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Making Procurement Performance Count - A 3 Step Approach
 

Making Procurement Performance Count - A 3 Step Approach

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This whitepaper will focus on problems prevalent in the process followed to measure procurement performance and how technology can be leveraged to improve procurement performance.

This whitepaper will focus on problems prevalent in the process followed to measure procurement performance and how technology can be leveraged to improve procurement performance.

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    Making Procurement Performance Count - A 3 Step Approach Making Procurement Performance Count - A 3 Step Approach Document Transcript

    • Making Procurement PerformanceCount - A 3 Step Approach
    • Making Procurement Performance Count - A 3 Step Approach Procurement has always been integral to the performance of an organization. However, it is now with increasing unpredictability in the market, cut throat competition and looming recession fears that procurement has become a highly topical area for the senior level management. Lets have a look at how procurement has evolved over a period of time. Prior World WarPrior to World War I, purchasing was regarded as primarily clerical. During World War I & IIDuring World War I & II - The function increased due to the importance of obtaining raw materials,supplies, and services needed to keep the factories and mines operating. 1950s & 1960s1950s & 1960s - Purchasing continued to gain stature as the techniques for performing thefunction became more refined and as the number of trained professionals increased. The emphasisbecame more managerial. With introduction of major public bodies and intergovernmentalorganizations, such as United Nations, procurement becomes a well-recognized science. 1970s & 1980s1970s & 1980s - More emphasis was placed on purchasing strategy as the ability to obtain neededitems from suppliers at realistic prices increased. 1990s1990s - Procurement starts to become more integrated into the overall corporate strategy and abroad-based transformation of the business function is ignited, fueled strongly by the developmentof supply management software solutions which help automate the source-to-settle process. 2000s2000s - The leader of the procurement function within many enterprises is established with a C-Level title - the Chief Procurement Officer. The global recession of 2008-2009 placesprocurement at the crux of business strategy. 2010s2010s - The elevation of the function continues as Chief Procurement Officers are recognized asimportant business leaders and begin to take on broader operation responsibility
    • Procurement is now being considered as a strategic business function. The increasingshare of material costs and purchased services in major global organizations Profit & Lossaccount highlights its growing significance. The need to align procurement objectives withthat of the organization is becoming a necessity.This can be understood with the help of the chart below The CPOs Top Metrics Identified Savings 48% Spend under management 44% Implemented savings 41% Cost avoidance 30% Enterprises Top Procurement Performance Metrics Implemented savings 53% Booked saving 43% Identified savings 38% Cost avoidance 38% Spend under Management 36% Source : Ardent Partners 2012As seen above, for a CPO the top metrics is Identified Savings whereas at theenterprise level the top metrics is Implemented Savings. Thus there is a starkdifference in the priorities which need to be aligned.This whitepaper will focus on problems prevalent in the process followed tomeasure procurement performance and how technology can be leveraged toimprove procurement performance.
    • Neil Deverill former CPO of Anglo American and Measuring theRoyal Philips quoted in Procurement performance of aIntelligence Unit (PIU), "what gets measured procurement departmentgets done". It literally conveys that it in order can be a very complexto improve efficiency of any process it ismandatory to have the correct metrics to process but, in 2013,measure it. more CPOs will work aggressively andProcurement is largely judged by the savings itgenerates. Measuring procurement should be a proactively to define thepart of an improvement process. The key is not performance criteriato measure for measurements sake, but to (and the methodologyindentify gaps which can be filled timely to used to track it) that willprevent any kind of savings leakages. be used to measureProcurement is a complex function with tiers of procurement departmentsuppliers and stakeholders spread across performance.geographies. The performance measurementprocess should thus consider the key aspects, -Ardent partners 2012agreed upon by all the stakeholders and giveresults that are widely in line with theorganization goals.Let us understand the procurement performance measurement woes withthe help of an example.Mr. John has been newly appointed as CPO of a manufacturing company withworkforce of 10,000+ employees. The company has its offices spread acrossthe globe. John has an upcoming meeting with the CFO where he needs topresent the performance of his function. However with the present process ofmeasuring procurement performance involving data spread across excelsheets, John was unable to comprehend the existing state of performance.
    • Some of the key pain areas for John were; + Difficulty in tracking procurement savings due to multiple stakeholders across commodities and divisions + Lack of transparency in maintaining and comparing forecasted and actual savings + Difficulty in collating all procurement savings from different sources and generating savings report for top management + No visibility into procurement savings obtained from supplier negotiations + Overcoming disconnect with finance division over savings definition + Difficult to demonstrate procurements impact on companys bottom-line + Difficult to shift focus from cost savings to growthWhat John needed was an effective measurement process that would overcome theseodds and ensure overall sustainability and success of the procurement function which isaligned with the organizational targets.Using tools like excel sheets to track savings results in disparate data spread across theglobe or having homegrown tools are most likely to put one in John position. Apart frombeing difficult to manage data, these tools also suffer from other issues like lack of orexpensive upgradation, inability to configure with the spend analysis tool, lack of security,lack of collaborative platform or user role definition mandating the use of an advancedtechnology to manage procurement performance.Having seen the challenges the following section will focus on the process thatprocurement needs to adopt for having a better performance tracking system in place.Organizations need to + Develop a function-specific view into individual projects and associated savings. This increases the visibility into organization wide savings a key to improving resource planning + Establish a common savings definition and baseline agreed upon by finance and procurement savings is an important factor for defining success for both Procurement and Finance. However, there has always been disconnect between the functions as savings generated by procurement is not reflected in the financial statements
    • + Map the impact of procurement savings by collaborating with the finance team + Streamline savings approval process thus ensuring the right information reaches the right authority + Track savings at a multi-dimensional level + Map forecasted savings to budgets - Project have multiple stages. It is important to be able to track forecasted savings vs. actual savings against the fixed budget at every stageProcess Configuration Execution ReportsIn this section we will focus on how technology can be leveraged to streamline the entireprocess of mapping procurement performance. In this whitepaperwe propose a 3 stepprocess to mapping procurement performance.Step 1: ConfigurationThis is the basic step which starts with defining the structure and boundary of theproject.1. Project type The procurement team along with the other stakeholders needs to decide the project type. For instance, cost avoidance, cost reduction, CAPEX, inflation management, revenue returns etc. Benefit types expected from the category i.e. various categories of savings whether it impacts P&L directly or indirectly, savings by cost avoidance etc.2. Customization Performance measurement tools/systems cannot adopt one for all strategy. It will vary depending on the organization structure, business and the industry it is functioning in. Thus it is necessary to have an option of customizing the fields as necessary. For instance track savings as per different business units, functions, plants etc.
    • 3. Defining user roles The data used to measure and manage the procurement performance is highly confidential to the organization. Thus care should be taken that right people have the right access. Technology enables defining user roles i.e. the access rights for the users. For instance, some users can have the right to create and edit the project while some users can only view the reports etc.4. Customized approval workflow In order to align the procurement function objectives with that of the organization, high level of collaboration is needed amongst the stakeholders of any given project. Building a workflow ensures the information is passed through the correct channel i.e. set of individuals and the end result is accurate and relevant. Multi level workflow is required to ensure correct flow of most relevant information. For instance, Level 1 Level 2 Level 3Reporting Manager Commodity Leader Financial Controller Reviewer Approver Approver5. Project stages A project has multiple stages. Typically 5 viz. 1. Supplier discovery 2. Creating a sourcing event 3. Negotiating a contract with the selected supplier 4. Managing and building supplier performance 5. Spend analysis The project will have a fixed overall budget. Savings should be forecasted at every stage. This forecasted savings should be compared with the actual realized savings. This helps the organization to track the status and success of project at every stage.
    • 6. Customized savings formula Just like flexibility is needed in defining the required fields and approval workflow, savings formula used to calculate the performance of procurement should also be customizable. Different projects have different requirements and so a rigid savings formula will not do justice to the procurement evaluation.7. Configure savings target In order to ensure clear communication of savings target to the teams/individual, top management should have the ability to configure targets on any parameter - for instance an individual, a team, unit, geography etc. so that they can plan the resources accordingly.Step 2: ExecutionAfter the project basics have been defined and configured, the next step is to execute it.Execution involves 2 stages.1. Manage savings As the project goes through different stages, savings also has multiple stages. At each stage there is a fight between forecasted saving vs. actual savings. Saving Stages Stage 1 Stage 2 Stage 3 Potential Savings Target Savings Negotiated Savings Stage 5 Stage 4 Realized Savings Implemented Savings The savings are calculated as per the agreed savings formula and its impact is mapped on the relevant financial statement.
    • In case of any changes at any stage, the user should have the option, depending upon the access rights to add comments or add an attachment or revise the data.2. Approve savings Savings approval follows the path defined by the multi level workflow. The reviewer/approver checks the savings and its impact on the financial statements and accordingly approves them or otherwise.Step 3: Report SavingsOnce the savings have been approved, the last step involves reporting them.Reports help in analyzing the reasons for project success or failure. An ideal reportingsystem should be customizable and provide an in-depth analysis of where and howsavings were generated. Dashboards with ability to track target v/s forecasted v/s actualsavings provides the necessary visibility to the top management for actionable decisionmaking.ConclusionThus we see that for procurement to successfully measure and manageperformance, the key is to effectively leverage technology which is less timeconsuming and gives accurate savings while maintaining a single version of truth,and at the same time ensuring transparency. Auto conversion of procurementsavings to show its impact on P&L and balance sheet gives the company valuableinsights and opportunities to grow which is the need of the hour today.
    • At Zycus we are 100% dedicated to positioning Z procurement at the heart of business performance. For more than a decade we have been the worlds most About trusted leader in Spend Analysis. With our spirit of Zycus innovation and a passion to help procurement create even greater business advantages, we have evolved our portfolio to a full suite of Procurement Performance Solutions — Spend Analysis, e-Sourcing, Contract Management, Supplier Management, and Financial Savings Management. Behind every Zycus solution stands an organization that possesses deep, detailed procurement expertise and a sharp focus on being responsive to customers. We are a large — 600+ and growing — company with a physical presence in virtually every major region of the globe. We see each customer as a partner in innovation and no client is too small to deserve our attention. With more than 200 solution deployments among Global 1000 clients, we search the world continually for procurement practices proven to drive competitive business performance. We incorporate these practices into easy-to-use solutions that give procurement teams the power to get moving quickly — from any point of departure — and to continue innovating and pushing business and procurement performance to new heights. NORTH Princeton: 103, Carnegie Center Suite 201, Princeton, NJ 08540 Ph: 609-799-5664AMERICA Chicago: 5600 N.River Road; Suite 800, Rosemont, 1L 60018. Ph: 847-993-3180 Atlanta: 555 North Point Center East; 4th Floor, Alpharetta, GA 30022. Ph: 678-366-5000EUROPE London: Office 404, 4th floor, Albany House, 324/326 Regent Street, London, W1B3HH. Ph : +44 (0)800 6226561 ASIA Mumbai: Plot No. GJ – 07, Seepz++, Seepz SEZ, Andheri (East), Mumbai, Maharashtra 400 096 Ph: +91-22-66407676