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M A Y 2 0 1 5 How Best in Class Companies Embrace Operational Excellence to Drive Procurement and Supply Chain Performance
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RESEARCH REPORT
IntroductionEnterprises today are under enormous pressures. They must keep supply chain costs low, innovate with new products and services, and respond to rapid changes in how products are marketed and sold, while executing their operations within an increasingly volatile, complex world. Responding to all these pressures and executing well in these volatile times makes operational excellence imperative.
Many leading companies have adopted Operational Excellence programs that establish a framework for supply chain performance improvement. While there are many definitions of Operational Excellence and various approaches to excellence programs, at its core, Operational Excellence is about creating value for the enterprise on a continuous, measurable basis. Value can be derived from lower procurement costs, a more resilient, risk tolerant supply chain, and improvements in customer service. As the world becomes more e-commerce driven, value also is created by excelling at logistics and fulfillment, being first to market with new products, and by rapidly capturing new channel opportunities.
Operational Excellence and Procurement Excellence programs vary by company, but they might span all these areas of value creation and more. While reducing the cost of purchased materials is a high priority for most companies, Procurement Excellence programs might also address priorities such as supply chain risk and resiliency, supplier management, and leveraging partnership agility to capitalize on new markets, or corporate sustainability objectives.
In sum, Operational Excellence and Procurement Excellence initiatives are about value creation and measurable improvement across those goals critical to the success of a business. Examining how the most successful companies approach Operational and Procurement Excellence provides insight into how companies might better attain their operational and strategic supply chain goals.
In a recent study sponsored by IHS, Inc. and conducted by Peerless Research Group (PRG) on behalf of Supply Chain Management Review, 236 leading supply chain executives provided insights on the efficacy of their procurement and sourcing operations. Specifically, the research examines how implementation and proper execution of programs such as Operational Excellence and Procurement Excellence provide supply chain executives with the direction needed for making key strategic decisions necessary for running highly proficient procurement and sourcing operations.
In particular, this research brief examines companies whose procurement practices successfully contribute to their company’s business accomplishments, in combination with their adoption and approach to Operational and Procurement Excellence. The practices and characteristics of these companies are contrasted with organizations that deem themselves less successful in meeting procurement and sourcing goals for their companies, and report lower adoption of excellence initiatives. These business segments are referenced as Best in Class and Laggard, respectively.
How Best in Class Companies Embrace Operational Excellence to Drive Procurement and Supply Chain Performance
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How Best in Class Companies Embrace Operational Excellence to Drive Procurement and Supply Chain Performance
Best in Class companies and Laggard businesses Responding companies are grouped into one of these two categories based on how the supply chain executives we surveyed perceive their company’s overall performance relative to their competition. Managers in “Best in Class” companies distinguish their corporation as either a top or leading performer when compared to competitors, while executives in “Laggard” businesses consider their company to be either an average or lagging performer in their market.
Company’s Procurement Organizations
Best in Class organizations are far more assured of hitting their performance goals. One out of five Best in Class companies are extremely confident they will meet their performance objectives. Furthermore, more than four out of five believe that they are poised to hit specific goals. By contrast, fewer than one out of 10 (9 percent) Laggards feel certain they’ll reach their targets while one-half in this group are confident they’ll meet performance objectives.
The number of global suppliers with whom procurement organizations work is comparable across both segments. On average, Best in Class companies are working with 213 (median = 75) global suppliers while Laggards partner with an average of 193 (median = 78) providers worldwide.
Although Best in Class and Laggards are similar in some regards, the organizational structure of companies’ procurement operations does differ in design. Best in Class companies are generally more apt to have a centralized, organization-wide global procurement operation while Laggards have a greater
Evaluating company’s overall business performance
Top or leading performer (Best in Class) 65%
Average or lagging performer (Laggards) 35%
Structure of procurement organization
Best in Class
Laggards
37%30%
A single enterprise-wide organization,responsible for all global procurement
26%26%
A single enterprise-wide organization, managing most procure-ment with some managed by sites, regions, or business units
25%27%
Divisions, business units, or regional organizationstructures manage their procurement
5%12%
Procurement is managed by the company’sindividual sites and facilities
5%1%
Other
3%4%
Don’t know
Confidence that company will reach performance goals
Best in Class
21%
60%
15%
4%%Laggards
9%
41%
41%
9%Extremely confidenttE
Very confident
Somewhat confidentntS
Not very/Not at all confident
81%
50%
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How Best in Class Companies Embrace Operational Excellence to Drive Procurement and Supply Chain Performance
Top key performance indicators (KPIs) are largely similar across the two segments. Overall supply chain cost savings, meeting customer service-driven metrics, and lowering transportation costs are the top KPIs among both groups. However, Best in Class takes a more expansive approach to key performance indicators (KPIs) and places greater emphasis on KPIs tied to speed and process performance efficiencies, improved cycle times, reductions in warehouse costs, and implementations of green solutions.
Key performance indicators
Best in Class
Laggards
89%84%
64%61%
63%56%
51%38%
50%37%
45%42%
44%48%
42%30%
37%35%
34%28%
34%40%
26%28%
24%12%
22%10%
Cost savings
Meeting customer service metrics
Reductions in transportation costs
Documented process andperformance efficiencies
Improved cycle times
Improved workflow processes
Documented inventory reduction
Reduced warehousing costs
Meeting sales forecasts
Better supplier collaboration
Reduced raw materials sourcing costs
Improved labor management
Implementation of environmentallysustainable/green initiatives
Automation implementations
tendency to run their procurement function on a siloed, decentralized basis.
Best in Class’ procurement divisions are larger. On average, 70 employees (median = 26 employees) work in Best in Class procurement departments as compared with Laggards who, on average, employ 53 individuals (median = 15) in their procurement group. One-fourth of the Best in Class operate with over 100 employees in procurement while only 14 percent of the Laggards have 100 or more workers in their procurement departments.
Best in Class have a greater estimated procurement spend level than do Laggards. More than one out of four Best in Class companies (28 percent) report procurement spend to be in excess of $100 million a year while, in contrast, 20 percent of Laggard companies are spending $100 million or more on goods and services annually.
This would suggest that Best in Class performers are afforded the necessary resources and that more staffing and funding is needed to attain performance excellence as well as reaching operational goals. It also suggests that Best-in-Class performers have more spend under their control, relative to the overall spend of the organization. By that, we mean that procurement groups in the “Laggard” category are not managing as large a percentage of spend for the company as a whole as “Best-in-Class” performers. For example, capital spend may fall outside the realm of procurement in a Laggard organization, putting it outside the scope of a global procurement strategy, and the standards and metrics to which that group is held.
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How Best in Class Companies Embrace Operational Excellence to Drive Procurement and Supply Chain Performance
Performance EvaluationsAs it pertains to companies meeting their annual financial performance expectations, the majority of Best in Class regularly hit their goals. More than one out of four (27 percent) always meet their financial expectations as compared with only 6 percent of the Laggards who are able to make this same claim.
Operational ExcellenceBest in Class are more likely to have an Operational Excellence strategy in place. In our survey, more than one-half (54 percent) of the Best in Class companies follow an Operational Excellence program while only half that many Laggards (27 percent) have a similar strategy in place. Because Operational Excellence programs often stress value creation and a framework for continuous improvement around established goals, the use of these programs correlates to greater effectiveness. In essence, Operational and Procurement Excellence programs apply methodology and measurement to the attainment of goals.
Have a strategy for Operational Excellence
Best in Class
54%
33%
13%
Laggards
16%
57%
27%Have strategyin place
No strategy
Not familiar with/Never heard of
Operational Excellence (OE)
Meeting performance goals
Best in Class
27%
62%
10%1% 1%
Laggards
41%
51%
6%Always
Frequently
Sometimes
89%
57%
1%1% Not very often Never1%1%
“ We have a fairly good handle on real time performance, and this includes procurement commitments versus budgets.”
—Best in Class/Corporate Manager/Healthcare/
$1B - $2.5B in revenues
“ We’re looking for tools to allow resources to spend greater time on value added initiatives”
—Best in Class/Supply Chain Manager/Food Services/$50M
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How Best in Class Companies Embrace Operational Excellence to Drive Procurement and Supply Chain Performance
Further, more than four out of five (82 percent) Best in Class companies who are following Operational Excellence principles link their sourcing and procurement function to their Operational Excellence program. And, respondents at Best in Class businesses further assert that procurement is a highly critical discipline to their overall Operational Excellence methodology (Best in Class: 38 percent versus Laggards 25 percent).
Procurement Effectiveness By substantial margins, Best in Class companies’ procurement functions are significantly more effective than those in Laggard organizations, most notably in areas relating to cost savings, meeting procurement objectives, acquiring better and highly accurate data for business decision-making, labor, and risk planning.
While the major challenge facing procurement operations in both the Best in Class and Laggard segments is the same, working with a lack of resources (53 percent and 50 percent, respectively), other obstacles differ among the two groups. Procurement operations in Best in Class businesses recognize a lack of visibility, using out-of-date technology and difficulties finding talent with the right skillsets. Laggards not only fight these same challenges, but also struggle working with insufficient benchmarking data, poor planning and insight, a lack of understanding of procurement methods, minimal support from management as well as inadequate funding.
Maintaining consistency in procurement practices enables businesses to rely on better data. This greatly applies when working to get a handle on pricing, negotiating and spend issues. Best in Class organizations, to a far greater degree than Laggards, are more successfully leveraging reliable data to gain a better understanding of market conditions, to be better prepared for negotiating with suppliers, in fostering more insightful decision-making and for developing cost estimates and spend analysis.
Procurement organization’s effectiveness in…
Best in Class
Laggards
81%50%
80%57%
77%47%
74%40%
73%44%
72%46%
69%47%
61%30%
60%34%
60%39%
60%27%
Meeting procurement targets
Achieving cost savings from suppliers
Conducting transparent /objective negotiations
Accurate cost and price analysisfor spend categories
Reducing costs/expanding margin
Understanding markets
Balancing cost and risk
Knowledge sharing & retention
Optimizing talent
Planning for risk in supplier decisions
Benchmarking performance
“ We are building a strong cohesive procurement strategy that is not just cost focused...includes capacity commitments and service related goals that are tied into an overall corporate strategy.”
—Best in Class/Purchasing Management/Electronics/$2.5B+
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How Best in Class Companies Embrace Operational Excellence to Drive Procurement and Supply Chain Performance
Challenge(s) procurement organizationsfaces in working to meet business goals
Best in Class
Laggards
53%50%
39%31%
31%25%
30%35%
19%28%
14%16%
13%27%
11%16%
11%12%
Lack of time/resources
Lack of visibility
Outdated technology
Talent shortage
Inability to benchmark performance
Lack of management support
Poor insight
Lack of funding
Other
Consistency in global procurement practices…
Best in Class
Laggards
78%52%
72%44%
66%39%
63%35%
62%27%
56%33%
56%41%
45%33%
44%35%
43%
33%20%
Reviewing historical price data
Preparing for supplier negotiations
Performing spend analysis
Estimating project costs
Reviewing input costs for spend categories
Evaluating market drivers of costs
Evaluating supplier/material cost structures
Evaluating economic influences
Understanding geographic/country risk
Modeling future price assumptions
Forecasting future prices
27%
“ There’s a severe talent shortage. We just do not have the manpower to complete jobs in a timely manner.”
—Laggard/Corporate Management
manufacturing/ <$50M
“ We have clear, accurate visibility into our customer’s sales cycles, forecasts, and demand planning.”
—Best in Class/Corporate Management/Pharmaceuticals/
$50M - $99M
“ In our forecasting, we rely on historical data for productivity, transportation,
and a use this to get firm estimate of projected cost increases.”
Best in Class/Warehouse Manager/Food & Beverage/$2.5B+
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How Best in Class Companies Embrace Operational Excellence to Drive Procurement and Supply Chain Performance
As expected, the inverse holds true as procurement performance among Laggards is inconsistent in all key areas. Because Laggards report a higher inability to benchmark performance, it’s likely that the lack of comprehensive scorecards and structured excellence methodologies contribute to greater inconsistencies and less confidence in measuring and modeling procurement programs. Without doubt, the maxim, “you can’t improve what you can’t measure” is at play here, as further seen by a greater tendency among Laggards to report inconsistency in being able to model, evaluate, and understand critical nuances involved in Procurement Effectiveness.
Procurement Excellence Best in Class companies are four times more likely to have a Procurement Excellence program in place. More than one out of four Best in Class companies have a formal Procurement Excellence or Procurement Effectiveness strategy in place. By comparison only 6 percent of Laggards have this type approach in operation. However, there’s still a need for greater awareness of what these programs are and how corporations can capitalize; roughly one out of six Best in Class and nearly one in five Laggard respondents are not familiar with the concept of Procurement Excellence or Procurement Effectiveness.
“ Understanding our volatile demand better is critical in reducing in-process scrap, and cutting manufacturing lead times.”
—Laggard/Supply Chain Manager/Tool Manufacturing/
$250M - $500M
Areas in which procurement is inconsistent
Best in Class
Laggards
14%26%
8%23%
15%23%
4%23%
6%21%
12%20%
5%20%
12%19%
6%18%
2%14%
3%11%
Modeling future price assumptions
Evaluating supplier/material cost structures
Forecasting future prices
Reviewing input costs for spend categories
Estimating project costs
Understanding geographic/country risk
Evaluating market drivers of costs
Evaluating economic influences
Performing spend analysis
Preparing for supplier negotiations
Reviewing historical price data
Companies having a formal “Procurement Excellence”or “Procurement Effectiveness” program
Best in Class
26%
61%
13%
Laggards
19%
75%
6%Yes
Not familiar with/Never heard
of these concepts
No
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How Best in Class Companies Embrace Operational Excellence to Drive Procurement and Supply Chain Performance
Cost savings and on-time delivery are the main goals that Best in Class businesses are trying to achieve with their Procurement Excellence program. As only a small percentage (6 percent) of Laggards interviewed has a “Procurement Excellence” philosophy in place, their KPI objectives are not reported as data are unstable.
Managers in Best in Class companies are extremely confident they’ll hit their Operational Excellence goals. In fact, of the supply chain, procurement, and executive managers we surveyed, all are confident with seven out of 10 (71 percent) being highly certain they’ll fully achieve performance objectives.
Confidence that company will reach performance goals
Extremely confident 25%
Very confident 46%
Somewhat confident 29%
Not very/Not at all confident 0%
Best in Class
KPI’s or target objectives of Procurement Excellence strategy
Total cost savings
On-time delivery
Quality
Contract terms
Total cost of ownership
Continuity of supply
Inventory optimization
Profit margin
Purchase Price Variance (PPV)
Value creation
Innovation
77%
53%
43%
43%
40%
37%
37%
30%
23%
23%
17%
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How Best in Class Companies Embrace Operational Excellence to Drive Procurement and Supply Chain Performance
ConclusionsIt’s evident why some businesses place value on archetypes that enable operations to run efficiently. We see in our survey findings that companies who follow disciplines intended to make operations run efficiently are accomplishing their business goals. These Best in Class companies are more likely to centralize their procurement operations as well as allocate the necessary funding and resources allowing for greater procurement efficiencies. Further, they place greater importance on key performance indicators such as cycle times, warehouse costs, and environmental or green initiatives.
Effectively leveraging a highly proficient procurement function within their operational excellence platform, companies are realizing:• cost savings• better decision-making and negotiating
through the use of current and more accurate data
• upgraded workforce optimization; and• improved planning and execution of risk
mitigation.In practicing key operational and performance methodologies such as Procurement and Operational Excellence programs organizations are well-equipped to address and, subsequently, hit performance goals.
MethodologyThis research was conducted by Peerless Research Group (PRG) on behalf of Supply Chain Management Review for IHS, Inc., a leading provider of supply chain information and services. This study was executed in November and December of 2014 and administered over the Internet among subscribers to Supply Chain Management Review magazine. All respondents were prequalified for being involved in decisions related to sourcing and procurement of goods and services for either their organization or for companies with whom they consult.
A detailed profile of survey respondents describing Best in Class and Laggards is on the right.
Demographics
VP/General manager
Supply chain manager
Corporate/Divisional manager
Logistics/Distribution manager
Purchasing management
23%17%16%13%12%
19%15%22%11%14%
Best in Class LaggardsTop job title/function
Electronics and media
Healthcare
Oil and gas
Automotive
Chemicals
Aerospace and defense
Agriculture
Consumer and retail
Metals and mining
Wholesale/retail trade
Transportation/warehouse services
3PL provider
Business/consulting services
Top industries
8%6%4%4%4%3%3%3%3%
12%7%6%
12%
2%5%0%3%0%5%3%
11%5%
11%12%
6%6%
Under $100 million
$100 million-$249,999 million
$250 million-$499,999 million
$500 million-$999,999 million
$1 billion-$2.49 billion
$2.5 billion or more
Revenues
43%14%
5%6%8%
23%
$785.4M
$199.5M
$411.9M
$125.0M
46%19%12%11%
6%6%
United States
Canada
European Union/Europa
Asia/Pacific Rim
Other
Location
89%3%7%1%1%
80%5%5%9%2%
Average revenues
Median revenues
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