a purchaser has all
Category Strategy
Company Strategy
Strategy per
Supplier
Risk amp Sus-tainabilityAnalysis
Supplier Integration
Supplier Controlling
Supplier De-velopment
Parameters for Sourcing amp
Award Decisions
From the TCO analysishellip hellip to the TVO analysis (Total Value of Ownership)
Supplier Selection
Supplier Selection
Supplier Connection
Supplier Controlling
Market Research
Category Strategy
eSourcing eSourcing
WebEDIEDI
Supplier Perf Rating
Supplier Profile
+ Supplierlsquos Production Costs
+ Supplierrsquos Production Costs
+ Evaluation of Results
+ Price Constraints + Price Constraints
+ Lead Buyer Stra-tegy
+ Supplierlsquos Material Costs
+ Supplierrsquos Material Costs
+ Process Costs given by the Supplier
+ Overhead + Overhead
+ Potential Evaluation
= TCO = TVO
Boost Your Procurement Value Engine I wwwpool4toolcom
18
Procurementrsquos role sitting between the enterprise and
supply markets means it will always be exposed to various factors outside the enterprise probably more so than any other function If itrsquos not commodity prices fluctuating crazily or natural disasters threatening supply continuity it will be something else like unethical practices in the supply pipeline giving the enterprise bad press
The Procurement leader must steer the team through the choppy waters of such challenges
raquoraquo
Sigi Osagie
Boost Your Procurement Value Engine I wwwpool4toolcom
19
TCO TVO information via various scores (bonus penalty) based on the key dimensions of the category
Moreover technology does not just limit itself to the passive role of making information availa-ble Technology can be proactive
The terms Big Data and Internet of Things are frequently used as buzzwords but they also illustrate the increased capabilities that new technologies enable in collecting and presenting data As always the real value is not in the data itself but in the actionable intelligence that you build and the actions decisions you take
Therefore algorithms will make the key difference and give companies a competitive advantage For Procurement this means technologies with capabilities
to allow an organization to act (or at least to propose a possible set of actions) based on data analyzed in real time and
to create new knowledge by identifying trends or correlations that have not been seen until now
will provide the sustainable value that Procurement is looking for
Our next paper will dive deeper into what these technologies are what they do and the many ways they enable efficiency and effectiveness but for now we will conclude that for a Procure-ment organization to have a sustainable Value Engine function Procurement will have to build and develop the right capabilities (people process and technology)
Supplier quote
TCOTVO (internal) based on various dimensions (risk
CSRhellip)
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
20
copy Copyright POOL4TOOL AG Altmannsdorfer Straszlige 9119
1120 Vienna | Austria Phone +43-1-80 490 80
Editor Bertrand Maltaverne Senior Project Manager
POOL4TOOL AG
Michael Lamoureux Sourcing Innovation
More information officepool4toolcom
wwwpool4toolcom
POOL4TOOL AGAltmannsdorfer Straszlige 9119 A-1120 Vienna Tel+43-1-80 490 80
officepool4toolcomwwwpool4toolcom
Vienna I Stuttgart I Munich I Belgrade I Detroit I Singapore I Dubai
Boost Your Procurement Value Engine I wwwpool4toolcom
4
We can measure the maturity of the organization using the hierarchy of supply provided to us by Hackett But while this specifies what the Procurement function can do it doesnrsquot specify what the Procurement function should do
We can therefore define the raison drsquoecirctre of a Procurement function as what the Procurement function should do And what should the Procurement function do Simply put Procurement should reinforce a companyrsquos Unique Selling Points (USPs) or Unique Value Propositions (UVPs) and competitive advantage by managing external spend with the appropriate strategy In this paper we will define a process that can be used to both define and execute the right strategy for each Procurement event
Sustainability
Efficiency
Effectiveness
Efficient(Doing the things right)
Sustainability (Continuously)
Effective (Doing the right things)
The sweet spot
The Procurement Value Engine
To make a comparison with the ma-nufacturing world Procurement is analogous to an engine The purpose of the engine is to produce the fuel that powers the vehicle it is cont-ained within To do so Procurement requires Energy The energy among other things consists of the function itself (the people) and everything the Procurement function needs to work (time information systems etc) The less energy the engine needs the better
But this is not the whole story The engine must run and continue to
perform at an optimum level of pro-ductivity over time and do so in a sustainable manner
A best-in-class Procurement function is thus a function whose Value Engi-ne continuously delivers value (it is sustainable) to other departments stakeholders (it is effective) while requiring minimum energy (it is effi-cient)
The Procurement Value Engine
Boost Your Procurement Value Engine I wwwpool4toolcom
5
Input Output
Ener
gy
Process
Fail slowly Excel
Fail fast Survive
Effectiviness
Effic
ienc
y
Effectiveness and Efficiency
Now that we have defined the Procurement Value Engine it is important to understand what its key performance indicators (KPIs) are Like any engine the two main KPIs are effectiveness and efficiency
Effectiveness is about producing an expected result The gap between the target and the actual result defines the level of performance
Efficiency has nothing to do with the result itself but focuses on what is required in terms of resources to produce it Therefore ldquothe less the betterrdquo is definitely the objective of increa-sing efficiency
The Productivity Plateau
Now that we have identified the two primary KPIs for the Procurement Value Engine we can explore how they relate to each other and what best-in-class or-ganizations should aim for
As illustrated to the left the Holy Grail is to be effective AND efficient
It is no big surprise that the way a com-pany maximizes its return on invest-ment (ROI) for its Procurement function is to increase efficiency and effective-ness However as explained in a recent article on Spend Mattersrsquo website Chief Procurement Officer it is often difficult if not impossible to simultaneously ma-
ximize both Nonetheless as the article points out there is a symbiotic relationship between effectiveness and efficiency and a failure to grasp this could result in an organization pursuing a plateau that it might not be able to reach
The Procurement Value Engine
Effectiveness
Efficiency
Efficiency is doing things right
effectiveness is doing the right things
raquo
raquoPeter Drucker Austrian-born American manage-
ment consultant educator and author He has
been described as ldquothe founder of modern ma-
nagementrdquo
Like Drucker POOL4TOOL was born in Vienna
Austria so we consider him a real inspiration
Boost Your Procurement Value Engine I wwwpool4toolcom
7
With a limited amount of energy (as defined earlier) your organization can only manage a cer-tain amount of input and produce a certain quantity of result This is where the organization reaches a productivity plateau To achieve an increase in results (or output) the only solution is to increase the level of energy which is very often translated as ldquomore peoplerdquo Another article from Spend Matters based on an APQC study on maverick buying illustrates this point
But is this really the only way to break the productivity plateau
There is another way As described in the article cited above you can ldquouse efficiency to fund ef-fectivenessrdquo Becoming more efficient will mean for example that people will do things faster The time freed up by an increase in efficiency can then be used to fuel effectiveness by being able to do and manage more In Procurement a typical example is using the newly available bandwidth to manage more spend and therefore produce new value incrementally But this is not enough to reach and maintain the optimal productivity plateau
Sustainable Productivity
The analogy of an engine again helps us to understand this because an engine needs constant care maintenance and fuel to run It is dynamic For many Procurement functions being self-aware is sometimes very difficult if not impossible because it requires
the right dashboard to measure changes in input output gap vs target
a lot of energy to gather data and perform the relevant analysis
Therefore in addition to effectiveness and efficien-cy the Procurement Value Engine must be sustain-able By sustainable we mean that Procurement should deliver value in the long run not just the short run This means ensuring that the triad of time cost and quality is always at its optimum and balanced
This third dimension of the Procurement Value Engi-ne has two main consequences
An approach and culture of continuous impro-vement (aka DMAIC)
An understanding of future impacts in all decisi-ons and actions (long-termism vs short-termism)
Time
Productivity
2 Cost
6 Talent4 Quality
3 Scope
1 Time
5 Risk
The Procurement Value Engine
Boost Your Procurement Value Engine I wwwpool4toolcom
8
Increasing the Value-for-Money (VfM) of Procurement
A better Procurement Engine is one that delivers more value-for-money (VfM) The Value-for-Money of Procurement can be defined as ldquoa utility derived from every purchase or every sum of money spent Value for money is based not only on the minimum purchase price (economy) but also on the maximum efficiency and effectiveness of the purchaserdquo1
Therefore VfM applied to Procurement is about maximizing value from each dollar invested in the Procurement functionrsquos people process and technology
At a high level the Procurement VfM can be described as
VfM levers = Reduce Input + Increase Output + Reduce Energy
Which leads us to the following breakdown
This means that an increase in effectiveness in any of these categories so long as it is not ac-companied by a decrease in effectiveness in another category will generally increase value for money But this breakdown doesnrsquot answer which increase will bring the greatest benefit or how Procurement can deliver the best value to organizational stakeholders
Definition of Value
Before you can deliver results you need to know what you are expected to deliver Or as the well-known negotiation concept puts it the receiving party defines what value is not the giver This means that value has to be determined by and with the ldquoend-userrdquo of the product or service that Procurement will be sourcing
As the CIPS model for Category Management shows this is a ldquotop-downrdquo approach that starts with a companyrsquos vision mission and values This then cascades to the level of the
Governance amp Category Mgmt SourcingSupply MgmtPurchase-to-Pay
Vfm = x x+ x x xReduce influence demand
Decrease contract
costs
Increase spend under management
Increase compliance
with contracts
Decrease order-to-pay
costs
Reduce usage costs
Reduce risk
Companyacutes Vision Mission amp Values
Procurement Strategy (Value)
Category Strategy
Category Strategy
Category Strategy
Companyacutes Overall Strategy
Finance
Supply Chain
HR
R amp D
Marketing
Technical
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
9
companyrsquos overall cross-functional strategy down to the category level at the end of the funnel
Obviously this is a function-specific exercise the outcome varies from company to company (as noted earlier the raison drsquoecirctre of Procurement is to reinforce a companyrsquos USPs) and as it is often said results may vary based on
Market and sector eg B2B B2C public private
Industry eg service manufacturing
Localization eg legal requirements
Nevertheless some common elements of relevance could be
Cost (performance profitability amp financials) eg price cost Total Cost of Ownership cash management growth
Agility contribute to supply chain rebalancing (buy where you sell) manage market dyna-mics (raw materials currencies etc) anticipate impact of disruptive technologies that may impact make-or-buy decisions andor supply markets contribute to time-to-market improvements etc
Risk reduction brand protection supply chain disruptions CSR etc
Effective Procurement
Effectiveness is where to start as illustrated in the quote above and in a recent Procurement book Procurement Mojo by Sigi Osagie
It is Procurementrsquos job to manage external spending so the key drivers of being effective are related to the Strategic Sourcing Processes A good start to assessing your current effectiveness is to look at AT Kearneyrsquos Strategic Sourcing Gemstone
McKinsey amp Company research has confirmed that procurement pays
Companies with high-performing procurement functions consistently
outperform their rivals on a range of financial indicators and the best
companies are building advanced talent management strategies into
the very heart of their procurement organizations Moreover procure-
ment will play a key role in helping companies cope with the new chal-
lenges and opportunities of our increasingly dynamic global economy
Industry Week ndash Jan 2014
raquo raquo
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
10
Consolidate number
of suppliers
Aggregate vo
lume accross u
nits
Redistribute vo
lume among
suppliers
Establish
develop key su
ppliers
Employ strategic
alliance
partnering
Examine strategic
ldquomake v buyrdquo
Conduct product value analysis
Optimise lifecycle costs
Rationalisestandardise
specifications
Substitute materials
Expand geographic supply base
Develop new suppliers
Exploit global supply demand
imbalances
Compare total costs
Model ldquoshould-costsrdquo
Renegotiate prices
Unbundle pricing
Hold an online auction
Re-engineer joint processes
Support supplier operations improvement
Share productivity gains
Develop integrated supply chain
To increase effectiveness as highlighted in the gemstone above the right measures aim to manage spend better and achieve more results by
Using historical spend to gain knowledge
Employing levers to reduce price or cost or eliminate cost and
Increasing spend under management to unlock new benefits
The following are examples of effectiveness levers based on the value for money formula presented earlier in this document
Demand Influence lifecycle cost analysis versus bonus potential
A full lifecycle cost analysis on similar product lines in a category might reveal that two al-most equal cellphone models have significantly different costs and one of the models should be retired with demand shifted to the other model But until sales understands the costs and how it impacts the bottom line and their bonus potential they might keep selling the higher cost model (instead of the higher profit model)
Spend Under Management (SUM) increase extendible on-line catalog for all types of requisitions
A big reason a lot of spend is not under management at many organizations is because there is no catalog for many one-off one-time or spot-buy purchase needs (such as extra office supplies not on the standard contract temporary services promotional items for events
Exercise Power Create Advantage
Volume
concentration
Product
specification
improvement
Product specification
improvement
Global sourcing
Joint process
improvement
Best-price evaluation
The strategic sourcing gemstone
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
11
travel services etc) and this spend ends up being requisitioned through e-mail requests made then is not entered in the Procurement system until the invoice comes in But if the organization has an extensive catalog where arbitrary items can be created by the or-ganization as needed all requisitions approval and spend gets recorded and gets under management
Contract Cost Decrease e-Signature options
Some organizations pay a lot of money couriering contracts back and forth for signature even when e-Signatures are just as legally binding A platform that is integrated with an e-Signature service can save the organization time and money allowing it to complete the contract cycle more expediently
Contract Compliance Increase alerts when documents are due (coming or past)
Organizations are at great risk when insurance certificates certifications releases or audits are not completed or submitted on time With a platform that tracks when documentary re-quirements are due the organization knows when to remind a supplier or take more severe action (such as halting all orders to the supplier until the issue is corrected) if the documen-tation needed is not received in a timely fashion
Usage Cost Decrease packaging improvements
In some industries such as food and beverage and pharmaceutical the packaging of a den-se liquid especially one with a tendency to stick to certain types of packaging can have a significant impact on the usage cost when there is high waste or expensive processes are needed to clean the containers for recycling Packaging improvements that use new types of non-stick packaging can reduce the overall lifecycle costs even if the packaging is more expensive
Risk Decrease in-transit visibility
A system that allows an organization to track its shipments from the time they leave the supplierrsquos warehouse to the time they hit the organizationrsquos warehouse with updates each time a waypoint is met or a (n intermodal) transfer is made with regular updates helps an organization not only track where itrsquos shipments are but whether or not they are likely to arrive at the expected time
Order-to-Pay Cost Decrease automatic payment on successful m-way match
Automated m-way match between a purchase order invoice and goods receipt not only increases efficiency but also increases effectiveness if the system can also automatically queue invoices that pass the m-way match for payment as this helps both Procurement and Accounts Payable be more effective in payment and cash flow planning
Efficient Procurement
As already mentioned efficiency can be invested into increasing effectiveness for example by enabling Procurement to address areas that have been left untouched or sub-optimized until now because of a lack of capacity In addition efficiency improvements allow Procurement to be more agile and pro-active
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
12
This leads to new capabilities and enhancements in cycle timesAnd allows for the following best practices to be employed which increase efficiency even more
Revisit sourcing lists (preferred suppliers) more than once a year to ensure continuous alignment between sourcing strategy and needs (especially critical for new product developments)
Manage market dynamics better the ability to identify and capture positive market changes (or mitigate impacts of negative ones) by dynamically going back to market
Improved cycle times in spend management processes that enable other support functions or positively impact the product lifecycle
Reduce savings leakage by transforming identified savings into actual savings realized because of improvements in contract management
Another aspect of efficiency lies in the tools used by Procurement to perform its activities Effi-ciency as stated earlier is about how Procurement works and in our technological era it is im-possible not to talk about technology Technology plays a key role in efficiency gains because it is an enabler simplifying a lot of administrative tasks and making process integration possible
Typical efficiency gains that are specific to using Procurement technology include
Automation impacting the level of resources needed and cycle times
Economies of scale from centralizing information and data management
Knowledge Management (KM) based on centralizing and securing information while making it more available across geographies (physical or functional)
Volatile markets opportunity or problem
The answer to this question depends on how you manage these challenges The fact
remains that Procurement must operate in the context of volatile markets
Therefore Procurement has to be equipped to cope with this
Part of this equipment is a mechanism to feed Sourcing events with real-time mar-
ket information This can be used among other things to track raw material prices
from external sources (eg London Metal Exchange) So when you have an RFQ in
addition to the suppliersrsquo conditions you can check the key price drivers against the
current market This is valuable information to ensure you do not ldquoleave moneyrdquo on
the table andor ask the right questions to suppliers to find ways to optimize condi-
tions for both parties
Plus having real-time market information allows you to constantly assess past agree-
ments against current conditions and if necessary go back to market easily
How Procurement responds to market changes is part of the broader idea of Procure-
ment agility that is a key differentiator in our world in constant change
For more see here
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
13
In addition to increasing efficiency in your Procurement organization technology also enables suppliers to be more efficient This means that Procurement can introduce efficiencies into the supply chain that it can benefit from This is also an important aspect of the business case for better supplier onboarding (supplier portals EDI e-Invoicing etc)
But not all technologies are equal when looking at efficiencies Some technologies are more cost effective than others Remember what Rudzki Smock Katzorke and Stewart said in Stra-ight to the Bottom Line An Executive Roadmap to World Class Supply Management
Also cost includes IT costs (infrastructure licenses fees etc) and usability costs In recent years SaaS and cloud solutions have transformed many functions Procurement included because they often maximize time-to-value vs on-premises solutions
In addition to reducing installation and operating costs most SaaS and cloud solutions rely on the philosophy of interoperability
System-to-system (interfaces and communication protocols)
Process-to-process (interdependence and integration)
People-to-people (collaboration)
All of this is in the context of a global economy and global supply chains Concepts like Enter-prise 20 are the new norm
Thanks to SaaS and cloud technologies Procurement can create a workspace containing all the data required for both strategic and tactical activities This workspace is ERP-agnostic mea-ning that it can be connected easily to multiple and various systems (ERPs and beyond PLMs BWs etc) internal and external systems This
centralizes key information in a single location making data collection and analysis easier
fosters collaboration with various partners and stakeholders as required by the various busi-ness processes running in the solution
streamlines data management by having data directly managed by the relevant data owner
simplifies master data management (MDM) by creating one set of master data that then dispatches the information to the operational systems and
Dont jump whole hog into technology Walk and then run if it works Establish meaningful metrics to measure its performance Make sure each piece fits into a long-term puzzle
Robert A Rudkzi Douglas A Smock Michael Katzorke and Shelley Stewart Jr
raquo raquo
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
14
increases agility and resilience by securing data and making it easily transferable (imagine an organizational change that results in changes in responsibilities and the resulting nightmare of transferring the data contained in mailboxes)
On top of that and as highlighted by the concept of interoperability cloud solutions usually live in an app ecosystem The capacity to connect to third party solutions is integrated into the solutionrsquos design and architecture For example this allows Procurement to enrich internal
data coming from internal systems with third party content to get a bigger picture than what was previously available or at least get the information faster by having the right information pushed to the right place and at the right moment
Sustainable Procurement
As noted earlier this obviously comes from having a culture of continuous improvement (DMAIC) However this isnrsquot everything Decisions your Procurement organization make today will impact operations tomorrow Therefore looking at the impacts (or future consequences) of todayrsquos decisions is a critical component of the Procurement Value Engine
This is the capability to influence the future by
Defining it (ldquoIFrdquo) - predictive analytics
Preparing for it (ldquoTHEN THATrdquo) - risk management
All of this is about anticipating and avoiding negative situations andor maximizing the occur-rence of positive ones This is the whole purpose of the broader discipline of risk management
Other Stakholder
Procurement
Masterdata 1
Masterdata 2
Masterdata n
Suppliers
3rd Party Sources Internal Information SystemsAccess Control amp Roles
Business Process 1
Business Process 2
Business Process n
Increasing the Value-for-Money (VfM) of Procurement
We need more standardized readily available third-party information shared amongst networked communities where people can pool data for operational assessment
raquoraquo
Gerard Chick amp Robert Handfield
Boost Your Procurement Value Engine I wwwpool4toolcom
16
As illustrated in the quote on the previous page current technologies are characterized by being able to gather more data thereby enabling deeper and more meaningful analysis But data alone means nothing It is what you do with it that creates value
A typical example in Procurement can be found in sourcing decisions Awarding business to suppliers must take into account the risks that the decision represents For example low-cost country (LCC) sourcing has been high on the agenda of many Procurement organizations for a while Most have now learned their global sourcing lessons and are now looking beyond LCC as simply a ldquocost downrdquo opportunity but also a ldquorisk uprdquo challenge
Increasing the Value-for-Money (VfM) of Procurement
How much do supply chain disruptions cost
Extract from a white paper by Zurich Insurance Group
Extensive research looked at thousands of company results whereby comments in
SEC reports were tied back to the stock performance of these companies The study
shows an average 25 percent reduction in share price and an impact which com-
monly lasts over two years as a result of supply chain disruptions Companies can
be simultaneously impacted by decreased sales and brand damage while incurring
significant extra expenses during recovery times following a business interruption
Historically supply chain disruptions can lead to an average of 9 percent lower sa-
les and 11 percent higher costs and many companies with extended interruptions
never recover
Perf
orm
ance
Preparation
TimeDisruptive event
Time of impact
Recovery
First response 9-30
Shareholder impact
Initital impact
Preparation for recovery
long term impact
Boost Your Procurement Value Engine I wwwpool4toolcom
17Increasing the Value-for-Money (VfM) of Procurement
Because supply chains are more and more global (ie complex) and regulations are constantly evolving the dimensions impacting sourcing decisions are becoming more and more complex Complexity includes process dependencies due to the DMAIC approach
and value analysis
Therefore having the big picture when analyzing bids and deciding an award is critical As exp-lained earlier this is where SaaS solutions and their app ecosystem can make life easier and re-present tremendous value in terms of time saved (data collection analysis) and value creation avoiding future issues is cost-avoidance that has value even if not measured in a PampL impact
The concept of ldquothe right information at the right time and the right placerdquo is illustrated below in the example of analyzing bids from suppliers In addition to the quotes a purchaser has all
Category Strategy
Company Strategy
Strategy per
Supplier
Risk amp Sus-tainabilityAnalysis
Supplier Integration
Supplier Controlling
Supplier De-velopment
Parameters for Sourcing amp
Award Decisions
From the TCO analysishellip hellip to the TVO analysis (Total Value of Ownership)
Supplier Selection
Supplier Selection
Supplier Connection
Supplier Controlling
Market Research
Category Strategy
eSourcing eSourcing
WebEDIEDI
Supplier Perf Rating
Supplier Profile
+ Supplierlsquos Production Costs
+ Supplierrsquos Production Costs
+ Evaluation of Results
+ Price Constraints + Price Constraints
+ Lead Buyer Stra-tegy
+ Supplierlsquos Material Costs
+ Supplierrsquos Material Costs
+ Process Costs given by the Supplier
+ Overhead + Overhead
+ Potential Evaluation
= TCO = TVO
Boost Your Procurement Value Engine I wwwpool4toolcom
18
Procurementrsquos role sitting between the enterprise and
supply markets means it will always be exposed to various factors outside the enterprise probably more so than any other function If itrsquos not commodity prices fluctuating crazily or natural disasters threatening supply continuity it will be something else like unethical practices in the supply pipeline giving the enterprise bad press
The Procurement leader must steer the team through the choppy waters of such challenges
raquoraquo
Sigi Osagie
Boost Your Procurement Value Engine I wwwpool4toolcom
19
TCO TVO information via various scores (bonus penalty) based on the key dimensions of the category
Moreover technology does not just limit itself to the passive role of making information availa-ble Technology can be proactive
The terms Big Data and Internet of Things are frequently used as buzzwords but they also illustrate the increased capabilities that new technologies enable in collecting and presenting data As always the real value is not in the data itself but in the actionable intelligence that you build and the actions decisions you take
Therefore algorithms will make the key difference and give companies a competitive advantage For Procurement this means technologies with capabilities
to allow an organization to act (or at least to propose a possible set of actions) based on data analyzed in real time and
to create new knowledge by identifying trends or correlations that have not been seen until now
will provide the sustainable value that Procurement is looking for
Our next paper will dive deeper into what these technologies are what they do and the many ways they enable efficiency and effectiveness but for now we will conclude that for a Procure-ment organization to have a sustainable Value Engine function Procurement will have to build and develop the right capabilities (people process and technology)
Supplier quote
TCOTVO (internal) based on various dimensions (risk
CSRhellip)
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
20
copy Copyright POOL4TOOL AG Altmannsdorfer Straszlige 9119
1120 Vienna | Austria Phone +43-1-80 490 80
Editor Bertrand Maltaverne Senior Project Manager
POOL4TOOL AG
Michael Lamoureux Sourcing Innovation
More information officepool4toolcom
wwwpool4toolcom
POOL4TOOL AGAltmannsdorfer Straszlige 9119 A-1120 Vienna Tel+43-1-80 490 80
officepool4toolcomwwwpool4toolcom
Vienna I Stuttgart I Munich I Belgrade I Detroit I Singapore I Dubai
Boost Your Procurement Value Engine I wwwpool4toolcom
5
Input Output
Ener
gy
Process
Fail slowly Excel
Fail fast Survive
Effectiviness
Effic
ienc
y
Effectiveness and Efficiency
Now that we have defined the Procurement Value Engine it is important to understand what its key performance indicators (KPIs) are Like any engine the two main KPIs are effectiveness and efficiency
Effectiveness is about producing an expected result The gap between the target and the actual result defines the level of performance
Efficiency has nothing to do with the result itself but focuses on what is required in terms of resources to produce it Therefore ldquothe less the betterrdquo is definitely the objective of increa-sing efficiency
The Productivity Plateau
Now that we have identified the two primary KPIs for the Procurement Value Engine we can explore how they relate to each other and what best-in-class or-ganizations should aim for
As illustrated to the left the Holy Grail is to be effective AND efficient
It is no big surprise that the way a com-pany maximizes its return on invest-ment (ROI) for its Procurement function is to increase efficiency and effective-ness However as explained in a recent article on Spend Mattersrsquo website Chief Procurement Officer it is often difficult if not impossible to simultaneously ma-
ximize both Nonetheless as the article points out there is a symbiotic relationship between effectiveness and efficiency and a failure to grasp this could result in an organization pursuing a plateau that it might not be able to reach
The Procurement Value Engine
Effectiveness
Efficiency
Efficiency is doing things right
effectiveness is doing the right things
raquo
raquoPeter Drucker Austrian-born American manage-
ment consultant educator and author He has
been described as ldquothe founder of modern ma-
nagementrdquo
Like Drucker POOL4TOOL was born in Vienna
Austria so we consider him a real inspiration
Boost Your Procurement Value Engine I wwwpool4toolcom
7
With a limited amount of energy (as defined earlier) your organization can only manage a cer-tain amount of input and produce a certain quantity of result This is where the organization reaches a productivity plateau To achieve an increase in results (or output) the only solution is to increase the level of energy which is very often translated as ldquomore peoplerdquo Another article from Spend Matters based on an APQC study on maverick buying illustrates this point
But is this really the only way to break the productivity plateau
There is another way As described in the article cited above you can ldquouse efficiency to fund ef-fectivenessrdquo Becoming more efficient will mean for example that people will do things faster The time freed up by an increase in efficiency can then be used to fuel effectiveness by being able to do and manage more In Procurement a typical example is using the newly available bandwidth to manage more spend and therefore produce new value incrementally But this is not enough to reach and maintain the optimal productivity plateau
Sustainable Productivity
The analogy of an engine again helps us to understand this because an engine needs constant care maintenance and fuel to run It is dynamic For many Procurement functions being self-aware is sometimes very difficult if not impossible because it requires
the right dashboard to measure changes in input output gap vs target
a lot of energy to gather data and perform the relevant analysis
Therefore in addition to effectiveness and efficien-cy the Procurement Value Engine must be sustain-able By sustainable we mean that Procurement should deliver value in the long run not just the short run This means ensuring that the triad of time cost and quality is always at its optimum and balanced
This third dimension of the Procurement Value Engi-ne has two main consequences
An approach and culture of continuous impro-vement (aka DMAIC)
An understanding of future impacts in all decisi-ons and actions (long-termism vs short-termism)
Time
Productivity
2 Cost
6 Talent4 Quality
3 Scope
1 Time
5 Risk
The Procurement Value Engine
Boost Your Procurement Value Engine I wwwpool4toolcom
8
Increasing the Value-for-Money (VfM) of Procurement
A better Procurement Engine is one that delivers more value-for-money (VfM) The Value-for-Money of Procurement can be defined as ldquoa utility derived from every purchase or every sum of money spent Value for money is based not only on the minimum purchase price (economy) but also on the maximum efficiency and effectiveness of the purchaserdquo1
Therefore VfM applied to Procurement is about maximizing value from each dollar invested in the Procurement functionrsquos people process and technology
At a high level the Procurement VfM can be described as
VfM levers = Reduce Input + Increase Output + Reduce Energy
Which leads us to the following breakdown
This means that an increase in effectiveness in any of these categories so long as it is not ac-companied by a decrease in effectiveness in another category will generally increase value for money But this breakdown doesnrsquot answer which increase will bring the greatest benefit or how Procurement can deliver the best value to organizational stakeholders
Definition of Value
Before you can deliver results you need to know what you are expected to deliver Or as the well-known negotiation concept puts it the receiving party defines what value is not the giver This means that value has to be determined by and with the ldquoend-userrdquo of the product or service that Procurement will be sourcing
As the CIPS model for Category Management shows this is a ldquotop-downrdquo approach that starts with a companyrsquos vision mission and values This then cascades to the level of the
Governance amp Category Mgmt SourcingSupply MgmtPurchase-to-Pay
Vfm = x x+ x x xReduce influence demand
Decrease contract
costs
Increase spend under management
Increase compliance
with contracts
Decrease order-to-pay
costs
Reduce usage costs
Reduce risk
Companyacutes Vision Mission amp Values
Procurement Strategy (Value)
Category Strategy
Category Strategy
Category Strategy
Companyacutes Overall Strategy
Finance
Supply Chain
HR
R amp D
Marketing
Technical
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
9
companyrsquos overall cross-functional strategy down to the category level at the end of the funnel
Obviously this is a function-specific exercise the outcome varies from company to company (as noted earlier the raison drsquoecirctre of Procurement is to reinforce a companyrsquos USPs) and as it is often said results may vary based on
Market and sector eg B2B B2C public private
Industry eg service manufacturing
Localization eg legal requirements
Nevertheless some common elements of relevance could be
Cost (performance profitability amp financials) eg price cost Total Cost of Ownership cash management growth
Agility contribute to supply chain rebalancing (buy where you sell) manage market dyna-mics (raw materials currencies etc) anticipate impact of disruptive technologies that may impact make-or-buy decisions andor supply markets contribute to time-to-market improvements etc
Risk reduction brand protection supply chain disruptions CSR etc
Effective Procurement
Effectiveness is where to start as illustrated in the quote above and in a recent Procurement book Procurement Mojo by Sigi Osagie
It is Procurementrsquos job to manage external spending so the key drivers of being effective are related to the Strategic Sourcing Processes A good start to assessing your current effectiveness is to look at AT Kearneyrsquos Strategic Sourcing Gemstone
McKinsey amp Company research has confirmed that procurement pays
Companies with high-performing procurement functions consistently
outperform their rivals on a range of financial indicators and the best
companies are building advanced talent management strategies into
the very heart of their procurement organizations Moreover procure-
ment will play a key role in helping companies cope with the new chal-
lenges and opportunities of our increasingly dynamic global economy
Industry Week ndash Jan 2014
raquo raquo
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
10
Consolidate number
of suppliers
Aggregate vo
lume accross u
nits
Redistribute vo
lume among
suppliers
Establish
develop key su
ppliers
Employ strategic
alliance
partnering
Examine strategic
ldquomake v buyrdquo
Conduct product value analysis
Optimise lifecycle costs
Rationalisestandardise
specifications
Substitute materials
Expand geographic supply base
Develop new suppliers
Exploit global supply demand
imbalances
Compare total costs
Model ldquoshould-costsrdquo
Renegotiate prices
Unbundle pricing
Hold an online auction
Re-engineer joint processes
Support supplier operations improvement
Share productivity gains
Develop integrated supply chain
To increase effectiveness as highlighted in the gemstone above the right measures aim to manage spend better and achieve more results by
Using historical spend to gain knowledge
Employing levers to reduce price or cost or eliminate cost and
Increasing spend under management to unlock new benefits
The following are examples of effectiveness levers based on the value for money formula presented earlier in this document
Demand Influence lifecycle cost analysis versus bonus potential
A full lifecycle cost analysis on similar product lines in a category might reveal that two al-most equal cellphone models have significantly different costs and one of the models should be retired with demand shifted to the other model But until sales understands the costs and how it impacts the bottom line and their bonus potential they might keep selling the higher cost model (instead of the higher profit model)
Spend Under Management (SUM) increase extendible on-line catalog for all types of requisitions
A big reason a lot of spend is not under management at many organizations is because there is no catalog for many one-off one-time or spot-buy purchase needs (such as extra office supplies not on the standard contract temporary services promotional items for events
Exercise Power Create Advantage
Volume
concentration
Product
specification
improvement
Product specification
improvement
Global sourcing
Joint process
improvement
Best-price evaluation
The strategic sourcing gemstone
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
11
travel services etc) and this spend ends up being requisitioned through e-mail requests made then is not entered in the Procurement system until the invoice comes in But if the organization has an extensive catalog where arbitrary items can be created by the or-ganization as needed all requisitions approval and spend gets recorded and gets under management
Contract Cost Decrease e-Signature options
Some organizations pay a lot of money couriering contracts back and forth for signature even when e-Signatures are just as legally binding A platform that is integrated with an e-Signature service can save the organization time and money allowing it to complete the contract cycle more expediently
Contract Compliance Increase alerts when documents are due (coming or past)
Organizations are at great risk when insurance certificates certifications releases or audits are not completed or submitted on time With a platform that tracks when documentary re-quirements are due the organization knows when to remind a supplier or take more severe action (such as halting all orders to the supplier until the issue is corrected) if the documen-tation needed is not received in a timely fashion
Usage Cost Decrease packaging improvements
In some industries such as food and beverage and pharmaceutical the packaging of a den-se liquid especially one with a tendency to stick to certain types of packaging can have a significant impact on the usage cost when there is high waste or expensive processes are needed to clean the containers for recycling Packaging improvements that use new types of non-stick packaging can reduce the overall lifecycle costs even if the packaging is more expensive
Risk Decrease in-transit visibility
A system that allows an organization to track its shipments from the time they leave the supplierrsquos warehouse to the time they hit the organizationrsquos warehouse with updates each time a waypoint is met or a (n intermodal) transfer is made with regular updates helps an organization not only track where itrsquos shipments are but whether or not they are likely to arrive at the expected time
Order-to-Pay Cost Decrease automatic payment on successful m-way match
Automated m-way match between a purchase order invoice and goods receipt not only increases efficiency but also increases effectiveness if the system can also automatically queue invoices that pass the m-way match for payment as this helps both Procurement and Accounts Payable be more effective in payment and cash flow planning
Efficient Procurement
As already mentioned efficiency can be invested into increasing effectiveness for example by enabling Procurement to address areas that have been left untouched or sub-optimized until now because of a lack of capacity In addition efficiency improvements allow Procurement to be more agile and pro-active
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
12
This leads to new capabilities and enhancements in cycle timesAnd allows for the following best practices to be employed which increase efficiency even more
Revisit sourcing lists (preferred suppliers) more than once a year to ensure continuous alignment between sourcing strategy and needs (especially critical for new product developments)
Manage market dynamics better the ability to identify and capture positive market changes (or mitigate impacts of negative ones) by dynamically going back to market
Improved cycle times in spend management processes that enable other support functions or positively impact the product lifecycle
Reduce savings leakage by transforming identified savings into actual savings realized because of improvements in contract management
Another aspect of efficiency lies in the tools used by Procurement to perform its activities Effi-ciency as stated earlier is about how Procurement works and in our technological era it is im-possible not to talk about technology Technology plays a key role in efficiency gains because it is an enabler simplifying a lot of administrative tasks and making process integration possible
Typical efficiency gains that are specific to using Procurement technology include
Automation impacting the level of resources needed and cycle times
Economies of scale from centralizing information and data management
Knowledge Management (KM) based on centralizing and securing information while making it more available across geographies (physical or functional)
Volatile markets opportunity or problem
The answer to this question depends on how you manage these challenges The fact
remains that Procurement must operate in the context of volatile markets
Therefore Procurement has to be equipped to cope with this
Part of this equipment is a mechanism to feed Sourcing events with real-time mar-
ket information This can be used among other things to track raw material prices
from external sources (eg London Metal Exchange) So when you have an RFQ in
addition to the suppliersrsquo conditions you can check the key price drivers against the
current market This is valuable information to ensure you do not ldquoleave moneyrdquo on
the table andor ask the right questions to suppliers to find ways to optimize condi-
tions for both parties
Plus having real-time market information allows you to constantly assess past agree-
ments against current conditions and if necessary go back to market easily
How Procurement responds to market changes is part of the broader idea of Procure-
ment agility that is a key differentiator in our world in constant change
For more see here
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
13
In addition to increasing efficiency in your Procurement organization technology also enables suppliers to be more efficient This means that Procurement can introduce efficiencies into the supply chain that it can benefit from This is also an important aspect of the business case for better supplier onboarding (supplier portals EDI e-Invoicing etc)
But not all technologies are equal when looking at efficiencies Some technologies are more cost effective than others Remember what Rudzki Smock Katzorke and Stewart said in Stra-ight to the Bottom Line An Executive Roadmap to World Class Supply Management
Also cost includes IT costs (infrastructure licenses fees etc) and usability costs In recent years SaaS and cloud solutions have transformed many functions Procurement included because they often maximize time-to-value vs on-premises solutions
In addition to reducing installation and operating costs most SaaS and cloud solutions rely on the philosophy of interoperability
System-to-system (interfaces and communication protocols)
Process-to-process (interdependence and integration)
People-to-people (collaboration)
All of this is in the context of a global economy and global supply chains Concepts like Enter-prise 20 are the new norm
Thanks to SaaS and cloud technologies Procurement can create a workspace containing all the data required for both strategic and tactical activities This workspace is ERP-agnostic mea-ning that it can be connected easily to multiple and various systems (ERPs and beyond PLMs BWs etc) internal and external systems This
centralizes key information in a single location making data collection and analysis easier
fosters collaboration with various partners and stakeholders as required by the various busi-ness processes running in the solution
streamlines data management by having data directly managed by the relevant data owner
simplifies master data management (MDM) by creating one set of master data that then dispatches the information to the operational systems and
Dont jump whole hog into technology Walk and then run if it works Establish meaningful metrics to measure its performance Make sure each piece fits into a long-term puzzle
Robert A Rudkzi Douglas A Smock Michael Katzorke and Shelley Stewart Jr
raquo raquo
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
14
increases agility and resilience by securing data and making it easily transferable (imagine an organizational change that results in changes in responsibilities and the resulting nightmare of transferring the data contained in mailboxes)
On top of that and as highlighted by the concept of interoperability cloud solutions usually live in an app ecosystem The capacity to connect to third party solutions is integrated into the solutionrsquos design and architecture For example this allows Procurement to enrich internal
data coming from internal systems with third party content to get a bigger picture than what was previously available or at least get the information faster by having the right information pushed to the right place and at the right moment
Sustainable Procurement
As noted earlier this obviously comes from having a culture of continuous improvement (DMAIC) However this isnrsquot everything Decisions your Procurement organization make today will impact operations tomorrow Therefore looking at the impacts (or future consequences) of todayrsquos decisions is a critical component of the Procurement Value Engine
This is the capability to influence the future by
Defining it (ldquoIFrdquo) - predictive analytics
Preparing for it (ldquoTHEN THATrdquo) - risk management
All of this is about anticipating and avoiding negative situations andor maximizing the occur-rence of positive ones This is the whole purpose of the broader discipline of risk management
Other Stakholder
Procurement
Masterdata 1
Masterdata 2
Masterdata n
Suppliers
3rd Party Sources Internal Information SystemsAccess Control amp Roles
Business Process 1
Business Process 2
Business Process n
Increasing the Value-for-Money (VfM) of Procurement
We need more standardized readily available third-party information shared amongst networked communities where people can pool data for operational assessment
raquoraquo
Gerard Chick amp Robert Handfield
Boost Your Procurement Value Engine I wwwpool4toolcom
16
As illustrated in the quote on the previous page current technologies are characterized by being able to gather more data thereby enabling deeper and more meaningful analysis But data alone means nothing It is what you do with it that creates value
A typical example in Procurement can be found in sourcing decisions Awarding business to suppliers must take into account the risks that the decision represents For example low-cost country (LCC) sourcing has been high on the agenda of many Procurement organizations for a while Most have now learned their global sourcing lessons and are now looking beyond LCC as simply a ldquocost downrdquo opportunity but also a ldquorisk uprdquo challenge
Increasing the Value-for-Money (VfM) of Procurement
How much do supply chain disruptions cost
Extract from a white paper by Zurich Insurance Group
Extensive research looked at thousands of company results whereby comments in
SEC reports were tied back to the stock performance of these companies The study
shows an average 25 percent reduction in share price and an impact which com-
monly lasts over two years as a result of supply chain disruptions Companies can
be simultaneously impacted by decreased sales and brand damage while incurring
significant extra expenses during recovery times following a business interruption
Historically supply chain disruptions can lead to an average of 9 percent lower sa-
les and 11 percent higher costs and many companies with extended interruptions
never recover
Perf
orm
ance
Preparation
TimeDisruptive event
Time of impact
Recovery
First response 9-30
Shareholder impact
Initital impact
Preparation for recovery
long term impact
Boost Your Procurement Value Engine I wwwpool4toolcom
17Increasing the Value-for-Money (VfM) of Procurement
Because supply chains are more and more global (ie complex) and regulations are constantly evolving the dimensions impacting sourcing decisions are becoming more and more complex Complexity includes process dependencies due to the DMAIC approach
and value analysis
Therefore having the big picture when analyzing bids and deciding an award is critical As exp-lained earlier this is where SaaS solutions and their app ecosystem can make life easier and re-present tremendous value in terms of time saved (data collection analysis) and value creation avoiding future issues is cost-avoidance that has value even if not measured in a PampL impact
The concept of ldquothe right information at the right time and the right placerdquo is illustrated below in the example of analyzing bids from suppliers In addition to the quotes a purchaser has all
Category Strategy
Company Strategy
Strategy per
Supplier
Risk amp Sus-tainabilityAnalysis
Supplier Integration
Supplier Controlling
Supplier De-velopment
Parameters for Sourcing amp
Award Decisions
From the TCO analysishellip hellip to the TVO analysis (Total Value of Ownership)
Supplier Selection
Supplier Selection
Supplier Connection
Supplier Controlling
Market Research
Category Strategy
eSourcing eSourcing
WebEDIEDI
Supplier Perf Rating
Supplier Profile
+ Supplierlsquos Production Costs
+ Supplierrsquos Production Costs
+ Evaluation of Results
+ Price Constraints + Price Constraints
+ Lead Buyer Stra-tegy
+ Supplierlsquos Material Costs
+ Supplierrsquos Material Costs
+ Process Costs given by the Supplier
+ Overhead + Overhead
+ Potential Evaluation
= TCO = TVO
Boost Your Procurement Value Engine I wwwpool4toolcom
18
Procurementrsquos role sitting between the enterprise and
supply markets means it will always be exposed to various factors outside the enterprise probably more so than any other function If itrsquos not commodity prices fluctuating crazily or natural disasters threatening supply continuity it will be something else like unethical practices in the supply pipeline giving the enterprise bad press
The Procurement leader must steer the team through the choppy waters of such challenges
raquoraquo
Sigi Osagie
Boost Your Procurement Value Engine I wwwpool4toolcom
19
TCO TVO information via various scores (bonus penalty) based on the key dimensions of the category
Moreover technology does not just limit itself to the passive role of making information availa-ble Technology can be proactive
The terms Big Data and Internet of Things are frequently used as buzzwords but they also illustrate the increased capabilities that new technologies enable in collecting and presenting data As always the real value is not in the data itself but in the actionable intelligence that you build and the actions decisions you take
Therefore algorithms will make the key difference and give companies a competitive advantage For Procurement this means technologies with capabilities
to allow an organization to act (or at least to propose a possible set of actions) based on data analyzed in real time and
to create new knowledge by identifying trends or correlations that have not been seen until now
will provide the sustainable value that Procurement is looking for
Our next paper will dive deeper into what these technologies are what they do and the many ways they enable efficiency and effectiveness but for now we will conclude that for a Procure-ment organization to have a sustainable Value Engine function Procurement will have to build and develop the right capabilities (people process and technology)
Supplier quote
TCOTVO (internal) based on various dimensions (risk
CSRhellip)
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
20
copy Copyright POOL4TOOL AG Altmannsdorfer Straszlige 9119
1120 Vienna | Austria Phone +43-1-80 490 80
Editor Bertrand Maltaverne Senior Project Manager
POOL4TOOL AG
Michael Lamoureux Sourcing Innovation
More information officepool4toolcom
wwwpool4toolcom
POOL4TOOL AGAltmannsdorfer Straszlige 9119 A-1120 Vienna Tel+43-1-80 490 80
officepool4toolcomwwwpool4toolcom
Vienna I Stuttgart I Munich I Belgrade I Detroit I Singapore I Dubai
Efficiency is doing things right
effectiveness is doing the right things
raquo
raquoPeter Drucker Austrian-born American manage-
ment consultant educator and author He has
been described as ldquothe founder of modern ma-
nagementrdquo
Like Drucker POOL4TOOL was born in Vienna
Austria so we consider him a real inspiration
Boost Your Procurement Value Engine I wwwpool4toolcom
7
With a limited amount of energy (as defined earlier) your organization can only manage a cer-tain amount of input and produce a certain quantity of result This is where the organization reaches a productivity plateau To achieve an increase in results (or output) the only solution is to increase the level of energy which is very often translated as ldquomore peoplerdquo Another article from Spend Matters based on an APQC study on maverick buying illustrates this point
But is this really the only way to break the productivity plateau
There is another way As described in the article cited above you can ldquouse efficiency to fund ef-fectivenessrdquo Becoming more efficient will mean for example that people will do things faster The time freed up by an increase in efficiency can then be used to fuel effectiveness by being able to do and manage more In Procurement a typical example is using the newly available bandwidth to manage more spend and therefore produce new value incrementally But this is not enough to reach and maintain the optimal productivity plateau
Sustainable Productivity
The analogy of an engine again helps us to understand this because an engine needs constant care maintenance and fuel to run It is dynamic For many Procurement functions being self-aware is sometimes very difficult if not impossible because it requires
the right dashboard to measure changes in input output gap vs target
a lot of energy to gather data and perform the relevant analysis
Therefore in addition to effectiveness and efficien-cy the Procurement Value Engine must be sustain-able By sustainable we mean that Procurement should deliver value in the long run not just the short run This means ensuring that the triad of time cost and quality is always at its optimum and balanced
This third dimension of the Procurement Value Engi-ne has two main consequences
An approach and culture of continuous impro-vement (aka DMAIC)
An understanding of future impacts in all decisi-ons and actions (long-termism vs short-termism)
Time
Productivity
2 Cost
6 Talent4 Quality
3 Scope
1 Time
5 Risk
The Procurement Value Engine
Boost Your Procurement Value Engine I wwwpool4toolcom
8
Increasing the Value-for-Money (VfM) of Procurement
A better Procurement Engine is one that delivers more value-for-money (VfM) The Value-for-Money of Procurement can be defined as ldquoa utility derived from every purchase or every sum of money spent Value for money is based not only on the minimum purchase price (economy) but also on the maximum efficiency and effectiveness of the purchaserdquo1
Therefore VfM applied to Procurement is about maximizing value from each dollar invested in the Procurement functionrsquos people process and technology
At a high level the Procurement VfM can be described as
VfM levers = Reduce Input + Increase Output + Reduce Energy
Which leads us to the following breakdown
This means that an increase in effectiveness in any of these categories so long as it is not ac-companied by a decrease in effectiveness in another category will generally increase value for money But this breakdown doesnrsquot answer which increase will bring the greatest benefit or how Procurement can deliver the best value to organizational stakeholders
Definition of Value
Before you can deliver results you need to know what you are expected to deliver Or as the well-known negotiation concept puts it the receiving party defines what value is not the giver This means that value has to be determined by and with the ldquoend-userrdquo of the product or service that Procurement will be sourcing
As the CIPS model for Category Management shows this is a ldquotop-downrdquo approach that starts with a companyrsquos vision mission and values This then cascades to the level of the
Governance amp Category Mgmt SourcingSupply MgmtPurchase-to-Pay
Vfm = x x+ x x xReduce influence demand
Decrease contract
costs
Increase spend under management
Increase compliance
with contracts
Decrease order-to-pay
costs
Reduce usage costs
Reduce risk
Companyacutes Vision Mission amp Values
Procurement Strategy (Value)
Category Strategy
Category Strategy
Category Strategy
Companyacutes Overall Strategy
Finance
Supply Chain
HR
R amp D
Marketing
Technical
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
9
companyrsquos overall cross-functional strategy down to the category level at the end of the funnel
Obviously this is a function-specific exercise the outcome varies from company to company (as noted earlier the raison drsquoecirctre of Procurement is to reinforce a companyrsquos USPs) and as it is often said results may vary based on
Market and sector eg B2B B2C public private
Industry eg service manufacturing
Localization eg legal requirements
Nevertheless some common elements of relevance could be
Cost (performance profitability amp financials) eg price cost Total Cost of Ownership cash management growth
Agility contribute to supply chain rebalancing (buy where you sell) manage market dyna-mics (raw materials currencies etc) anticipate impact of disruptive technologies that may impact make-or-buy decisions andor supply markets contribute to time-to-market improvements etc
Risk reduction brand protection supply chain disruptions CSR etc
Effective Procurement
Effectiveness is where to start as illustrated in the quote above and in a recent Procurement book Procurement Mojo by Sigi Osagie
It is Procurementrsquos job to manage external spending so the key drivers of being effective are related to the Strategic Sourcing Processes A good start to assessing your current effectiveness is to look at AT Kearneyrsquos Strategic Sourcing Gemstone
McKinsey amp Company research has confirmed that procurement pays
Companies with high-performing procurement functions consistently
outperform their rivals on a range of financial indicators and the best
companies are building advanced talent management strategies into
the very heart of their procurement organizations Moreover procure-
ment will play a key role in helping companies cope with the new chal-
lenges and opportunities of our increasingly dynamic global economy
Industry Week ndash Jan 2014
raquo raquo
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
10
Consolidate number
of suppliers
Aggregate vo
lume accross u
nits
Redistribute vo
lume among
suppliers
Establish
develop key su
ppliers
Employ strategic
alliance
partnering
Examine strategic
ldquomake v buyrdquo
Conduct product value analysis
Optimise lifecycle costs
Rationalisestandardise
specifications
Substitute materials
Expand geographic supply base
Develop new suppliers
Exploit global supply demand
imbalances
Compare total costs
Model ldquoshould-costsrdquo
Renegotiate prices
Unbundle pricing
Hold an online auction
Re-engineer joint processes
Support supplier operations improvement
Share productivity gains
Develop integrated supply chain
To increase effectiveness as highlighted in the gemstone above the right measures aim to manage spend better and achieve more results by
Using historical spend to gain knowledge
Employing levers to reduce price or cost or eliminate cost and
Increasing spend under management to unlock new benefits
The following are examples of effectiveness levers based on the value for money formula presented earlier in this document
Demand Influence lifecycle cost analysis versus bonus potential
A full lifecycle cost analysis on similar product lines in a category might reveal that two al-most equal cellphone models have significantly different costs and one of the models should be retired with demand shifted to the other model But until sales understands the costs and how it impacts the bottom line and their bonus potential they might keep selling the higher cost model (instead of the higher profit model)
Spend Under Management (SUM) increase extendible on-line catalog for all types of requisitions
A big reason a lot of spend is not under management at many organizations is because there is no catalog for many one-off one-time or spot-buy purchase needs (such as extra office supplies not on the standard contract temporary services promotional items for events
Exercise Power Create Advantage
Volume
concentration
Product
specification
improvement
Product specification
improvement
Global sourcing
Joint process
improvement
Best-price evaluation
The strategic sourcing gemstone
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
11
travel services etc) and this spend ends up being requisitioned through e-mail requests made then is not entered in the Procurement system until the invoice comes in But if the organization has an extensive catalog where arbitrary items can be created by the or-ganization as needed all requisitions approval and spend gets recorded and gets under management
Contract Cost Decrease e-Signature options
Some organizations pay a lot of money couriering contracts back and forth for signature even when e-Signatures are just as legally binding A platform that is integrated with an e-Signature service can save the organization time and money allowing it to complete the contract cycle more expediently
Contract Compliance Increase alerts when documents are due (coming or past)
Organizations are at great risk when insurance certificates certifications releases or audits are not completed or submitted on time With a platform that tracks when documentary re-quirements are due the organization knows when to remind a supplier or take more severe action (such as halting all orders to the supplier until the issue is corrected) if the documen-tation needed is not received in a timely fashion
Usage Cost Decrease packaging improvements
In some industries such as food and beverage and pharmaceutical the packaging of a den-se liquid especially one with a tendency to stick to certain types of packaging can have a significant impact on the usage cost when there is high waste or expensive processes are needed to clean the containers for recycling Packaging improvements that use new types of non-stick packaging can reduce the overall lifecycle costs even if the packaging is more expensive
Risk Decrease in-transit visibility
A system that allows an organization to track its shipments from the time they leave the supplierrsquos warehouse to the time they hit the organizationrsquos warehouse with updates each time a waypoint is met or a (n intermodal) transfer is made with regular updates helps an organization not only track where itrsquos shipments are but whether or not they are likely to arrive at the expected time
Order-to-Pay Cost Decrease automatic payment on successful m-way match
Automated m-way match between a purchase order invoice and goods receipt not only increases efficiency but also increases effectiveness if the system can also automatically queue invoices that pass the m-way match for payment as this helps both Procurement and Accounts Payable be more effective in payment and cash flow planning
Efficient Procurement
As already mentioned efficiency can be invested into increasing effectiveness for example by enabling Procurement to address areas that have been left untouched or sub-optimized until now because of a lack of capacity In addition efficiency improvements allow Procurement to be more agile and pro-active
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
12
This leads to new capabilities and enhancements in cycle timesAnd allows for the following best practices to be employed which increase efficiency even more
Revisit sourcing lists (preferred suppliers) more than once a year to ensure continuous alignment between sourcing strategy and needs (especially critical for new product developments)
Manage market dynamics better the ability to identify and capture positive market changes (or mitigate impacts of negative ones) by dynamically going back to market
Improved cycle times in spend management processes that enable other support functions or positively impact the product lifecycle
Reduce savings leakage by transforming identified savings into actual savings realized because of improvements in contract management
Another aspect of efficiency lies in the tools used by Procurement to perform its activities Effi-ciency as stated earlier is about how Procurement works and in our technological era it is im-possible not to talk about technology Technology plays a key role in efficiency gains because it is an enabler simplifying a lot of administrative tasks and making process integration possible
Typical efficiency gains that are specific to using Procurement technology include
Automation impacting the level of resources needed and cycle times
Economies of scale from centralizing information and data management
Knowledge Management (KM) based on centralizing and securing information while making it more available across geographies (physical or functional)
Volatile markets opportunity or problem
The answer to this question depends on how you manage these challenges The fact
remains that Procurement must operate in the context of volatile markets
Therefore Procurement has to be equipped to cope with this
Part of this equipment is a mechanism to feed Sourcing events with real-time mar-
ket information This can be used among other things to track raw material prices
from external sources (eg London Metal Exchange) So when you have an RFQ in
addition to the suppliersrsquo conditions you can check the key price drivers against the
current market This is valuable information to ensure you do not ldquoleave moneyrdquo on
the table andor ask the right questions to suppliers to find ways to optimize condi-
tions for both parties
Plus having real-time market information allows you to constantly assess past agree-
ments against current conditions and if necessary go back to market easily
How Procurement responds to market changes is part of the broader idea of Procure-
ment agility that is a key differentiator in our world in constant change
For more see here
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
13
In addition to increasing efficiency in your Procurement organization technology also enables suppliers to be more efficient This means that Procurement can introduce efficiencies into the supply chain that it can benefit from This is also an important aspect of the business case for better supplier onboarding (supplier portals EDI e-Invoicing etc)
But not all technologies are equal when looking at efficiencies Some technologies are more cost effective than others Remember what Rudzki Smock Katzorke and Stewart said in Stra-ight to the Bottom Line An Executive Roadmap to World Class Supply Management
Also cost includes IT costs (infrastructure licenses fees etc) and usability costs In recent years SaaS and cloud solutions have transformed many functions Procurement included because they often maximize time-to-value vs on-premises solutions
In addition to reducing installation and operating costs most SaaS and cloud solutions rely on the philosophy of interoperability
System-to-system (interfaces and communication protocols)
Process-to-process (interdependence and integration)
People-to-people (collaboration)
All of this is in the context of a global economy and global supply chains Concepts like Enter-prise 20 are the new norm
Thanks to SaaS and cloud technologies Procurement can create a workspace containing all the data required for both strategic and tactical activities This workspace is ERP-agnostic mea-ning that it can be connected easily to multiple and various systems (ERPs and beyond PLMs BWs etc) internal and external systems This
centralizes key information in a single location making data collection and analysis easier
fosters collaboration with various partners and stakeholders as required by the various busi-ness processes running in the solution
streamlines data management by having data directly managed by the relevant data owner
simplifies master data management (MDM) by creating one set of master data that then dispatches the information to the operational systems and
Dont jump whole hog into technology Walk and then run if it works Establish meaningful metrics to measure its performance Make sure each piece fits into a long-term puzzle
Robert A Rudkzi Douglas A Smock Michael Katzorke and Shelley Stewart Jr
raquo raquo
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
14
increases agility and resilience by securing data and making it easily transferable (imagine an organizational change that results in changes in responsibilities and the resulting nightmare of transferring the data contained in mailboxes)
On top of that and as highlighted by the concept of interoperability cloud solutions usually live in an app ecosystem The capacity to connect to third party solutions is integrated into the solutionrsquos design and architecture For example this allows Procurement to enrich internal
data coming from internal systems with third party content to get a bigger picture than what was previously available or at least get the information faster by having the right information pushed to the right place and at the right moment
Sustainable Procurement
As noted earlier this obviously comes from having a culture of continuous improvement (DMAIC) However this isnrsquot everything Decisions your Procurement organization make today will impact operations tomorrow Therefore looking at the impacts (or future consequences) of todayrsquos decisions is a critical component of the Procurement Value Engine
This is the capability to influence the future by
Defining it (ldquoIFrdquo) - predictive analytics
Preparing for it (ldquoTHEN THATrdquo) - risk management
All of this is about anticipating and avoiding negative situations andor maximizing the occur-rence of positive ones This is the whole purpose of the broader discipline of risk management
Other Stakholder
Procurement
Masterdata 1
Masterdata 2
Masterdata n
Suppliers
3rd Party Sources Internal Information SystemsAccess Control amp Roles
Business Process 1
Business Process 2
Business Process n
Increasing the Value-for-Money (VfM) of Procurement
We need more standardized readily available third-party information shared amongst networked communities where people can pool data for operational assessment
raquoraquo
Gerard Chick amp Robert Handfield
Boost Your Procurement Value Engine I wwwpool4toolcom
16
As illustrated in the quote on the previous page current technologies are characterized by being able to gather more data thereby enabling deeper and more meaningful analysis But data alone means nothing It is what you do with it that creates value
A typical example in Procurement can be found in sourcing decisions Awarding business to suppliers must take into account the risks that the decision represents For example low-cost country (LCC) sourcing has been high on the agenda of many Procurement organizations for a while Most have now learned their global sourcing lessons and are now looking beyond LCC as simply a ldquocost downrdquo opportunity but also a ldquorisk uprdquo challenge
Increasing the Value-for-Money (VfM) of Procurement
How much do supply chain disruptions cost
Extract from a white paper by Zurich Insurance Group
Extensive research looked at thousands of company results whereby comments in
SEC reports were tied back to the stock performance of these companies The study
shows an average 25 percent reduction in share price and an impact which com-
monly lasts over two years as a result of supply chain disruptions Companies can
be simultaneously impacted by decreased sales and brand damage while incurring
significant extra expenses during recovery times following a business interruption
Historically supply chain disruptions can lead to an average of 9 percent lower sa-
les and 11 percent higher costs and many companies with extended interruptions
never recover
Perf
orm
ance
Preparation
TimeDisruptive event
Time of impact
Recovery
First response 9-30
Shareholder impact
Initital impact
Preparation for recovery
long term impact
Boost Your Procurement Value Engine I wwwpool4toolcom
17Increasing the Value-for-Money (VfM) of Procurement
Because supply chains are more and more global (ie complex) and regulations are constantly evolving the dimensions impacting sourcing decisions are becoming more and more complex Complexity includes process dependencies due to the DMAIC approach
and value analysis
Therefore having the big picture when analyzing bids and deciding an award is critical As exp-lained earlier this is where SaaS solutions and their app ecosystem can make life easier and re-present tremendous value in terms of time saved (data collection analysis) and value creation avoiding future issues is cost-avoidance that has value even if not measured in a PampL impact
The concept of ldquothe right information at the right time and the right placerdquo is illustrated below in the example of analyzing bids from suppliers In addition to the quotes a purchaser has all
Category Strategy
Company Strategy
Strategy per
Supplier
Risk amp Sus-tainabilityAnalysis
Supplier Integration
Supplier Controlling
Supplier De-velopment
Parameters for Sourcing amp
Award Decisions
From the TCO analysishellip hellip to the TVO analysis (Total Value of Ownership)
Supplier Selection
Supplier Selection
Supplier Connection
Supplier Controlling
Market Research
Category Strategy
eSourcing eSourcing
WebEDIEDI
Supplier Perf Rating
Supplier Profile
+ Supplierlsquos Production Costs
+ Supplierrsquos Production Costs
+ Evaluation of Results
+ Price Constraints + Price Constraints
+ Lead Buyer Stra-tegy
+ Supplierlsquos Material Costs
+ Supplierrsquos Material Costs
+ Process Costs given by the Supplier
+ Overhead + Overhead
+ Potential Evaluation
= TCO = TVO
Boost Your Procurement Value Engine I wwwpool4toolcom
18
Procurementrsquos role sitting between the enterprise and
supply markets means it will always be exposed to various factors outside the enterprise probably more so than any other function If itrsquos not commodity prices fluctuating crazily or natural disasters threatening supply continuity it will be something else like unethical practices in the supply pipeline giving the enterprise bad press
The Procurement leader must steer the team through the choppy waters of such challenges
raquoraquo
Sigi Osagie
Boost Your Procurement Value Engine I wwwpool4toolcom
19
TCO TVO information via various scores (bonus penalty) based on the key dimensions of the category
Moreover technology does not just limit itself to the passive role of making information availa-ble Technology can be proactive
The terms Big Data and Internet of Things are frequently used as buzzwords but they also illustrate the increased capabilities that new technologies enable in collecting and presenting data As always the real value is not in the data itself but in the actionable intelligence that you build and the actions decisions you take
Therefore algorithms will make the key difference and give companies a competitive advantage For Procurement this means technologies with capabilities
to allow an organization to act (or at least to propose a possible set of actions) based on data analyzed in real time and
to create new knowledge by identifying trends or correlations that have not been seen until now
will provide the sustainable value that Procurement is looking for
Our next paper will dive deeper into what these technologies are what they do and the many ways they enable efficiency and effectiveness but for now we will conclude that for a Procure-ment organization to have a sustainable Value Engine function Procurement will have to build and develop the right capabilities (people process and technology)
Supplier quote
TCOTVO (internal) based on various dimensions (risk
CSRhellip)
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
20
copy Copyright POOL4TOOL AG Altmannsdorfer Straszlige 9119
1120 Vienna | Austria Phone +43-1-80 490 80
Editor Bertrand Maltaverne Senior Project Manager
POOL4TOOL AG
Michael Lamoureux Sourcing Innovation
More information officepool4toolcom
wwwpool4toolcom
POOL4TOOL AGAltmannsdorfer Straszlige 9119 A-1120 Vienna Tel+43-1-80 490 80
officepool4toolcomwwwpool4toolcom
Vienna I Stuttgart I Munich I Belgrade I Detroit I Singapore I Dubai
Boost Your Procurement Value Engine I wwwpool4toolcom
7
With a limited amount of energy (as defined earlier) your organization can only manage a cer-tain amount of input and produce a certain quantity of result This is where the organization reaches a productivity plateau To achieve an increase in results (or output) the only solution is to increase the level of energy which is very often translated as ldquomore peoplerdquo Another article from Spend Matters based on an APQC study on maverick buying illustrates this point
But is this really the only way to break the productivity plateau
There is another way As described in the article cited above you can ldquouse efficiency to fund ef-fectivenessrdquo Becoming more efficient will mean for example that people will do things faster The time freed up by an increase in efficiency can then be used to fuel effectiveness by being able to do and manage more In Procurement a typical example is using the newly available bandwidth to manage more spend and therefore produce new value incrementally But this is not enough to reach and maintain the optimal productivity plateau
Sustainable Productivity
The analogy of an engine again helps us to understand this because an engine needs constant care maintenance and fuel to run It is dynamic For many Procurement functions being self-aware is sometimes very difficult if not impossible because it requires
the right dashboard to measure changes in input output gap vs target
a lot of energy to gather data and perform the relevant analysis
Therefore in addition to effectiveness and efficien-cy the Procurement Value Engine must be sustain-able By sustainable we mean that Procurement should deliver value in the long run not just the short run This means ensuring that the triad of time cost and quality is always at its optimum and balanced
This third dimension of the Procurement Value Engi-ne has two main consequences
An approach and culture of continuous impro-vement (aka DMAIC)
An understanding of future impacts in all decisi-ons and actions (long-termism vs short-termism)
Time
Productivity
2 Cost
6 Talent4 Quality
3 Scope
1 Time
5 Risk
The Procurement Value Engine
Boost Your Procurement Value Engine I wwwpool4toolcom
8
Increasing the Value-for-Money (VfM) of Procurement
A better Procurement Engine is one that delivers more value-for-money (VfM) The Value-for-Money of Procurement can be defined as ldquoa utility derived from every purchase or every sum of money spent Value for money is based not only on the minimum purchase price (economy) but also on the maximum efficiency and effectiveness of the purchaserdquo1
Therefore VfM applied to Procurement is about maximizing value from each dollar invested in the Procurement functionrsquos people process and technology
At a high level the Procurement VfM can be described as
VfM levers = Reduce Input + Increase Output + Reduce Energy
Which leads us to the following breakdown
This means that an increase in effectiveness in any of these categories so long as it is not ac-companied by a decrease in effectiveness in another category will generally increase value for money But this breakdown doesnrsquot answer which increase will bring the greatest benefit or how Procurement can deliver the best value to organizational stakeholders
Definition of Value
Before you can deliver results you need to know what you are expected to deliver Or as the well-known negotiation concept puts it the receiving party defines what value is not the giver This means that value has to be determined by and with the ldquoend-userrdquo of the product or service that Procurement will be sourcing
As the CIPS model for Category Management shows this is a ldquotop-downrdquo approach that starts with a companyrsquos vision mission and values This then cascades to the level of the
Governance amp Category Mgmt SourcingSupply MgmtPurchase-to-Pay
Vfm = x x+ x x xReduce influence demand
Decrease contract
costs
Increase spend under management
Increase compliance
with contracts
Decrease order-to-pay
costs
Reduce usage costs
Reduce risk
Companyacutes Vision Mission amp Values
Procurement Strategy (Value)
Category Strategy
Category Strategy
Category Strategy
Companyacutes Overall Strategy
Finance
Supply Chain
HR
R amp D
Marketing
Technical
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
9
companyrsquos overall cross-functional strategy down to the category level at the end of the funnel
Obviously this is a function-specific exercise the outcome varies from company to company (as noted earlier the raison drsquoecirctre of Procurement is to reinforce a companyrsquos USPs) and as it is often said results may vary based on
Market and sector eg B2B B2C public private
Industry eg service manufacturing
Localization eg legal requirements
Nevertheless some common elements of relevance could be
Cost (performance profitability amp financials) eg price cost Total Cost of Ownership cash management growth
Agility contribute to supply chain rebalancing (buy where you sell) manage market dyna-mics (raw materials currencies etc) anticipate impact of disruptive technologies that may impact make-or-buy decisions andor supply markets contribute to time-to-market improvements etc
Risk reduction brand protection supply chain disruptions CSR etc
Effective Procurement
Effectiveness is where to start as illustrated in the quote above and in a recent Procurement book Procurement Mojo by Sigi Osagie
It is Procurementrsquos job to manage external spending so the key drivers of being effective are related to the Strategic Sourcing Processes A good start to assessing your current effectiveness is to look at AT Kearneyrsquos Strategic Sourcing Gemstone
McKinsey amp Company research has confirmed that procurement pays
Companies with high-performing procurement functions consistently
outperform their rivals on a range of financial indicators and the best
companies are building advanced talent management strategies into
the very heart of their procurement organizations Moreover procure-
ment will play a key role in helping companies cope with the new chal-
lenges and opportunities of our increasingly dynamic global economy
Industry Week ndash Jan 2014
raquo raquo
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
10
Consolidate number
of suppliers
Aggregate vo
lume accross u
nits
Redistribute vo
lume among
suppliers
Establish
develop key su
ppliers
Employ strategic
alliance
partnering
Examine strategic
ldquomake v buyrdquo
Conduct product value analysis
Optimise lifecycle costs
Rationalisestandardise
specifications
Substitute materials
Expand geographic supply base
Develop new suppliers
Exploit global supply demand
imbalances
Compare total costs
Model ldquoshould-costsrdquo
Renegotiate prices
Unbundle pricing
Hold an online auction
Re-engineer joint processes
Support supplier operations improvement
Share productivity gains
Develop integrated supply chain
To increase effectiveness as highlighted in the gemstone above the right measures aim to manage spend better and achieve more results by
Using historical spend to gain knowledge
Employing levers to reduce price or cost or eliminate cost and
Increasing spend under management to unlock new benefits
The following are examples of effectiveness levers based on the value for money formula presented earlier in this document
Demand Influence lifecycle cost analysis versus bonus potential
A full lifecycle cost analysis on similar product lines in a category might reveal that two al-most equal cellphone models have significantly different costs and one of the models should be retired with demand shifted to the other model But until sales understands the costs and how it impacts the bottom line and their bonus potential they might keep selling the higher cost model (instead of the higher profit model)
Spend Under Management (SUM) increase extendible on-line catalog for all types of requisitions
A big reason a lot of spend is not under management at many organizations is because there is no catalog for many one-off one-time or spot-buy purchase needs (such as extra office supplies not on the standard contract temporary services promotional items for events
Exercise Power Create Advantage
Volume
concentration
Product
specification
improvement
Product specification
improvement
Global sourcing
Joint process
improvement
Best-price evaluation
The strategic sourcing gemstone
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
11
travel services etc) and this spend ends up being requisitioned through e-mail requests made then is not entered in the Procurement system until the invoice comes in But if the organization has an extensive catalog where arbitrary items can be created by the or-ganization as needed all requisitions approval and spend gets recorded and gets under management
Contract Cost Decrease e-Signature options
Some organizations pay a lot of money couriering contracts back and forth for signature even when e-Signatures are just as legally binding A platform that is integrated with an e-Signature service can save the organization time and money allowing it to complete the contract cycle more expediently
Contract Compliance Increase alerts when documents are due (coming or past)
Organizations are at great risk when insurance certificates certifications releases or audits are not completed or submitted on time With a platform that tracks when documentary re-quirements are due the organization knows when to remind a supplier or take more severe action (such as halting all orders to the supplier until the issue is corrected) if the documen-tation needed is not received in a timely fashion
Usage Cost Decrease packaging improvements
In some industries such as food and beverage and pharmaceutical the packaging of a den-se liquid especially one with a tendency to stick to certain types of packaging can have a significant impact on the usage cost when there is high waste or expensive processes are needed to clean the containers for recycling Packaging improvements that use new types of non-stick packaging can reduce the overall lifecycle costs even if the packaging is more expensive
Risk Decrease in-transit visibility
A system that allows an organization to track its shipments from the time they leave the supplierrsquos warehouse to the time they hit the organizationrsquos warehouse with updates each time a waypoint is met or a (n intermodal) transfer is made with regular updates helps an organization not only track where itrsquos shipments are but whether or not they are likely to arrive at the expected time
Order-to-Pay Cost Decrease automatic payment on successful m-way match
Automated m-way match between a purchase order invoice and goods receipt not only increases efficiency but also increases effectiveness if the system can also automatically queue invoices that pass the m-way match for payment as this helps both Procurement and Accounts Payable be more effective in payment and cash flow planning
Efficient Procurement
As already mentioned efficiency can be invested into increasing effectiveness for example by enabling Procurement to address areas that have been left untouched or sub-optimized until now because of a lack of capacity In addition efficiency improvements allow Procurement to be more agile and pro-active
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
12
This leads to new capabilities and enhancements in cycle timesAnd allows for the following best practices to be employed which increase efficiency even more
Revisit sourcing lists (preferred suppliers) more than once a year to ensure continuous alignment between sourcing strategy and needs (especially critical for new product developments)
Manage market dynamics better the ability to identify and capture positive market changes (or mitigate impacts of negative ones) by dynamically going back to market
Improved cycle times in spend management processes that enable other support functions or positively impact the product lifecycle
Reduce savings leakage by transforming identified savings into actual savings realized because of improvements in contract management
Another aspect of efficiency lies in the tools used by Procurement to perform its activities Effi-ciency as stated earlier is about how Procurement works and in our technological era it is im-possible not to talk about technology Technology plays a key role in efficiency gains because it is an enabler simplifying a lot of administrative tasks and making process integration possible
Typical efficiency gains that are specific to using Procurement technology include
Automation impacting the level of resources needed and cycle times
Economies of scale from centralizing information and data management
Knowledge Management (KM) based on centralizing and securing information while making it more available across geographies (physical or functional)
Volatile markets opportunity or problem
The answer to this question depends on how you manage these challenges The fact
remains that Procurement must operate in the context of volatile markets
Therefore Procurement has to be equipped to cope with this
Part of this equipment is a mechanism to feed Sourcing events with real-time mar-
ket information This can be used among other things to track raw material prices
from external sources (eg London Metal Exchange) So when you have an RFQ in
addition to the suppliersrsquo conditions you can check the key price drivers against the
current market This is valuable information to ensure you do not ldquoleave moneyrdquo on
the table andor ask the right questions to suppliers to find ways to optimize condi-
tions for both parties
Plus having real-time market information allows you to constantly assess past agree-
ments against current conditions and if necessary go back to market easily
How Procurement responds to market changes is part of the broader idea of Procure-
ment agility that is a key differentiator in our world in constant change
For more see here
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
13
In addition to increasing efficiency in your Procurement organization technology also enables suppliers to be more efficient This means that Procurement can introduce efficiencies into the supply chain that it can benefit from This is also an important aspect of the business case for better supplier onboarding (supplier portals EDI e-Invoicing etc)
But not all technologies are equal when looking at efficiencies Some technologies are more cost effective than others Remember what Rudzki Smock Katzorke and Stewart said in Stra-ight to the Bottom Line An Executive Roadmap to World Class Supply Management
Also cost includes IT costs (infrastructure licenses fees etc) and usability costs In recent years SaaS and cloud solutions have transformed many functions Procurement included because they often maximize time-to-value vs on-premises solutions
In addition to reducing installation and operating costs most SaaS and cloud solutions rely on the philosophy of interoperability
System-to-system (interfaces and communication protocols)
Process-to-process (interdependence and integration)
People-to-people (collaboration)
All of this is in the context of a global economy and global supply chains Concepts like Enter-prise 20 are the new norm
Thanks to SaaS and cloud technologies Procurement can create a workspace containing all the data required for both strategic and tactical activities This workspace is ERP-agnostic mea-ning that it can be connected easily to multiple and various systems (ERPs and beyond PLMs BWs etc) internal and external systems This
centralizes key information in a single location making data collection and analysis easier
fosters collaboration with various partners and stakeholders as required by the various busi-ness processes running in the solution
streamlines data management by having data directly managed by the relevant data owner
simplifies master data management (MDM) by creating one set of master data that then dispatches the information to the operational systems and
Dont jump whole hog into technology Walk and then run if it works Establish meaningful metrics to measure its performance Make sure each piece fits into a long-term puzzle
Robert A Rudkzi Douglas A Smock Michael Katzorke and Shelley Stewart Jr
raquo raquo
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
14
increases agility and resilience by securing data and making it easily transferable (imagine an organizational change that results in changes in responsibilities and the resulting nightmare of transferring the data contained in mailboxes)
On top of that and as highlighted by the concept of interoperability cloud solutions usually live in an app ecosystem The capacity to connect to third party solutions is integrated into the solutionrsquos design and architecture For example this allows Procurement to enrich internal
data coming from internal systems with third party content to get a bigger picture than what was previously available or at least get the information faster by having the right information pushed to the right place and at the right moment
Sustainable Procurement
As noted earlier this obviously comes from having a culture of continuous improvement (DMAIC) However this isnrsquot everything Decisions your Procurement organization make today will impact operations tomorrow Therefore looking at the impacts (or future consequences) of todayrsquos decisions is a critical component of the Procurement Value Engine
This is the capability to influence the future by
Defining it (ldquoIFrdquo) - predictive analytics
Preparing for it (ldquoTHEN THATrdquo) - risk management
All of this is about anticipating and avoiding negative situations andor maximizing the occur-rence of positive ones This is the whole purpose of the broader discipline of risk management
Other Stakholder
Procurement
Masterdata 1
Masterdata 2
Masterdata n
Suppliers
3rd Party Sources Internal Information SystemsAccess Control amp Roles
Business Process 1
Business Process 2
Business Process n
Increasing the Value-for-Money (VfM) of Procurement
We need more standardized readily available third-party information shared amongst networked communities where people can pool data for operational assessment
raquoraquo
Gerard Chick amp Robert Handfield
Boost Your Procurement Value Engine I wwwpool4toolcom
16
As illustrated in the quote on the previous page current technologies are characterized by being able to gather more data thereby enabling deeper and more meaningful analysis But data alone means nothing It is what you do with it that creates value
A typical example in Procurement can be found in sourcing decisions Awarding business to suppliers must take into account the risks that the decision represents For example low-cost country (LCC) sourcing has been high on the agenda of many Procurement organizations for a while Most have now learned their global sourcing lessons and are now looking beyond LCC as simply a ldquocost downrdquo opportunity but also a ldquorisk uprdquo challenge
Increasing the Value-for-Money (VfM) of Procurement
How much do supply chain disruptions cost
Extract from a white paper by Zurich Insurance Group
Extensive research looked at thousands of company results whereby comments in
SEC reports were tied back to the stock performance of these companies The study
shows an average 25 percent reduction in share price and an impact which com-
monly lasts over two years as a result of supply chain disruptions Companies can
be simultaneously impacted by decreased sales and brand damage while incurring
significant extra expenses during recovery times following a business interruption
Historically supply chain disruptions can lead to an average of 9 percent lower sa-
les and 11 percent higher costs and many companies with extended interruptions
never recover
Perf
orm
ance
Preparation
TimeDisruptive event
Time of impact
Recovery
First response 9-30
Shareholder impact
Initital impact
Preparation for recovery
long term impact
Boost Your Procurement Value Engine I wwwpool4toolcom
17Increasing the Value-for-Money (VfM) of Procurement
Because supply chains are more and more global (ie complex) and regulations are constantly evolving the dimensions impacting sourcing decisions are becoming more and more complex Complexity includes process dependencies due to the DMAIC approach
and value analysis
Therefore having the big picture when analyzing bids and deciding an award is critical As exp-lained earlier this is where SaaS solutions and their app ecosystem can make life easier and re-present tremendous value in terms of time saved (data collection analysis) and value creation avoiding future issues is cost-avoidance that has value even if not measured in a PampL impact
The concept of ldquothe right information at the right time and the right placerdquo is illustrated below in the example of analyzing bids from suppliers In addition to the quotes a purchaser has all
Category Strategy
Company Strategy
Strategy per
Supplier
Risk amp Sus-tainabilityAnalysis
Supplier Integration
Supplier Controlling
Supplier De-velopment
Parameters for Sourcing amp
Award Decisions
From the TCO analysishellip hellip to the TVO analysis (Total Value of Ownership)
Supplier Selection
Supplier Selection
Supplier Connection
Supplier Controlling
Market Research
Category Strategy
eSourcing eSourcing
WebEDIEDI
Supplier Perf Rating
Supplier Profile
+ Supplierlsquos Production Costs
+ Supplierrsquos Production Costs
+ Evaluation of Results
+ Price Constraints + Price Constraints
+ Lead Buyer Stra-tegy
+ Supplierlsquos Material Costs
+ Supplierrsquos Material Costs
+ Process Costs given by the Supplier
+ Overhead + Overhead
+ Potential Evaluation
= TCO = TVO
Boost Your Procurement Value Engine I wwwpool4toolcom
18
Procurementrsquos role sitting between the enterprise and
supply markets means it will always be exposed to various factors outside the enterprise probably more so than any other function If itrsquos not commodity prices fluctuating crazily or natural disasters threatening supply continuity it will be something else like unethical practices in the supply pipeline giving the enterprise bad press
The Procurement leader must steer the team through the choppy waters of such challenges
raquoraquo
Sigi Osagie
Boost Your Procurement Value Engine I wwwpool4toolcom
19
TCO TVO information via various scores (bonus penalty) based on the key dimensions of the category
Moreover technology does not just limit itself to the passive role of making information availa-ble Technology can be proactive
The terms Big Data and Internet of Things are frequently used as buzzwords but they also illustrate the increased capabilities that new technologies enable in collecting and presenting data As always the real value is not in the data itself but in the actionable intelligence that you build and the actions decisions you take
Therefore algorithms will make the key difference and give companies a competitive advantage For Procurement this means technologies with capabilities
to allow an organization to act (or at least to propose a possible set of actions) based on data analyzed in real time and
to create new knowledge by identifying trends or correlations that have not been seen until now
will provide the sustainable value that Procurement is looking for
Our next paper will dive deeper into what these technologies are what they do and the many ways they enable efficiency and effectiveness but for now we will conclude that for a Procure-ment organization to have a sustainable Value Engine function Procurement will have to build and develop the right capabilities (people process and technology)
Supplier quote
TCOTVO (internal) based on various dimensions (risk
CSRhellip)
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
20
copy Copyright POOL4TOOL AG Altmannsdorfer Straszlige 9119
1120 Vienna | Austria Phone +43-1-80 490 80
Editor Bertrand Maltaverne Senior Project Manager
POOL4TOOL AG
Michael Lamoureux Sourcing Innovation
More information officepool4toolcom
wwwpool4toolcom
POOL4TOOL AGAltmannsdorfer Straszlige 9119 A-1120 Vienna Tel+43-1-80 490 80
officepool4toolcomwwwpool4toolcom
Vienna I Stuttgart I Munich I Belgrade I Detroit I Singapore I Dubai
Boost Your Procurement Value Engine I wwwpool4toolcom
8
Increasing the Value-for-Money (VfM) of Procurement
A better Procurement Engine is one that delivers more value-for-money (VfM) The Value-for-Money of Procurement can be defined as ldquoa utility derived from every purchase or every sum of money spent Value for money is based not only on the minimum purchase price (economy) but also on the maximum efficiency and effectiveness of the purchaserdquo1
Therefore VfM applied to Procurement is about maximizing value from each dollar invested in the Procurement functionrsquos people process and technology
At a high level the Procurement VfM can be described as
VfM levers = Reduce Input + Increase Output + Reduce Energy
Which leads us to the following breakdown
This means that an increase in effectiveness in any of these categories so long as it is not ac-companied by a decrease in effectiveness in another category will generally increase value for money But this breakdown doesnrsquot answer which increase will bring the greatest benefit or how Procurement can deliver the best value to organizational stakeholders
Definition of Value
Before you can deliver results you need to know what you are expected to deliver Or as the well-known negotiation concept puts it the receiving party defines what value is not the giver This means that value has to be determined by and with the ldquoend-userrdquo of the product or service that Procurement will be sourcing
As the CIPS model for Category Management shows this is a ldquotop-downrdquo approach that starts with a companyrsquos vision mission and values This then cascades to the level of the
Governance amp Category Mgmt SourcingSupply MgmtPurchase-to-Pay
Vfm = x x+ x x xReduce influence demand
Decrease contract
costs
Increase spend under management
Increase compliance
with contracts
Decrease order-to-pay
costs
Reduce usage costs
Reduce risk
Companyacutes Vision Mission amp Values
Procurement Strategy (Value)
Category Strategy
Category Strategy
Category Strategy
Companyacutes Overall Strategy
Finance
Supply Chain
HR
R amp D
Marketing
Technical
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
9
companyrsquos overall cross-functional strategy down to the category level at the end of the funnel
Obviously this is a function-specific exercise the outcome varies from company to company (as noted earlier the raison drsquoecirctre of Procurement is to reinforce a companyrsquos USPs) and as it is often said results may vary based on
Market and sector eg B2B B2C public private
Industry eg service manufacturing
Localization eg legal requirements
Nevertheless some common elements of relevance could be
Cost (performance profitability amp financials) eg price cost Total Cost of Ownership cash management growth
Agility contribute to supply chain rebalancing (buy where you sell) manage market dyna-mics (raw materials currencies etc) anticipate impact of disruptive technologies that may impact make-or-buy decisions andor supply markets contribute to time-to-market improvements etc
Risk reduction brand protection supply chain disruptions CSR etc
Effective Procurement
Effectiveness is where to start as illustrated in the quote above and in a recent Procurement book Procurement Mojo by Sigi Osagie
It is Procurementrsquos job to manage external spending so the key drivers of being effective are related to the Strategic Sourcing Processes A good start to assessing your current effectiveness is to look at AT Kearneyrsquos Strategic Sourcing Gemstone
McKinsey amp Company research has confirmed that procurement pays
Companies with high-performing procurement functions consistently
outperform their rivals on a range of financial indicators and the best
companies are building advanced talent management strategies into
the very heart of their procurement organizations Moreover procure-
ment will play a key role in helping companies cope with the new chal-
lenges and opportunities of our increasingly dynamic global economy
Industry Week ndash Jan 2014
raquo raquo
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
10
Consolidate number
of suppliers
Aggregate vo
lume accross u
nits
Redistribute vo
lume among
suppliers
Establish
develop key su
ppliers
Employ strategic
alliance
partnering
Examine strategic
ldquomake v buyrdquo
Conduct product value analysis
Optimise lifecycle costs
Rationalisestandardise
specifications
Substitute materials
Expand geographic supply base
Develop new suppliers
Exploit global supply demand
imbalances
Compare total costs
Model ldquoshould-costsrdquo
Renegotiate prices
Unbundle pricing
Hold an online auction
Re-engineer joint processes
Support supplier operations improvement
Share productivity gains
Develop integrated supply chain
To increase effectiveness as highlighted in the gemstone above the right measures aim to manage spend better and achieve more results by
Using historical spend to gain knowledge
Employing levers to reduce price or cost or eliminate cost and
Increasing spend under management to unlock new benefits
The following are examples of effectiveness levers based on the value for money formula presented earlier in this document
Demand Influence lifecycle cost analysis versus bonus potential
A full lifecycle cost analysis on similar product lines in a category might reveal that two al-most equal cellphone models have significantly different costs and one of the models should be retired with demand shifted to the other model But until sales understands the costs and how it impacts the bottom line and their bonus potential they might keep selling the higher cost model (instead of the higher profit model)
Spend Under Management (SUM) increase extendible on-line catalog for all types of requisitions
A big reason a lot of spend is not under management at many organizations is because there is no catalog for many one-off one-time or spot-buy purchase needs (such as extra office supplies not on the standard contract temporary services promotional items for events
Exercise Power Create Advantage
Volume
concentration
Product
specification
improvement
Product specification
improvement
Global sourcing
Joint process
improvement
Best-price evaluation
The strategic sourcing gemstone
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
11
travel services etc) and this spend ends up being requisitioned through e-mail requests made then is not entered in the Procurement system until the invoice comes in But if the organization has an extensive catalog where arbitrary items can be created by the or-ganization as needed all requisitions approval and spend gets recorded and gets under management
Contract Cost Decrease e-Signature options
Some organizations pay a lot of money couriering contracts back and forth for signature even when e-Signatures are just as legally binding A platform that is integrated with an e-Signature service can save the organization time and money allowing it to complete the contract cycle more expediently
Contract Compliance Increase alerts when documents are due (coming or past)
Organizations are at great risk when insurance certificates certifications releases or audits are not completed or submitted on time With a platform that tracks when documentary re-quirements are due the organization knows when to remind a supplier or take more severe action (such as halting all orders to the supplier until the issue is corrected) if the documen-tation needed is not received in a timely fashion
Usage Cost Decrease packaging improvements
In some industries such as food and beverage and pharmaceutical the packaging of a den-se liquid especially one with a tendency to stick to certain types of packaging can have a significant impact on the usage cost when there is high waste or expensive processes are needed to clean the containers for recycling Packaging improvements that use new types of non-stick packaging can reduce the overall lifecycle costs even if the packaging is more expensive
Risk Decrease in-transit visibility
A system that allows an organization to track its shipments from the time they leave the supplierrsquos warehouse to the time they hit the organizationrsquos warehouse with updates each time a waypoint is met or a (n intermodal) transfer is made with regular updates helps an organization not only track where itrsquos shipments are but whether or not they are likely to arrive at the expected time
Order-to-Pay Cost Decrease automatic payment on successful m-way match
Automated m-way match between a purchase order invoice and goods receipt not only increases efficiency but also increases effectiveness if the system can also automatically queue invoices that pass the m-way match for payment as this helps both Procurement and Accounts Payable be more effective in payment and cash flow planning
Efficient Procurement
As already mentioned efficiency can be invested into increasing effectiveness for example by enabling Procurement to address areas that have been left untouched or sub-optimized until now because of a lack of capacity In addition efficiency improvements allow Procurement to be more agile and pro-active
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
12
This leads to new capabilities and enhancements in cycle timesAnd allows for the following best practices to be employed which increase efficiency even more
Revisit sourcing lists (preferred suppliers) more than once a year to ensure continuous alignment between sourcing strategy and needs (especially critical for new product developments)
Manage market dynamics better the ability to identify and capture positive market changes (or mitigate impacts of negative ones) by dynamically going back to market
Improved cycle times in spend management processes that enable other support functions or positively impact the product lifecycle
Reduce savings leakage by transforming identified savings into actual savings realized because of improvements in contract management
Another aspect of efficiency lies in the tools used by Procurement to perform its activities Effi-ciency as stated earlier is about how Procurement works and in our technological era it is im-possible not to talk about technology Technology plays a key role in efficiency gains because it is an enabler simplifying a lot of administrative tasks and making process integration possible
Typical efficiency gains that are specific to using Procurement technology include
Automation impacting the level of resources needed and cycle times
Economies of scale from centralizing information and data management
Knowledge Management (KM) based on centralizing and securing information while making it more available across geographies (physical or functional)
Volatile markets opportunity or problem
The answer to this question depends on how you manage these challenges The fact
remains that Procurement must operate in the context of volatile markets
Therefore Procurement has to be equipped to cope with this
Part of this equipment is a mechanism to feed Sourcing events with real-time mar-
ket information This can be used among other things to track raw material prices
from external sources (eg London Metal Exchange) So when you have an RFQ in
addition to the suppliersrsquo conditions you can check the key price drivers against the
current market This is valuable information to ensure you do not ldquoleave moneyrdquo on
the table andor ask the right questions to suppliers to find ways to optimize condi-
tions for both parties
Plus having real-time market information allows you to constantly assess past agree-
ments against current conditions and if necessary go back to market easily
How Procurement responds to market changes is part of the broader idea of Procure-
ment agility that is a key differentiator in our world in constant change
For more see here
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
13
In addition to increasing efficiency in your Procurement organization technology also enables suppliers to be more efficient This means that Procurement can introduce efficiencies into the supply chain that it can benefit from This is also an important aspect of the business case for better supplier onboarding (supplier portals EDI e-Invoicing etc)
But not all technologies are equal when looking at efficiencies Some technologies are more cost effective than others Remember what Rudzki Smock Katzorke and Stewart said in Stra-ight to the Bottom Line An Executive Roadmap to World Class Supply Management
Also cost includes IT costs (infrastructure licenses fees etc) and usability costs In recent years SaaS and cloud solutions have transformed many functions Procurement included because they often maximize time-to-value vs on-premises solutions
In addition to reducing installation and operating costs most SaaS and cloud solutions rely on the philosophy of interoperability
System-to-system (interfaces and communication protocols)
Process-to-process (interdependence and integration)
People-to-people (collaboration)
All of this is in the context of a global economy and global supply chains Concepts like Enter-prise 20 are the new norm
Thanks to SaaS and cloud technologies Procurement can create a workspace containing all the data required for both strategic and tactical activities This workspace is ERP-agnostic mea-ning that it can be connected easily to multiple and various systems (ERPs and beyond PLMs BWs etc) internal and external systems This
centralizes key information in a single location making data collection and analysis easier
fosters collaboration with various partners and stakeholders as required by the various busi-ness processes running in the solution
streamlines data management by having data directly managed by the relevant data owner
simplifies master data management (MDM) by creating one set of master data that then dispatches the information to the operational systems and
Dont jump whole hog into technology Walk and then run if it works Establish meaningful metrics to measure its performance Make sure each piece fits into a long-term puzzle
Robert A Rudkzi Douglas A Smock Michael Katzorke and Shelley Stewart Jr
raquo raquo
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
14
increases agility and resilience by securing data and making it easily transferable (imagine an organizational change that results in changes in responsibilities and the resulting nightmare of transferring the data contained in mailboxes)
On top of that and as highlighted by the concept of interoperability cloud solutions usually live in an app ecosystem The capacity to connect to third party solutions is integrated into the solutionrsquos design and architecture For example this allows Procurement to enrich internal
data coming from internal systems with third party content to get a bigger picture than what was previously available or at least get the information faster by having the right information pushed to the right place and at the right moment
Sustainable Procurement
As noted earlier this obviously comes from having a culture of continuous improvement (DMAIC) However this isnrsquot everything Decisions your Procurement organization make today will impact operations tomorrow Therefore looking at the impacts (or future consequences) of todayrsquos decisions is a critical component of the Procurement Value Engine
This is the capability to influence the future by
Defining it (ldquoIFrdquo) - predictive analytics
Preparing for it (ldquoTHEN THATrdquo) - risk management
All of this is about anticipating and avoiding negative situations andor maximizing the occur-rence of positive ones This is the whole purpose of the broader discipline of risk management
Other Stakholder
Procurement
Masterdata 1
Masterdata 2
Masterdata n
Suppliers
3rd Party Sources Internal Information SystemsAccess Control amp Roles
Business Process 1
Business Process 2
Business Process n
Increasing the Value-for-Money (VfM) of Procurement
We need more standardized readily available third-party information shared amongst networked communities where people can pool data for operational assessment
raquoraquo
Gerard Chick amp Robert Handfield
Boost Your Procurement Value Engine I wwwpool4toolcom
16
As illustrated in the quote on the previous page current technologies are characterized by being able to gather more data thereby enabling deeper and more meaningful analysis But data alone means nothing It is what you do with it that creates value
A typical example in Procurement can be found in sourcing decisions Awarding business to suppliers must take into account the risks that the decision represents For example low-cost country (LCC) sourcing has been high on the agenda of many Procurement organizations for a while Most have now learned their global sourcing lessons and are now looking beyond LCC as simply a ldquocost downrdquo opportunity but also a ldquorisk uprdquo challenge
Increasing the Value-for-Money (VfM) of Procurement
How much do supply chain disruptions cost
Extract from a white paper by Zurich Insurance Group
Extensive research looked at thousands of company results whereby comments in
SEC reports were tied back to the stock performance of these companies The study
shows an average 25 percent reduction in share price and an impact which com-
monly lasts over two years as a result of supply chain disruptions Companies can
be simultaneously impacted by decreased sales and brand damage while incurring
significant extra expenses during recovery times following a business interruption
Historically supply chain disruptions can lead to an average of 9 percent lower sa-
les and 11 percent higher costs and many companies with extended interruptions
never recover
Perf
orm
ance
Preparation
TimeDisruptive event
Time of impact
Recovery
First response 9-30
Shareholder impact
Initital impact
Preparation for recovery
long term impact
Boost Your Procurement Value Engine I wwwpool4toolcom
17Increasing the Value-for-Money (VfM) of Procurement
Because supply chains are more and more global (ie complex) and regulations are constantly evolving the dimensions impacting sourcing decisions are becoming more and more complex Complexity includes process dependencies due to the DMAIC approach
and value analysis
Therefore having the big picture when analyzing bids and deciding an award is critical As exp-lained earlier this is where SaaS solutions and their app ecosystem can make life easier and re-present tremendous value in terms of time saved (data collection analysis) and value creation avoiding future issues is cost-avoidance that has value even if not measured in a PampL impact
The concept of ldquothe right information at the right time and the right placerdquo is illustrated below in the example of analyzing bids from suppliers In addition to the quotes a purchaser has all
Category Strategy
Company Strategy
Strategy per
Supplier
Risk amp Sus-tainabilityAnalysis
Supplier Integration
Supplier Controlling
Supplier De-velopment
Parameters for Sourcing amp
Award Decisions
From the TCO analysishellip hellip to the TVO analysis (Total Value of Ownership)
Supplier Selection
Supplier Selection
Supplier Connection
Supplier Controlling
Market Research
Category Strategy
eSourcing eSourcing
WebEDIEDI
Supplier Perf Rating
Supplier Profile
+ Supplierlsquos Production Costs
+ Supplierrsquos Production Costs
+ Evaluation of Results
+ Price Constraints + Price Constraints
+ Lead Buyer Stra-tegy
+ Supplierlsquos Material Costs
+ Supplierrsquos Material Costs
+ Process Costs given by the Supplier
+ Overhead + Overhead
+ Potential Evaluation
= TCO = TVO
Boost Your Procurement Value Engine I wwwpool4toolcom
18
Procurementrsquos role sitting between the enterprise and
supply markets means it will always be exposed to various factors outside the enterprise probably more so than any other function If itrsquos not commodity prices fluctuating crazily or natural disasters threatening supply continuity it will be something else like unethical practices in the supply pipeline giving the enterprise bad press
The Procurement leader must steer the team through the choppy waters of such challenges
raquoraquo
Sigi Osagie
Boost Your Procurement Value Engine I wwwpool4toolcom
19
TCO TVO information via various scores (bonus penalty) based on the key dimensions of the category
Moreover technology does not just limit itself to the passive role of making information availa-ble Technology can be proactive
The terms Big Data and Internet of Things are frequently used as buzzwords but they also illustrate the increased capabilities that new technologies enable in collecting and presenting data As always the real value is not in the data itself but in the actionable intelligence that you build and the actions decisions you take
Therefore algorithms will make the key difference and give companies a competitive advantage For Procurement this means technologies with capabilities
to allow an organization to act (or at least to propose a possible set of actions) based on data analyzed in real time and
to create new knowledge by identifying trends or correlations that have not been seen until now
will provide the sustainable value that Procurement is looking for
Our next paper will dive deeper into what these technologies are what they do and the many ways they enable efficiency and effectiveness but for now we will conclude that for a Procure-ment organization to have a sustainable Value Engine function Procurement will have to build and develop the right capabilities (people process and technology)
Supplier quote
TCOTVO (internal) based on various dimensions (risk
CSRhellip)
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
20
copy Copyright POOL4TOOL AG Altmannsdorfer Straszlige 9119
1120 Vienna | Austria Phone +43-1-80 490 80
Editor Bertrand Maltaverne Senior Project Manager
POOL4TOOL AG
Michael Lamoureux Sourcing Innovation
More information officepool4toolcom
wwwpool4toolcom
POOL4TOOL AGAltmannsdorfer Straszlige 9119 A-1120 Vienna Tel+43-1-80 490 80
officepool4toolcomwwwpool4toolcom
Vienna I Stuttgart I Munich I Belgrade I Detroit I Singapore I Dubai
Boost Your Procurement Value Engine I wwwpool4toolcom
9
companyrsquos overall cross-functional strategy down to the category level at the end of the funnel
Obviously this is a function-specific exercise the outcome varies from company to company (as noted earlier the raison drsquoecirctre of Procurement is to reinforce a companyrsquos USPs) and as it is often said results may vary based on
Market and sector eg B2B B2C public private
Industry eg service manufacturing
Localization eg legal requirements
Nevertheless some common elements of relevance could be
Cost (performance profitability amp financials) eg price cost Total Cost of Ownership cash management growth
Agility contribute to supply chain rebalancing (buy where you sell) manage market dyna-mics (raw materials currencies etc) anticipate impact of disruptive technologies that may impact make-or-buy decisions andor supply markets contribute to time-to-market improvements etc
Risk reduction brand protection supply chain disruptions CSR etc
Effective Procurement
Effectiveness is where to start as illustrated in the quote above and in a recent Procurement book Procurement Mojo by Sigi Osagie
It is Procurementrsquos job to manage external spending so the key drivers of being effective are related to the Strategic Sourcing Processes A good start to assessing your current effectiveness is to look at AT Kearneyrsquos Strategic Sourcing Gemstone
McKinsey amp Company research has confirmed that procurement pays
Companies with high-performing procurement functions consistently
outperform their rivals on a range of financial indicators and the best
companies are building advanced talent management strategies into
the very heart of their procurement organizations Moreover procure-
ment will play a key role in helping companies cope with the new chal-
lenges and opportunities of our increasingly dynamic global economy
Industry Week ndash Jan 2014
raquo raquo
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
10
Consolidate number
of suppliers
Aggregate vo
lume accross u
nits
Redistribute vo
lume among
suppliers
Establish
develop key su
ppliers
Employ strategic
alliance
partnering
Examine strategic
ldquomake v buyrdquo
Conduct product value analysis
Optimise lifecycle costs
Rationalisestandardise
specifications
Substitute materials
Expand geographic supply base
Develop new suppliers
Exploit global supply demand
imbalances
Compare total costs
Model ldquoshould-costsrdquo
Renegotiate prices
Unbundle pricing
Hold an online auction
Re-engineer joint processes
Support supplier operations improvement
Share productivity gains
Develop integrated supply chain
To increase effectiveness as highlighted in the gemstone above the right measures aim to manage spend better and achieve more results by
Using historical spend to gain knowledge
Employing levers to reduce price or cost or eliminate cost and
Increasing spend under management to unlock new benefits
The following are examples of effectiveness levers based on the value for money formula presented earlier in this document
Demand Influence lifecycle cost analysis versus bonus potential
A full lifecycle cost analysis on similar product lines in a category might reveal that two al-most equal cellphone models have significantly different costs and one of the models should be retired with demand shifted to the other model But until sales understands the costs and how it impacts the bottom line and their bonus potential they might keep selling the higher cost model (instead of the higher profit model)
Spend Under Management (SUM) increase extendible on-line catalog for all types of requisitions
A big reason a lot of spend is not under management at many organizations is because there is no catalog for many one-off one-time or spot-buy purchase needs (such as extra office supplies not on the standard contract temporary services promotional items for events
Exercise Power Create Advantage
Volume
concentration
Product
specification
improvement
Product specification
improvement
Global sourcing
Joint process
improvement
Best-price evaluation
The strategic sourcing gemstone
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
11
travel services etc) and this spend ends up being requisitioned through e-mail requests made then is not entered in the Procurement system until the invoice comes in But if the organization has an extensive catalog where arbitrary items can be created by the or-ganization as needed all requisitions approval and spend gets recorded and gets under management
Contract Cost Decrease e-Signature options
Some organizations pay a lot of money couriering contracts back and forth for signature even when e-Signatures are just as legally binding A platform that is integrated with an e-Signature service can save the organization time and money allowing it to complete the contract cycle more expediently
Contract Compliance Increase alerts when documents are due (coming or past)
Organizations are at great risk when insurance certificates certifications releases or audits are not completed or submitted on time With a platform that tracks when documentary re-quirements are due the organization knows when to remind a supplier or take more severe action (such as halting all orders to the supplier until the issue is corrected) if the documen-tation needed is not received in a timely fashion
Usage Cost Decrease packaging improvements
In some industries such as food and beverage and pharmaceutical the packaging of a den-se liquid especially one with a tendency to stick to certain types of packaging can have a significant impact on the usage cost when there is high waste or expensive processes are needed to clean the containers for recycling Packaging improvements that use new types of non-stick packaging can reduce the overall lifecycle costs even if the packaging is more expensive
Risk Decrease in-transit visibility
A system that allows an organization to track its shipments from the time they leave the supplierrsquos warehouse to the time they hit the organizationrsquos warehouse with updates each time a waypoint is met or a (n intermodal) transfer is made with regular updates helps an organization not only track where itrsquos shipments are but whether or not they are likely to arrive at the expected time
Order-to-Pay Cost Decrease automatic payment on successful m-way match
Automated m-way match between a purchase order invoice and goods receipt not only increases efficiency but also increases effectiveness if the system can also automatically queue invoices that pass the m-way match for payment as this helps both Procurement and Accounts Payable be more effective in payment and cash flow planning
Efficient Procurement
As already mentioned efficiency can be invested into increasing effectiveness for example by enabling Procurement to address areas that have been left untouched or sub-optimized until now because of a lack of capacity In addition efficiency improvements allow Procurement to be more agile and pro-active
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
12
This leads to new capabilities and enhancements in cycle timesAnd allows for the following best practices to be employed which increase efficiency even more
Revisit sourcing lists (preferred suppliers) more than once a year to ensure continuous alignment between sourcing strategy and needs (especially critical for new product developments)
Manage market dynamics better the ability to identify and capture positive market changes (or mitigate impacts of negative ones) by dynamically going back to market
Improved cycle times in spend management processes that enable other support functions or positively impact the product lifecycle
Reduce savings leakage by transforming identified savings into actual savings realized because of improvements in contract management
Another aspect of efficiency lies in the tools used by Procurement to perform its activities Effi-ciency as stated earlier is about how Procurement works and in our technological era it is im-possible not to talk about technology Technology plays a key role in efficiency gains because it is an enabler simplifying a lot of administrative tasks and making process integration possible
Typical efficiency gains that are specific to using Procurement technology include
Automation impacting the level of resources needed and cycle times
Economies of scale from centralizing information and data management
Knowledge Management (KM) based on centralizing and securing information while making it more available across geographies (physical or functional)
Volatile markets opportunity or problem
The answer to this question depends on how you manage these challenges The fact
remains that Procurement must operate in the context of volatile markets
Therefore Procurement has to be equipped to cope with this
Part of this equipment is a mechanism to feed Sourcing events with real-time mar-
ket information This can be used among other things to track raw material prices
from external sources (eg London Metal Exchange) So when you have an RFQ in
addition to the suppliersrsquo conditions you can check the key price drivers against the
current market This is valuable information to ensure you do not ldquoleave moneyrdquo on
the table andor ask the right questions to suppliers to find ways to optimize condi-
tions for both parties
Plus having real-time market information allows you to constantly assess past agree-
ments against current conditions and if necessary go back to market easily
How Procurement responds to market changes is part of the broader idea of Procure-
ment agility that is a key differentiator in our world in constant change
For more see here
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
13
In addition to increasing efficiency in your Procurement organization technology also enables suppliers to be more efficient This means that Procurement can introduce efficiencies into the supply chain that it can benefit from This is also an important aspect of the business case for better supplier onboarding (supplier portals EDI e-Invoicing etc)
But not all technologies are equal when looking at efficiencies Some technologies are more cost effective than others Remember what Rudzki Smock Katzorke and Stewart said in Stra-ight to the Bottom Line An Executive Roadmap to World Class Supply Management
Also cost includes IT costs (infrastructure licenses fees etc) and usability costs In recent years SaaS and cloud solutions have transformed many functions Procurement included because they often maximize time-to-value vs on-premises solutions
In addition to reducing installation and operating costs most SaaS and cloud solutions rely on the philosophy of interoperability
System-to-system (interfaces and communication protocols)
Process-to-process (interdependence and integration)
People-to-people (collaboration)
All of this is in the context of a global economy and global supply chains Concepts like Enter-prise 20 are the new norm
Thanks to SaaS and cloud technologies Procurement can create a workspace containing all the data required for both strategic and tactical activities This workspace is ERP-agnostic mea-ning that it can be connected easily to multiple and various systems (ERPs and beyond PLMs BWs etc) internal and external systems This
centralizes key information in a single location making data collection and analysis easier
fosters collaboration with various partners and stakeholders as required by the various busi-ness processes running in the solution
streamlines data management by having data directly managed by the relevant data owner
simplifies master data management (MDM) by creating one set of master data that then dispatches the information to the operational systems and
Dont jump whole hog into technology Walk and then run if it works Establish meaningful metrics to measure its performance Make sure each piece fits into a long-term puzzle
Robert A Rudkzi Douglas A Smock Michael Katzorke and Shelley Stewart Jr
raquo raquo
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
14
increases agility and resilience by securing data and making it easily transferable (imagine an organizational change that results in changes in responsibilities and the resulting nightmare of transferring the data contained in mailboxes)
On top of that and as highlighted by the concept of interoperability cloud solutions usually live in an app ecosystem The capacity to connect to third party solutions is integrated into the solutionrsquos design and architecture For example this allows Procurement to enrich internal
data coming from internal systems with third party content to get a bigger picture than what was previously available or at least get the information faster by having the right information pushed to the right place and at the right moment
Sustainable Procurement
As noted earlier this obviously comes from having a culture of continuous improvement (DMAIC) However this isnrsquot everything Decisions your Procurement organization make today will impact operations tomorrow Therefore looking at the impacts (or future consequences) of todayrsquos decisions is a critical component of the Procurement Value Engine
This is the capability to influence the future by
Defining it (ldquoIFrdquo) - predictive analytics
Preparing for it (ldquoTHEN THATrdquo) - risk management
All of this is about anticipating and avoiding negative situations andor maximizing the occur-rence of positive ones This is the whole purpose of the broader discipline of risk management
Other Stakholder
Procurement
Masterdata 1
Masterdata 2
Masterdata n
Suppliers
3rd Party Sources Internal Information SystemsAccess Control amp Roles
Business Process 1
Business Process 2
Business Process n
Increasing the Value-for-Money (VfM) of Procurement
We need more standardized readily available third-party information shared amongst networked communities where people can pool data for operational assessment
raquoraquo
Gerard Chick amp Robert Handfield
Boost Your Procurement Value Engine I wwwpool4toolcom
16
As illustrated in the quote on the previous page current technologies are characterized by being able to gather more data thereby enabling deeper and more meaningful analysis But data alone means nothing It is what you do with it that creates value
A typical example in Procurement can be found in sourcing decisions Awarding business to suppliers must take into account the risks that the decision represents For example low-cost country (LCC) sourcing has been high on the agenda of many Procurement organizations for a while Most have now learned their global sourcing lessons and are now looking beyond LCC as simply a ldquocost downrdquo opportunity but also a ldquorisk uprdquo challenge
Increasing the Value-for-Money (VfM) of Procurement
How much do supply chain disruptions cost
Extract from a white paper by Zurich Insurance Group
Extensive research looked at thousands of company results whereby comments in
SEC reports were tied back to the stock performance of these companies The study
shows an average 25 percent reduction in share price and an impact which com-
monly lasts over two years as a result of supply chain disruptions Companies can
be simultaneously impacted by decreased sales and brand damage while incurring
significant extra expenses during recovery times following a business interruption
Historically supply chain disruptions can lead to an average of 9 percent lower sa-
les and 11 percent higher costs and many companies with extended interruptions
never recover
Perf
orm
ance
Preparation
TimeDisruptive event
Time of impact
Recovery
First response 9-30
Shareholder impact
Initital impact
Preparation for recovery
long term impact
Boost Your Procurement Value Engine I wwwpool4toolcom
17Increasing the Value-for-Money (VfM) of Procurement
Because supply chains are more and more global (ie complex) and regulations are constantly evolving the dimensions impacting sourcing decisions are becoming more and more complex Complexity includes process dependencies due to the DMAIC approach
and value analysis
Therefore having the big picture when analyzing bids and deciding an award is critical As exp-lained earlier this is where SaaS solutions and their app ecosystem can make life easier and re-present tremendous value in terms of time saved (data collection analysis) and value creation avoiding future issues is cost-avoidance that has value even if not measured in a PampL impact
The concept of ldquothe right information at the right time and the right placerdquo is illustrated below in the example of analyzing bids from suppliers In addition to the quotes a purchaser has all
Category Strategy
Company Strategy
Strategy per
Supplier
Risk amp Sus-tainabilityAnalysis
Supplier Integration
Supplier Controlling
Supplier De-velopment
Parameters for Sourcing amp
Award Decisions
From the TCO analysishellip hellip to the TVO analysis (Total Value of Ownership)
Supplier Selection
Supplier Selection
Supplier Connection
Supplier Controlling
Market Research
Category Strategy
eSourcing eSourcing
WebEDIEDI
Supplier Perf Rating
Supplier Profile
+ Supplierlsquos Production Costs
+ Supplierrsquos Production Costs
+ Evaluation of Results
+ Price Constraints + Price Constraints
+ Lead Buyer Stra-tegy
+ Supplierlsquos Material Costs
+ Supplierrsquos Material Costs
+ Process Costs given by the Supplier
+ Overhead + Overhead
+ Potential Evaluation
= TCO = TVO
Boost Your Procurement Value Engine I wwwpool4toolcom
18
Procurementrsquos role sitting between the enterprise and
supply markets means it will always be exposed to various factors outside the enterprise probably more so than any other function If itrsquos not commodity prices fluctuating crazily or natural disasters threatening supply continuity it will be something else like unethical practices in the supply pipeline giving the enterprise bad press
The Procurement leader must steer the team through the choppy waters of such challenges
raquoraquo
Sigi Osagie
Boost Your Procurement Value Engine I wwwpool4toolcom
19
TCO TVO information via various scores (bonus penalty) based on the key dimensions of the category
Moreover technology does not just limit itself to the passive role of making information availa-ble Technology can be proactive
The terms Big Data and Internet of Things are frequently used as buzzwords but they also illustrate the increased capabilities that new technologies enable in collecting and presenting data As always the real value is not in the data itself but in the actionable intelligence that you build and the actions decisions you take
Therefore algorithms will make the key difference and give companies a competitive advantage For Procurement this means technologies with capabilities
to allow an organization to act (or at least to propose a possible set of actions) based on data analyzed in real time and
to create new knowledge by identifying trends or correlations that have not been seen until now
will provide the sustainable value that Procurement is looking for
Our next paper will dive deeper into what these technologies are what they do and the many ways they enable efficiency and effectiveness but for now we will conclude that for a Procure-ment organization to have a sustainable Value Engine function Procurement will have to build and develop the right capabilities (people process and technology)
Supplier quote
TCOTVO (internal) based on various dimensions (risk
CSRhellip)
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
20
copy Copyright POOL4TOOL AG Altmannsdorfer Straszlige 9119
1120 Vienna | Austria Phone +43-1-80 490 80
Editor Bertrand Maltaverne Senior Project Manager
POOL4TOOL AG
Michael Lamoureux Sourcing Innovation
More information officepool4toolcom
wwwpool4toolcom
POOL4TOOL AGAltmannsdorfer Straszlige 9119 A-1120 Vienna Tel+43-1-80 490 80
officepool4toolcomwwwpool4toolcom
Vienna I Stuttgart I Munich I Belgrade I Detroit I Singapore I Dubai
Boost Your Procurement Value Engine I wwwpool4toolcom
10
Consolidate number
of suppliers
Aggregate vo
lume accross u
nits
Redistribute vo
lume among
suppliers
Establish
develop key su
ppliers
Employ strategic
alliance
partnering
Examine strategic
ldquomake v buyrdquo
Conduct product value analysis
Optimise lifecycle costs
Rationalisestandardise
specifications
Substitute materials
Expand geographic supply base
Develop new suppliers
Exploit global supply demand
imbalances
Compare total costs
Model ldquoshould-costsrdquo
Renegotiate prices
Unbundle pricing
Hold an online auction
Re-engineer joint processes
Support supplier operations improvement
Share productivity gains
Develop integrated supply chain
To increase effectiveness as highlighted in the gemstone above the right measures aim to manage spend better and achieve more results by
Using historical spend to gain knowledge
Employing levers to reduce price or cost or eliminate cost and
Increasing spend under management to unlock new benefits
The following are examples of effectiveness levers based on the value for money formula presented earlier in this document
Demand Influence lifecycle cost analysis versus bonus potential
A full lifecycle cost analysis on similar product lines in a category might reveal that two al-most equal cellphone models have significantly different costs and one of the models should be retired with demand shifted to the other model But until sales understands the costs and how it impacts the bottom line and their bonus potential they might keep selling the higher cost model (instead of the higher profit model)
Spend Under Management (SUM) increase extendible on-line catalog for all types of requisitions
A big reason a lot of spend is not under management at many organizations is because there is no catalog for many one-off one-time or spot-buy purchase needs (such as extra office supplies not on the standard contract temporary services promotional items for events
Exercise Power Create Advantage
Volume
concentration
Product
specification
improvement
Product specification
improvement
Global sourcing
Joint process
improvement
Best-price evaluation
The strategic sourcing gemstone
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
11
travel services etc) and this spend ends up being requisitioned through e-mail requests made then is not entered in the Procurement system until the invoice comes in But if the organization has an extensive catalog where arbitrary items can be created by the or-ganization as needed all requisitions approval and spend gets recorded and gets under management
Contract Cost Decrease e-Signature options
Some organizations pay a lot of money couriering contracts back and forth for signature even when e-Signatures are just as legally binding A platform that is integrated with an e-Signature service can save the organization time and money allowing it to complete the contract cycle more expediently
Contract Compliance Increase alerts when documents are due (coming or past)
Organizations are at great risk when insurance certificates certifications releases or audits are not completed or submitted on time With a platform that tracks when documentary re-quirements are due the organization knows when to remind a supplier or take more severe action (such as halting all orders to the supplier until the issue is corrected) if the documen-tation needed is not received in a timely fashion
Usage Cost Decrease packaging improvements
In some industries such as food and beverage and pharmaceutical the packaging of a den-se liquid especially one with a tendency to stick to certain types of packaging can have a significant impact on the usage cost when there is high waste or expensive processes are needed to clean the containers for recycling Packaging improvements that use new types of non-stick packaging can reduce the overall lifecycle costs even if the packaging is more expensive
Risk Decrease in-transit visibility
A system that allows an organization to track its shipments from the time they leave the supplierrsquos warehouse to the time they hit the organizationrsquos warehouse with updates each time a waypoint is met or a (n intermodal) transfer is made with regular updates helps an organization not only track where itrsquos shipments are but whether or not they are likely to arrive at the expected time
Order-to-Pay Cost Decrease automatic payment on successful m-way match
Automated m-way match between a purchase order invoice and goods receipt not only increases efficiency but also increases effectiveness if the system can also automatically queue invoices that pass the m-way match for payment as this helps both Procurement and Accounts Payable be more effective in payment and cash flow planning
Efficient Procurement
As already mentioned efficiency can be invested into increasing effectiveness for example by enabling Procurement to address areas that have been left untouched or sub-optimized until now because of a lack of capacity In addition efficiency improvements allow Procurement to be more agile and pro-active
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
12
This leads to new capabilities and enhancements in cycle timesAnd allows for the following best practices to be employed which increase efficiency even more
Revisit sourcing lists (preferred suppliers) more than once a year to ensure continuous alignment between sourcing strategy and needs (especially critical for new product developments)
Manage market dynamics better the ability to identify and capture positive market changes (or mitigate impacts of negative ones) by dynamically going back to market
Improved cycle times in spend management processes that enable other support functions or positively impact the product lifecycle
Reduce savings leakage by transforming identified savings into actual savings realized because of improvements in contract management
Another aspect of efficiency lies in the tools used by Procurement to perform its activities Effi-ciency as stated earlier is about how Procurement works and in our technological era it is im-possible not to talk about technology Technology plays a key role in efficiency gains because it is an enabler simplifying a lot of administrative tasks and making process integration possible
Typical efficiency gains that are specific to using Procurement technology include
Automation impacting the level of resources needed and cycle times
Economies of scale from centralizing information and data management
Knowledge Management (KM) based on centralizing and securing information while making it more available across geographies (physical or functional)
Volatile markets opportunity or problem
The answer to this question depends on how you manage these challenges The fact
remains that Procurement must operate in the context of volatile markets
Therefore Procurement has to be equipped to cope with this
Part of this equipment is a mechanism to feed Sourcing events with real-time mar-
ket information This can be used among other things to track raw material prices
from external sources (eg London Metal Exchange) So when you have an RFQ in
addition to the suppliersrsquo conditions you can check the key price drivers against the
current market This is valuable information to ensure you do not ldquoleave moneyrdquo on
the table andor ask the right questions to suppliers to find ways to optimize condi-
tions for both parties
Plus having real-time market information allows you to constantly assess past agree-
ments against current conditions and if necessary go back to market easily
How Procurement responds to market changes is part of the broader idea of Procure-
ment agility that is a key differentiator in our world in constant change
For more see here
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
13
In addition to increasing efficiency in your Procurement organization technology also enables suppliers to be more efficient This means that Procurement can introduce efficiencies into the supply chain that it can benefit from This is also an important aspect of the business case for better supplier onboarding (supplier portals EDI e-Invoicing etc)
But not all technologies are equal when looking at efficiencies Some technologies are more cost effective than others Remember what Rudzki Smock Katzorke and Stewart said in Stra-ight to the Bottom Line An Executive Roadmap to World Class Supply Management
Also cost includes IT costs (infrastructure licenses fees etc) and usability costs In recent years SaaS and cloud solutions have transformed many functions Procurement included because they often maximize time-to-value vs on-premises solutions
In addition to reducing installation and operating costs most SaaS and cloud solutions rely on the philosophy of interoperability
System-to-system (interfaces and communication protocols)
Process-to-process (interdependence and integration)
People-to-people (collaboration)
All of this is in the context of a global economy and global supply chains Concepts like Enter-prise 20 are the new norm
Thanks to SaaS and cloud technologies Procurement can create a workspace containing all the data required for both strategic and tactical activities This workspace is ERP-agnostic mea-ning that it can be connected easily to multiple and various systems (ERPs and beyond PLMs BWs etc) internal and external systems This
centralizes key information in a single location making data collection and analysis easier
fosters collaboration with various partners and stakeholders as required by the various busi-ness processes running in the solution
streamlines data management by having data directly managed by the relevant data owner
simplifies master data management (MDM) by creating one set of master data that then dispatches the information to the operational systems and
Dont jump whole hog into technology Walk and then run if it works Establish meaningful metrics to measure its performance Make sure each piece fits into a long-term puzzle
Robert A Rudkzi Douglas A Smock Michael Katzorke and Shelley Stewart Jr
raquo raquo
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
14
increases agility and resilience by securing data and making it easily transferable (imagine an organizational change that results in changes in responsibilities and the resulting nightmare of transferring the data contained in mailboxes)
On top of that and as highlighted by the concept of interoperability cloud solutions usually live in an app ecosystem The capacity to connect to third party solutions is integrated into the solutionrsquos design and architecture For example this allows Procurement to enrich internal
data coming from internal systems with third party content to get a bigger picture than what was previously available or at least get the information faster by having the right information pushed to the right place and at the right moment
Sustainable Procurement
As noted earlier this obviously comes from having a culture of continuous improvement (DMAIC) However this isnrsquot everything Decisions your Procurement organization make today will impact operations tomorrow Therefore looking at the impacts (or future consequences) of todayrsquos decisions is a critical component of the Procurement Value Engine
This is the capability to influence the future by
Defining it (ldquoIFrdquo) - predictive analytics
Preparing for it (ldquoTHEN THATrdquo) - risk management
All of this is about anticipating and avoiding negative situations andor maximizing the occur-rence of positive ones This is the whole purpose of the broader discipline of risk management
Other Stakholder
Procurement
Masterdata 1
Masterdata 2
Masterdata n
Suppliers
3rd Party Sources Internal Information SystemsAccess Control amp Roles
Business Process 1
Business Process 2
Business Process n
Increasing the Value-for-Money (VfM) of Procurement
We need more standardized readily available third-party information shared amongst networked communities where people can pool data for operational assessment
raquoraquo
Gerard Chick amp Robert Handfield
Boost Your Procurement Value Engine I wwwpool4toolcom
16
As illustrated in the quote on the previous page current technologies are characterized by being able to gather more data thereby enabling deeper and more meaningful analysis But data alone means nothing It is what you do with it that creates value
A typical example in Procurement can be found in sourcing decisions Awarding business to suppliers must take into account the risks that the decision represents For example low-cost country (LCC) sourcing has been high on the agenda of many Procurement organizations for a while Most have now learned their global sourcing lessons and are now looking beyond LCC as simply a ldquocost downrdquo opportunity but also a ldquorisk uprdquo challenge
Increasing the Value-for-Money (VfM) of Procurement
How much do supply chain disruptions cost
Extract from a white paper by Zurich Insurance Group
Extensive research looked at thousands of company results whereby comments in
SEC reports were tied back to the stock performance of these companies The study
shows an average 25 percent reduction in share price and an impact which com-
monly lasts over two years as a result of supply chain disruptions Companies can
be simultaneously impacted by decreased sales and brand damage while incurring
significant extra expenses during recovery times following a business interruption
Historically supply chain disruptions can lead to an average of 9 percent lower sa-
les and 11 percent higher costs and many companies with extended interruptions
never recover
Perf
orm
ance
Preparation
TimeDisruptive event
Time of impact
Recovery
First response 9-30
Shareholder impact
Initital impact
Preparation for recovery
long term impact
Boost Your Procurement Value Engine I wwwpool4toolcom
17Increasing the Value-for-Money (VfM) of Procurement
Because supply chains are more and more global (ie complex) and regulations are constantly evolving the dimensions impacting sourcing decisions are becoming more and more complex Complexity includes process dependencies due to the DMAIC approach
and value analysis
Therefore having the big picture when analyzing bids and deciding an award is critical As exp-lained earlier this is where SaaS solutions and their app ecosystem can make life easier and re-present tremendous value in terms of time saved (data collection analysis) and value creation avoiding future issues is cost-avoidance that has value even if not measured in a PampL impact
The concept of ldquothe right information at the right time and the right placerdquo is illustrated below in the example of analyzing bids from suppliers In addition to the quotes a purchaser has all
Category Strategy
Company Strategy
Strategy per
Supplier
Risk amp Sus-tainabilityAnalysis
Supplier Integration
Supplier Controlling
Supplier De-velopment
Parameters for Sourcing amp
Award Decisions
From the TCO analysishellip hellip to the TVO analysis (Total Value of Ownership)
Supplier Selection
Supplier Selection
Supplier Connection
Supplier Controlling
Market Research
Category Strategy
eSourcing eSourcing
WebEDIEDI
Supplier Perf Rating
Supplier Profile
+ Supplierlsquos Production Costs
+ Supplierrsquos Production Costs
+ Evaluation of Results
+ Price Constraints + Price Constraints
+ Lead Buyer Stra-tegy
+ Supplierlsquos Material Costs
+ Supplierrsquos Material Costs
+ Process Costs given by the Supplier
+ Overhead + Overhead
+ Potential Evaluation
= TCO = TVO
Boost Your Procurement Value Engine I wwwpool4toolcom
18
Procurementrsquos role sitting between the enterprise and
supply markets means it will always be exposed to various factors outside the enterprise probably more so than any other function If itrsquos not commodity prices fluctuating crazily or natural disasters threatening supply continuity it will be something else like unethical practices in the supply pipeline giving the enterprise bad press
The Procurement leader must steer the team through the choppy waters of such challenges
raquoraquo
Sigi Osagie
Boost Your Procurement Value Engine I wwwpool4toolcom
19
TCO TVO information via various scores (bonus penalty) based on the key dimensions of the category
Moreover technology does not just limit itself to the passive role of making information availa-ble Technology can be proactive
The terms Big Data and Internet of Things are frequently used as buzzwords but they also illustrate the increased capabilities that new technologies enable in collecting and presenting data As always the real value is not in the data itself but in the actionable intelligence that you build and the actions decisions you take
Therefore algorithms will make the key difference and give companies a competitive advantage For Procurement this means technologies with capabilities
to allow an organization to act (or at least to propose a possible set of actions) based on data analyzed in real time and
to create new knowledge by identifying trends or correlations that have not been seen until now
will provide the sustainable value that Procurement is looking for
Our next paper will dive deeper into what these technologies are what they do and the many ways they enable efficiency and effectiveness but for now we will conclude that for a Procure-ment organization to have a sustainable Value Engine function Procurement will have to build and develop the right capabilities (people process and technology)
Supplier quote
TCOTVO (internal) based on various dimensions (risk
CSRhellip)
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
20
copy Copyright POOL4TOOL AG Altmannsdorfer Straszlige 9119
1120 Vienna | Austria Phone +43-1-80 490 80
Editor Bertrand Maltaverne Senior Project Manager
POOL4TOOL AG
Michael Lamoureux Sourcing Innovation
More information officepool4toolcom
wwwpool4toolcom
POOL4TOOL AGAltmannsdorfer Straszlige 9119 A-1120 Vienna Tel+43-1-80 490 80
officepool4toolcomwwwpool4toolcom
Vienna I Stuttgart I Munich I Belgrade I Detroit I Singapore I Dubai
Boost Your Procurement Value Engine I wwwpool4toolcom
11
travel services etc) and this spend ends up being requisitioned through e-mail requests made then is not entered in the Procurement system until the invoice comes in But if the organization has an extensive catalog where arbitrary items can be created by the or-ganization as needed all requisitions approval and spend gets recorded and gets under management
Contract Cost Decrease e-Signature options
Some organizations pay a lot of money couriering contracts back and forth for signature even when e-Signatures are just as legally binding A platform that is integrated with an e-Signature service can save the organization time and money allowing it to complete the contract cycle more expediently
Contract Compliance Increase alerts when documents are due (coming or past)
Organizations are at great risk when insurance certificates certifications releases or audits are not completed or submitted on time With a platform that tracks when documentary re-quirements are due the organization knows when to remind a supplier or take more severe action (such as halting all orders to the supplier until the issue is corrected) if the documen-tation needed is not received in a timely fashion
Usage Cost Decrease packaging improvements
In some industries such as food and beverage and pharmaceutical the packaging of a den-se liquid especially one with a tendency to stick to certain types of packaging can have a significant impact on the usage cost when there is high waste or expensive processes are needed to clean the containers for recycling Packaging improvements that use new types of non-stick packaging can reduce the overall lifecycle costs even if the packaging is more expensive
Risk Decrease in-transit visibility
A system that allows an organization to track its shipments from the time they leave the supplierrsquos warehouse to the time they hit the organizationrsquos warehouse with updates each time a waypoint is met or a (n intermodal) transfer is made with regular updates helps an organization not only track where itrsquos shipments are but whether or not they are likely to arrive at the expected time
Order-to-Pay Cost Decrease automatic payment on successful m-way match
Automated m-way match between a purchase order invoice and goods receipt not only increases efficiency but also increases effectiveness if the system can also automatically queue invoices that pass the m-way match for payment as this helps both Procurement and Accounts Payable be more effective in payment and cash flow planning
Efficient Procurement
As already mentioned efficiency can be invested into increasing effectiveness for example by enabling Procurement to address areas that have been left untouched or sub-optimized until now because of a lack of capacity In addition efficiency improvements allow Procurement to be more agile and pro-active
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
12
This leads to new capabilities and enhancements in cycle timesAnd allows for the following best practices to be employed which increase efficiency even more
Revisit sourcing lists (preferred suppliers) more than once a year to ensure continuous alignment between sourcing strategy and needs (especially critical for new product developments)
Manage market dynamics better the ability to identify and capture positive market changes (or mitigate impacts of negative ones) by dynamically going back to market
Improved cycle times in spend management processes that enable other support functions or positively impact the product lifecycle
Reduce savings leakage by transforming identified savings into actual savings realized because of improvements in contract management
Another aspect of efficiency lies in the tools used by Procurement to perform its activities Effi-ciency as stated earlier is about how Procurement works and in our technological era it is im-possible not to talk about technology Technology plays a key role in efficiency gains because it is an enabler simplifying a lot of administrative tasks and making process integration possible
Typical efficiency gains that are specific to using Procurement technology include
Automation impacting the level of resources needed and cycle times
Economies of scale from centralizing information and data management
Knowledge Management (KM) based on centralizing and securing information while making it more available across geographies (physical or functional)
Volatile markets opportunity or problem
The answer to this question depends on how you manage these challenges The fact
remains that Procurement must operate in the context of volatile markets
Therefore Procurement has to be equipped to cope with this
Part of this equipment is a mechanism to feed Sourcing events with real-time mar-
ket information This can be used among other things to track raw material prices
from external sources (eg London Metal Exchange) So when you have an RFQ in
addition to the suppliersrsquo conditions you can check the key price drivers against the
current market This is valuable information to ensure you do not ldquoleave moneyrdquo on
the table andor ask the right questions to suppliers to find ways to optimize condi-
tions for both parties
Plus having real-time market information allows you to constantly assess past agree-
ments against current conditions and if necessary go back to market easily
How Procurement responds to market changes is part of the broader idea of Procure-
ment agility that is a key differentiator in our world in constant change
For more see here
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
13
In addition to increasing efficiency in your Procurement organization technology also enables suppliers to be more efficient This means that Procurement can introduce efficiencies into the supply chain that it can benefit from This is also an important aspect of the business case for better supplier onboarding (supplier portals EDI e-Invoicing etc)
But not all technologies are equal when looking at efficiencies Some technologies are more cost effective than others Remember what Rudzki Smock Katzorke and Stewart said in Stra-ight to the Bottom Line An Executive Roadmap to World Class Supply Management
Also cost includes IT costs (infrastructure licenses fees etc) and usability costs In recent years SaaS and cloud solutions have transformed many functions Procurement included because they often maximize time-to-value vs on-premises solutions
In addition to reducing installation and operating costs most SaaS and cloud solutions rely on the philosophy of interoperability
System-to-system (interfaces and communication protocols)
Process-to-process (interdependence and integration)
People-to-people (collaboration)
All of this is in the context of a global economy and global supply chains Concepts like Enter-prise 20 are the new norm
Thanks to SaaS and cloud technologies Procurement can create a workspace containing all the data required for both strategic and tactical activities This workspace is ERP-agnostic mea-ning that it can be connected easily to multiple and various systems (ERPs and beyond PLMs BWs etc) internal and external systems This
centralizes key information in a single location making data collection and analysis easier
fosters collaboration with various partners and stakeholders as required by the various busi-ness processes running in the solution
streamlines data management by having data directly managed by the relevant data owner
simplifies master data management (MDM) by creating one set of master data that then dispatches the information to the operational systems and
Dont jump whole hog into technology Walk and then run if it works Establish meaningful metrics to measure its performance Make sure each piece fits into a long-term puzzle
Robert A Rudkzi Douglas A Smock Michael Katzorke and Shelley Stewart Jr
raquo raquo
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
14
increases agility and resilience by securing data and making it easily transferable (imagine an organizational change that results in changes in responsibilities and the resulting nightmare of transferring the data contained in mailboxes)
On top of that and as highlighted by the concept of interoperability cloud solutions usually live in an app ecosystem The capacity to connect to third party solutions is integrated into the solutionrsquos design and architecture For example this allows Procurement to enrich internal
data coming from internal systems with third party content to get a bigger picture than what was previously available or at least get the information faster by having the right information pushed to the right place and at the right moment
Sustainable Procurement
As noted earlier this obviously comes from having a culture of continuous improvement (DMAIC) However this isnrsquot everything Decisions your Procurement organization make today will impact operations tomorrow Therefore looking at the impacts (or future consequences) of todayrsquos decisions is a critical component of the Procurement Value Engine
This is the capability to influence the future by
Defining it (ldquoIFrdquo) - predictive analytics
Preparing for it (ldquoTHEN THATrdquo) - risk management
All of this is about anticipating and avoiding negative situations andor maximizing the occur-rence of positive ones This is the whole purpose of the broader discipline of risk management
Other Stakholder
Procurement
Masterdata 1
Masterdata 2
Masterdata n
Suppliers
3rd Party Sources Internal Information SystemsAccess Control amp Roles
Business Process 1
Business Process 2
Business Process n
Increasing the Value-for-Money (VfM) of Procurement
We need more standardized readily available third-party information shared amongst networked communities where people can pool data for operational assessment
raquoraquo
Gerard Chick amp Robert Handfield
Boost Your Procurement Value Engine I wwwpool4toolcom
16
As illustrated in the quote on the previous page current technologies are characterized by being able to gather more data thereby enabling deeper and more meaningful analysis But data alone means nothing It is what you do with it that creates value
A typical example in Procurement can be found in sourcing decisions Awarding business to suppliers must take into account the risks that the decision represents For example low-cost country (LCC) sourcing has been high on the agenda of many Procurement organizations for a while Most have now learned their global sourcing lessons and are now looking beyond LCC as simply a ldquocost downrdquo opportunity but also a ldquorisk uprdquo challenge
Increasing the Value-for-Money (VfM) of Procurement
How much do supply chain disruptions cost
Extract from a white paper by Zurich Insurance Group
Extensive research looked at thousands of company results whereby comments in
SEC reports were tied back to the stock performance of these companies The study
shows an average 25 percent reduction in share price and an impact which com-
monly lasts over two years as a result of supply chain disruptions Companies can
be simultaneously impacted by decreased sales and brand damage while incurring
significant extra expenses during recovery times following a business interruption
Historically supply chain disruptions can lead to an average of 9 percent lower sa-
les and 11 percent higher costs and many companies with extended interruptions
never recover
Perf
orm
ance
Preparation
TimeDisruptive event
Time of impact
Recovery
First response 9-30
Shareholder impact
Initital impact
Preparation for recovery
long term impact
Boost Your Procurement Value Engine I wwwpool4toolcom
17Increasing the Value-for-Money (VfM) of Procurement
Because supply chains are more and more global (ie complex) and regulations are constantly evolving the dimensions impacting sourcing decisions are becoming more and more complex Complexity includes process dependencies due to the DMAIC approach
and value analysis
Therefore having the big picture when analyzing bids and deciding an award is critical As exp-lained earlier this is where SaaS solutions and their app ecosystem can make life easier and re-present tremendous value in terms of time saved (data collection analysis) and value creation avoiding future issues is cost-avoidance that has value even if not measured in a PampL impact
The concept of ldquothe right information at the right time and the right placerdquo is illustrated below in the example of analyzing bids from suppliers In addition to the quotes a purchaser has all
Category Strategy
Company Strategy
Strategy per
Supplier
Risk amp Sus-tainabilityAnalysis
Supplier Integration
Supplier Controlling
Supplier De-velopment
Parameters for Sourcing amp
Award Decisions
From the TCO analysishellip hellip to the TVO analysis (Total Value of Ownership)
Supplier Selection
Supplier Selection
Supplier Connection
Supplier Controlling
Market Research
Category Strategy
eSourcing eSourcing
WebEDIEDI
Supplier Perf Rating
Supplier Profile
+ Supplierlsquos Production Costs
+ Supplierrsquos Production Costs
+ Evaluation of Results
+ Price Constraints + Price Constraints
+ Lead Buyer Stra-tegy
+ Supplierlsquos Material Costs
+ Supplierrsquos Material Costs
+ Process Costs given by the Supplier
+ Overhead + Overhead
+ Potential Evaluation
= TCO = TVO
Boost Your Procurement Value Engine I wwwpool4toolcom
18
Procurementrsquos role sitting between the enterprise and
supply markets means it will always be exposed to various factors outside the enterprise probably more so than any other function If itrsquos not commodity prices fluctuating crazily or natural disasters threatening supply continuity it will be something else like unethical practices in the supply pipeline giving the enterprise bad press
The Procurement leader must steer the team through the choppy waters of such challenges
raquoraquo
Sigi Osagie
Boost Your Procurement Value Engine I wwwpool4toolcom
19
TCO TVO information via various scores (bonus penalty) based on the key dimensions of the category
Moreover technology does not just limit itself to the passive role of making information availa-ble Technology can be proactive
The terms Big Data and Internet of Things are frequently used as buzzwords but they also illustrate the increased capabilities that new technologies enable in collecting and presenting data As always the real value is not in the data itself but in the actionable intelligence that you build and the actions decisions you take
Therefore algorithms will make the key difference and give companies a competitive advantage For Procurement this means technologies with capabilities
to allow an organization to act (or at least to propose a possible set of actions) based on data analyzed in real time and
to create new knowledge by identifying trends or correlations that have not been seen until now
will provide the sustainable value that Procurement is looking for
Our next paper will dive deeper into what these technologies are what they do and the many ways they enable efficiency and effectiveness but for now we will conclude that for a Procure-ment organization to have a sustainable Value Engine function Procurement will have to build and develop the right capabilities (people process and technology)
Supplier quote
TCOTVO (internal) based on various dimensions (risk
CSRhellip)
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
20
copy Copyright POOL4TOOL AG Altmannsdorfer Straszlige 9119
1120 Vienna | Austria Phone +43-1-80 490 80
Editor Bertrand Maltaverne Senior Project Manager
POOL4TOOL AG
Michael Lamoureux Sourcing Innovation
More information officepool4toolcom
wwwpool4toolcom
POOL4TOOL AGAltmannsdorfer Straszlige 9119 A-1120 Vienna Tel+43-1-80 490 80
officepool4toolcomwwwpool4toolcom
Vienna I Stuttgart I Munich I Belgrade I Detroit I Singapore I Dubai
Boost Your Procurement Value Engine I wwwpool4toolcom
12
This leads to new capabilities and enhancements in cycle timesAnd allows for the following best practices to be employed which increase efficiency even more
Revisit sourcing lists (preferred suppliers) more than once a year to ensure continuous alignment between sourcing strategy and needs (especially critical for new product developments)
Manage market dynamics better the ability to identify and capture positive market changes (or mitigate impacts of negative ones) by dynamically going back to market
Improved cycle times in spend management processes that enable other support functions or positively impact the product lifecycle
Reduce savings leakage by transforming identified savings into actual savings realized because of improvements in contract management
Another aspect of efficiency lies in the tools used by Procurement to perform its activities Effi-ciency as stated earlier is about how Procurement works and in our technological era it is im-possible not to talk about technology Technology plays a key role in efficiency gains because it is an enabler simplifying a lot of administrative tasks and making process integration possible
Typical efficiency gains that are specific to using Procurement technology include
Automation impacting the level of resources needed and cycle times
Economies of scale from centralizing information and data management
Knowledge Management (KM) based on centralizing and securing information while making it more available across geographies (physical or functional)
Volatile markets opportunity or problem
The answer to this question depends on how you manage these challenges The fact
remains that Procurement must operate in the context of volatile markets
Therefore Procurement has to be equipped to cope with this
Part of this equipment is a mechanism to feed Sourcing events with real-time mar-
ket information This can be used among other things to track raw material prices
from external sources (eg London Metal Exchange) So when you have an RFQ in
addition to the suppliersrsquo conditions you can check the key price drivers against the
current market This is valuable information to ensure you do not ldquoleave moneyrdquo on
the table andor ask the right questions to suppliers to find ways to optimize condi-
tions for both parties
Plus having real-time market information allows you to constantly assess past agree-
ments against current conditions and if necessary go back to market easily
How Procurement responds to market changes is part of the broader idea of Procure-
ment agility that is a key differentiator in our world in constant change
For more see here
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
13
In addition to increasing efficiency in your Procurement organization technology also enables suppliers to be more efficient This means that Procurement can introduce efficiencies into the supply chain that it can benefit from This is also an important aspect of the business case for better supplier onboarding (supplier portals EDI e-Invoicing etc)
But not all technologies are equal when looking at efficiencies Some technologies are more cost effective than others Remember what Rudzki Smock Katzorke and Stewart said in Stra-ight to the Bottom Line An Executive Roadmap to World Class Supply Management
Also cost includes IT costs (infrastructure licenses fees etc) and usability costs In recent years SaaS and cloud solutions have transformed many functions Procurement included because they often maximize time-to-value vs on-premises solutions
In addition to reducing installation and operating costs most SaaS and cloud solutions rely on the philosophy of interoperability
System-to-system (interfaces and communication protocols)
Process-to-process (interdependence and integration)
People-to-people (collaboration)
All of this is in the context of a global economy and global supply chains Concepts like Enter-prise 20 are the new norm
Thanks to SaaS and cloud technologies Procurement can create a workspace containing all the data required for both strategic and tactical activities This workspace is ERP-agnostic mea-ning that it can be connected easily to multiple and various systems (ERPs and beyond PLMs BWs etc) internal and external systems This
centralizes key information in a single location making data collection and analysis easier
fosters collaboration with various partners and stakeholders as required by the various busi-ness processes running in the solution
streamlines data management by having data directly managed by the relevant data owner
simplifies master data management (MDM) by creating one set of master data that then dispatches the information to the operational systems and
Dont jump whole hog into technology Walk and then run if it works Establish meaningful metrics to measure its performance Make sure each piece fits into a long-term puzzle
Robert A Rudkzi Douglas A Smock Michael Katzorke and Shelley Stewart Jr
raquo raquo
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
14
increases agility and resilience by securing data and making it easily transferable (imagine an organizational change that results in changes in responsibilities and the resulting nightmare of transferring the data contained in mailboxes)
On top of that and as highlighted by the concept of interoperability cloud solutions usually live in an app ecosystem The capacity to connect to third party solutions is integrated into the solutionrsquos design and architecture For example this allows Procurement to enrich internal
data coming from internal systems with third party content to get a bigger picture than what was previously available or at least get the information faster by having the right information pushed to the right place and at the right moment
Sustainable Procurement
As noted earlier this obviously comes from having a culture of continuous improvement (DMAIC) However this isnrsquot everything Decisions your Procurement organization make today will impact operations tomorrow Therefore looking at the impacts (or future consequences) of todayrsquos decisions is a critical component of the Procurement Value Engine
This is the capability to influence the future by
Defining it (ldquoIFrdquo) - predictive analytics
Preparing for it (ldquoTHEN THATrdquo) - risk management
All of this is about anticipating and avoiding negative situations andor maximizing the occur-rence of positive ones This is the whole purpose of the broader discipline of risk management
Other Stakholder
Procurement
Masterdata 1
Masterdata 2
Masterdata n
Suppliers
3rd Party Sources Internal Information SystemsAccess Control amp Roles
Business Process 1
Business Process 2
Business Process n
Increasing the Value-for-Money (VfM) of Procurement
We need more standardized readily available third-party information shared amongst networked communities where people can pool data for operational assessment
raquoraquo
Gerard Chick amp Robert Handfield
Boost Your Procurement Value Engine I wwwpool4toolcom
16
As illustrated in the quote on the previous page current technologies are characterized by being able to gather more data thereby enabling deeper and more meaningful analysis But data alone means nothing It is what you do with it that creates value
A typical example in Procurement can be found in sourcing decisions Awarding business to suppliers must take into account the risks that the decision represents For example low-cost country (LCC) sourcing has been high on the agenda of many Procurement organizations for a while Most have now learned their global sourcing lessons and are now looking beyond LCC as simply a ldquocost downrdquo opportunity but also a ldquorisk uprdquo challenge
Increasing the Value-for-Money (VfM) of Procurement
How much do supply chain disruptions cost
Extract from a white paper by Zurich Insurance Group
Extensive research looked at thousands of company results whereby comments in
SEC reports were tied back to the stock performance of these companies The study
shows an average 25 percent reduction in share price and an impact which com-
monly lasts over two years as a result of supply chain disruptions Companies can
be simultaneously impacted by decreased sales and brand damage while incurring
significant extra expenses during recovery times following a business interruption
Historically supply chain disruptions can lead to an average of 9 percent lower sa-
les and 11 percent higher costs and many companies with extended interruptions
never recover
Perf
orm
ance
Preparation
TimeDisruptive event
Time of impact
Recovery
First response 9-30
Shareholder impact
Initital impact
Preparation for recovery
long term impact
Boost Your Procurement Value Engine I wwwpool4toolcom
17Increasing the Value-for-Money (VfM) of Procurement
Because supply chains are more and more global (ie complex) and regulations are constantly evolving the dimensions impacting sourcing decisions are becoming more and more complex Complexity includes process dependencies due to the DMAIC approach
and value analysis
Therefore having the big picture when analyzing bids and deciding an award is critical As exp-lained earlier this is where SaaS solutions and their app ecosystem can make life easier and re-present tremendous value in terms of time saved (data collection analysis) and value creation avoiding future issues is cost-avoidance that has value even if not measured in a PampL impact
The concept of ldquothe right information at the right time and the right placerdquo is illustrated below in the example of analyzing bids from suppliers In addition to the quotes a purchaser has all
Category Strategy
Company Strategy
Strategy per
Supplier
Risk amp Sus-tainabilityAnalysis
Supplier Integration
Supplier Controlling
Supplier De-velopment
Parameters for Sourcing amp
Award Decisions
From the TCO analysishellip hellip to the TVO analysis (Total Value of Ownership)
Supplier Selection
Supplier Selection
Supplier Connection
Supplier Controlling
Market Research
Category Strategy
eSourcing eSourcing
WebEDIEDI
Supplier Perf Rating
Supplier Profile
+ Supplierlsquos Production Costs
+ Supplierrsquos Production Costs
+ Evaluation of Results
+ Price Constraints + Price Constraints
+ Lead Buyer Stra-tegy
+ Supplierlsquos Material Costs
+ Supplierrsquos Material Costs
+ Process Costs given by the Supplier
+ Overhead + Overhead
+ Potential Evaluation
= TCO = TVO
Boost Your Procurement Value Engine I wwwpool4toolcom
18
Procurementrsquos role sitting between the enterprise and
supply markets means it will always be exposed to various factors outside the enterprise probably more so than any other function If itrsquos not commodity prices fluctuating crazily or natural disasters threatening supply continuity it will be something else like unethical practices in the supply pipeline giving the enterprise bad press
The Procurement leader must steer the team through the choppy waters of such challenges
raquoraquo
Sigi Osagie
Boost Your Procurement Value Engine I wwwpool4toolcom
19
TCO TVO information via various scores (bonus penalty) based on the key dimensions of the category
Moreover technology does not just limit itself to the passive role of making information availa-ble Technology can be proactive
The terms Big Data and Internet of Things are frequently used as buzzwords but they also illustrate the increased capabilities that new technologies enable in collecting and presenting data As always the real value is not in the data itself but in the actionable intelligence that you build and the actions decisions you take
Therefore algorithms will make the key difference and give companies a competitive advantage For Procurement this means technologies with capabilities
to allow an organization to act (or at least to propose a possible set of actions) based on data analyzed in real time and
to create new knowledge by identifying trends or correlations that have not been seen until now
will provide the sustainable value that Procurement is looking for
Our next paper will dive deeper into what these technologies are what they do and the many ways they enable efficiency and effectiveness but for now we will conclude that for a Procure-ment organization to have a sustainable Value Engine function Procurement will have to build and develop the right capabilities (people process and technology)
Supplier quote
TCOTVO (internal) based on various dimensions (risk
CSRhellip)
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
20
copy Copyright POOL4TOOL AG Altmannsdorfer Straszlige 9119
1120 Vienna | Austria Phone +43-1-80 490 80
Editor Bertrand Maltaverne Senior Project Manager
POOL4TOOL AG
Michael Lamoureux Sourcing Innovation
More information officepool4toolcom
wwwpool4toolcom
POOL4TOOL AGAltmannsdorfer Straszlige 9119 A-1120 Vienna Tel+43-1-80 490 80
officepool4toolcomwwwpool4toolcom
Vienna I Stuttgart I Munich I Belgrade I Detroit I Singapore I Dubai
Boost Your Procurement Value Engine I wwwpool4toolcom
13
In addition to increasing efficiency in your Procurement organization technology also enables suppliers to be more efficient This means that Procurement can introduce efficiencies into the supply chain that it can benefit from This is also an important aspect of the business case for better supplier onboarding (supplier portals EDI e-Invoicing etc)
But not all technologies are equal when looking at efficiencies Some technologies are more cost effective than others Remember what Rudzki Smock Katzorke and Stewart said in Stra-ight to the Bottom Line An Executive Roadmap to World Class Supply Management
Also cost includes IT costs (infrastructure licenses fees etc) and usability costs In recent years SaaS and cloud solutions have transformed many functions Procurement included because they often maximize time-to-value vs on-premises solutions
In addition to reducing installation and operating costs most SaaS and cloud solutions rely on the philosophy of interoperability
System-to-system (interfaces and communication protocols)
Process-to-process (interdependence and integration)
People-to-people (collaboration)
All of this is in the context of a global economy and global supply chains Concepts like Enter-prise 20 are the new norm
Thanks to SaaS and cloud technologies Procurement can create a workspace containing all the data required for both strategic and tactical activities This workspace is ERP-agnostic mea-ning that it can be connected easily to multiple and various systems (ERPs and beyond PLMs BWs etc) internal and external systems This
centralizes key information in a single location making data collection and analysis easier
fosters collaboration with various partners and stakeholders as required by the various busi-ness processes running in the solution
streamlines data management by having data directly managed by the relevant data owner
simplifies master data management (MDM) by creating one set of master data that then dispatches the information to the operational systems and
Dont jump whole hog into technology Walk and then run if it works Establish meaningful metrics to measure its performance Make sure each piece fits into a long-term puzzle
Robert A Rudkzi Douglas A Smock Michael Katzorke and Shelley Stewart Jr
raquo raquo
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
14
increases agility and resilience by securing data and making it easily transferable (imagine an organizational change that results in changes in responsibilities and the resulting nightmare of transferring the data contained in mailboxes)
On top of that and as highlighted by the concept of interoperability cloud solutions usually live in an app ecosystem The capacity to connect to third party solutions is integrated into the solutionrsquos design and architecture For example this allows Procurement to enrich internal
data coming from internal systems with third party content to get a bigger picture than what was previously available or at least get the information faster by having the right information pushed to the right place and at the right moment
Sustainable Procurement
As noted earlier this obviously comes from having a culture of continuous improvement (DMAIC) However this isnrsquot everything Decisions your Procurement organization make today will impact operations tomorrow Therefore looking at the impacts (or future consequences) of todayrsquos decisions is a critical component of the Procurement Value Engine
This is the capability to influence the future by
Defining it (ldquoIFrdquo) - predictive analytics
Preparing for it (ldquoTHEN THATrdquo) - risk management
All of this is about anticipating and avoiding negative situations andor maximizing the occur-rence of positive ones This is the whole purpose of the broader discipline of risk management
Other Stakholder
Procurement
Masterdata 1
Masterdata 2
Masterdata n
Suppliers
3rd Party Sources Internal Information SystemsAccess Control amp Roles
Business Process 1
Business Process 2
Business Process n
Increasing the Value-for-Money (VfM) of Procurement
We need more standardized readily available third-party information shared amongst networked communities where people can pool data for operational assessment
raquoraquo
Gerard Chick amp Robert Handfield
Boost Your Procurement Value Engine I wwwpool4toolcom
16
As illustrated in the quote on the previous page current technologies are characterized by being able to gather more data thereby enabling deeper and more meaningful analysis But data alone means nothing It is what you do with it that creates value
A typical example in Procurement can be found in sourcing decisions Awarding business to suppliers must take into account the risks that the decision represents For example low-cost country (LCC) sourcing has been high on the agenda of many Procurement organizations for a while Most have now learned their global sourcing lessons and are now looking beyond LCC as simply a ldquocost downrdquo opportunity but also a ldquorisk uprdquo challenge
Increasing the Value-for-Money (VfM) of Procurement
How much do supply chain disruptions cost
Extract from a white paper by Zurich Insurance Group
Extensive research looked at thousands of company results whereby comments in
SEC reports were tied back to the stock performance of these companies The study
shows an average 25 percent reduction in share price and an impact which com-
monly lasts over two years as a result of supply chain disruptions Companies can
be simultaneously impacted by decreased sales and brand damage while incurring
significant extra expenses during recovery times following a business interruption
Historically supply chain disruptions can lead to an average of 9 percent lower sa-
les and 11 percent higher costs and many companies with extended interruptions
never recover
Perf
orm
ance
Preparation
TimeDisruptive event
Time of impact
Recovery
First response 9-30
Shareholder impact
Initital impact
Preparation for recovery
long term impact
Boost Your Procurement Value Engine I wwwpool4toolcom
17Increasing the Value-for-Money (VfM) of Procurement
Because supply chains are more and more global (ie complex) and regulations are constantly evolving the dimensions impacting sourcing decisions are becoming more and more complex Complexity includes process dependencies due to the DMAIC approach
and value analysis
Therefore having the big picture when analyzing bids and deciding an award is critical As exp-lained earlier this is where SaaS solutions and their app ecosystem can make life easier and re-present tremendous value in terms of time saved (data collection analysis) and value creation avoiding future issues is cost-avoidance that has value even if not measured in a PampL impact
The concept of ldquothe right information at the right time and the right placerdquo is illustrated below in the example of analyzing bids from suppliers In addition to the quotes a purchaser has all
Category Strategy
Company Strategy
Strategy per
Supplier
Risk amp Sus-tainabilityAnalysis
Supplier Integration
Supplier Controlling
Supplier De-velopment
Parameters for Sourcing amp
Award Decisions
From the TCO analysishellip hellip to the TVO analysis (Total Value of Ownership)
Supplier Selection
Supplier Selection
Supplier Connection
Supplier Controlling
Market Research
Category Strategy
eSourcing eSourcing
WebEDIEDI
Supplier Perf Rating
Supplier Profile
+ Supplierlsquos Production Costs
+ Supplierrsquos Production Costs
+ Evaluation of Results
+ Price Constraints + Price Constraints
+ Lead Buyer Stra-tegy
+ Supplierlsquos Material Costs
+ Supplierrsquos Material Costs
+ Process Costs given by the Supplier
+ Overhead + Overhead
+ Potential Evaluation
= TCO = TVO
Boost Your Procurement Value Engine I wwwpool4toolcom
18
Procurementrsquos role sitting between the enterprise and
supply markets means it will always be exposed to various factors outside the enterprise probably more so than any other function If itrsquos not commodity prices fluctuating crazily or natural disasters threatening supply continuity it will be something else like unethical practices in the supply pipeline giving the enterprise bad press
The Procurement leader must steer the team through the choppy waters of such challenges
raquoraquo
Sigi Osagie
Boost Your Procurement Value Engine I wwwpool4toolcom
19
TCO TVO information via various scores (bonus penalty) based on the key dimensions of the category
Moreover technology does not just limit itself to the passive role of making information availa-ble Technology can be proactive
The terms Big Data and Internet of Things are frequently used as buzzwords but they also illustrate the increased capabilities that new technologies enable in collecting and presenting data As always the real value is not in the data itself but in the actionable intelligence that you build and the actions decisions you take
Therefore algorithms will make the key difference and give companies a competitive advantage For Procurement this means technologies with capabilities
to allow an organization to act (or at least to propose a possible set of actions) based on data analyzed in real time and
to create new knowledge by identifying trends or correlations that have not been seen until now
will provide the sustainable value that Procurement is looking for
Our next paper will dive deeper into what these technologies are what they do and the many ways they enable efficiency and effectiveness but for now we will conclude that for a Procure-ment organization to have a sustainable Value Engine function Procurement will have to build and develop the right capabilities (people process and technology)
Supplier quote
TCOTVO (internal) based on various dimensions (risk
CSRhellip)
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
20
copy Copyright POOL4TOOL AG Altmannsdorfer Straszlige 9119
1120 Vienna | Austria Phone +43-1-80 490 80
Editor Bertrand Maltaverne Senior Project Manager
POOL4TOOL AG
Michael Lamoureux Sourcing Innovation
More information officepool4toolcom
wwwpool4toolcom
POOL4TOOL AGAltmannsdorfer Straszlige 9119 A-1120 Vienna Tel+43-1-80 490 80
officepool4toolcomwwwpool4toolcom
Vienna I Stuttgart I Munich I Belgrade I Detroit I Singapore I Dubai
Boost Your Procurement Value Engine I wwwpool4toolcom
14
increases agility and resilience by securing data and making it easily transferable (imagine an organizational change that results in changes in responsibilities and the resulting nightmare of transferring the data contained in mailboxes)
On top of that and as highlighted by the concept of interoperability cloud solutions usually live in an app ecosystem The capacity to connect to third party solutions is integrated into the solutionrsquos design and architecture For example this allows Procurement to enrich internal
data coming from internal systems with third party content to get a bigger picture than what was previously available or at least get the information faster by having the right information pushed to the right place and at the right moment
Sustainable Procurement
As noted earlier this obviously comes from having a culture of continuous improvement (DMAIC) However this isnrsquot everything Decisions your Procurement organization make today will impact operations tomorrow Therefore looking at the impacts (or future consequences) of todayrsquos decisions is a critical component of the Procurement Value Engine
This is the capability to influence the future by
Defining it (ldquoIFrdquo) - predictive analytics
Preparing for it (ldquoTHEN THATrdquo) - risk management
All of this is about anticipating and avoiding negative situations andor maximizing the occur-rence of positive ones This is the whole purpose of the broader discipline of risk management
Other Stakholder
Procurement
Masterdata 1
Masterdata 2
Masterdata n
Suppliers
3rd Party Sources Internal Information SystemsAccess Control amp Roles
Business Process 1
Business Process 2
Business Process n
Increasing the Value-for-Money (VfM) of Procurement
We need more standardized readily available third-party information shared amongst networked communities where people can pool data for operational assessment
raquoraquo
Gerard Chick amp Robert Handfield
Boost Your Procurement Value Engine I wwwpool4toolcom
16
As illustrated in the quote on the previous page current technologies are characterized by being able to gather more data thereby enabling deeper and more meaningful analysis But data alone means nothing It is what you do with it that creates value
A typical example in Procurement can be found in sourcing decisions Awarding business to suppliers must take into account the risks that the decision represents For example low-cost country (LCC) sourcing has been high on the agenda of many Procurement organizations for a while Most have now learned their global sourcing lessons and are now looking beyond LCC as simply a ldquocost downrdquo opportunity but also a ldquorisk uprdquo challenge
Increasing the Value-for-Money (VfM) of Procurement
How much do supply chain disruptions cost
Extract from a white paper by Zurich Insurance Group
Extensive research looked at thousands of company results whereby comments in
SEC reports were tied back to the stock performance of these companies The study
shows an average 25 percent reduction in share price and an impact which com-
monly lasts over two years as a result of supply chain disruptions Companies can
be simultaneously impacted by decreased sales and brand damage while incurring
significant extra expenses during recovery times following a business interruption
Historically supply chain disruptions can lead to an average of 9 percent lower sa-
les and 11 percent higher costs and many companies with extended interruptions
never recover
Perf
orm
ance
Preparation
TimeDisruptive event
Time of impact
Recovery
First response 9-30
Shareholder impact
Initital impact
Preparation for recovery
long term impact
Boost Your Procurement Value Engine I wwwpool4toolcom
17Increasing the Value-for-Money (VfM) of Procurement
Because supply chains are more and more global (ie complex) and regulations are constantly evolving the dimensions impacting sourcing decisions are becoming more and more complex Complexity includes process dependencies due to the DMAIC approach
and value analysis
Therefore having the big picture when analyzing bids and deciding an award is critical As exp-lained earlier this is where SaaS solutions and their app ecosystem can make life easier and re-present tremendous value in terms of time saved (data collection analysis) and value creation avoiding future issues is cost-avoidance that has value even if not measured in a PampL impact
The concept of ldquothe right information at the right time and the right placerdquo is illustrated below in the example of analyzing bids from suppliers In addition to the quotes a purchaser has all
Category Strategy
Company Strategy
Strategy per
Supplier
Risk amp Sus-tainabilityAnalysis
Supplier Integration
Supplier Controlling
Supplier De-velopment
Parameters for Sourcing amp
Award Decisions
From the TCO analysishellip hellip to the TVO analysis (Total Value of Ownership)
Supplier Selection
Supplier Selection
Supplier Connection
Supplier Controlling
Market Research
Category Strategy
eSourcing eSourcing
WebEDIEDI
Supplier Perf Rating
Supplier Profile
+ Supplierlsquos Production Costs
+ Supplierrsquos Production Costs
+ Evaluation of Results
+ Price Constraints + Price Constraints
+ Lead Buyer Stra-tegy
+ Supplierlsquos Material Costs
+ Supplierrsquos Material Costs
+ Process Costs given by the Supplier
+ Overhead + Overhead
+ Potential Evaluation
= TCO = TVO
Boost Your Procurement Value Engine I wwwpool4toolcom
18
Procurementrsquos role sitting between the enterprise and
supply markets means it will always be exposed to various factors outside the enterprise probably more so than any other function If itrsquos not commodity prices fluctuating crazily or natural disasters threatening supply continuity it will be something else like unethical practices in the supply pipeline giving the enterprise bad press
The Procurement leader must steer the team through the choppy waters of such challenges
raquoraquo
Sigi Osagie
Boost Your Procurement Value Engine I wwwpool4toolcom
19
TCO TVO information via various scores (bonus penalty) based on the key dimensions of the category
Moreover technology does not just limit itself to the passive role of making information availa-ble Technology can be proactive
The terms Big Data and Internet of Things are frequently used as buzzwords but they also illustrate the increased capabilities that new technologies enable in collecting and presenting data As always the real value is not in the data itself but in the actionable intelligence that you build and the actions decisions you take
Therefore algorithms will make the key difference and give companies a competitive advantage For Procurement this means technologies with capabilities
to allow an organization to act (or at least to propose a possible set of actions) based on data analyzed in real time and
to create new knowledge by identifying trends or correlations that have not been seen until now
will provide the sustainable value that Procurement is looking for
Our next paper will dive deeper into what these technologies are what they do and the many ways they enable efficiency and effectiveness but for now we will conclude that for a Procure-ment organization to have a sustainable Value Engine function Procurement will have to build and develop the right capabilities (people process and technology)
Supplier quote
TCOTVO (internal) based on various dimensions (risk
CSRhellip)
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
20
copy Copyright POOL4TOOL AG Altmannsdorfer Straszlige 9119
1120 Vienna | Austria Phone +43-1-80 490 80
Editor Bertrand Maltaverne Senior Project Manager
POOL4TOOL AG
Michael Lamoureux Sourcing Innovation
More information officepool4toolcom
wwwpool4toolcom
POOL4TOOL AGAltmannsdorfer Straszlige 9119 A-1120 Vienna Tel+43-1-80 490 80
officepool4toolcomwwwpool4toolcom
Vienna I Stuttgart I Munich I Belgrade I Detroit I Singapore I Dubai
We need more standardized readily available third-party information shared amongst networked communities where people can pool data for operational assessment
raquoraquo
Gerard Chick amp Robert Handfield
Boost Your Procurement Value Engine I wwwpool4toolcom
16
As illustrated in the quote on the previous page current technologies are characterized by being able to gather more data thereby enabling deeper and more meaningful analysis But data alone means nothing It is what you do with it that creates value
A typical example in Procurement can be found in sourcing decisions Awarding business to suppliers must take into account the risks that the decision represents For example low-cost country (LCC) sourcing has been high on the agenda of many Procurement organizations for a while Most have now learned their global sourcing lessons and are now looking beyond LCC as simply a ldquocost downrdquo opportunity but also a ldquorisk uprdquo challenge
Increasing the Value-for-Money (VfM) of Procurement
How much do supply chain disruptions cost
Extract from a white paper by Zurich Insurance Group
Extensive research looked at thousands of company results whereby comments in
SEC reports were tied back to the stock performance of these companies The study
shows an average 25 percent reduction in share price and an impact which com-
monly lasts over two years as a result of supply chain disruptions Companies can
be simultaneously impacted by decreased sales and brand damage while incurring
significant extra expenses during recovery times following a business interruption
Historically supply chain disruptions can lead to an average of 9 percent lower sa-
les and 11 percent higher costs and many companies with extended interruptions
never recover
Perf
orm
ance
Preparation
TimeDisruptive event
Time of impact
Recovery
First response 9-30
Shareholder impact
Initital impact
Preparation for recovery
long term impact
Boost Your Procurement Value Engine I wwwpool4toolcom
17Increasing the Value-for-Money (VfM) of Procurement
Because supply chains are more and more global (ie complex) and regulations are constantly evolving the dimensions impacting sourcing decisions are becoming more and more complex Complexity includes process dependencies due to the DMAIC approach
and value analysis
Therefore having the big picture when analyzing bids and deciding an award is critical As exp-lained earlier this is where SaaS solutions and their app ecosystem can make life easier and re-present tremendous value in terms of time saved (data collection analysis) and value creation avoiding future issues is cost-avoidance that has value even if not measured in a PampL impact
The concept of ldquothe right information at the right time and the right placerdquo is illustrated below in the example of analyzing bids from suppliers In addition to the quotes a purchaser has all
Category Strategy
Company Strategy
Strategy per
Supplier
Risk amp Sus-tainabilityAnalysis
Supplier Integration
Supplier Controlling
Supplier De-velopment
Parameters for Sourcing amp
Award Decisions
From the TCO analysishellip hellip to the TVO analysis (Total Value of Ownership)
Supplier Selection
Supplier Selection
Supplier Connection
Supplier Controlling
Market Research
Category Strategy
eSourcing eSourcing
WebEDIEDI
Supplier Perf Rating
Supplier Profile
+ Supplierlsquos Production Costs
+ Supplierrsquos Production Costs
+ Evaluation of Results
+ Price Constraints + Price Constraints
+ Lead Buyer Stra-tegy
+ Supplierlsquos Material Costs
+ Supplierrsquos Material Costs
+ Process Costs given by the Supplier
+ Overhead + Overhead
+ Potential Evaluation
= TCO = TVO
Boost Your Procurement Value Engine I wwwpool4toolcom
18
Procurementrsquos role sitting between the enterprise and
supply markets means it will always be exposed to various factors outside the enterprise probably more so than any other function If itrsquos not commodity prices fluctuating crazily or natural disasters threatening supply continuity it will be something else like unethical practices in the supply pipeline giving the enterprise bad press
The Procurement leader must steer the team through the choppy waters of such challenges
raquoraquo
Sigi Osagie
Boost Your Procurement Value Engine I wwwpool4toolcom
19
TCO TVO information via various scores (bonus penalty) based on the key dimensions of the category
Moreover technology does not just limit itself to the passive role of making information availa-ble Technology can be proactive
The terms Big Data and Internet of Things are frequently used as buzzwords but they also illustrate the increased capabilities that new technologies enable in collecting and presenting data As always the real value is not in the data itself but in the actionable intelligence that you build and the actions decisions you take
Therefore algorithms will make the key difference and give companies a competitive advantage For Procurement this means technologies with capabilities
to allow an organization to act (or at least to propose a possible set of actions) based on data analyzed in real time and
to create new knowledge by identifying trends or correlations that have not been seen until now
will provide the sustainable value that Procurement is looking for
Our next paper will dive deeper into what these technologies are what they do and the many ways they enable efficiency and effectiveness but for now we will conclude that for a Procure-ment organization to have a sustainable Value Engine function Procurement will have to build and develop the right capabilities (people process and technology)
Supplier quote
TCOTVO (internal) based on various dimensions (risk
CSRhellip)
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
20
copy Copyright POOL4TOOL AG Altmannsdorfer Straszlige 9119
1120 Vienna | Austria Phone +43-1-80 490 80
Editor Bertrand Maltaverne Senior Project Manager
POOL4TOOL AG
Michael Lamoureux Sourcing Innovation
More information officepool4toolcom
wwwpool4toolcom
POOL4TOOL AGAltmannsdorfer Straszlige 9119 A-1120 Vienna Tel+43-1-80 490 80
officepool4toolcomwwwpool4toolcom
Vienna I Stuttgart I Munich I Belgrade I Detroit I Singapore I Dubai
Boost Your Procurement Value Engine I wwwpool4toolcom
16
As illustrated in the quote on the previous page current technologies are characterized by being able to gather more data thereby enabling deeper and more meaningful analysis But data alone means nothing It is what you do with it that creates value
A typical example in Procurement can be found in sourcing decisions Awarding business to suppliers must take into account the risks that the decision represents For example low-cost country (LCC) sourcing has been high on the agenda of many Procurement organizations for a while Most have now learned their global sourcing lessons and are now looking beyond LCC as simply a ldquocost downrdquo opportunity but also a ldquorisk uprdquo challenge
Increasing the Value-for-Money (VfM) of Procurement
How much do supply chain disruptions cost
Extract from a white paper by Zurich Insurance Group
Extensive research looked at thousands of company results whereby comments in
SEC reports were tied back to the stock performance of these companies The study
shows an average 25 percent reduction in share price and an impact which com-
monly lasts over two years as a result of supply chain disruptions Companies can
be simultaneously impacted by decreased sales and brand damage while incurring
significant extra expenses during recovery times following a business interruption
Historically supply chain disruptions can lead to an average of 9 percent lower sa-
les and 11 percent higher costs and many companies with extended interruptions
never recover
Perf
orm
ance
Preparation
TimeDisruptive event
Time of impact
Recovery
First response 9-30
Shareholder impact
Initital impact
Preparation for recovery
long term impact
Boost Your Procurement Value Engine I wwwpool4toolcom
17Increasing the Value-for-Money (VfM) of Procurement
Because supply chains are more and more global (ie complex) and regulations are constantly evolving the dimensions impacting sourcing decisions are becoming more and more complex Complexity includes process dependencies due to the DMAIC approach
and value analysis
Therefore having the big picture when analyzing bids and deciding an award is critical As exp-lained earlier this is where SaaS solutions and their app ecosystem can make life easier and re-present tremendous value in terms of time saved (data collection analysis) and value creation avoiding future issues is cost-avoidance that has value even if not measured in a PampL impact
The concept of ldquothe right information at the right time and the right placerdquo is illustrated below in the example of analyzing bids from suppliers In addition to the quotes a purchaser has all
Category Strategy
Company Strategy
Strategy per
Supplier
Risk amp Sus-tainabilityAnalysis
Supplier Integration
Supplier Controlling
Supplier De-velopment
Parameters for Sourcing amp
Award Decisions
From the TCO analysishellip hellip to the TVO analysis (Total Value of Ownership)
Supplier Selection
Supplier Selection
Supplier Connection
Supplier Controlling
Market Research
Category Strategy
eSourcing eSourcing
WebEDIEDI
Supplier Perf Rating
Supplier Profile
+ Supplierlsquos Production Costs
+ Supplierrsquos Production Costs
+ Evaluation of Results
+ Price Constraints + Price Constraints
+ Lead Buyer Stra-tegy
+ Supplierlsquos Material Costs
+ Supplierrsquos Material Costs
+ Process Costs given by the Supplier
+ Overhead + Overhead
+ Potential Evaluation
= TCO = TVO
Boost Your Procurement Value Engine I wwwpool4toolcom
18
Procurementrsquos role sitting between the enterprise and
supply markets means it will always be exposed to various factors outside the enterprise probably more so than any other function If itrsquos not commodity prices fluctuating crazily or natural disasters threatening supply continuity it will be something else like unethical practices in the supply pipeline giving the enterprise bad press
The Procurement leader must steer the team through the choppy waters of such challenges
raquoraquo
Sigi Osagie
Boost Your Procurement Value Engine I wwwpool4toolcom
19
TCO TVO information via various scores (bonus penalty) based on the key dimensions of the category
Moreover technology does not just limit itself to the passive role of making information availa-ble Technology can be proactive
The terms Big Data and Internet of Things are frequently used as buzzwords but they also illustrate the increased capabilities that new technologies enable in collecting and presenting data As always the real value is not in the data itself but in the actionable intelligence that you build and the actions decisions you take
Therefore algorithms will make the key difference and give companies a competitive advantage For Procurement this means technologies with capabilities
to allow an organization to act (or at least to propose a possible set of actions) based on data analyzed in real time and
to create new knowledge by identifying trends or correlations that have not been seen until now
will provide the sustainable value that Procurement is looking for
Our next paper will dive deeper into what these technologies are what they do and the many ways they enable efficiency and effectiveness but for now we will conclude that for a Procure-ment organization to have a sustainable Value Engine function Procurement will have to build and develop the right capabilities (people process and technology)
Supplier quote
TCOTVO (internal) based on various dimensions (risk
CSRhellip)
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
20
copy Copyright POOL4TOOL AG Altmannsdorfer Straszlige 9119
1120 Vienna | Austria Phone +43-1-80 490 80
Editor Bertrand Maltaverne Senior Project Manager
POOL4TOOL AG
Michael Lamoureux Sourcing Innovation
More information officepool4toolcom
wwwpool4toolcom
POOL4TOOL AGAltmannsdorfer Straszlige 9119 A-1120 Vienna Tel+43-1-80 490 80
officepool4toolcomwwwpool4toolcom
Vienna I Stuttgart I Munich I Belgrade I Detroit I Singapore I Dubai
Boost Your Procurement Value Engine I wwwpool4toolcom
17Increasing the Value-for-Money (VfM) of Procurement
Because supply chains are more and more global (ie complex) and regulations are constantly evolving the dimensions impacting sourcing decisions are becoming more and more complex Complexity includes process dependencies due to the DMAIC approach
and value analysis
Therefore having the big picture when analyzing bids and deciding an award is critical As exp-lained earlier this is where SaaS solutions and their app ecosystem can make life easier and re-present tremendous value in terms of time saved (data collection analysis) and value creation avoiding future issues is cost-avoidance that has value even if not measured in a PampL impact
The concept of ldquothe right information at the right time and the right placerdquo is illustrated below in the example of analyzing bids from suppliers In addition to the quotes a purchaser has all
Category Strategy
Company Strategy
Strategy per
Supplier
Risk amp Sus-tainabilityAnalysis
Supplier Integration
Supplier Controlling
Supplier De-velopment
Parameters for Sourcing amp
Award Decisions
From the TCO analysishellip hellip to the TVO analysis (Total Value of Ownership)
Supplier Selection
Supplier Selection
Supplier Connection
Supplier Controlling
Market Research
Category Strategy
eSourcing eSourcing
WebEDIEDI
Supplier Perf Rating
Supplier Profile
+ Supplierlsquos Production Costs
+ Supplierrsquos Production Costs
+ Evaluation of Results
+ Price Constraints + Price Constraints
+ Lead Buyer Stra-tegy
+ Supplierlsquos Material Costs
+ Supplierrsquos Material Costs
+ Process Costs given by the Supplier
+ Overhead + Overhead
+ Potential Evaluation
= TCO = TVO
Boost Your Procurement Value Engine I wwwpool4toolcom
18
Procurementrsquos role sitting between the enterprise and
supply markets means it will always be exposed to various factors outside the enterprise probably more so than any other function If itrsquos not commodity prices fluctuating crazily or natural disasters threatening supply continuity it will be something else like unethical practices in the supply pipeline giving the enterprise bad press
The Procurement leader must steer the team through the choppy waters of such challenges
raquoraquo
Sigi Osagie
Boost Your Procurement Value Engine I wwwpool4toolcom
19
TCO TVO information via various scores (bonus penalty) based on the key dimensions of the category
Moreover technology does not just limit itself to the passive role of making information availa-ble Technology can be proactive
The terms Big Data and Internet of Things are frequently used as buzzwords but they also illustrate the increased capabilities that new technologies enable in collecting and presenting data As always the real value is not in the data itself but in the actionable intelligence that you build and the actions decisions you take
Therefore algorithms will make the key difference and give companies a competitive advantage For Procurement this means technologies with capabilities
to allow an organization to act (or at least to propose a possible set of actions) based on data analyzed in real time and
to create new knowledge by identifying trends or correlations that have not been seen until now
will provide the sustainable value that Procurement is looking for
Our next paper will dive deeper into what these technologies are what they do and the many ways they enable efficiency and effectiveness but for now we will conclude that for a Procure-ment organization to have a sustainable Value Engine function Procurement will have to build and develop the right capabilities (people process and technology)
Supplier quote
TCOTVO (internal) based on various dimensions (risk
CSRhellip)
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
20
copy Copyright POOL4TOOL AG Altmannsdorfer Straszlige 9119
1120 Vienna | Austria Phone +43-1-80 490 80
Editor Bertrand Maltaverne Senior Project Manager
POOL4TOOL AG
Michael Lamoureux Sourcing Innovation
More information officepool4toolcom
wwwpool4toolcom
POOL4TOOL AGAltmannsdorfer Straszlige 9119 A-1120 Vienna Tel+43-1-80 490 80
officepool4toolcomwwwpool4toolcom
Vienna I Stuttgart I Munich I Belgrade I Detroit I Singapore I Dubai
Boost Your Procurement Value Engine I wwwpool4toolcom
18
Procurementrsquos role sitting between the enterprise and
supply markets means it will always be exposed to various factors outside the enterprise probably more so than any other function If itrsquos not commodity prices fluctuating crazily or natural disasters threatening supply continuity it will be something else like unethical practices in the supply pipeline giving the enterprise bad press
The Procurement leader must steer the team through the choppy waters of such challenges
raquoraquo
Sigi Osagie
Boost Your Procurement Value Engine I wwwpool4toolcom
19
TCO TVO information via various scores (bonus penalty) based on the key dimensions of the category
Moreover technology does not just limit itself to the passive role of making information availa-ble Technology can be proactive
The terms Big Data and Internet of Things are frequently used as buzzwords but they also illustrate the increased capabilities that new technologies enable in collecting and presenting data As always the real value is not in the data itself but in the actionable intelligence that you build and the actions decisions you take
Therefore algorithms will make the key difference and give companies a competitive advantage For Procurement this means technologies with capabilities
to allow an organization to act (or at least to propose a possible set of actions) based on data analyzed in real time and
to create new knowledge by identifying trends or correlations that have not been seen until now
will provide the sustainable value that Procurement is looking for
Our next paper will dive deeper into what these technologies are what they do and the many ways they enable efficiency and effectiveness but for now we will conclude that for a Procure-ment organization to have a sustainable Value Engine function Procurement will have to build and develop the right capabilities (people process and technology)
Supplier quote
TCOTVO (internal) based on various dimensions (risk
CSRhellip)
Increasing the Value-for-Money (VfM) of Procurement
Boost Your Procurement Value Engine I wwwpool4toolcom
20
copy Copyright POOL4TOOL AG Altmannsdorfer Straszlige 9119
1120 Vienna | Austria Phone +43-1-80 490 80
Editor Bertrand Maltaverne Senior Project Manager
POOL4TOOL AG
Michael Lamoureux Sourcing Innovation
More information officepool4toolcom
wwwpool4toolcom
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TCO TVO information via various scores (bonus penalty) based on the key dimensions of the category
Moreover technology does not just limit itself to the passive role of making information availa-ble Technology can be proactive
The terms Big Data and Internet of Things are frequently used as buzzwords but they also illustrate the increased capabilities that new technologies enable in collecting and presenting data As always the real value is not in the data itself but in the actionable intelligence that you build and the actions decisions you take
Therefore algorithms will make the key difference and give companies a competitive advantage For Procurement this means technologies with capabilities
to allow an organization to act (or at least to propose a possible set of actions) based on data analyzed in real time and
to create new knowledge by identifying trends or correlations that have not been seen until now
will provide the sustainable value that Procurement is looking for
Our next paper will dive deeper into what these technologies are what they do and the many ways they enable efficiency and effectiveness but for now we will conclude that for a Procure-ment organization to have a sustainable Value Engine function Procurement will have to build and develop the right capabilities (people process and technology)
Supplier quote
TCOTVO (internal) based on various dimensions (risk
CSRhellip)
Increasing the Value-for-Money (VfM) of Procurement
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copy Copyright POOL4TOOL AG Altmannsdorfer Straszlige 9119
1120 Vienna | Austria Phone +43-1-80 490 80
Editor Bertrand Maltaverne Senior Project Manager
POOL4TOOL AG
Michael Lamoureux Sourcing Innovation
More information officepool4toolcom
wwwpool4toolcom
POOL4TOOL AGAltmannsdorfer Straszlige 9119 A-1120 Vienna Tel+43-1-80 490 80
officepool4toolcomwwwpool4toolcom
Vienna I Stuttgart I Munich I Belgrade I Detroit I Singapore I Dubai
Boost Your Procurement Value Engine I wwwpool4toolcom
20
copy Copyright POOL4TOOL AG Altmannsdorfer Straszlige 9119
1120 Vienna | Austria Phone +43-1-80 490 80
Editor Bertrand Maltaverne Senior Project Manager
POOL4TOOL AG
Michael Lamoureux Sourcing Innovation
More information officepool4toolcom
wwwpool4toolcom
POOL4TOOL AGAltmannsdorfer Straszlige 9119 A-1120 Vienna Tel+43-1-80 490 80
officepool4toolcomwwwpool4toolcom
Vienna I Stuttgart I Munich I Belgrade I Detroit I Singapore I Dubai
POOL4TOOL AGAltmannsdorfer Straszlige 9119 A-1120 Vienna Tel+43-1-80 490 80
officepool4toolcomwwwpool4toolcom
Vienna I Stuttgart I Munich I Belgrade I Detroit I Singapore I Dubai