Supplier category-management

Supplier Category Management DRIVING VALUE THROUGH THE PROCUREMENT ORGANIZATION

©2012 APQC. ALL RIGHTS RESERVED.

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Table of Contents Project Personnel and Copyright 4

Sponsor and Partner Organizations 6

Executive Summary 7

Overview of Findings 8

Research Champion 9

Chapter 1: Strategic Implications for Category Management 11

Chapter 2: Resource Commitment and Talent Management 27

Chapter 3: Category-Specific Processes and Tools 38

Chapter 4: Extending Supplier Relationships 50

Case Study: ATMI 57

Case Study: FMC 70

Case Study: Merck 84



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Project Personnel PROJECT TEAM Erin Williams, APQC Shaina Bielaz, APQC

SUBJECT MATTER EXPERTISE Marisa Brown, APQC Samir Khushalani, principal—national strategic sourcing and procurement leader, KPMG Patti Muldowney, managing director—business effectiveness, KPMG

CONTRIBUTING AUTHORS Shaina Bielaz Marisa Brown Patti Muldowney Becky Partida Erin Williams

EDITORS Tara Edwards Amelia Scholtz

MEMBERSHIP INFORMATION For information about how to become a member of APQC and to receive publications and other benefits, call 800-776-9676 or +1-713-681-4020 or visit our Web site at www.apqc.org.

COPYRIGHT ©2012 APQC, 123 North Post Oak Lane, Third Floor, Houston, Texas 77024-7797 USA. This report cannot be reproduced or transmitted in any form or by any means electronic or mechanical, including photocopying, faxing, recording, or information storage and retrieval.

Additional copies of the report may be purchased from APQC by calling 800-776-9676 (U.S.) or +1-713-681-4020 or online at www.apqc.org. Quantity discounts are available.

ISBN-13: 978-1-60197-174-6 • ISBN-10: 1-60197-174-5



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STATEMENT OF PURPOSE The purpose of publishing this report is to provide a reference point for an insight into the processes and practices associated with certain issues. It should be used as an educational learning tool and is not a “recipe” or step-by-step procedure to be copied or duplicated in any way. This report may not represent current organizational processes, policies, or practices because changes may have occurred since the completion of this study.



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Research Champion KPMG

Sponsor Organizations Bush Brothers & Company General Mills Intel Johnson and Johnson Schlumberger University of California University of North Texas

Partner Organizations ATMI FMC Technologies, Inc. Merck



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Executive Summary INTRODUCTION The rate of change required of the procurement function to keep pace with business demands continues to accelerate. Having achieved success over the last decade in building structured processes, generating cost savings, and expanding visibility into overall spend, what’s next for procurement?

In our view, the next leap in procurement capability will come from two related and transforming steps. First, procurement must evolve its role to become a true partner to the business rather than a passive service provider. This change will be grounded in the early wins of cost savings and process improvement. It will grow out of a studied knowledge of the business strategy, an understanding of the trajectory of key supply markets, and an ability to impact business growth. The second and related step is the maturation of the procurement function into a sustainable value driver for the business. This step can be accomplished by actively and selectively investing in and managing procurement resources. While the procurement technology market has exploded with offerings over the past decade and most mature procurement organizations have built solid processes and enabling technology, human capital has actually become a scarce and valued resource. Procurement organizations that recognize the value of investing in talent will develop the strategic perspectives, business skills, and breadth of knowledge to be able to take that next step to becoming a true business partner.

Each best-practice organization participating in this study demonstrates meaningful alignment between procurement and the overall business structure. Each procurement function has consequently earned its “seat at the table” as a true partner in both driving business planning and contributing to organizational results.

—Patti Muldowney, managing director—business effectiveness, KPMG



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OVERVIEW OF FINDINGS During this APQC study, the project team identified the following 14 compelling category management findings, grouped by theme into four chapters in this report.

Strategic Implications Adopt a business—not cost—driven focus. Balance long-term vision and planning with short-term agility. Separate strategic processes from tactical processes. Recognize supplier segmentation as a foundation for category management. Engage procurement in the full value chain with a specific focus on customer

needs and values.

Resource Commitment and Talent Management Empower visible, focused category management teams with diverse

membership. Provide opportunities for career progression and skills acquisition through

clearly articulated and differentiated requirements across the procurement organization.

Seek to incorporate procurement and sourcing early in the new product development process.

Category-Specific Processes and Tools Create a standardized category approach to enable working and resourcing

across categories and the ability to decide how much to invest by category. Implement category risk management to monitor external market risks at the

market or category level. Conduct supplier risk assessments as part of the strategic sourcing process and

on an ongoing basis. Maintain an Intranet portal to provide one source for information that all

relevant employees can access.

Extending Supplier Relationships Invest in building strong suppliers. Give suppliers tools to succeed and create a symbiotic relationship.



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Research Champion KPMG LLP offers audit, tax, and advisory services, as the U.S. member firm of KPMG International. KPMG International's member firms have 137,000 professionals, including more than 7,600 partners in 144 countries. Our advisory practice provides global service to our clients across a full range of critical business needs. KPMG’s experienced strategic sourcing and procurement professionals are committed to assisting our clients in driving structural improvements to the procurement function that will help make procurement a source of value and innovation. Our comprehensive approach to procurement and transformation balances enhanced business performance through better spend management and productivity gains with internal controls and risk management.

SUBJECT MATTER EXPERTISE Samir Khushalani, KPMG Samir is an Advisory Principal based in Houston. He serves as the National Practice Leader for Strategic Sourcing & Procurement. Samir has over 20 years of consulting experience and is responsible for strategy setting, thought leadership, executive client management and engagement delivery aspects for this practice. He has assisted companies conceive, develop, and execute comprehensive strategies in the areas of Strategic Sourcing, Category Management, Purchase-to-Pay, Contract Management, B2B Marketplaces, Supplier Relationship Management (SRM), and Materials Management. He has authored various thought leadership articles on supply chain and spoken on procurement excellence at various forums. He is a certified Project Management Professional (PMP) and earned a Master’s degree in Electrical Engineering from Rice University.

Patti Muldowney, KPMG Patti is a Managing Director in KPMG’s Advisory practice. With more than eighteen years of consulting experience, Patti assists her clients with procurement strategy, procurement transformation, supplier risk management, cross-functional process optimization, and cost analytics and optimization. She is currently co-leading the firm’s development of a global vendor risk management framework that provides a comprehensive approach to assessing and managing enterprise risk related to supplier engagement. Patti is a frequent speaker at national procurement conferences and has published articles on performance management and cost analytics.

Marisa Brown, APQC Marisa Brown is the director of APQC’s Knowledge Center, the group charged with creating and publishing relevant, meaningful content for APQC members and other clients. In this role, she oversees APQC’s content publishing and synchronizes it with all research deliverables created through APQC’s Delivery Services. In addition, she often serves as an adviser for APQC research in supply chain, innovation, and product development. Brown has led some of APQC’s largest



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research projects and served as project manager, client manager, subject matter expert, and co-author of numerous projects, including APQC’s Open Standards Benchmarking in supply chain planning, procurement, manufacturing, logistics, innovation, and product development.



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Chapter 1 Strategic Implications for Category Management

Findings in This Chapter 1. Adopt a business—not cost—driven focus.

2. Balance long-term vision and planning with short-term agility.

3. Separate strategic processes from tactical processes.

4. Recognize supplier segmentation as a foundation for category

management.

5. Engage procurement in the full value chain with a specific focus on

customer needs and values.

ADOPT A BUSINESS—NOT COST—DRIVEN FOCUS Sourcing and procurement can add greater value to the organization by focusing on the business’s overall goals and objectives instead of focusing more narrowly on finding the lowest cost for purchased goods and services. What is the role of the sourcing and procurement organization within an enterprise? At one level, it is to buy the materials and services needed to produce and sell finished goods and/or solutions in the market place. But today’s sourcing and procurement function has the ability to be so much more than just the buying arm of the enterprise, focused only on getting the lowest cost.

Shifting the focus to what the business needs to accomplish its goals can enable procurement to take into account elements such as supplier quality and reliability. If a supplier offers a low price, but the quality is unreliable or the delivery schedule is erratic, that is not a procurement success. Seeing sourcing through the lens of business success or failure, not just the cost to purchase, helps put the sourcing organization in alignment with the larger enterprise.

Extracting and automating the most tactical procurement processes (e.g., ordering materials and services, spend reporting) can free up time for employees to focus on the aspects of sourcing that are more central to the needs of the business:



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developing sourcing strategies, selecting suppliers and developing or maintaining contracts, and appraising and developing suppliers.

The best-practice organizations studied in this project operate in industries for which product quality is of paramount importance, such as semiconductors, in which tolerances are measured in parts per trillion, pharmaceuticals, in which quality issues can result in patient death, and deep sea drilling, in which the environmental impact of quality failures is substantial. For them, hopping from supplier to supplier to save a few pennies is not worth it. By emphasizing efforts in categories that are critical to the business, the procurement and sourcing organization can build and manage supplier relationships that deliver results for the business.

For Merck, global category management involves linking and aligning procurement strategies to the strategy for the organization as a whole (Figure 1). Prior to its November 2009 merger with Schering-Plough, Merck’s sourcing was opportunistic. Since then, however, it has focused more on how the overall global procurement strategy links back to the overall Merck strategy, and how each strategy within global procurement links back to this as well.

As part of its transformation effort, Merck’s global procurement organization realigned its key priorities from basic service delivery (e.g., business continuity) to more nuanced and business-driven capabilities (e.g., comprehensive risk management). This shift in priorities reflects a better understanding of holistic business needs. Similarly, restructuring the global function to partner with and support business needs that vary by geography demonstrates an evolved view of how procurement integrates with the business.

To be competitive, Merck’s global procurement group tries to reduce costs, transform business support capabilities, and develop global functional talent management approaches. Merck’s global procurement group is charged with supplier relationship management, the development of suppliers as a source of innovation, and supplier risk management. Creating a lean and flexible business model is an important element in Merck’s strategy road map and integral to the global procurement value proposition.

Merck’s vision for its global procurement group is that by 2012 it will be viewed both internally and externally as a world-class procurement organization, which will result in a competitive advantage for the organization as a whole.



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What is Global Category Management at Merck?

Figure 1

To ensure that procurement and sourcing are linked to the overall business, ATMI uses a robust sales and operations planning (S&OP) process. The S&OP process looks 24 months ahead for factors that could affect ATMI and its supply chain. The S&OP process begins with a product management review that evaluates and updates product development. It then moves to demand planning to predict what customer needs will be and when they will change. A supply review involves capacity planning and assessing ATMI’s ability to meet demand. The entire plan then undergoes a management business review at the highest level of the organization.

To ensure that the supply chain group is delivering what the organization requires, each ATMI category supplier management team is also responsible for creating a strategic road map that must ultimately tie back to ATMI’s business needs.

In order of priority, FMC’s strategic goals for sourcing and procurement focus on its core strategic areas: safety, quality, delivery, and cost. By putting safety, quality, and delivery ahead of cost, FMC focuses on its overall goal of perfect delivery. As part of the organization’s continuous improvement activities, FMC measures each category and every supplier based on the four core strategic areas.

One way that FMC ensures a business focus for sourcing is through its reporting structure. FMC gives category managers dual reporting lines, which provides the sourcing organization with a direct link to the business through product lines as well as guidance from the sourcing director. In addition to the reporting structure at the



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global level, at the site-specific level there is dual reporting of procurement managers to product line managers and procurement managers at that location.

BALANCE THE LONG TERM WITH THE SHORT TERM To ensure the organization embraces effective and efficient category management processes, best-practice organizations balance their long-term vision and planning with shorter-term agility. Managing sourcing and procurement categories effectively requires organizations to operate in multiple supply chain time horizons. Considering the complexity of sourcing decisions and the time often needed to develop strong supplier relationships, organizations must have one eye on the longer-term future for their supplier category management processes while staying attuned to changes in the immediate environment. To drive value for the enterprise, the sourcing and procurement organization cannot wait to find an alternate source of supply until after a supplier goes out of business or wait until a new product is on the verge of its market launch to source specialty materials. To avoid missing opportunities to create and execute strategies that add value and drive success for the larger organization, it is vital to invest in both longer-term planning and shorter-term agility.

Having a vision for the future is a necessary but not sufficient condition to guarantee sourcing and procurement success. Looking toward the future and using the longest-range vision possible can provide strategic direction to the category management teams and help them achieve unity of purpose and a common goal. However, there needs to be a degree of freedom and flexibility built into that longer-term vision because what is yet to come may change. Changes that can impact category management may come from both inside the organization (e.g., shifts in strategy or product mix) and outside (e.g., market volatility or supply disruption).

Having an eye on the near-term horizon helps sourcing and procurement organizations stay agile and shift quickly when things change. To react to changes in the immediate environment effectively, the best-practice organizations in this study have adopted and adapted many classic change management principles.

ATMI looks to the longer term strategically but has built tools to handle changes in the short term. Looking forward, each ATMI category management team creates a strategic road map that outlines objectives for the next three years. This three-year road map ensures that the team establishes long-term initiatives and is not only focused on addressing current problems. As part of the category plan, the road map helps establish the strategy for a particular category.

For the short term, ATMI has created tools, specifically an alert system (see the “Monitor Market Risks” finding in Chapter 3 for more detail), to notify the organization of immediate or near-term changes in the external environment. These



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tools enable ATMI to quickly enact a contingency plan for alternative sources of supply. To enable this agility, ATMI has mapped locations for its suppliers and its suppliers’ suppliers, an undertaking accomplished as a result of deep and trusted relationships.

For each category, FMC analyzes strengths, weaknesses, opportunities, and threats (SWOT) to create a plan with immediate, short-term, and long-term solutions to manage or overcome any challenges. Short-term actions are typically supplier-specific with a tangible impact within the next six months. Long-term actions typically take six months to two years to complete and address systemic issues that affect the category.

Given the long cycle times in its industry (12 to 18 months), FMC strives to create a three- to five-year forecast for its purchases to help develop stronger long-term supplier agreements. The organization aspires to build capacity and capabilities in advance so it can support unplanned customer demand. To allow for long-term planning and development of its supply base, FMC desires a continual and planned adjustment of its sourcing strategies rather than a reaction to unexpected events.

Change management is a fundamental part of FMC’s sourcing process. To successfully manage a category and achieve its goals, category managers integrate change management into the category strategy as a part of their project management activities. Figure 2 shows that change management is the first step in the implementation of a category strategy. Change management can include establishing communication plans, conducting stakeholder analysis, and establishing stakeholder management plans.

FMC’s Category Implementation Plan and Progress Report

Figure 2

When Merck’s global procurement group defines a strategy for a category, it considers not only the present but also where it wants to be in three years and how



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that will align with Merck’s overall strategy. Merck’s global procurement group must prepare for the future by adapting to changing demands and working more efficiently.

Because Merck anticipates that every organizational change is going to be met with some resistance, it has developed a change leader network (Figure 3) with the primary function of driving near-term change across the organization. The individuals in this network serve as change leads, in addition to their normal job duties, and they are trained in change execution. Procurement leaders have tasked the individuals with bringing any concerns from their home groups to the network to be addressed early on. These change leads have diverse perspectives as they all have different backgrounds and even come from different legacy organizations.

Merck’s Change Leader Network

Figure 3

Merck has also adopted a change commitment curve that employees can use as a self-assessment to determine their degree of support for a given change. By incorporating this curve into informal employee surveys, procurement and other leaders can understand the degree of support from the organization as a whole at a given point in time.

SEPARATE STRATEGIC PROCESSES FROM TACTICAL PROCESSES Successful procurement organizations recognize the importance of both strategic sourcing and tactical purchasing. Best-practice organizations tend



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to create separate groups that are dedicated to each of these key processes, with the two meeting at the top under a common senior executive. In this study, the project team found the procurement and sourcing organization chart often divided into two groups: a strategic group focused on strategic sourcing and deep supplier relationships, and a tactical group focused on the process of ordering materials and services. Having a common reporting structure keeps these two groups united in pursuit of common goals. Category management strategies and teams may cut across both of these groups but tend to be primarily composed of and led by strategic personnel in the studied organizations.

At FMC, approximately 305 sourcing and procurement employees manage more than $2 billion in spend. FMC manages sourcing strategies at the global level for all categories and global product lines. This global approach allows for standardized policies, procedures, systems, and global coordination. To achieve maximum leverage with suppliers, each category is strategically managed as one total bucket of spend whether one or multiple product lines use that category. While many categories cross multiple product lines, the product line that spends the most essentially owns the category. FMC also divides its largest categories into subcategories managed by subcategory leads who report to category managers.

Tactical procurement, by contrast, is typically executed through site-specific product line procurement teams (i.e., a procurement team at an operating site). FMC’s global product lines have procurement teams located at four operating sites to handle tactical procurement by executing purchase orders within the strategic framework established by the sourcing and category management team. Typically, the more limited the supply of a product, the more likely the centralized category management procurement organization will handle the purchasing.

ATMI’s supply chain management and procurement groups are separate, but both report to the senior director of supply chain. The supply chain management group focuses on developing sourcing strategy, participating in product development gate reviews, qualifying suppliers, negotiating and contracting, managing costs, and identifying value proposition opportunities. Supply chain management representatives also serve as the leaders of ATMI’s supplier management teams and the main points of contact between ATMI and suppliers. The procurement group, which is more tactical, primarily handles purchase orders and assesses supplier performance (quality, service, delivery, and scorecards).

At Merck, global procurement is organized into a matrix structure (Figure 4) with sourcing employees in three strategic centers of expertise—indirect, direct materials, and research—as well as emerging markets. Peers of these staff members are located within three regions and primarily handle tactical execution of the procurement strategy and manage supplier relationships. However, regional staff members may also develop strategies at the regional level if needed. A strategy and planning group



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acts across all regions and all centers of expertise, with responsibility for training, compliance, management reporting, and the rollout of Merck’s SAP system.

Merck’s Global Procurement Organizational Structure

Figure 4

SUPPLIER SEGMENTATION IS FOUNDATIONAL Recognize supplier segmentation as a necessary foundation for successful category management. Segmenting suppliers within categories enables an organization to prioritize and define relationships based on relative value. Segmenting suppliers is not an uncommon practice; however, the best-practice organizations in this study focus on the quality of their supplier segmentation processes. They keep it simple, grounded in business imperatives, and value-driven.

Merck segments its suppliers into three tiers to ensure that it partners with key suppliers to deliver results to the organization as a whole. Merck assigns each supplier to a tier based on four key criteria as illustrated in Figure 5.



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Value to Merck: How much value does the supplier provide to Merck? Value is strategic, and it is not the same as the amount of spend.

Spend: How much does Merck spend with that supplier? Supplier preferencing: Does the supplier view Merck as a strategic partner? Portfolio analysis: How does Merck view the supplier (e.g., strategic or

commodity)? To Merck, value does not necessarily equal cost savings, and Merck measures the value of some suppliers in terms of the innovation the suppliers provide. Merck’s top-tier suppliers (approximately 37) receive the most supplier value management focus. With managed suppliers (approximately 200), Merck holds regular meetings and establishes key performance indicators that are reviewed on a regular basis. Management of active suppliers (approximately 1,000) is conducted on an ad hoc basis.

Merck’s Supplier Segmentation Criteria

Figure 5

Similarly, ATMI uses a pyramid structure to classify its suppliers, with suppliers at the top of the pyramid comprising 11 percent of ATMI’s suppliers and representing 87 percent of its spend. Suppliers in the top tier receive the greatest attention since their performance can greatly influence ATMI’s success. With its top tier of suppliers, ATMI has implemented scorecards that suppliers can use to self-score themselves quarterly or biannually.



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Each FMC category team identifies its top and bottom suppliers based on four key measurements in its core strategic areas of safety, quality, delivery, and cost.

Safety: Lost time incident (LTI)—This measure comes from the United States Department of Labor and is calculated as the number of hours that are lost when an employee is not able to work due to an injury vs. the total number of work hours in the company.

Quality: Price of non-conformance (PONC)—This measure tracks the waste of products due to poor quality. Some examples are scrap, rework, and administrative hours used to process quality notifications.

Delivery: On-time delivery (OTD)—This measure calculates the difference between the delivered date and the agreed-upon delivery date.

Cost: Total cost of ownership—The total cost of ownership is measured using a generic and homegrown FMC model that is then adapted to match relevant specifications for that category.

ENGAGE PROCUREMENT IN THE FULL VALUE CHAIN, WITH A FOCUS ON THE CUSTOMER In best-practice organizations, procurement is invested in the full value chain with a specific focus on customer needs and values. Keeping the linkage from supplier to customer in mind ensures that sourcing and procurement do not occur in an organizational vacuum. For FMC, one of its business imperatives is to achieve global quality, reliability, and consistent process expectations of customers. Therefore, quality in products is a “pull through” requirement from its customers to its suppliers. Due to the complexity of its engineered-to-order, highly technical, high-specification, and industry-specific products, FMC values having a good cultural fit with its suppliers so that it can serve its customers well and meet their expectations.

Strategically, sourcing and procurement focus on leveraging global spend to achieve high-quality products, improve product integrity, attain superior cycle times, and lower the total cost of ownership. FMC also strives to identify global, world-class, high-performing suppliers. Selecting suppliers with global reach allows FMC to meet the requirement placed on it in many countries to include locally produced content in its products by having these suppliers expand production to support local projects.

At Merck, category strategies are aligned to market- and customer-focused initiatives. When the global procurement organization builds its category strategy road maps, it takes into account how the following factors may impact the category in the future:



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the spend and savings for the category by region; who the top suppliers are in each region, segmented into valued and managed

suppliers; any future suppliers; and any stakeholders for the category.

When assessing suppliers, the sourcing group at ATMI looks for supplier capability to fulfill product and, ultimately, customer needs. Early in the supplier selection process, ATMI evaluates overall supplier capability based on the supplier’s general business information, facilities, operations, supply chain management capabilities, engineering, human resources, information technology, finance information, environmental health and safety, and quality with regard to the material to be sourced. Information on the target product for ATMI is also considered.

Cross-functional teams conduct deeper supplier assessments with a focus on six areas: quality of product, planning, supplier assurance, customer focus, and change control. Scoring criteria are defined for each question in the assessment so that suppliers can conduct a self-assessment. Members of the cross-functional team conduct an on-site visit with the supplier to establish scores from ATMI. ATMI has added questions regarding the sustainability practices of potential suppliers, although implementation of these practices is not currently a requirement for the contracting process.

CONCLUSION The best-practice organizations in this study focus their sourcing and category management activities on business needs, not just cost. They also balance their long-term vision and planning with short-term agility while separating strategic processes from tactical processes. Additionally, they recognize supplier segmentation as a foundation for category management and invest procurement in the full value chain with a specific focus on customer needs and values.



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RESEARCH CHAMPION PERSPECTIVES: KPMG Procurement as the Strategic Partner Through Effective Category Management The role of the procurement function in organizations has evolved over the past decade to become more relevant to the business. The Chief Procurement Officer (CPO) position has risen in prominence. But has procurement truly achieved a level of strategic significance in most organizations? Within our study group, the leading procurement professional reports to a C-level executive in only about 60 percent of the organizations. In nearly twenty percent of organizations, procurement is still not actively engaged in annual planning processes. These data points suggest that there remains a gap in the strategic alignment of procurement with the organization that prevents these organizations from becoming a source of sustainable value for the business. They are still earning their “seat at the table”. In KPMG’s view, effective category management is the vehicle for raising procurement to the level of strategic partner to the business. The critical path lies in elevating procurement away from a purely cost reduction focus, which has a backwards-looking and reactive feel, to one where procurement is aligned with and contributes to the revenue and profitability goals of the organization. For many procurement organizations, this is a radical departure from the traditional view of their role in the organization, and has implications for their approach to organizational alignment, category strategies, and supplier relationship management. KPMG’s clients that are achieving true business partner status have been able to: ► ground category strategy and management in a strong value chain perspective

that ties directly to overall organizational strategies, ► build category management teams that align with the business to truly

understand not just business needs but business goals and strategies, and ► translate business objectives into actionable short-term and long-term category

management plans. The journey begins with the right organization structure. Procurement organizations that have differentiated strategic from tactical activities are better positioned to effectively engage with the business on each of those levels. KPMG’s view of procurement’s core value proposition and responsibilities reflects this organizational construct:



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Within this construct, business strategy and goals are cascaded down into a procurement organization structure that distinguishes the strategic from the tactical procurement imperatives. Supplier management is engaged at both the strategic and transactional levels, and the growing importance of overall risk and compliance management requirements is reflected as an integrated characteristic of overall category management rather than a stand-alone activity, consistent with the approach taken at the business level to address these critical needs. The second element required to bring procurement up to a more strategic level of engagement is the development of category strategies and plans that truly reflect business goals, not just savings targets. This study illustrates the criticality of category management moving from an emphasis on cost to an emphasis on business needs. Category strategies need to be first and foremost informed by the “why” of the business rather than the “what.” This requires understanding the strategic direction of the organization and translating that understanding into effective category strategies. In KPMG’s view, the right approach emphasizes the development of category strategy and management that incorporates savings initiatives into the broader context of growth.



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The challenge is gaining traction at the right time and level within broader planning processes. We often see procurement given a savings target largely disconnected from the strategic, marketing, and/or product development plans of the organization as a whole. Attacking that target in the absence of the broader planning context can result in procurement acting in a transactional capacity, which suboptimizes category management outcomes for the business. Engaging at the business planning level allows procurement to effectively balance market perspectives and customer needs to develop a plan that supports business growth and maximizes savings potential. To gain this level of engagement in planning processes, category teams should be structured to include business partners as well as relevant other stakeholders (e.g., finance, risk management, quality control).

KPMG advises our clients to focus on these three levers to build strategic relevance to the procurement function: Organizational design distinguishing strategic from tactical responsibilities

Business-focused category management teams and strategies

Effective and collaborative supplier relationship management



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This more upstream approach has the added benefit of integrating the procurement and category management function into business planning in a way that can leverage procurement’s expertise in understanding and managing the current and potential supply base for the organization’s benefit. As we see throughout this study, the best firms cultivate suppliers as partners in the long-term product planning process, leveraging the suppliers’ R&D and innovation capabilities as they develop their long-term marketing and profitability plans and overall business cases. Procurement, through effective supplier relationship management, can serve as a facilitator and counselor to the business in these efforts.



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QUESTIONS TO CONSIDER GOING FORWARD 1. What steps could your leadership team take to improve its support of

category management?

2. How effective are the mechanisms your organization has in place to manage or govern your categories? Can you identify “where the buck stops” in your organization’s category management process?

3. Has your organization clearly defined a strategy for category management? How is it linked to the enterprise’s overall strategy?

4. How effective is your category management process in balancing long-term vision and planning with shorter-term ability to react to changes in markets?

5. Are strategic and tactical roles clearly defined? Are these two roles united in pursuit of common strategic goals?

6. How effective is your organization’s supplier segmentation in driving your categories forward?

7. Is your category management strategy focused on the needs and values of your customers? How do you link the supplier to the customer and ensure that sourcing and procurement do not occur in an organizational vacuum?



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Chapter 2 Resource Commitment and Talent Management

Findings in This Chapter 1. Empower visible, focused category management teams with diverse

membership. 2. Provide opportunities for career progression and skills acquisition

through clearly articulated and differentiated requirements across the

procurement organization. 3. Seek to incorporate procurement and sourcing early in the new

product development process.

EMPOWER VISIBLE, FOCUSED CATEGORY MANAGEMENT TEAMS WITH DIVERSE MEMBERSHIP Best-practice organizations create category teams that have high-level visibility in the organization, strong leaders, membership that crosses functional lines, and a focus on business priorities. They are aided by endorsement and high-level support from senior leadership, even at the C-level. The best-practice organizations in this study have established cross-functional category management teams made up of procurement staff, technical experts, quality representatives, and others, depending on specific needs.

With strongly empowered category team leaders and cross-functional membership, these teams focus on business priorities. The teams have access to senior business leaders in the organization to remain visible and stay in alignment.

Within its global procurement group, Merck has established an operations leadership team with ownership and accountability for the success of the procurement scorecard, organizational performance, and any procurement strategy that the executive team defines. The operations leadership team is cross-functional, and it includes representatives from every center of expertise and each region. The structure includes sub-teams aligned with key initiatives such as savings, supplier diversity, supplier value management, and risk. Each member of the operations



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leadership team has a responsibility to go back to his/her home area and communicate any improvement initiatives and how these can impact the home areas. Leaders and members of the operations leadership team rotate on an annual basis.

At ATMI, a member of the strategic supply chain management group leads each cross-functional supplier management team and serves as the main point of contact between ATMI and its suppliers. In addition, to provide a holistic view of the sourcing process, each team has a quality representative and a technical representative. The quality representative conducts supplier assessments and continuous improvement projects as well as collects and analyzes supplier performance data. The technical representative is typically a scientist who acts as a consultant to the suppliers to ensure they can provide what ATMI needs. These teams receive support from ATMI’s marketing and procurement groups as needed.

ATMI has a process set out for the management of each of its categories (Figure 6) that pulls in different functions at various points. In the category or supplier management team (SMT) strategy phase, for example, the supplier management team defines its objectives by focusing on new product development sourcing strategies, supplier performance goals, and key projects. In the strategy consensus phase, the team communicates with the operations group, the supply chain management group, and the business management team to ensure that the category’s needs and objectives are in alignment with the overall needs and objectives of the organization.

ATMI’s Supply Management Process

Figure 6

Category Profiling

Category/SMTStrategy

•Market/supply analysis

•Internal needs analysis

•Spend analysis

Strategy Consensus

Product Phase Gate Readiness

SupplierPerformance &RelationshipManagement

•Define SMT objectives

•NPD sourcing strategies

•Supplier performance goals

•Key projects

• Operations & Supply Chain Management

• BMT Alignment

•Request for proposal

•Proposal analysis

•Negotiation

•Supplier qualification

•Supplier selection

•Award

•Defined metrics

•Contract compliance

•Segmentation measures

•QBR feedback

•Supplier awards

•Supplier Forum

Continuous Improvement

Internal

•Lessons learned

•Feedback

Supplier

•Defined CIPs

•Intensive engagements

Strategic Definition Execution



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According to FMC’s global sourcing director, an ideal category manager is someone with a strong technical background combined with a strong commercial background. FMC looks for someone with experience in one or more of the following: operations, project management, commercial areas, or technical areas such as engineering.

FMC’s category management teams are accountable for strategy and execution of procurement objectives, and they function as self-contained teams with resources for sourcing and supplier development. As depicted in Figure 7, category teams also include supplier quality resources, subject matter experts (SMEs), and product responsible engineers (PREs). The subject matter expert is typically someone with specific knowledge (e.g., fabrication, machining, or welding) or a product-responsible engineer involved in specific products. Product line buyers, located at each operating site around the world, report to the site product line manager for operational issues and the subcategory lead for strategic or functional issues (such as those involving plans, policies, or procedures).

FMC’s Category Team Composition

Figure 7

FMC’s three-way collaboration among the category manager, the global product line sourcing manager, and the global sourcing director is integral to the success of FMC’s sourcing and procurement organization.



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ARTICULATE SKILL REQUIREMENTS FOR CAREER DEVELOPMENT Provide opportunities for career progression and skills acquisition through clearly articulated and differentiated skill requirements across the procurement organization. Best-practice organizations recognize the need to invest in training, skill development, and career mentoring for their employees. The organizations studied here use skill assessments to understand the strengths and weaknesses of their sourcing and procurement teams. They then use training and career development plans to enhance the skills and capabilities of the team members.

Sourcing in itself is a profession that is being recognized, and it is much more than just placing a purchase order.

—Fredrik Glette, global sourcing director subsea systems, FMC Technologies

Within sourcing and procurement, FMC believes that talent management should be a key area of focus. In collaboration with a third party, FMC developed a training program that each professional is required to complete. FMC is adapting this training for the next level, aligning individual tracks for managers, leaders, and category managers.

A dedicated talent management group in FMC’s global sourcing and procurement organization is responsible for developing employees through:

competency descriptions, competency assessments, job descriptions, training plans, and development and implementation of training programs (e.g., strategic sourcing

training).

This talent management group in sourcing and procurement manages FMC’s links with key global educational institutions. In addition to creating career plans for key individuals and high performers, this group is also responsible for resource planning because it tracks open positions or the need for new positions and fills them with internal key talent as well as external hires when necessary.

Driven by its chief procurement officer as part of its implementation of a structured five-step sourcing management process, Merck has an explicit expectation of



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professionalism for all of its procurement employees. The new sourcing management process has brought additional rigor to sourcing, which in turn has necessitated a higher level of professionalism and a longer-term mind-set within procurement. In addition, Merck focuses on whether the organization has the forward-thinking skill set needed for its expanding global market.

Merck seeks to develop the talents of its staff through a dedicated learning and development team within global procurement that identifies opportunities for skill enhancement for the group. These staff members review the technical skill sets of employees, specifically regarding the sourcing management process, supplier value or relationship management, outsourcing, advanced negotiation, risk management, contracting, project management, supplier financial analysis, and cost modeling.

The learning and development staff members also evaluate the employees’ behavioral skills, such as cross-functional team leadership, change management, stakeholder analysis and influencing, strategic thinking and analysis, cross-cultural awareness and effectiveness, and conflict management. Merck chose these skill sets based on the results of customer surveys. The survey results were placed on a matrix, and this matrix was used to determine areas of focus for employee skills enhancement programs. Some areas identified by Merck for improvement include the method of delivery of employee skills enhancement programs for employees outside of the United States as well as follow-up processes to help employees apply skills learned in training.

ATMI focuses its procurement employee development program on organizational excellence and operational excellence. It strives to be an organization in which employees both teach and are taught. ATMI creates a development plan for each employee that outlines his or her career plan and personal development plan. ATMI assesses each employee’s skill level in various areas, and bases training requirements on that assessment. In addition, ATMI has a specific program to recognize and cultivate individuals who demonstrate outstanding potential.

PARTNER WITH PRODUCT DEVELOPMENT IN THE EARLY STAGES Seek to incorporate procurement and sourcing early in the new product development process. Getting procurement involved in the early stages of the design and development of new products can streamline the sourcing process and lead to important savings.

In the development process, procurement can evaluate the proposed materials for a new product and evaluate potential sourcing countries based on factors such as the amount of the materials needed, whether the countries have free trade agreements with the United States, and the respective duty rates of potential sourcing countries. In some industries, it might be possible for product development teams to tweak aspects of the design to take advantage of similar materials with an overall lower



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price or from a more reliable sourcing location. For instance, a company producing an article of clothing may be able to specify a different type of cloth to obtain the best value.

In addition to global trade considerations, some industries have stringent product quality demands either from regulatory agencies (e.g., pharmaceuticals) or customers (e.g., semiconductors). In those cases, it is critical that the sourcing teams are in the loop as early as possible regarding any changes to materials needed.

Due to its customers’ high quality expectations and strong resistance to change, ATMI incorporates sourcing activities early in the new product development process (Figure 8). ATMI has relatively long product development cycle times, and this works to procurement’s advantage: the business wants to be engaged with procurement.

ATMI has six stages in its new product development process, and supply chain identification is included as early as the third stage, “alpha research.” ATMI defines scorecard criteria for supplier identification by functional area at each gate, with a focus on supply assurance and supplier capabilities. Involving the supply chain management group early in the product development process works best for ATMI because, given its highly specialized materials, the organization would find it difficult to find an alternative supplier once a product was developed and sourced.

New Product Development Process

Figure 8

Phase 1 Phase 2 Phase 3 Phase 4 Phase 5 Phase 6



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Merck has a five-stage sourcing management process that supports new product development through supplier selection and sourcing decisions. Specifically, in the second stage, business requirements are identified and data is collected and analyzed. Additionally, Merck’s global procurement group is charged with developing suppliers as a source of innovation. On the whole, Merck focuses on excellence in science and health care innovation, and its suppliers play an important part in that. Global category management at Merck has resulted in innovative sourcing within the categories of fleet, marketing, logistics, lab supplies, and direct materials. Through the deep relationships fostered as part of Merck’s global category management, Merck’s suppliers have opportunities to work more efficiently with Merck as well as opportunities for growth and best practice sharing. The process also allows suppliers to lead innovation that can result in a competitive advantage for Merck as well as the supplier. Going forward, Merck intends to focus more on the innovation value provided by its suppliers, not necessarily on the suppliers that provide the best savings.

FMC’s sourcing and procurement groups are integrally involved with the organization’s product teams responsible for product delivery and execution. This enables clear alignment between new products and procurement categories. Additionally, the subject matter experts and product-responsible engineers within the category teams help to connect the teams to the product development process.



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RESEARCH CHAMPION PERSPECTIVES: KPMG The Talent Challenge KPMG has observed a growing talent challenge across procurement organizations in virtually all industry sectors. The application of our principles identified in Chapter 1, which raise the level of procurement’s strategic role in the business, has imposed a significant stress on the finite talent pool from which proficient procurement resources are drawn. Building a procurement organization that comprises all of the key attributes of a strategic business partner requires significant human capital. These attributes include: Each of these capability areas is resource intensive in the need to engage internally and externally. In the coming decade, successful procurement organizations will have recognized the need to develop talent internally, created meaningful career paths, and invested in expanding the knowledge and capabilities of their resources. Already, 68 percent of our study participants have implemented career path programs for their procurement staff, many of which are integrated into a formal corporate leadership training program. Of those with formal programs, most cite the need to attract and retain talent as a key driver for supporting the program.



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Despite these established programs, ongoing investment in procurement training remains relatively small. On average, our study participants are requiring fewer than 10 hours of training annually per procurement professional and less than one quarter of the study group is spending more than $1,000 per employee on its annual training budget. This limited investment can promote a negative cycle of over-reliance on external support. The overuse of consultants and subcontractors may undermine institutional confidence in, and ultimately, willingness to partner with, the procurement function. One effective approach to addressing the talent challenge, as evidenced in our study findings, is fostering cross-functional participation and teaming for category management. High-performing category and supplier management programs share the common characteristic of empowering visible, focused category management teams that exhibit these attributes: ► high-level visibility in the organization; ► strong leadership skills; ► membership that crosses functional lines; ► a focus on business priorities; and ► endorsement by and high-level support from senior leadership, up to the C-

level. Participation in a cross-functional category team benefits the procurement professional from a development perspective. It also benefits the organization by creating a teaming structure that ensures the interests of constituencies are effectively represented, facilitates buy-in with key stakeholders (both SBU and Corporate) as plans and strategies are developed, and promotes effective communication of progress status and initiatives as the team moves through the process. Participation in cross-functional category teams also provides a critical opportunity for talented firm resources originating in procurement to gain the skills and exposure to pursue career paths that were uncommon in years past. We have discussed the elevation of procurement from a reactive back-office function to one that has a “seat at the strategic table.” Becoming an incubator of talent incontrovertibly adds to the strategic value of the procurement function.



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KPMG’s clients that have a robust procurement organization share a focus on clearly articulated and differentiated skill requirements across the procurement organization and provide the opportunity for career progression and skills acquisition, including: ► formal learning and development programs to develop technical skills; ► targets, goals, and incentives tied to compensation; ► formal career planning; and ► support for developing broader management and organizational skills. The opportunity for strategic participation, skills development, and broad exposure provides an attractive entry and development point for talent at best-practice firms. Increasingly at these firms, procurement is emerging as not only a place for talented, fast-tracked finance professionals to rotate through to “get operations experience,” but also “a great place to be from” for future leaders of the firm. The combination of effective talent management and cross-functional team participation is a key facilitator of that change.



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QUESTIONS TO CONSIDER GOING FORWARD 1. Who are the leaders of your category management teams? What are the

criteria for selecting them?

2. Are your category teams composed of cross-functional members who span business units, geographies, and markets? Are teams focused on business priorities?

3. Does your organization have talent management and development approaches in place for your sourcing and procurement personnel?

4. Does the talent development plan for your procurement team keep pace with your organization’s strategic plan? How will you prepare your team for the future?

5. At what point in your new product development process does procurement get pulled in? Is procurement part of the early stages or are specifications tossed over the wall to it?



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Chapter 3 Category-Specific Processes and Tools

Findings in This Chapter 1. Create a standardized category approach to enable working and

resourcing across categories and the ability to decide how much to

invest by category.

2. Implement category risk management to monitor external market

risks at the market or category level.

3. Conduct supplier risk assessments as part of the strategic sourcing

process and on an ongoing basis.

4. Maintain an Intranet portal to provide one source for information that

all relevant employees can access.

STANDARDIZE THE CATEGORY APPROACH Create a standardized category approach to enable working and resourcing across categories and the ability to decide how much to invest by category. The best-practice organizations in this study have standardized their category management approaches. Whether via road maps or plans, there is uniform documentation that follows a consistent process for each category. Senior stakeholders review these reports or plans on a regular basis, and they use this information to guide decisions about allocating resources and other opportunities. Successful approaches have in common that they link to and support the corporate strategy and add value to the business. Plans also have a governance process that allows for review and modification as market conditions change or as the business strategy shifts. This active involvement by leadership makes these organizations stand out.

Each FMC category manager is required to present an annual category business plan to the global product line directors and the director of global sourcing. The business plan includes:



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an executive summary; a scope of work or organization (see example in Figure 9); a category assessment; a strengths, weaknesses, opportunities, and threats (SWOT) analysis; the current state and planned actions; and a gap analysis.

The category plan highlights the customer and supply market drivers that affect the category. Strategic positioning for the category includes the product, design, production, and supply chain strategies that are in line with the strategies of the product line to which that category reports. Like the strategic position, operational goals are defined in collaboration with the global product line. Operational goals include areas such as professional development for the category team; safety, quality, delivery, and cost goals (i.e., zero incidents, zero defects, execution improvements, cost reduction, and supply base optimization); and overall growth.

FMC’s category plans include strategic timelines, implementation plans, and progress reports for the stages of category sourcing projects. The plans also include immediate, short-term, and long-term solutions that address the category management and functional support aspects of how to manage or overcome the category’s challenges.

FMC’s Category Scope of Work – How Much and with Whom

Figure 9

SUPPLIERS$7.50 Supplier 1

$11.00 $1.75 Supplier 255% $1.75 Supplier 3

$0.00 Supplier 4

$2.00$3.00 $0.70

15% $0.30$0.00

$0.50$2.00 $0.00

10% $0.00$0.00

$1.00 Supplier 5$2.00 $0.50 Supplier 6

10% $0.00 Supplier 7$0.00 Supplier 2

$1.00$2.00 $0.00

10% $0.00$0.00$0.00

Component 4

Component 1

Sub-category 1 Component 2Component 3

(USD Millions) Component 5Category Sub-category 2 Component 6$20.00 Component 7100%

Component 8

Sub-category 3 Component 9

Component 10


Component 13

Sub-category 5



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Merck’s category strategy road maps are universally applicable to all areas of Merck’s global procurement, and all Merck employees have access to them. When Merck creates a category strategy road map, it examines several factors that can influence the category. The goal of the road map is to determine how the following factors may impact the category in the future:


suppliers; any future suppliers (for example, this factor may enable an evaluation of how

Merck’s spend will be impacted by focusing on particular developing markets); and

any stakeholders for the category.

In addition to its road maps, Merck has developed a spend elevation strategy to manage the geographic level (local, regional, international, global) at which sourcing for a particular category occurs currently and determine whether that will change over the next three years. Changes in the category could signal the need for an elevation. A move to a different geographic level depends on several factors, such as sourcing strategy, complexity of the category, whether suppliers support a move to a different market, what the market looks like, and whether the stakeholders will support the move.

ATMI has a defined process for category management: the first part is labeled as a strategic definition period (category profiling phase and category or supplier management team strategy phase) and the second half is the execution period (phase gate readiness phase and supplier performance and relationship management phase).

Like Merck and FMC, ATMI uses category plans to establish the strategy for a particular category. These plans generally consist of a category overview, a spend analysis, a market and supplier risk analysis, a road map with strategic objectives, strategic plans, an issues list, a supplier segmentation overview, a supplier performance summary, a list of any necessary corrective actions, supplier dashboards, and performance metrics. Using the category plan, the supply chain manager works with the supplier management team to develop a holistic strategy for the category that is shared with key internal stakeholders to ensure alignment with ATMI’s priorities and objectives. The category plan undergoes a major update annually with a minor update every six months.

Supplier management teams establish strategic objectives to outline any key issues to address within their categories. They create strategic road maps to outline strategies and initiatives for both short-term and long-term challenges. The strategic road map must ultimately tie back to ATMI’s business needs to ensure that the supply chain group is delivering what the organization needs.



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MONITOR MARKET RISKS Implement category risk management to monitor external market risks at the market or category level. To successfully engage in supplier category management, it is important for organizations to understand the landscape of their supply markets. They need to identify all potential suppliers in the category and have a way to assess potential risks to the market or category, including but not limited to the following:

geopolitical risks, environmental risks, energy shortages or costs, regulatory or tax issues, commodity shortages, supply chain risk (transportation, labor, infrastructure), and other kinds of risks to the market or category.

ATMI has created a supply chain alert system focused on its top revenue-generating products to help mitigate the risk of disruptions to its supply chain due to natural disasters. The system maps each product through ATMI’s suppliers and to the base elements provided by its suppliers’ suppliers. The alert system includes the geographical coordinates of the source for each base element, so when an alert notification system such as the United States Geological Survey’s National Earthquake Information Center reports an event, the supply chain management staff can quickly contact potentially affected suppliers to determine any action that ATMI needs to take. The supply chain team can also input coordinates and the radius of concern directly into the system to obtain a report about which products and suppliers could be affected by an event or major catastrophe. With the maps and alert system, ATMI has the opportunity to quickly enact a contingency plan that can enable the organization to be one of the first to obtain alternative supplies. The alert system also allows ATMI to have quick answers to any customer inquiries that may result from an event.

The key to ATMI’s system is its ability to see into its suppliers’ supply base, achieved only as a result of deep, strong relationships with suppliers that are willing to share this information. The success of a system like this is heavily influenced by how complicated an organization’s supply base is.

For 2011, risk management was one of Merck’s key priorities. Merck has outlined a five-step risk management process that involves all categories and regions within the global procurement group but is ultimately managed by a risk group located within the same Merck division that houses the global procurement group. The risk management process begins with a trigger that can range from an unexpected event (such as a natural disaster) to a regularly scheduled assessment of Merck’s supply base.



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For ongoing risk management, Merck will periodically look at its top products (either from a revenue or reputation standpoint) and conduct a risk assessment on those products. Its Market Intelligence Exchange portal tracks key information in almost real time for certain types of news that impact Merck’s supply markets. The supply chain risk management process is part of a larger, organizational risk management process. As such, Merck has identified the need for an organization-wide risk management group and has established an enterprise-wide risk management council.

PERFORM INITIAL AND ONGOING SUPPLIER RISK ASSESSMENT Conduct supplier risk assessments as part of the strategic sourcing process and on an ongoing basis. Once an organization has evaluated the risk inherent in its supply markets and understands the risk at the category level, then, as part of strategic sourcing, it should also evaluate the risk of specific suppliers. Best-practice organizations in this study conduct an initial risk assessment as part of strategic sourcing decisions. They also engage in ongoing risk management with their top-tier suppliers. Ongoing assessment of key supplier risk helps avoid or minimize the chances of being caught unaware when a supplier goes out of business. Ongoing supplier assessment activities can include regular monitoring, quarterly meetings, and updated due diligence.

ATMI conducts supplier risk analysis by evaluating suppliers within a category and calculating a risk probability for each. Its risk probability index tool helps ATMI determine whether to make additional investments to help a supplier or pursue sourcing from another supplier.

Early in its supplier selection process, ATMI uses a Microsoft Excel-based supplier survey to determine overall supplier capability. Based on the results of the survey, which flags areas of potential risk worthy of additional investigation, ATMI will determine whether to conduct an on-site assessment of the potential supplier.

A cross-functional team conducts supplier assessments focused on five areas: quality of product, planning, supplier assurance, customer focus, and change control. ATMI has defined scoring criteria for each question so suppliers can conduct a self-assessment in addition to the scores given by ATMI’s team. Any score below a certain threshold across the categories indicates that the supplier needs further improvement but does not necessarily eliminate the supplier from the selection process.

Merck’s complex network of activity makes risk one of its primary concerns. Approximately 80 percent of Merck’s spend is through 800 suppliers, yet heavy regulations that affect its entire supply chain make sourcing from new suppliers



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especially difficult. Industry regulations require Merck to test any new suppliers to ensure quality and consistency of product, which can take months or years.

Merck’s risk management process begins with a sourcing decision and is part of ongoing supplier management or continuous improvement activities that occur in the last stage of Merck’s sourcing management process. As part of its risk management process, Merck’s risk management group examines any supplier financial instability, environmental issues, performance issues, regulatory issues, or ethical issues that may result in risk to Merck. The group then sets priorities for risk management and develops a plan to address any identified risks. The last step involves developing long-term plans to sustain and mitigate risks.

For Merck, everything that touches one of its products or the ingredients of a product is a potential source of contamination, so Merck must also assess the risk of its suppliers’ suppliers. Merck has thus formed a supplier quality assurance group that maintains direct contact with suppliers to ensure that their materials maintain a standard of quality. The group provides suppliers with a standardized way of measuring risk and makes Merck’s expectations more transparent. Additionally, it provides a way for Merck to build relationships with suppliers and act proactively to address risk issues.

FMC conducts joint planning with its strategic and core suppliers via quarterly business review meetings. Discussions among senior representatives from FMC and the supplier cover topics such as organizational updates, future joint business, mutual development opportunities, and continuous improvement action plans. FMC has formal business alliances with some of its core suppliers that typically result in frame agreements that formally govern the relationship. These frame agreements are also used to mitigate any long-term business risks and ensure that key suppliers stay on board.

MAINTAIN AN INTRANET PORTAL TO PROVIDE ONE SOURCE FOR INFORMATION THAT ALL RELEVANT EMPLOYEES CAN ACCESS To ensure employees have the information they need when they need it, best-practice organizations provide a dedicated internal information source. By putting all key information in a single portal, employees involved in category management can find and contribute relevant information more easily. According to APQC’s 2010 research in Knowledge Management, 1 this type of consistent, consolidated solution provides a number of advantages, including:

1 APQC. Sustaining Effective Communities of Practice. APQC’s Collaborative Benchmarking, 2010.

http://www.apqc.org/knowledge-base/documents/sustaining-effective-communities-practice-best-practices-report



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creating a better user experience for employees who belong to multiple groups; increasing the probability of standardization and content reuse; reducing the amount of time employees spend finding and contributing

expertise and content; providing clarity around the business case and deliverables for category

management teams; and enabling a focus on content and connectivity, instead of on the logistics of the

process.

Access to category-related knowledge tools must be simple and efficient to meet employees’ need for “one-stop shopping” and single-point access to housing contracts, agreements, and other critical supplier-related documents. At all the best-practice organizations, single-point access is part of a larger philosophy of global standardization across categories.

Merck’s Market Intelligence Exchange portal is an online data repository including supply market reports, up-to-date industry information, supplier profiles and news, commodity price forecasts, global labor rates, category news and alerts, and project tracking information for reports created within the repository. The portal is accessible by all Merck employees and ensures that everyone involved in supplier or category management can find needed content to help them do their jobs.

In addition, Merck is transitioning to using SAP for all supplier management. This shift will ensure that supplier information is centralized and will provide visibility into that information and the supplier management process to employees across the organization.

Like many other organizations, FMC uses Microsoft SharePoint as a centralized location for storing essential category management information. Its “Knowledge Network” site houses discussion forums, wiki pages, lists of preferred suppliers, shared calendars, and blogs, allowing all sourcing and procurement employees access to the knowledge they need when they need it. By capturing information on the centralized site, rather than in siloed e-mail inboxes, employees can read an exchange or learn about a discussion even if they were not involved in the initial conversation. Since FMC is a global organization with category teams on multiple continents, the asynchronous learning opportunity that such a site affords is essential to employee productivity.

Like FMC, ATMI uses a Microsoft SharePoint site to facilitate communication and collaboration among supply chain employees across the globe. Its site is also used to facilitate meetings by housing slide decks and dashboards that team members can modify. ATMI uses the calendar feature to keep track of employees’ personal time off and supplier meetings. The site allows managers to see the supply chain management team’s activities and allows individual members of the team to see the activities of other team members.



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Also available on ATMI’s Intranet is its online sourcing guide. The supply chain group manages this database of preferred suppliers that contains a wealth of information about each supplier, including the category and subcategory to which it belongs. The guide provides engineering and development teams with a list of vetted, approved suppliers, preventing them from wasting time searching for potential suppliers when a qualified one already exists.

OBSERVATION: LEAD WITH STRONG PROCESSES, NOT TOOLS The following observation, while not at the same level of importance as the findings, is something the project team felt should be included in this section of the report. It is a good practice that is applicable far beyond the realm of supplier category management.

Refining the processes with relatively uncomplicated support, and then automating as possible, yields a more efficient outcome. Implementing a complex system or software package before ensuring that the underlying process has been optimized can lead to rework and can increase the time needed to achieve positive results. ATMI is a great example of an organization that keeps it simple by creating processes that work and use already available tools, such as Microsoft Excel, to create blueprints for any future automation of processes such as supplier assessment.



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RESEARCH CHAMPION PERSPECTIVES: KPMG Category Management and the Importance of Resource Allocation and an Effective Supplier Risk Assessment Capability As procurement organizations strive to be strategic partners with their internal customers, an effective category management approach has been an important toolset in supporting the business. Creating category strategies and plans, engaging the business in this category planning activity, and executing against category plans are all important elements in driving value for the business. Two emerging trends are making category management an even more strategic capability for high-performing procurement organizations. These trends are: an emphasis on differentiated procurement resource allocation across categories and the integration of risk management into strategic sourcing and category management processes. Good category management is a resource-intensive capability. Increasingly, KPMG is seeing procurement organizations step back from broad-brush activities that apply the same level of effort to all categories and all suppliers. Instead, procurement is allocating its scarce resources based on the strategic significance of categories of spend. To accomplish this well, procurement must first develop a strong framework and category structure as demonstrated by the best-practice organizations in this study. Creating this standard framework generates the clarity required to begin to differentiate resource requirements. With the standard framework in place, procurement can make explicit decisions regarding which categories require and deserve additional staff attention as well as other investments (e.g., cost modeling, third party data acquisition). This structured evaluation can provide the basis for determining where to invest in building market intelligence, how to focus supplier performance management oversight, and when to emphasize expanded due diligence in market research and supplier reviews. Aligning procurement resource investment in category management with the overall strategic direction of the business is another way that procurement raises its level of strategic integration with the business. As firms increasingly come to rely on suppliers not only for key inputs, but also for process or production support, innovation, and outsourcing partnerships, procurement’s ability to effectively manage supplier risk has become an essential competitive differentiator. The increasing integration of third parties into core



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processes, the increased speed at which business is done, and the growth in regulatory complexity is forcing KPMG’s clients to review and improve their approach to identifying and managing risk with their suppliers and other strategic third-party relationships. This brings about the second trend KPMG is observing in evolving category management capabilities—an emphasis on managing the risk to value equation. Many procurement organizations make the mistake of performing risk evaluation activities in a vacuum, based on their own procurement-centric definitions of risk, and as a one-time event rather than as an ongoing process. Leading procurement organizations recognize that risk is a characteristic of supplier relationships and create an integrated approach that assesses and manages that risk throughout the supplier lifecycle. Effective risk management is embedded in the category strategy first through an understanding of the inherent risks associated with engaging suppliers in that category and an assessment of how risk can be influenced by key decisions made as part of the category strategy (most importantly, strategic sourcing decisions). For example, the very basic decision of what to buy (i.e., specification development) is the first opportunity to introduce supplier risk because of the potential for dependence on a third party. Where to source is another example of a strategic sourcing decision that potentially introduces additional risk (e.g., possible geopolitical risk from a low-cost country sourcing strategy). Explicitly recognizing these risk-influencing touchpoints and helping the business to assess them is a significant value adding procurement capability. Further integrating risk management processes and capabilities throughout the supplier lifecycle as part of good category management is a key strategic imperative as demonstrated by the best-practice organizations in the study. Identifying and assessing risk at the outset of a supplier engagement as well as continuing to provide the insight and resources needed to assess and manage risk on an ongoing basis is a critical contribution by procurement.



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Building a strong supplier risk management capability requires a collaborative effort among the business, procurement, and the enterprise risk management functions. Depending on industry norms, this enterprise risk function may reside in operations or the executive suite, but in either case, aligning category management risk identification and tolerances to those established at the top of the enterprise risk management pyramid will help to build integration and relevance to the supplier risk management program.



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QUESTIONS TO CONSIDER GOING FORWARD 1. How is information exchanged in your organization? Is there a single

source for information that employees can access?

2. Do you have a standardized category structure? Does your category structure enable execution and resourcing across categories, regions, business units, and product lines?

3. Do you have a process that tracks and projects investment by category?

4. Do you have a robust risk management program that is capable of monitoring external market risks at the market or category level?

5. Does your category management team conduct supplier risk assessments as part of the strategic sourcing process and on an ongoing basis?



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Chapter 4 Extending Supplier Relationships

Findings in This Chapter 1. Invest in building strong suppliers.

2. Give suppliers tools to succeed and create a symbiotic relationship.

INVEST IN BUILDING STRONG SUPPLIERS Best-practice organizations recognize the need to identify high-potential suppliers and help those suppliers develop into strong partners. Using suppliers that are already “good enough” or can meet today’s needs is a viable option for most organizations; however, the best-practice organizations in this study go beyond the current existing options in the marketplace to identify existing and new suppliers that have the potential to grow, improve, and become long-term, mutually beneficial partners with a little bit of extra cultivation. Additionally, these organizations actively consolidate category spend and focus on key partners that are well positioned to support their longer-term business needs.

Merck integrates supplier diversity into its category management plan and the scorecard used to evaluate the performance of its global procurement group. Additionally, its category strategy road maps include a section on supplier diversity that highlights any challenges or risks to supplier diversity within the category and provides information on the spend and savings over the previous three years.

Merck has a supplier diversity group that is linked to the corporate-wide diversity program at Merck, allowing the procurement group to leverage the program’s resources. The organization has a dedicated supplier diversity program leader in the global procurement group whose job is to ask others within procurement: “If you haven’t considered a diverse supplier, why not?”

Beyond considering and contracting with diverse suppliers, Merck mentors suppliers to increase the likelihood of a successful partnership. Global procurement ensures that new and existing suppliers understand how to do business with Merck effectively, specifically by explaining what the organization is looking for in a supplier and helping the supplier determine how it can build that capability.



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When evaluating new suppliers, ATMI conducts a formal supplier assessment that covers quality of product, planning, supplier assurance, customer focus, and change control. Scores below 70 on the assessment indicate that the supplier needs improvement; however, ATMI recognizes the need to consider a supplier’s potential rather than focusing solely on its existing output or capabilities. Accordingly, low scores do not eliminate suppliers from the selection process.

For current suppliers, ATMI’s supplier management team reviews scorecard performance, continuous improvement projects, and any corrective actions taken over the previous four quarters. This information allows the team to determine whether the investment ATMI is making in a specific supplier is achieving positive results. It also provides the supplier management team with the information it needs to reassess its approach with any of its suppliers.

FMC’s products have long lead times, from 12 to 18 months on average, and the organization needs long-term agreements to support those products. Changing suppliers in the middle of a project, especially to a new supplier, is a potential risk. As a result, FMC looks beyond its short-term supplier needs to form long-term partnerships with suppliers that have the capacity to grow in the direction in which FMC is heading. The organization strives to identify suppliers with the capability to grow with FMC while maintaining high performance.

GIVE SUPPLIERS TOOLS TO SUCCEED AND CREATE A SYMBIOTIC RELATIONSHIP Best-practice organizations equip their suppliers with tools to better the suppliers’ performance. These organizations also recognize the need for joint improvement to optimize each supplier relationship. The best-practice organizations in this study recognize the need not only to seek quality suppliers and help those suppliers improve but also to ask “how can we become a better customer to our top suppliers?” In addition, they focus on what a supplier could do to support them as opposed to what the supplier is currently doing.

The supplier performance management tools seen in this study help the suppliers identify areas for self-improvement that are important to their customers. These tools should also enable suppliers to identify their customers’ performance or practices that may impact the suppliers’ ability to meet expectations. The best-practice organizations have performance tools focused on what is important to their procurement needs, and these are linked to their business objectives.

ATMI’s products require consistent, top-notch materials to meet the demands of its customers. Additionally, given the tiny size and fine tolerances of its products, any minor raw material substitution can significantly impact ATMI’s final products. Because the cost of transitioning to a new supplier is so high, the organization strives to find good suppliers and develop deep, long-term relationships with them. After



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determining that a supplier is at risk, ATMI’s procurement team decides whether to find an alternative supplier (new or existing), invest more in the development of the current supplier, procure and hold extra inventory for the supplier, or work on continuous improvement processes with the supplier. Aside from finding an alternative supplier, the other options involve substantial investment on the part of ATMI and the shifting of some of the supplier’s risk to ATMI in an effort to truly partner with the supplier.

Beyond completing its own risk assessment, ATMI provides its suppliers with self-scoring mechanisms so that they can understand how they will be evaluated. This makes the assessment process transparent to the suppliers and gives them an opportunity for self-assessment and internal process improvement. In 2011, ATMI shifted to a new scorecard that requires all direct suppliers to report data monthly.

As mentioned in Chapter 3, ATMI has developed a supply chain maps and alert system to identify potential supply chain disruptions following natural disasters or other calamitous events. Once the supply chain management staff is alerted, it reaches out to potentially affected suppliers to determine what action, if any, to take. In some cases, the suppliers are not aware of the disaster, so ATMI’s alert system may give them the notice they need to contact their own suppliers or customers.

FMC conducts joint planning with its strategic and core suppliers. Senior FMC and supplier representatives meet quarterly to discuss organizational updates, future business together, mutual development opportunities, and continuous improvement action plans. Additionally, FMC has formal business alliances with some of its core suppliers that use frame agreements to formally govern the relationship.

Suppliers with a high performance in FMC’s core values (safety, quality, delivery, and cost) are recognized and rewarded with a larger piece of a category’s spend and repeat business. Suppliers that have a good cultural fit with FMC are highly valued, and FMC works to maintain and extend those relationships due to the complexity of its engineered-to-order and very industry-specific products.

Merck’s supplier value management process goes beyond scorecards and annual supplier evaluations to establish trust-based high-quality relationships with the organization’s suppliers. Merck’s top-tier suppliers receive the most management focus. Top-tier suppliers are determined by spend, supplier value, and whether Merck’s view of the supplier and the supplier’s view of Merck are aligned. Supplier value does not necessarily reflect cost savings; it can also relate to the innovation a supplier provides.

Beyond active ingredients, everything that comes into contact with Merck’s ingredients or products, such as machinery parts, has the potential to contaminate the product. To ensure that all materials maintain a quality standard, Merck has formed a supplier quality assurance group. This group works directly with suppliers to standardize the way Merck views risk and to make Merck’s expectations of suppliers more transparent. This group helps Merck build stronger relationships with its suppliers.



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RESEARCH CHAMPION PERSPECTIVES: KPMG Fostering High Performing Supplier Partnerships KPMG thinks of supplier development as an essential aspect of supplier relationship management and a key contributing factor in effective category management overall. It requires skillful and rigorous supplier performance management while putting a premium on a strategic, long-term view of the firm’s product portfolio in the context of the combined categories and potential partners that can profitably bring the products to market. One positive unintended consequence of the economic downturn was an increasing requirement for firms to creatively support financially distressed but strategic suppliers through approaches like accelerating receivables, co-investment in capital improvements, favorable trade terms, and inventory buy-backs. Firms recognized that the health of these key suppliers was critical to their own ability to deliver products and services. As a result, companies with the capacity to accurately identify worthy partners are increasingly comfortable creating close financial and operational entanglements with those suppliers. Specific capabilities are required for a procurement organization to successfully achieve this supplier remediation. First, it must have the ability to identify which suppliers are truly business critical and deserving of support. This is harder than it looks since the business may be parochial in its view of criticality and resistant to alternatives. Structured category strategies and plans, as noted in Chapter 3, are essential tools to enable a dispassionate review on behalf of the business. A further complicating factor is the need to understand not just which suppliers are critical today but which are likely to be critical to future growth. This is where, once again, having a strong understanding of the strategic direction of the firm and insight into the strategic planning process is essential for procurement. Next, procurement needs the capability to accurately diagnose potential issues suppliers may be encountering (using financial analysis and other evaluation tools) in order to develop solutions to improve the health of those suppliers. This requirement brings us back to the importance of building strong capabilities and skillsets within the procurement organization, as noted in Chapter 2, to conduct supplier analysis. These alternative supplier arrangements put an even greater premium on effective evaluation and scorecarding to monitor and sustain supplier performance, but this premium provides another opportunity for procurement to partner with the businesses and further demonstrate strategic value.



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Supplier development has been widely discussed in the context of minority- and women-owned firms, including in this study. There has been a historic need in this supplier segment, due to the challenges firms have faced in reaching their supplier diversity targets in the context of high production volume requirements, quality and delivery standards, and logistical constraints. KPMG believes high-performing procurement organizations invest in similar development efforts across the supplier portfolio. The foundational element of best-in-class supplier development is the desire for a mutually beneficial partnership with the supplier. Increasingly, firms are looking for suppliers to partner or lead in identifying innovative processes, technologies, inputs, and substitutes for the current set of purchased goods and services. As a result, there is now a much greater emphasis on institutionalizing rewards for positive behaviors (year-over-year unit cost reduction, innovation, process improvements, etc.) through the contracting process and on shared benefit. Indeed, among the study group, almost half of respondents said they provide incentives to their suppliers who successfully drive future value through effective partnering. What does that effective partnering look like? It starts with a clear understanding of mutual value. Here, procurement can support the business through effective negotiation and contracting that accurately reflects the value propositions on both sides of the deal. From that basis, effective partnering grows through the application of a robust supplier performance management program that is tailored to key strategic supplier partners. Information transparency, which was illustrated by the best-practice organizations in the use of portals and other technology tools for information exchange, is one critical element to supplier development. Other elements include the ability and willingness to learn from suppliers through 360 degree feedback, the creation of standard communication mechanisms to foster common language and approaches, and ongoing encouragement of positive behaviors. This last lever is used by many of the study participants. Seventy-five percent of the study group have formal internal recognition programs for suppliers and 44 percent provide external recognition to high-performing suppliers.



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Levers for Optimizing Supplier Relationships

While experiences with troubled suppliers are responsible for many of the ongoing supplier development approaches used by procurement organizations today, the ability to expand and apply development approaches to the higher end of the supplier stratum truly differentiates a high-performing procurement organization. Best-practice firms realize a simple truth: strategic relationships with financially solid suppliers who can bring product-specific innovation to goods and services is a strategic advantage. Supporting the business in balancing risk and value creation through supplier performance management clearly raises the profile of the procurement organization to the level of strategic partner to the business.

Symbiotic Vendor

Relationship

Supplier capability focus

Open communication

around risk events

Frame agreements formalizing

relationships

360 degree supplier

feedback

Innovative partnerships

Joint improvement

initiatives

Scorecards with self-scoring mechanisms



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QUESTIONS TO CONSIDER GOING FORWARD 1. Do you have a process in place to identify high-potential suppliers? Is it

effective?

2. Does your sourcing activity include a review of the supplier’s current and future capabilities? Are these aligned to your current and future needs?

3. Is your commodity management team chartered with helping new and existing suppliers develop into strong partners? How does your organization invest in building strong suppliers?

4. Do your supplier performance management tools focus on supplier success? Do the tools help suppliers identify areas of self-improvement that will impact their ability to support your strategic objectives?

5. Do your supplier performance tools foster a symbiotic relationship with your key suppliers?



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Case Study ATMI

ORGANIZATION OVERVIEW ATMI is a publicly traded provider of technologies for the semiconductor, life science, and display industries with over 775 employees (170 of which are in the technology development disciplines). In 2010, ATMI had $367 million in revenue. It has invested $445 million in technology development during its 25 years. Much of ATMI’s customer base is in Asia. As such, it has a presence in Korea, Japan, China, Taiwan, and Singapore, with locations also in Germany, Belgium, and the United States. The strategic intent of ATMI is to be the source of process efficiency solutions for technology-driven customers. It aims to do this by providing its customers with materials and related delivery systems and technologies, all within sustainable business models.

ATMI’s major achievements include being the first organization to receive the U.S. Environmental Protection Agency’s Designated for the Environment label for semiconductor manufacturing materials and being the first organization to utilize combinatorial screening worldwide in semiconductors. ATMI has also won awards for its design in solid source delivery. It designed a revolutionary technology that absorbs dangerous gases into a cylinder that makes them subatmospheric and thus prevents their release.

ATMI is known for its expertise in materials. Advancement in materials has been the primary force behind the advancement of semiconductor chips in recent years. The organization’s knowledge of semiconductor materials packaging has allowed it to easily transition into the life sciences market, for which it produces single-use sterilizable packaging, storage vessels, mixers, and bioreactors.

If you can’t deliver quality, you’re out of the game before it even starts.

-Rick Eklund

Supply Chain Management and Procurement The mission of ATMI’s supply management division is to create value for both internal and external stakeholders by sourcing, selecting, and managing high-performing suppliers. The driver behind ATMI’s mission is its customers’ focus on



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quality in light of the highly complex nature of semiconductor components. The semiconductor market also relies heavily on the assurance and consistency of supply because any minor change to materials may impact the final product and the manufacturing process.

ATMI’s supply chain management and procurement groups are separate, but both report to the senior director of supply chain. The supply chain management group, with a staff of nine resources worldwide, focuses on direct spend categories, developing sourcing strategy, assessing supplier qualification, negotiating and contracting, managing costs, identifying value proposition opportunities, and serving as leadership for the organization’s supplier management teams (SMTs). The procurement group, with a worldwide staff of 10 resources, primarily handles purchase orders for direct spend, indirect expense items, and capital spending, and assesses supplier performance.

SMTs are cross-functional groups composed of a member of the supply chain management group, a quality representative, and a technical representative. This composition helps to provide a holistic view of the sourcing process. The supply management representative serves as the leader of the SMT and the main point of contact between ATMI and the supplier. The quality representative conducts supplier assessments and continuous improvement projects (CIPs) and collects and analyzes supplier performance data. The technical representative is a scientist who acts as a consultant to suppliers to make sure they can provide what is needed. SMTs receive support from ATMI’s marketing and procurement groups as needed. Figure 10 illustrates the functions of SMTs and their sources of input.



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SMTs: Functions and Sources of Input

Figure 10

Business management teams (BMTs) are cross-functional teams headed by senior leadership from across the organization. Members of the teams come from ATMI’s marketing, supply chain, product management, and finance groups. The primary function of BMTs is to break down the activities of ATMI into more manageable pieces. Ultimately, the BMTs determine the actions of ATMI; they set priorities for the organization and ensure that ATMI’s resources are aligned to achieve those priorities.

STRATEGIC IMPLICATIONS Strategic Objectives Due to its customers’ high quality expectations and strong resistance to change, ATMI incorporates sourcing activities early in the new product development process (Figure 11). The organization’s new product development process consists of six phases, with a gate review between phases. ATMI includes supply chain identification as early as its third stage, “alpha research.” Scorecard criteria for supplier identification are defined by functional area at each phase gate with a focus



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on supply assurance and supplier capabilities. A BMT oversees all of the new product development activity and resources. Involving the supply chain management group early in the product development process works best for ATMI because, given its highly specialized materials, the organization would find it difficult to find an alternative supplier once a product was developed and sourced.

New Product Development Process

Figure 11 Category Management Organization ATMI manages four broad categories of materials: equipment for semiconductors and the life science industry, off wafer materials (materials that move items off of a semiconductor wafer), on wafer materials (materials that put items onto a semiconductor wafer), and plastics and films. ATMI uses a traditional pyramid structure to classify its suppliers, with suppliers at the top of the pyramid making up 11 percent of ATMI’s suppliers and receiving 87 percent of the spend.

ATMI has a process set out for the management of each of its categories (Figure 12). The first half of the process is labeled as a strategic definition period. The process begins with a category profiling phase in which analysis is conducted on the current market and the internal need for the materials. A category/SMT strategy phase then occurs in which the SMT defines its objectives by focusing on new product development sourcing strategies, supplier performance goals, and key projects. In the strategy consensus phase, the SMT communicates with the operations group, supply chain management group, and the project management teams to ensure that the needs and objectives for the category are in alignment with

Phase 1 Phase 2 Phase 3 Phase 4 Phase 5 Phase 6



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the overall needs and objectives of the organization. The second half of the process is labeled the execution period. The first phase in this period is the product phase gate readiness phase, in which requests for proposal are developed and ultimately suppliers are chosen and awarded contracts. The process then moves into the supplier performance and relationship management phase, in which ATMI’s procurement group monitors suppliers for contract compliance. In the past, ATMI had supplier awards and supplier forums in place for this phase, but the recent economic downturn put those activities on hold. ATMI is currently working to re-establish those activities. The last phase in the category management process is the continuous improvement phase, in which internal feedback and lessons learned are gathered. ATMI also uses this phase to identify CIPs with suppliers and any intensive engagements that may be needed.

Supply Management Process

Figure 12

Supply Chain Risk ATMI uses category plans to establish the strategy for a particular category. These plans generally consist of a category overview, a spend analysis, a market and supplier risk analysis, a roadmap with strategic objectives, strategic plans, an issues list, a supplier segmentation overview, a supplier performance summary, a list of any necessary corrective actions, supplier dashboards, and performance metrics. Using the category plan, the supply chain manager works with the SMT to develop a holistic strategy for the category. Once the plan is created, it is shared with key internal stakeholders to make sure that it is in line with ATMI’s priorities and objectives. It undergoes a major update annually with another minor update in the middle of the year.

Category Profiling

Category/SMTStrategy

•Market/supply analysis

•Internal needs analysis

•Spend analysis

Strategy Consensus

Product Phase Gate Readiness

SupplierPerformance &RelationshipManagement

•Define SMT objectives

•NPD sourcing strategies

•Supplier performance goals

•Key projects

• Operations & Supply Chain Management

• BMT Alignment

•Request for proposal

•Proposal analysis

•Negotiation

•Supplier qualification

•Supplier selection

•Award

•Defined metrics

•Contract compliance

•Segmentation measures

•QBR feedback

•Supplier awards

•Supplier Forum

Continuous Improvement

Internal

•Lessons learned

•Feedback

Supplier

•Defined CIPs

•Intensive engagements

Strategic Definition Execution



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Figure 13 illustrates the category overview section of ATMI’s category plan. This is a high-level summary of the category that includes current market conditions and a list of the current suppliers. The spend analysis then breaks down each category into subcategories of more specific types of products. Spend is also broken down by supplier to determine which suppliers receive more of the spend and how this has changed over time. The spend analysis also includes a category environment analysis in which any category trends are identified as well as any emerging technologies that may impact the market for the category. A market summary is then created that details any industry, supply, pricing, and technology trends in the market and how those trends could impact ATMI.

Category Plan: Category Overview

Figure 13

In the supplier risk analysis, the SMT looks at the key suppliers within the category and calculates a risk probability for each one so that the organization can understand where its highest risks are. Figure 14 shows the chart on which each supplier is placed to assess its risk. Any supplier in the red section of the chart should be considered for a risk mitigation strategy. This may involve finding a completely new supplier, investing more in the development of the current supplier, holding extra inventory from the supplier, initiating more continuous improvement processes, or other actions.



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Supplier Risk Analysis

Figure 14

The SMT then establishes strategic objectives to outline any key issues that need to be addressed within the category. A strategic roadmap is created that outlines strategies and initiatives for both short-term and long-term challenges. The strategic roadmap must ultimately tie back to ATMI’s business needs to ensure that the supply chain management group is delivering what the organization needs.

Strategic plans (Figure 15) are created as required to outline the objectives for the category, the strategy, any requirements for the strategy, the results to date, and any key actions. A temperature gauge is included for each item in the plan to convey the status of the strategy.



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Sample Strategic Plan

Figure 15

The SMT typically reviews key supplier historical performance metrics for the category (Figure 16). This includes supplier scorecard performance, any CIPs, and any corrective actions taken over the previous four quarters. These metrics provide a way for the SMT to assess whether the investment ATMI is making in the suppliers has delivered any results and whether the SMT needs to reassess its approach with any of the suppliers.

Sample Supplier Performance Metrics

Figure 16



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The SMT also creates a supplier summary dashboard (Figure 17) as an overview with key data on the supplier, and a stoplight report on key performance metrics for the supplier. These dashboards are often used by senior staff when they visit a supplier to get a general overview of the how the supplier is performing. Figure 17 is the template for the supplier summary dashboard.

Sample Supplier Summary Dashboard

Figure 17

ATMI has a supply chain maps and alert system to help mitigate risk of disruptions to its supply chain due to natural disasters. This alert system is focused on the top revenue generating products. The system has a map of each product through ATMI’s suppliers and to the base elements provided by the suppliers’ suppliers. The alert system includes the geographical coordinates of each base element, so when an alert notification system such as the U.S. Geological Survey’s National Earthquake Information Center reports an event, the supply chain management staff can quickly contact potentially affected suppliers to determine any action needed. The supply chain team can also input coordinates and the radius of concern directly into the system to obtain which products and suppliers could be affected by an event. With the maps and alert system, ATMI has the opportunity to quickly enact a contingency plan, which could allow the organization to be one of the first to obtain any alternative supplies. The alert system also allows ATMI to have quick answers to any customer inquiries that may result from an event.



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RESOURCE COMMITMENT AND TALENT MANAGEMENT Supplier performance is managed by the procurement group at ATMI. None of the supply chain management or procurement functions are outsourced. ATMI has partnered with students at Texas A&M University to develop risk management tools, but those tools are still under development. ATMI also partnered with students at The University of Texas at Austin to develop its maps and alerts system.

ATMI uses online resources, internal job postings, talent search agencies, and a referral program to identify supply chain professionals for its organization. ATMI has adopted the concept of being an “A-player company,” in which results come from employees, and the organization’s culture is based on integrity, edge, energy, and the ability of employees to energize others. ATMI focuses its employee development program on organizational and operational excellence. It strives to be an organization in which employees both teach and are taught. A development plan is available for each employee to outline the employee’s career plan and personal development plan. The employee’s skill level in various areas is assessed, and training requirements are based on that assessment.

ATMI does not have a defined job rotation program in place due to the organization’s size and different geographic locations. However, employees are encouraged to rotate to other supply chain areas as they are able.

CATEGORY-SPECIFIC PROCESSES AND TOOLS ATMI uses a Microsoft SharePoint site as a data repository and as a means of facilitating collaboration among supply chain management employees across the globe. The SharePoint site is also used for ongoing meetings and to house slide decks and dashboards, all of which are modifiable by team members. A calendar is used to document personal time off taken by the team members as well as meetings with suppliers. The SharePoint site enables managers to see the activities of the supply chain management team and also enables members of the supply chain team to see the activities of other members.

The ATMI supply chain management group stays informed of market trends by reading through market trend analysis reports, attending conferences, reading articles in publications, and networking with suppliers. The group uses these resources as well as customer suggestions to identify potential suppliers.

Automation and Systems Support The majority of the tools used by ATMI in its supply chain management functions were developed in-house and originated from its customers’ need for assurance of supply. ATMI obtained some tools directly from customers and then adapted them for use by ATMI.

Supplier Assessment: Early in the supplier selection process, ATMI uses a Microsoft Excel-based supplier survey (Figure 18) to help determine overall supplier capability. Based on the responses to the survey, ATMI will determine whether to conduct an



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on-site assessment of the potential supplier. The supplier survey contains sections on the supplier’s general business information, facilities, operations, supply chain management capabilities, engineering, human resources, information technology, finance information, environmental health and safety, and quality with regard to the material to be sourced. Information on the target product for ATMI and a checklist of required documents are also included in the supplier survey. The supplier survey includes a hidden scoring sheet that is password protected. The hidden scoring sheet automatically flags the supplier responses that merit further investigation and analysis before ATMI can make a decision on whether to proceed with the selection process.

Supplier Survey – Sample Sections

Figure 18

A supplier assessment is conducted by a cross-functional team with a focus on five areas: quality of product, planning, supplier assurance, customer focus, and change



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control. Scoring criteria are defined for each question in the tool so that suppliers can conduct a self-assessment. Members of the cross-functional team conduct an on-site visit with the supplier to establish scores from ATMI. Any score of less than 70 across the categories indicates that further improvement is needed for the supplier but does not eliminate the supplier from the selection process. ATMI has recently added questions regarding the sustainability practices of potential suppliers, although implementation of these practices is not a requirement for the contracting process.

Supplier Scorecard: QCAST (quality, cost, ability to deliver, service, technology) are the elements of the current ATMI supplier scorecard. The scorecards are only used with ATMI’s top tier of suppliers and are completed quarterly or biannually. The scorecards have a self-scoring mechanism so that suppliers can immediately recognize any areas that need improvement. The scorecards have detailed questions within each section. The elements of the scorecard are weighted, with the quality section having the most weight. ATMI is shifting its supplier scorecard methodology from QCAST to QSD (quality, service, delivery). This scorecard will be used for all direct suppliers and will require monthly data reporting. Data will be pulled from the available supplier metrics into the scorecard, which will then be sent automatically to the suppliers for review.

Sourcing Guide: ATMI also uses an online sourcing guide, which is a database of preferred supplier sources managed by the supply chain management group. The database includes the category and subcategory of each supplier and is intended to be used as a guide for the engineering and development teams during the supplier selection process. The sourcing guide originated from the need to find established suppliers with competency in a particular area rather than suppliers that could produce a particular part. The sourcing guide is available on ATMI’s intranet site.

Sales and Operations Planning: ATMI uses a complex monthly sales and operations planning (S&OP) process that looks 24 months into the future for factors that could affect ATMI and its supply chain. It begins with a product management review that evaluates and updates product development. The process then moves to demand planning to predict what customer needs will be and when they will change. A supply review involves capacity planning and assessing ATMI’s ability to meet demand. The entire plan then undergoes a management business review at the highest level of the organization. Once management approves the plan, the team executes that plan.

Risk Assessment: ATMI utilizes a risk probability index tool (Figure 19) to calculate a score for select suppliers. The tool uses exponential scoring to assess the risk of the supplier. The index is then used to plot the supplier on the supplier risk analysis chart. ATMI uses this risk probability to determine whether it needs to consider actions such as additional investments to help a supplier or if it needs to pursue sourcing from another supplier.



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Risk Probability Index Tool

Figure 19

CONCLUSION ATMI manages four broad categories of materials for technologies within the semiconductor, life sciences, and display industries. The organization’s supply chain management group owns the sourcing strategy, supplier identification, and contracting processes, while its procurement group manages purchases and supplier performance evaluation. ATMI has multiple tools in place to evaluate supplier performance, assess risk, and mitigate risk from external disruptions. ATMI values quality of its materials and its employees above all else. This focus on providing quality, as well as supply assurance and consistency of supply, has influenced the way ATMI manages its supply chain processes.



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Case Study

FMC Technologies

ORGANIZATION OVERVIEW FMC Technologies, Inc. is a leading global provider of technology solutions for the energy industry. Named by FORTUNE® Magazine as the World's Most Admired Oil and Gas Equipment, Service Company in 2010, the organization has approximately 12,500 employees and operates 27 production facilities in 16 countries. FMC Technologies designs, manufactures, and services technologically sophisticated systems and products such as subsea production and processing systems, surface wellhead systems, high pressure fluid control equipment, measurement solutions, and marine loading systems for the oil and gas industry.

FMC’s subsea systems business encompasses a wide range of equipment and technologies that are required to explore, drill, and develop offshore oil and gas fields. FMC has a strong global presence in all of the world’s major basins. Whether it is high-pressure, high-temperature (HPHT) trees and wellheads, subsea controls and systems, or production optimization services, FMC adds value to the organization’s customers throughout the life of the field.

FMC’s subsea systems business continues to capitalize on the growing demand for deepwater oil and gas production with its subsea separation, boosting, and processing systems. FMC provides the technology to increase oil recovery for mature projects and to develop new projects that may otherwise be considered economically unviable or inaccessible.

Sourcing and Procurement At FMC, approximately 305 sourcing and procurement employees manage over two billion dollars in spend. FMC has 1,000 suppliers with only 150 of its suppliers accounting for 80 percent of its direct spend.

FMC has long practiced category management regionally, but the organization recently moved toward a more global perspective with its Vision 2010 initiative. Launched in October of 2010, the Vision 2010 initiative greatly affected the procurement and strategic sourcing functions. It addressed four distinct business imperatives:



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Become better positioned competitively through the global leverage of product execution and quality transformation.

Provide a better focus on customers. (Work on this imperative was led in the regions through sales, customer support, and project execution.)

Achieve global quality, reliability, and consistent process expectations of customers.

Position FMC to compete, grow, and continue to lead subsea system production into the future.

All spend for subsea system production is managed through categories that support a global product line (Figure 20). The global approach allows for standardized policies, procedures, systems, and global coordination. By contrast, all tactical procurement is executed through either the site-specific product line organization (i.e., a procurement team at the operating site) or the centralized category-managed procurement for all operating sites. The global product lines have procurement teams located at each operation site: Houston, Kongsberg, Rio de Janeiro, and Singapore. These teams handle the tactical procurement by executing purchase orders within the strategic framework established by the sourcing and category management team. Typically, the more limited the supply of a product, or the more critical the execution, the more likely that procurement will be done through the centralized category management procurement organization.



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Sourcing and Procurement Organization

Figure 20

STRATEGIC IMPLICATIONS Strategic Objectives Strategic goals for sourcing and procurement are organized in a Hoshin Planning Matrix (Figure 21) focusing on FMC’s core strategic areas, in order of priority: safety, quality, delivery, and cost (SQDC). These areas help drive FMC’s overall goal of “perfect delivery.” The x-matrix shows strategic objectives, priorities, metric targets, and the people accountable for the strategic objectives.



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Hoshin Planning Matrix

Figure 21

An important element to the strategic planning process is that sourcing and procurement are an integral part of the product lines, which are responsible for product delivery and execution. This enables clear alignment to the categories.

Strategically, sourcing and procurement focus on leveraging global capacity, acquiring high-quality products, improving product integrity, attaining superior cycle times, and lowering the total cost of ownership. FMC strives to identify and manage world class, high-performing suppliers who can share growth opportunities. FMC works toward forecasting its purchases in order to develop strong long-term supplier agreements. Another strategic objective is to influence the product design to achieve higher quality products and lower the total cost. Sourcing and procurement have undergone a continuous quality transformation with a focus on achieving zero defects within FMC’s products. Lastly, FMC sourcing and procurement facilitates the transfer of best practices across regional product lines.

Category Management Organization By looking at the categories and product lines on a global level rather than a regional level, Vision 2010 changed FMC’s category management processes and procedures. All of FMC’s direct spend is organized into eight major categories:



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Raw materials Machining

MPS machining WCS machining

Fabrication Large fabrication Small/medium fabrication

Steel and pipe Third party chokes OEM suppliers Controls and data management Well access

Sourcing strategies are managed at the global level for all categories and global product lines. Tactical procurement is executed through the site product line procurement teams. This structure enables the sourcing and procurement functions to maximize leverage and achieve their strategic objectives. While many categories are used across several global product lines, the product line that spends the most essentially owns the category. Each category is managed by a category manager who is responsible for implementing and maintaining the sourcing and procurement strategies for the category. The category manager has dual reporting to the global product line sourcing manager and the global product line sourcing director with which the category is aligned. This dual reporting structure provides the sourcing organization with a strong and direct link to the business through product lines, strong functional support, and direction from the sourcing director, the functional leader.

To achieve maximum leverage with the suppliers, each category is managed as one total bucket of spend whether one or multiple product lines use that category. Most categories represent a large amount of spend, and the largest ones are divided into subcategories that are managed by a subcategory lead who reports to the category manager.

The Category Team Category management teams are accountable for both strategy and execution of the procurement objectives. FMC believes a category functions best as a self-contained team that has resources for sourcing and supplier development. The category teams also include supplier quality resources, subject matter experts (SMEs), and product responsible engineers (PREs), depicted in Figure 22. The SME support usually comes from a person with specific knowledge (e.g., fabrication, machining, or welding) or from product-responsible engineers involved in specific products. Product line buyers, located at each operating site around the world, report to the



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site product line manager for operational issues and the subcategory lead for strategic or functional issues (such as those involving plans, policies, or procedures).

Category Team Roles

Figure 22

Global Product Line Sourcing and Procurement Each global product line has a product line sourcing manager who is chartered with developing, maintaining, and implementing the sourcing and procurement strategies, policies, procedures, and processes for that global product line.

While category managers develop strategies by looking horizontally across all product lines, sourcing managers focus vertically within their product line to ensure that total supply needs are met. The three-way collaboration among the category manager, the global product line sourcing manager, and global sourcing director is integral to the success of the sourcing and procurement organization. Each global sourcing director is also a global product line sourcing manager for one or more of the global product lines. The global sourcing and procurement function is responsible for:

sourcing and procurement processes and systems, sourcing and procurement analysis, talent management and development, supplier quality, supplier development, and supplier contracting.



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The processes and systems group is responsible for developing, implementing, and maintaining all global sourcing and procurement policies, processes, and procedures. It acts as a liaison to the IT department, provides IT system support, and scopes tools that support the sourcing and procurement organization in achieving its goals. This group is also responsible for managing the usage of the global supply chain demand forecasting system that aggregates the sales and marketing macro level forecasts of sales and calculates demand level for specific components. Category teams use this data to work with suppliers to secure capacity and plan future business with the suppliers. The processes and systems group also maintains the knowledge network used by the sourcing and procurement function.

The analysis group provides services for all sourcing and procurement business analysis needs. It establishes and maintains the global sourcing and procurement metrics and generates the spend analysis periodically. The analysis group also generates and distributes a metric report on a regular basis and conducts analysis projects on a per-request basis.

Category Business Plan Each category manager is required to present an annual category business plan to the global product line directors and the director of global sourcing. FMC notes a continual and planned adjustment of its sourcing strategies rather than a reaction to ad-hoc events. This process also allows for long-term planning and development of the supply base.

A category business plan is completed yearly by the category managers for all major categories at FMC. The business plan includes:

an executive summary; a scope of work or organization (see example in Figure 23); a category assessment; a strengths, weaknesses, opportunities, and threats (SWOT) analysis; the current state and planned actions; and a gap analysis.

The executive summary highlights the customer and supply market drivers that affect the category. The strategic position includes the product, design, production, and supply chain strategies. The supply chain strategies are in line with the strategies of the global product lines to which the category reports. Like the strategic position, the operational goals are defined in collaboration with the global product line. The operational goals include areas such as professional development for the category team, SQDC goals (i.e., zero incidents, zero defects, execution improvements, cost reduction, supply base optimization), and overall growth.



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The “Scope of Work/Organization” section of the planning document also includes:

the category team organization chart, spend analysis by subcategory and supplier, spend analysis by year, and spend analysis by region.

Category Scope of Work – How Much and with Whom

Figure 23

The spend analysis by category is illustrated in a tree diagram that breaks down category spend by subcategory, component, and supplier (Figure 23). The spend analysis by year includes the previous year’s spend using historical data, current year’s estimated spend, and the forecasted spend for the next two to three years. FMC aspires to build capacity in advance so it can deliver any unplanned projects. FMC’s forecasts are based on the global demand management system and tend to be highly accurate because its customers are motivated to notify FMC of any upcoming projects due to the long lead time of 12 to 18 months. The category spend and suppliers are represented geographically by region.

A SWOT analysis is completed to identify the category’s strengths, weaknesses, opportunities, and threats, as seen in Figure 24. Within the SQDC areas, FMC

SUPPLIERS$7.50 Supplier 1

$11.00 $1.75 Supplier 255% $1.75 Supplier 3

$0.00 Supplier 4

$2.00$3.00 $0.70

15% $0.30$0.00

$0.50$2.00 $0.00

10% $0.00$0.00

$1.00 Supplier 5$2.00 $0.50 Supplier 6

10% $0.00 Supplier 7$0.00 Supplier 2

$1.00$2.00 $0.00

10% $0.00$0.00$0.00

Component 4

Component 1


(USD Millions) Component 5Category Sub-category 2 Component 6$20.00 Component 7100%

Component 8

Sub-category 3 Component 9

Component 10


Component 13

Sub-category 5



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identifies the top and bottom five suppliers and then identifies the short-term and long-term actions to take. Short term actions are typically supplier specific or clearly connected to performance improvement shown in the measures for each category. These actions should have a tangible impact within the next six months. Long-term actions are typically system issues that affect the category and are completed within six months to two years.

SWOT Analysis Diagram

Figure 24

Lost time incident (LTI), price of non-conformance (PONC), on-time-delivery (OTD), and total cost of ownership measures are used to identify the top and bottom suppliers for the safety, quality, delivery, and cost areas, respectively. LTI

• What do we do exceptionally well?• What advantages do we have?• What valuable assets and resources do

we have?• What do our members or

customers identify as ourstrengths?

• What opportunities do we know about, but have not addressed?

• Are there emerging trends on which we can capitalize?

• What could we do better?• What are we criticized for or

receive complaints about?• Where are we vulnerable?

• Are weaknesses likely to make us critically vulnerable?

• What external roadblocks exist that block our progress?

• Is there significant change comingin our members’ sector?

• Are economic conditions affecting our financial viability?

Posit

ive



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measures are derived from the Department of Labor and are based on the hours that are lost when an employee is not able to work due to an injury vs. the total number of work hours in the company. PONC measures the waste of products due to poor quality. Some examples are scrap, rework, and administration hours used to process quality notifications. OTD measures the difference between the delivered date and the agreed upon delivery date. The total cost of ownership is measured using a generic and homegrown model that is then adapted to match the relevant specifications for that category. The category team’s SME focus for improvement is typically the bottom five suppliers.

The “Current State and Planned Actions” section of the category plan includes a strategic timeline, an implementation plan, and a progress report. The strategic timeline indicates the key category milestones pertaining to all processes, events, and milestones within the category-related sourcing projects. FMC is in the process of developing SharePoint integration so that the status of the projects can be seen at all times by anyone who wants to know.

Lastly, the category manager is asked to define the greatest challenges or constraints of the category in the gap analysis section. A plan is developed composed of immediate, short-term, and long-term solutions that address the category management and functional support aspects of how to manage or overcome those challenges.

RESOURCE COMMITMENT AND TALENT MANAGEMENT The talent management group is responsible for developing the sourcing and procurement resources’ competencies through:

competency descriptions, competency assessment, job descriptions, training plans, and development and implementation of training programs (e.g., strategic sourcing

training).

Career development planning is accomplished through career plans for the key individuals and high performers. The talent management group is also responsible for resource planning because it tracks open positions or the need for new positions and fills them with internal key talent as well as external recruitment when necessary. The talent management group in sourcing and procurement also manages FMC’s links with key global educational institutions.

Change management is a fundamental part of FMC’s sourcing process and at the onset of a category initiative or project. Figure 25 shows that change management is the first step in the implementation of a category strategy. Change management skills are taught in training programs that cover subjects like communication plans,



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stakeholder analysis, and stakeholder management plans. Change management is integrated into the category strategies as a part of the project management activities that a category manager needs to undertake to successfully manage a category and achieve its goals. Tools such as LACTI charts, project charters, principles, stakeholder analysis, decision criteria, enablers and obstacles, and communication plans are used to implement change management. These tools are used to gain category team buy-in, create structure, and set the course for change. While these change management tools help launch a project, they are also used as reinforcement throughout the process.

Category Implementation Plan and Progress Report

Figure 25

FMC’s sourcing and procurement organization is a mix of homegrown and externally sourced procurement professionals. FMC currently has 155 sourcing and 150 procurement professionals, but believes that the resources should increase by 15 to 20 percent to efficiently manage all of the direct spend. The decision to increase strategic resources is an investment decision, while adding tactical resources is driven by workload.

FMC does not outsource any category management activities due to the complexity of its business and need for subject matter knowledge. If FMC were to outsource category management activities, such outsourcing would be for the indirect spend.

According to Global Sourcing Director Fredrik Glette an ideal category manager is someone with a combined strong technical background and strong commercial background. FMC looks for someone with experience in one or more of the following areas: operations, project management, commercial, or technical areas like engineering.

FMC believes that talent management should be a key area of focus. According to Glette, “Without good, well-trained people, it all collapses. Sourcing in itself is a



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profession that is being recognized, and it is much more than just placing a purchase order.” FMC has developed an in-house training program in collaboration with a third party for its sourcing and procurement professionals. Every employee must complete this training program. FMC is adapting this training for the next level, aligning individual tracks for managers, leaders, category managers, and tactical professionals with organizational change. FMC is in the process of developing the training as a multi-month program that will include classroom sessions, homework, and coaching session.

CATEGORY-SPECIFIC PROCESSES AND TOOLS FMC uses a knowledge network collaboration site in Microsoft SharePoint to help employees move away from using e-mail. This centralized location for employees houses discussion forums, wiki pages, lists of preferred suppliers, shared calendars, and blogs so that everyone can benefit from information, even if he or she was not a part of the initial conversation. The knowledge network is built to be a one-stop shop for all sourcing and procurement information. This communication tool is especially useful for a global organization with category teams that are spread over multiple continents.

Open information sources and services help FMC stay informed of developments in category supply markets. FMC also utilizes personal contacts and customers in the supply base. Glette emphasizes, “You learn from having personal contact with your supply base and key customers. We frequently exchange a lot of supplier-related information with our customers.”

Another key practice that helps boost alignment is assigning all suppliers to particular category teams to be managed. The category that has the highest spend with a supplier takes responsibility for managing the relationship. FMC also has an internal contracting group that develops templates, develops guidelines, and manages key negotiations across the entire global organization. This group consists of roughly 10 contracting specialists. A major accomplishment of this group is a single terms and conditions document that is used with all customers regardless of where the customer is located.

Automation and Systems Support FMC uses an SAP enterprise resource planning (ERP) system globally, helping to drive compliance and alignment across all regions. Through the ERP system, all regions can view any excess inventory at other production sites. Before this system was in place, production facilities often ordered additional supplies without realizing that another production site had excess inventory that was not going to be used. With the implementation of the worldwide SAP system, production facilities are able to transfer the excess inventory to facilities that can use that inventory immediately. The ERP system is used to organize the database of active and potential suppliers. This system also manages the sourcing pipeline and the continuity of supply. The ERP system works together with FMC’s sales and operations planning (S&OP) efforts to vet FMC’s forecasting.



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EXTENDING SUPPLIER RELATIONSHIPS FMC’s suppliers are as geographically diverse as FMC. With 27 production facilities in 16 countries, supplier norms vary widely. The subcategory leads are responsible for supplier relationship management, but the category manager is ultimately accountable. A supplier that is used across categories or product lines is assigned to one person who owns the relationship.

The global supplier quality group manages all aspects of supplier quality:

supplier quality assurance, supplier quality improvement, supplier quality development, preventive and corrective actions with suppliers, and link to global quality leadership.

The supplier contracting group establishes all processes, procedures, and strategies for supplier contracts and maintains all archived global contracts. This group advises on any issues related to supplier contracts, frame agreements, and contract negotiations. The supplier contracting group acts as the approval authority for supplier terms and conditions. With the Vision 2010 initiative, the supplier contracting group established one global set of terms and conditions to be used with all suppliers regardless of geographical location. This was a major step towards a global sourcing and procurement strategy.

Category managers handle all aspects of supplier management at FMC, but the quality team performs the actual quality auditing. There is an initial supplier quality audit for any new supplier. Once a supplier maintains consistently high quality in its products, this audit is repeated every three years. The mid-range suppliers will be audited every year, and the developmental suppliers are audited every six months. FMC visits top suppliers’ locations quarterly as a part of relationship building, and FMC’s customers also visit supplier locations periodically.

Suppliers are recognized for high performance in FMC’s core values of safety, quality, delivery, and cost (SQDC). FMC rewards suppliers through a higher share of the order from a category and repeat business. FMC also values a good cultural fit with its suppliers due to the complexity of its engineered-to-order, highly technical, high-specification, and industry-specific products. Currently, FMC does not measure supplier value but would like to define and operationalize value based on its customers’ perspectives.

Joint planning is done with strategic and core suppliers through quarterly business review meetings in which senior representatives from FMC and the supplier discuss topics such as organizational updates, future business together, mutual development opportunities, and continuous improvement action plans. FMC has formal business alliances with some of its core suppliers that typically result in frame agreements that formally govern the relationship. These frame agreements are also used to mitigate



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any long-term business risks and ensure that key suppliers stay on board. FMC holds supplier summits at each of its main subsea operating locations around the world. These summits remain regionally focused and have not moved toward a global perspective.

CONCLUSION FMC’s category management takes a global approach to both strategy and supplier management but performs the tactical procurement at the site product line production facilities. Each category is aligned to a product line based on the volume of spend, but the category team must coordinate with all product lines that the category touches. Each category team is staffed with technical and subject matter support, and a global SharePoint site facilitates collaboration across all production facilities. FMC values professional talent development and is continually improving its in-house training program. FMC focuses on SQDC—safety, quality, delivery, and cost— in all aspects of its business. Each category and supplier is measured based on the SQDC areas, which drive FMC’s continuous improvement activities.



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Case Study Merck

ORGANIZATION OVERVIEW Merck (or MSD outside of the United States) is a publicly traded company headquartered in Whitehouse Station, New Jersey. It has approximately $46 billion in revenue and spent approximately $11 billion on research and development in 2010. Its areas of business are pharmaceuticals, vaccines, biologics, consumer health care, and animal health. Merck’s 2009 merger with Schering-Plough resulted in the addition of the last two product areas.

Since the merger, Merck’s commercial portfolio has been broadened in key therapeutic areas, its research and development efforts have been enhanced, and its global presence (or footprint) has been expanded. This has accelerated the organization’s international growth efforts, especially in emerging markets. The organization has an incremental $3.5 billion in annual cost savings targeted after 2011 as a result of the merger. It aims to recruit energized and talented people around the world and expand to new markets with new clients and new ways of doing business.

Merck’s vision is to make a difference in the lives of people around the world by providing innovative medicines, vaccines, consumer health products, and animal health products. It considers its mission to be the provision of innovative, unique products that improve lives and satisfy customer needs. On the whole, the organization focuses on excellence in science and health care innovation, with a specific emphasis on addressing unmet medical needs. It seeks to anticipate customers’ needs and to expand access to its medicines and vaccines as a means of improving global health. From an operational standpoint, Merck seeks to be recognized as a great place to work and to provide the organization’s investors with a superior rate of return.

Merck recognizes that there are numerous factors that affect health care across the world. These include changes to health care dynamics (such as an aging population and increasing health care costs), the worldwide economic crisis, and global trends (such as regional economic growth differences and the emergence of public or private systems). Merck also recognizes that there are unique challenges within the biopharmaceutical industry, such as increasing development costs and less certain product pipelines. To address these factors, Merck has begun to focus on sustained growth in emerging markets outside of the United States. The growth in these areas is fueled by increases in disposable income (which lead to an increase in private spending on health care) as well as increases in capital investment and urban populations.



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With its shift in focus to a more global view, Merck knows that its manufacturing and procurement strategies must adapt. Most of Merck’s spend goes to indirect suppliers, followed by direct suppliers, and then research. Currently most of its spending occurs in North America, but its spending in Europe, the Middle East, and Africa (EMEA) and Latin America has increased.

Procurement Organizational Structure Figure 26 outlines Merck’s global procurement (GP) organizational structure. The procurement group is organized into a matrix structure with staff in four centers of expertise (COEs):

indirect, direct materials, research, and emerging markets.

Peers of these staff members sit within three regions: Europe, the Americas, and Asia Pacific. The regions primarily execute the procurement strategy developed by the centers of expertise but also manage supplier relationships. They may develop regional strategies themselves if needed. The strategy and planning group acts across all regions and all centers of expertise. It is essentially the enabling arm of the procurement group, and its responsibilities include training, compliance, management reporting, and the rollout of Merck’s SAP system.

Global Procurement Organizational Structure

Figure 26



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An additional part of the strategy and planning group is the market intelligence group, which develops information relevant to Merck’s purchased goods and services that can be used in the organization’s decision making. The market intelligence group is part of a larger umbrella called the centralized services and outsourcing group, which standardizes common procurement activities and leverages external capabilities to drive efficiency and effectiveness across the procurement group. Centralized services encompasses process ownership functions such as:

market intelligence, supplier value management, risk management, benchmarking, data aggregation, and e-sourcing.

It also oversees the supplier management program. The outsourcing arm of the group manages the outsourcing of procurement business processes, which have included external and internal data gathering, processing of routine transactions such as nondisclosure agreements and other simple contracts, and electronic procurement.

Developing the Procurement Structure The new structure for Merck’s procurement group was inspired by the 2009 merger with Schering-Plough. Merck took a balanced scorecard approach and created a strategy map to determine where procurement added value to the organization, then aligned procurement measures with the strategy objectives. It aligned accountability for each item on the scorecard so that managers in each area had accountability for delivering each of those items. The measures and goals resulting from this exercise were shared across the organization so that all groups would be aware of how procurement success would be defined, and the objectives were incorporated into the personal performance objectives for all Merck procurement employees for the year.

Creating a lean and flexible business model is an important element in Merck’s strategy road map and integral to the global procurement value proposition. The motivation for this change to Merck’s procurement structure is that, to remain competitive, Merck’s procurement group must reduce costs, transform business support capabilities, and develop global functional talent management approaches. Thus the procurement group within Merck is now charged with enhancing its value contribution to the organization through sustainable cost improvement, supplier relationship management, the development of suppliers as a source of innovation, and supplier risk management. The group is additionally charged with being prepared for the future by adapting to changing demands and working more efficiently. Merck’s vision for its procurement group is that by 2012 it will be viewed



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both internally and externally as a world-class procurement organization, which will result in a competitive advantage for Merck as a whole.

Establishing Priorities and Measures Since the merger, Merck has identified key measures for the organization and translated those measures into key priorities. In 2011 Merck’s key priorities were:

risk management; sourcing management process savings through a structured strategic sourcing

process; supplier value management; and COMET, the process of installing SAP as Merck’s common enterprise resource

planning system.

These key priorities marked a shift in the organization to a more mature, strategic focus than was seen in the 2010 key priorities, which were business continuity, synergy savings, COMET, and functional integration of legacy Merck and Schering-Plough’s disparate systems. Merck delivers on its key priorities by establishing initiatives and aligning the priorities with the initiatives. Merck uses a heat map to determine how the organization is performing in each of the priorities to aid in transparency.

Merck has established an operations leadership team (OLT) structure within its procurement group (Figure 27). This includes a GPMC, or an executive leadership team within the procurement group. This team is tasked with setting the direction and strategy for the procurement group, while the operations leadership teams have ownership and accountability for the success of the procurement scorecard, organizational performance, and any strategy that the procurement executive leadership team defines. The operations leadership team structure also includes sub-teams aligned with the key initiatives savings, supplier diversity, supplier value management (SVM) and risk, and other charters. The operations leadership team is a cross-functional team and includes representatives from every center of expertise and every region. Each member has a responsibility to go back to his or her home area and communicate any improvement initiatives and how those initiatives can impact the home area. Leaders and members of the operations leadership team rotate on an annual basis.



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Operations Leadership Team Operating Structure

Figure 27

STRATEGIC IMPLICATIONS Strategic Objectives Merck uses a five-stage sourcing management process (Figure 28). In the first stage of the process, roles are defined and the needed tools are identified. In the second stage, business requirements are identified and data is collected and analyzed. In the third stage, a strategic analysis is performed and a strategy is created and approved. In the fourth stage, a strategy implementation plan is created and a supplier contract is negotiated and approved. The fifth stage consists of supplier value management, which encompasses supplier management, supply management, and specification management. This stage can also be considered the continuous improvement process. The fifth stage has historically been done inconsistently, so Merck has set a goal of better integrating this stage into the sourcing process.



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Sourcing Management Process

Figure 28

For Merck, global category management (GCM) involves linking procurement strategies to the organization’s overall strategy (Figure 29). Prior to the merger, Merck’s procurement group focused on opportunistic sourcing. Since then, it has focused more on how the overall global procurement strategy (and each strategy within the procurement group) links back to the Merck strategy. When Merck’s procurement group defines a strategy for a category it looks at not only the current state of the category but also where the category should be in three years and how this will align with Merck’s overall strategy.

Supplier diversity is integrated into the category management plan. Goals for supplier diversity are built into the scorecard used to evaluate the performance of the procurement group. This ties diversity to performance awards for the entire organization because procurement goals are tied in with Merck overall strategy goals. There is a dedicated supplier diversity program leader within the procurement group, and the supplier diversity group is matrixed into Merck’s overarching diversity organization to better achieve the organization’s diversity goals.



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Linking of Strategies Within Global Category Management

Figure 29

Category Management Organization Merck’s global category management process has a pyramid management structure. At the top of the pyramid is the procurement executive leadership team, which conducts category reviews. The next level is made up of category owners, who conduct standards management process reviews for the category. The third level is the category strategy level, at which savings and pipeline management are considered. The fourth level is the category strategy road map and supplier management. The fifth level of the pyramid is the sourcing level, at which compliance tracking occurs and strategy is channeled. The bottom level of the pyramid is the strategy implementation level, at which team objectives are set and individual performance plans are established.

Global category management at Merck has resulted in innovative sourcing within the categories of fleet, marketing, logistics, lab supplies, and direct materials. Global category management provides Merck’s suppliers with opportunities to work more efficiently with Merck, as well as opportunities for growth and best practice sharing. Moreover, it allows suppliers to lead innovation that can result in a competitive advantage for Merck as well as the supplier.

Supply Chain Risk Merck’s complex network of activity makes risk one of its primary concerns. Approximately 80 percent of Merck’s procurement spending is directed to 800 suppliers, yet heavy regulations that affect its entire supply chain make sourcing from new suppliers especially difficult. Regulations on the industry require any new suppliers to be tested to ensure quality and consistency of product, which can take



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months or years. Merck has approximately 90 manufacturing sites with a large network of external partners. Moreover, it has 15,000 stock keeping units across its prescription and consumer products.

Thus Merck views risk management as a continuous process that must involve suppliers heavily. Merck has outlined a five-step risk management process (Figure 30) that involves all categories and regions within the procurement group but is ultimately managed by a risk group located within the same Merck division that houses the procurement group. The process begins with a trigger that can range from an unexpected event (such as a natural disaster) to a regularly scheduled assessment of Merck’s supply base. In step two, the risk management group looks at any supplier financial instability, environmental issues, supplier performance issues, or supplier ethical issues that may result in risk to Merck. In step three, the risk management group identifies any priorities for risk management. In step four, the risk management group develops a plan to address any identified risks. In step five, the risk management group develops long-term plans to sustain and control risk mitigation.

Risk Management Process

Figure 30

The risk management process commences with a sourcing decision and is part of ongoing supplier management and continuous improvement activities that occur in stage five of Merck’s sourcing management process. For ongoing risk management, Merck will periodically look at its top products (either from a revenue or reputation standpoint) and conduct a risk assessment for those products. To date, more than 250 risk assessments have been performed globally. The risk management process is part of a larger, organizational risk management process. As such, Merck has identified the need for an organization-wide risk management group and has established an enterprise-wide risk management council.

However, it is not solely the active ingredients for products that are sources of concern for Merck. Everything that touches a Merck product or the ingredients of a



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Merck product is a source of risk. Machinery parts (such as glass, gaskets, rubber, etc.) at a supplier’s plant have the potential to contaminate active ingredients that are to be included in a Merck product, so risk must be assessed. Merck has thus formed a supplier quality assurance group that maintains direct contact with suppliers to ensure that their materials maintain a standard of quality. The group is made up of individuals from different areas so that the group can provide a more holistic view of manufacturing risk. The group provides suppliers with a standardized way of looking at risk and makes Merck’s expectations more transparent. Additionally, it provides a way for Merck to build relationships with suppliers and act proactively to address risk issues.

RESOURCE COMMITMENT AND TALENT MANAGEMENT When the merger occurred, Merck developed a change leader network (Figure 31) with the primary function of driving change across the organization. The network is made up of individuals who serve in addition to their normal functions. These individuals are trained in change execution and anticipate that every organizational change is going to be met with some resistance. The individuals then bring any concerns within their home groups to the network so that they can be addressed early on. The individuals that serve on the network have diverse perspectives as they all have different backgrounds and even come from different legacy organizations. Merck also adopted a change commitment curve that employees can use as a self-assessment to determine where work may be needed to adapt to a change.

Change Leader Network

Figure 31

Merck has adopted a scorecard to assess the performance of the procurement group. The scorecard assesses the behaviors being demonstrated across the



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organization and how the procurement goals are being achieved. Targets for the procurement group are established based on a step change in the maturity of the behaviors. The scorecard is assessed monthly by peer operations leadership teams and is validated by the procurement executive leadership team. Eventually the results of the scorecard are linked to employee compensation.

As part of its mission, Merck seeks to develop the talents of its employees so that the organization can benefit as a whole. The procurement group has learning and development staff members who identify opportunities for skill enhancement. The staff members review the technical skill set of procurement employees, specifically regarding:

the sourcing management process, supplier value management or relationship management, outsourcing, advanced negotiation, risk management, contracting, project management, supplier financial analysis, and cost modeling.

Further, the staff members evaluate the behavioral skill set of employees, such as:

cross-functional team leadership, change management, stakeholder analysis and influencing, strategic thinking and analysis, cross-cultural awareness and effectiveness, and conflict management.

These skill sets were chosen as a result of surveys Merck conducted of its customers to determine skills that needed to be developed within Merck. The survey results were placed on a matrix, and this matrix was used to determine areas of focus for employee skills enhancement programs. This employee development initiative has only been in place for a few months and is still being adjusted. Some areas identified by Merck for improvement include the method of delivery of employee skills enhancement programs for employees outside of the United States, as well as follow-up processes to help employees apply skills learned in training.

Merck has an expectation of professionalism for all of its procurement employees. This expectation emerged seven years ago when a new chief procurement officer for the organization initiated the five-step sourcing management process. The new



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process brought additional rigor to sourcing, which in turn necessitated a high level of professionalism and a long-term mind-set within procurement. Another turning point for the procurement area was during the merger. When the initial year had been completed and targets were being established, Merck focused on whether the organization had the skill set for its expanding global market. This renewed the call for a forward-thinking focus on the part of global procurement.

CATEGORY-SPECIFIC PROCESSES AND TOOLS Category Road Maps Category strategy road maps are applicable to all areas of Merck’s global procurement, and anyone within Merck has access to these road maps. When a category strategy road map is created, Merck looks at several factors that can influence the category (Figure 32). A road map includes:


suppliers; any future suppliers; and any stakeholders for the category.

The goal of the category road map is to determine how these factors may impact the category in the future. The listing of potential suppliers prompts the procurement group to determine how to transition to these potential suppliers and, if necessary, away from any current suppliers. The listing of stakeholders prompts the procurement group to determine whether these stakeholders are aligned with the goals of the category strategy.

The road map includes a three-year “in scope” countries delivery view, which evaluates how Merck’s procurement spending will be impacted by focusing on particular developing markets. Specifically, Merck is interested in whether there is enough stakeholder support for a focus on these markets and whether priorities need to be changed to implement a strategy that focuses on these markets. The road map also includes plans for “out-of-scope” countries so that the procurement group has a clear idea of the total procurement strategy for the category.

The road map includes a section on supplier diversity plans, which is a relatively new addition. This section includes any challenges or risks to supplier diversity within the category, as well as a view of savings and spend over the last three years. This section will be updated on an annual basis with a three-year outlook.



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Sample Category Strategy Road Map



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Figure 32

Mutual Accountability Tool Merck uses a table in which regional and commodities areas rate how well the other is doing on staying aligned with the category strategy (Figure 33). Merck initiated this function as a way of enabling mutual accountability for desired behaviors and has required that it be done on a periodic basis. Each area inputs a rating for the other area into the table, and a cell color is assigned to each rating.

A green cell indicates that the rated area:

is aligned with the category strategy and has sufficient resources, is on target for savings delivery and implementation, shows good communication practices, and has sufficient stakeholder support.

A yellow cell indicates that the area’s alignment has not been confirmed, which means that the area:

has not yet agreed on the strategy, has not yet committed resources,



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has not confirmed savings delivery and implementation, does not have sufficient communication practices, or has limited or low stakeholder support.

A red cell indicates that the area is not aligned with the category strategy because:

its behaviors conflict with the strategy, it does not have access to sufficient resources, its savings delivery or implementation is below the target, it lacks sufficient communication practices, or it does not have stakeholder support.

The use of this rating system represents a change in Merck’s culture in that opportunities for improvement are openly acknowledged and discussed. Legacy Merck’s culture was such that deficiencies in behaviors were ignored rather than embraced.

Sample Mutual Accountability Rating Tool

Figure 33

Regional Support Tools Merck uses a local, regional, international, global (LRIG) chart (Figure 34) to support the development of a spend elevation strategy. The geographic level at which sourcing for a particular category currently occurs and whether that level will change over the next three years are determined. A change in geographic level could mean a change in Merck’s spending for the category. A move to a different geographic level depends on several factors recorded in the LRIG, such as:



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sourcing strategy, complexity of the category, whether suppliers support a move to a different market, what the market looks like, and whether the stakeholders will support the move.

This tool is important to the procurement group at Merck because it indicates whether an increase in spending within a particular region is feasible.

Sample Local, Regional, International, Global Chart

Figure 34

An example of how Merck used its global category management structure can be seen in its increased activity in the Asia Pacific region. In 2010, before Merck enacted changes to the procurement structure in this region, there was weak collaboration between the category leaders in the United States and the regional category teams within Asia. Sourcing was done primarily at the local level, and it took an extended time to complete sourcing activity. These issues were partly the result of Merck not understanding the challenges within that specific region and not thinking through the implementation of successful sourcing within the region. Merck then enacted its global category management structure, and a 166 percent increase in regional spending is expected in the region for 2011. The supply base within the region has been consolidated and there is an increased visibility of the spend in that region. In addition, Merck has enhanced its relationship with regional stakeholders and has a better understanding of the suppliers’ business both locally and globally. This has resulted in savings numbering in the millions of dollars.

Developments in Category Supply Markets Merck views information and the knowledge resulting from that information to be key to its supplier value management procurement initiative. However, Merck’s



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global presence raises several challenges to the gathering of knowledge and the incorporation of that knowledge into the organization’s strategies. Legacy systems located in various Merck locations across the globe may not be as integrated with each other as the organization would like, which makes the exchange of data more difficult. Merck also acknowledges that knowledge of regional or market differences between locations may not be as well understood as it needs to be. In an age in which a large amount of information is readily available, it can be difficult for an organization like Merck to turn that information into knowledge that benefits the organization.

To address all of these challenges, Merck created the market intelligence center of expertise. This group is partially located in-house and uses information feeds from third-party sources. The market intelligence group provides Merck with a competitive advantage while reducing risk through the knowledge it obtains on supply market dynamics and supply base composition. To capture market intelligence information, Merck developed MI Exchange Portal, a repository accessible by anyone within the organization. MI Exchange Portal includes:

supply market reports, up-to-date industry information, supplier profiles and news, commodity price forecasts, global labor rates, category news and alerts, and project tracking information for reports created within the repository.

Automation and Systems Support Many of the tools used by the procurement group in Merck were developed in-house or are Microsoft Excel spreadsheets. Merck’s spend analytics group uses unique tools as well. After the merger, Merck found that many sites used tools that were unique to the site. Merck is moving toward using SAP to manage all suppliers and is almost at the point where data from the unique site tools are completely visible to the rest of the organization.

EXTENDING SUPPLIER RELATIONSHIPS Merck recognizes that several factors will influence its future supply base. Mergers and acquisitions within the pharmaceutical industry will further concentrate relationships with suppliers. The industry is moving more toward outsourcing as a preferred partner model, which encourages the use of strategic relationships between organizations and their suppliers. With this new focus on the quality of relationships, Merck is reducing its number of suppliers so that it can concentrate on a small number of reliable, trusted suppliers globally. In light of these trends, Merck developed its supplier value management process. Supplier value management goes beyond scorecarding and annual supplier performance



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evaluations to establish an ongoing collaborative process with suppliers that is built on trust.

The principles, processes, and practices of supplier value management are outlined in Figure 35. Merck uses supplier value management with all of its suppliers, but the level of rigor with which it is applied depends on the tier to which the supplier belongs. Merck segments its suppliers into three tiers to ensure that it partners with suppliers that deliver results to the organization as a whole. Each supplier is assigned to a tier based on the amount of spend dedicated to the supplier, the value the supplier provides, and whether Merck’s view of the supplier matches the supplier’s view of Merck (Figure 36). To Merck, value does not necessarily equal savings. The value of a supplier is sometimes measured in the innovation the supplier provides. Merck’s top-tier suppliers (approximately 37 suppliers) receive the most focus with regard to supplier value management. With managed suppliers (approximately 200 suppliers), Merck holds regular meetings and establishes key performance indicators that are managed on a regular basis. Supplier value management with active suppliers (approximately 1,000 suppliers) is conducted on an ad hoc basis.

Merck’s supplier value management process has several pieces (Figure 37) and is executed at the organizational level; however, the operations leadership sub-team that focuses on supplier value management owns the process and ensures that the organization as a whole is following the process in a consistent, effective way. The sub-team accomplishes this by defining how the organization delivers the results from the scorecard, identifying action items that need to be pursued, and identifying ways in which the process can be improved.

Supplier Value Management Principles, Processes, and Practices

Figure 35



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Supplier Segmentation Criteria

Figure 36

Supplier Value Management Process Outline

Figure 37



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CONCLUSION The next areas of focus for Merck’s procurement group will be the further development of its risk management area and the improvement of its outsourcing management capability. It has recently had success in its outsourcing initiative through the outsourcing of its facilities management functions. Merck also intends to focus more on the innovation value provided by some of its suppliers who do not necessarily provide the best savings.

Merck’s experience with its 2009 merger with Schering-Plough has revealed that the focus of its procurement group is changing. It has reorganized its procurement group into centers of expertise that establish sourcing strategies and regions that execute those strategies in their specific locations. Merck’s procurement group has established a procurement executive leadership team and operations leadership teams that enact and execute broader strategies for the entire procurement group. Merck has further developed its relationships with suppliers through the supplier value management process and has developed a market intelligence gathering initiative. These changes are part of Merck’s proactive measures to adapt to its more global focus and to factors within the health care field.

Supplier category-management

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