The Power of    Procurement  A global survey of Procurement functionskpmg.com
© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swis...
forewordAsk any business                                                                          And as the world continu...
contents                                                          02 Executive                                            ...
29 2. Regional    comparators                                                                               54            ...
1 | The Power of Procurementdeconstructing thesurvey framework                                                            ...
The Power of Procurement | 2  executive  summaryAround the world                                                          ...
3 | The Power of Procurement                                        An opportunity exists for Procurement                 ...
The Power of Procurement | 4                       key                functional                  findings                 ...
5 | The Power of Procurement1.1 A PLACE AT THE TABLE?What will it take to elevate Procurement into a strategic role, worth...
The Power of Procurement | 6                       With the exception of Retail, less                       than 75% of th...
7 | The Power of Procurement                                                                              Procurement gene...
The Power of Procurement | 8Figure 4: Level of involvement in ‘Make versus Buy’ decisions             100                 ...
9 | The Power of ProcurementThe ability not only to create Procurement policy for the                                     ...
The Power of Procurement | 10                                       KPMG VIEWPOINT                                   The e...
11 | The Power of Procurement1.2 STRETCHING BEYOND SAVINGSHow will Procurement elevate their game beyond savings to delive...
The Power of Procurement | 12             Our research indicates a direct link between             cost savings and maturi...
13 | The Power of Procurement                                                       Only 4% of respondents claimed to have...
The Power of Procurement | 14         KPMG VIEWPOINT     Clearly, Procurement                                             ...
15 | The Power of Procurement1.3 CENTRING ON VALUEDoes a centralised Procurement operating model provide better value and ...
The Power of Procurement | 16                Half of all respondents indicated that                they had adopted either...
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
Procurement Benchmarking Survey 2012   Main Report   The Power Of Procurement
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Procurement Benchmarking Survey 2012 Main Report The Power Of Procurement

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The findings from the survey indicate that, although most procurement functions have made significant progress in terms of creating value for their organizations, over the past few years, momentum has stagnated somewhat. In large part, this is because much of the ‘low hanging fruit’ has already been harvested in terms of cost savings, leverage and price. In order to enhance the value delivered, Procurement functions will need to stretch to identify broader opportunities and take on a more strategic role.

Procurement Benchmarking Survey 2012 Main Report The Power Of Procurement

  1. 1. The Power of Procurement A global survey of Procurement functionskpmg.com
  2. 2. © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of theKPMG network are affiliated. All rights reserved.
  3. 3. forewordAsk any business And as the world continues to wade through its financial morass, the Procurement function will also find itselfleader what their top challenge is today and under increasing pressure in areas currently considered to be low priority. Supply Chain sustainability will– more than likely – the answer will be cost. Indeed, once again become a key challenge for business, andKPMG’s 2011 European Business Leader Survey more focus will be placed on leveraging systems anddemonstrated that realising cost efficiencies is now technology to drive greater value, innovation and marketthe top priority for business leaders across all industry differentiation from suppliers.sectors1. Ever since the first rumblings of the globalfinancial crisis, businesses have been feverishly We believe that this report provides an unprecedentedstripping out costs; headcount reductions have been insight into the key challenges currently facingthe most typical immediate reaction to cost reductions, Procurement functions. What is more, the researchbut organisations have also become acutely aware of represents the state of the function from thethe potential sustainable cost savings to be had across perspective of Chief Procurement Officers and Supplythe supply chain. Chain Directors themselves, and should therefore more accurately reflect the actual challenges andClearly, it is time for Procurement functions to shine. opportunities facing the function today.However the reality is that most Procurement functions And while the findings may not paint the mosthave not moved as quickly to address supply chain positive picture of the maturity of Procurementefficiency as some organisations have demanded. functions overall, the accompanying analysis andIn fact, according to our research, many Procurement insight offers a clear roadmap by which Procurementfunctions have struggled to raise their game beyond can raise its game to meet – and even exceed – thesimple tactical activity and (re)negotiating low cost expectations of the business.contracts, to a broader and more strategic role withinthe wider business. This report is the first of an annual series that will continue to compile data from ProcurementThe expectations of Procurement are shifting. organisations around the world and across sectorsNot so long ago, Procurement was considered to to provide an ongoing and consistent benchmark forbe an add-on service; it was the business that decided Procurement functions to measure their progresswhich suppliers were core to the organisation and little against that of their peers.more was expected of Procurement than to battle somecost out of the contract and then hand the relationship I encourage you to contact any of the authors of thisback to the business to manage. report – or your local KPMG member firm – to explore the implications of these findings for your business orToday however, many executives are increasingly to participate in this ongoing research study.looking to Procurement to engage the business instrategic conversations about how the supply chain Richard Nixoncan be optimised to deliver the greatest returns. Partner, KPMG in the UKBut, overwhelmingly, Procurement has beenslow to evolve. Our research shows that – acrossthe board – there is not enough focus on ongoingsupplier relationship management, precious littleinvolvement in demand management, even lessparticipation in the ‘make versus buy’ decision processand an often dangerous lack of preparation, mitigationand action around supply chain risk.1 Business Leaders’ Survey, KPMG, June 2011© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of theKPMG network are affiliated. All rights reserved.
  4. 4. contents 02 Executive summary Deconstructing the 1. Key functional01 survey framework 04 findings 1.1 A place at the table? 05 1.2 Stretching beyond savings 11 1.3 Centring on Value 15 1.4 Running the Risk 20 1.5 Taking Advantage of Technology 25© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of theKPMG network are affiliated. All rights reserved.
  5. 5. 29 2. Regional comparators 54 Conclusion 2.1 The View from Asia Pacific 30 Our five key recommendations 56 2.2 The View from North America 34 10 Questions to ask yourself to assess your Procurement maturity 57 3. Key findings 36 by sector 58 Appendices 3.1 Financial Services 37 How to participate in 3.2 Transportation the survey 58 and Logistics 39 Glossary 3.3 Public Sector, Health of Terms 59 and Not-for-Profit 41 3.4 Retail 44 3.5 Manufacturing and Consumer Packaged Goods (CPG) 46 3.6 Energy & Natural Resources, Chemicals & Pharmaceuticals and Infrastructure 48 3.7 Technology, Media, Telecommunications and Business Services 51 © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
  6. 6. 1 | The Power of Procurementdeconstructing thesurvey framework In 2011Key elements of the framework KPMG, in association with CPO Agenda, VALUE AND STRATEGY conducted an online global survey of 585 Procurement PERFORMANCE AND BUSINESS leaders from across all industry groups and sectors. PLANNING The survey was designed in two parts, each intended to deliver a dynamic yet realistic view of the level of maturity and influence of Procurement functions within businesses around the world. The methodology itself is based on KPMG member firms’ work with a broad range of leading organisations over many years, and has been designed to accurately reflect the Procurement maturity journey. OPERATIONAL OPERATING Respondents were initially asked to provide a series EXCELLENCE MODEL of data points related to their direct and indirect spend across a series of key measures: Value and Performance, Purchase to Pay, Supply Base Management, Category Management and Operating Model. From this data, a robust set of ratios and measures were calculated to provide an objective comparison between organisations on core Procurement disciplines.Four-level maturity model Participants were then asked to map their behaviours and attributes in four key elements of Procurement: Strategy EXCELLENCE 4 and Business Planning, Operating Models, Operational Excellence, and Value and Performance. To facilitate this, respondents were presented with a series of attributes from which they selected the 3 LEADING statements that best reflected the current state within their organisation. From these responses, KPMG and CPO Agenda determined where the function sat on a four-level maturity model. 2 ESTABLISHED Those reporting low levels of maturity in these elements were ranked in the ‘foundation’ category, those indicating strong progress were termed as ‘established’, functions reporting more mature attributes were ranked as ‘leading’, and organisations with the highest level of maturity were designated in the ‘excellence’ category. 1 FOUNDATION It should be noted that these levels are cumulative, meaning that those ranked higher on the maturity framework were expected to demonstrate all of the attributes of the lower ranks, while also indicating an adherence to some of the more mature attributes and behaviours.© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of theKPMG network are affiliated. All rights reserved.
  7. 7. The Power of Procurement | 2 executive summaryAround the world • Partnering with the organisation: For Procurement to achieve a place at the table, more work should beand across all sectors , done to align to key stakeholders and understand the business operations to become a true strategic partner.organisations are experiencing an unprecedented pace of This means moving up the value chain to ensure thatchange. As a result, businesses are rapidly re-evaluating the function is involved much earlier in the decision-their operating models and market strategies not just to making processes and clearly demonstrating howwithstand these market forces, but capitalise on them. active involvement adds tangible value to both theClearly, Procurement has a significant role to play in bottom and the top lines.helping their organisations achieve their objectives • Moving beyond cost savings: Driving costs fromand prepare for the uncertainty ahead. In part, this will supply contracts will always be a central tenet ofrequire Procurement to focus on driving costs out of the Procurement, but many organisations seem to bebusiness. But the opportunity also exists for the function struggling to extend their activities proactively intoto add value in a much more strategic way. core capabilities such as category management,And as we engage with Procurement functions around and beyond into demand management, Supplierthe world, KPMG firms’ professionals have witnessed a Relationship Management (SRM) and risknumber of highly mature Procurement organisations that management. With relatively low levels of spendhave stepped-up their game, fundamentally changing under contract and under management in manythe way they work with the business and – as a result – sectors, there remains a significant opportunity forare increasingly taking a leadership role in helping drive Procurement to stretch beyond cost savings to delivergrowth and reduce costs across the organisation. more strategic value to the organisation.But what exactly does a ‘mature’ Procurement function • Achieving the optimal operating model: Whilst thelook like? How are they adding value beyond traditional majority of Procurement organisations have alreadycost-cutting measures? And what can less mature adopted a more centralised operating model, manyorganisations learn from their more evolved peers? still face challenges in translating this into strategicIn order to better quantify the maturity of Procurement value for their businesses. CPOs and Supply Chainfunctions around the world KPMG, in association with Directors will increasingly find themselves reassessingCPO Agenda, surveyed 585 Procurement leaders across their operating models to squeeze greater value fromthe world. What we found was that – overall – there is a their activities around the world, while providing asignificant gap between where Procurement is now and robust centralised framework that delivers efficiencieswhere they could be. across the business at a reduced operating cost for the function as a whole.In particular, our research identified five key areaswhere Procurement could be elevating its game to addsignificant value to its organisation:© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of theKPMG network are affiliated. All rights reserved.
  8. 8. 3 | The Power of Procurement An opportunity exists for Procurement professionals to drive real value for their organisations and – as a result – tangible competitive advantage• Prioritising supply chain risk: Given the events of • The Public Sector and Health sectors also reported the past five years – financial crisis, natural disasters a mixed level of maturity, with a small number of and massive supplier failures, to name just a few – the exemplars who have achieved ‘excellence’ in category research demonstrates a worrying lack of leadership management and strategic sourcing disciplines. in the area of supplier risk. Procurement will need This was balanced by the majority who were still aggressively to push the inclusion of supply chain risk performing at ‘established’ levels and managing less on the broader business agenda in order to protect than 60 percent of spend, showing that the wider the business from the uncertainty and turbulence that Public Sector still has considerable opportunity almost certainly lies ahead. to improve.• Leveraging systems and technology: Whilst supply • The Not-for-Profit sector showed a comparatively low chain technology and business systems have evolved level of maturity. rapidly, many Procurement functions seem unable – • Retailers reported some of the highest levels of possibly unwilling – to leverage these new capabilities maturity, particularly in their Goods For Resale (GFR) in order to bring greater automation to the business. spend, but indicated some room for improvement in In many cases, the situation is even more alarming: the Goods Not For Resale (GNFR) arena. having made the investments, they have yet to realise the value. In particular, the business will increasingly • Manufacturing and Consumer Packaged Goods be looking to Procurement to maximise their existing respondents returned impressive results in SRM and systems and technology to provide greater clarity Contract Management, but reported weak capabilities into the Management Information and Business in Risk Management. Intelligence processes. • Good progress has been made by organisations withinNot surprisingly, our research also uncovered a number the Energy & Natural Resources, Chemicals &of differences across the various business sectors. Pharmaceuticals and Infrastructure sectors withSome – such as Manufacturing, Consumer Packaged firmly established maturity in Risk Management andGoods and Retail – boast fairly mature Procurement the use of Systems and Technology.capabilities reflecting the importance of suppliers within • Technology, Media, Telecommunications andthe core business. Others, however, still have some way Business Services organisations generally performedto go. In brief: well in areas such SRM, Contract Management and• Financial Services organisations performed well in a Risk Management, there are significant opportunities number of key capabilities such as risk management, for Procurement to bring more spend under bringing spend under contract and formalising management and rationalise the supplier base. Procurement policy. However, the sector will likely Based on these findings, our global team of Procurement face significant challenges as a result of new and professionals has developed five key recommendations proposed regulation. for CPOs and Supply Chain Directors seeking to raise• Transportation and Logistics organisations reported the maturity of their function and ten questions that mixed maturity with some organisations performing should be answered to provide a realistic and practical very well, with others noticeably lagging behind their assessment of your Procurement maturity. peers, particularly in demand management and use of One thing is clear, however: An opportunity exists for systems and technology. Procurement professionals to drive real value for their organisations and – as a result – tangible competitive advantage. Now it’s up to CPOs and Supply Chain Directors to make the most of this opportunity.© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of theKPMG network are affiliated. All rights reserved.
  9. 9. The Power of Procurement | 4 key functional findings ONE© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of theKPMG network are affiliated. All rights reserved.
  10. 10. 5 | The Power of Procurement1.1 A PLACE AT THE TABLE?What will it take to elevate Procurement into a strategic role, worthy of a seat at the boardroom table?For years, Procurement Managers have sought to Indeed, respondents seem to indicate that Procurementascend to the boardroom table to take a place alongside is continuing to struggle to make a strategic impact onother enterprise services such as Marketing, Operations the organisation. For example, our survey shows thatand Finance. – on average – Procurement influences less than 60 percent of spend across both direct and indirect categories,But, according to our survey, many Procurement functions which puts them in the ‘foundation’ segment of maturitystill do not operate at a strategic level within the context (figure 1). What’s more, as illustrated in figure 2, mostof their wider organisations and – as a result – are neither companies outside of the Retail sector indicate that lessrecognised nor delivering as a true partner to the business. than three-quarters of their direct spend is currently under contract.Figure 1a: Percentage of direct spend under management 100 90 80 Financial Services 70 HealthPercentage in sector 60 Manufacturing & CPG 50 Public Sector Organisations 40 Retail 30 TMT & Business Services 20 Transport & Logistics 10 ENR, Chems, Pharma & Infrastructure 0 Not-for-Profit Foundation (<60%) Established (60-89%) Leading (90-99%) Excellence (100%) Maturity levelFigure 1b: Percentage of indirect spend under management 100 90 80 Financial Services 70 HealthPercentage in sector 60 Manufacturing & CPG 50 Public Sector Organisations 40 Retail 30 TMT & Business Services 20 Transport & Logistics 10 ENR, Chems, Pharma & Infrastructure 0 Not-for-Profit Foundation (<60%) Established (60-75%) Leading (75-89%) Excellence (>90%) Maturity level© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of theKPMG network are affiliated. All rights reserved.
  11. 11. The Power of Procurement | 6 With the exception of Retail, less than 75% of third-party spend is under an active contractFigure 2a: Percentage of spend under contract (of total direct spend) 100 90 80 Financial Services 70 HealthPercentage in sector 60 Manufacturing & CPG 50 Public Sector Organisations 40 Retail 30 TMT & Business Services 20 Transport & Logistics 10 ENR, Chems, Pharma & Infrastructure 0 Not-for-Profit Foundation (0-40%) Established (40-75%) Leading (75-95%) Excellence (>95%) Maturity levelFigure 2b: Percentage of spend under contract (of total indirect spend) 100 90 80 Financial Services 70 HealthPercentage in sector 60 Manufacturing & CPG 50 Public Sector Organisations 40 Retail 30 TMT & Business Services 20 Transport & Logistics 10 ENR, Chems, Pharma & Infrastructure 0 Not-for-Profit Foundation (0-19%) Established (20-59%) Leading (60-84%) Excellence (>85%) Maturity levelBy increasing the level of spend under contract, tends to result in better supplier segmentation allowingProcurement can achieve significant strategic benefits businesses to identify and track their top suppliers andfor the organisation such as increased leverage of – as a result – better manage risk (an area of particularspend, improved pricing, higher discounts, reduced importance given the high volatility experienced by mostrisk of supply failure or contractual disputes. businesses in recent years).Moreover, effective contract management also© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of theKPMG network are affiliated. All rights reserved.
  12. 12. 7 | The Power of Procurement Procurement generally influences less than 60% of spend across both direct and indirect categoriesInterestingly, as we see in figure 3, only a small number be spread thinly across multiple categories and vendors,of organisations claim to have 80 percent of their spend thereby missing opportunities for improved SRM andconcentrated within 20 percent of their supplier base, supplier performance management, and driving up theindicating that many Procurement functions continue to cost of the Procurement function as a whole.Figure 3a: Percentage of suppliers accounting for 80% of spend (for direct spend) 100 90 80 Financial Services 70 HealthPercentage in sector 60 Manufacturing & CPG 50 Public Sector Organisations 40 Retail 30 TMT & Business Services 20 Transport & Logistics 10 ENR, Chems, Pharma & Infrastructure 0 Not-for-Profit Foundation (>20%) Established (10-20%) Leading (5-10%) Excellence (<5%) Maturity levelFigure 3b: Percentage of suppliers accounting for 80% of spend (for indirect spend) 100 90 80 Financial Services 70 HealthPercentage in sector 60 Manufacturing & CPG 50 Public Sector Organisations 40 Retail 30 TMT & Business Services 20 Transport & Logistics 10 ENR, Chems, Pharma & Infrastructure 0 Not-for-Profit Foundation (>20%) Established (10-20%) Leading (5-10%) Excellence (<5%) Maturity level© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of theKPMG network are affiliated. All rights reserved.
  13. 13. The Power of Procurement | 8Figure 4: Level of involvement in ‘Make versus Buy’ decisions 100 6% 90 18% 24% 24% 32% 33% 80 41% 45% 70 55% 27% 60Percentage 70% 50 61% 46% 45% 40 64% 53% 30 55% 55% 36% Dont Participate 20 24% 23% 22% Participate 10 15% 12% 9% 6% Lead 0 Financial Health Manufacturing Public Retail TMT & Transport ENR, Chems, Not-for­ Services & CPG Sector Business & Logistics Pharma & Profit Organisations Services Infrastructure SectorRespondents also indicated a rather low level of on behalf of the business, this is the point at which a largeparticipation in their organisation’s ‘make versus buy’ portion of the cost of the good or service is determined.decision-making process (figure 4). Only 17 percent said Procurement departments have a critical role to play inthat they currently lead the process and almost a third driving value for money and managing the risk associated(31 percent) admitted that they do not participate in the with these decisions. Those that take a leading role in thisprocess at all. While the Procurement function is not process tend to enjoy an enhanced strategic profile withinstrictly responsible for taking ‘make versus buy’ decisions the broader company. 31% admitted they do not participate in ‘make versus buy’ decisions © 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. All rights reserved.
  14. 14. 9 | The Power of ProcurementThe ability not only to create Procurement policy for the in collaboration with the organisation, they are not fullywider enterprise, but also to report and manage non- embedded in the Purchase to Pay process nor is non­compliance is key to achieving a more strategic role for compliance generally reported or managed. As a result,Procurement. However, as figure 5 clearly demonstrates, many Procurement organisations find themselves tied-an overwhelming majority of respondents across sectors up managing issues related to too many suppliers, off-seemed to indicate an ‘established’ level of maturity contract purchases or varying price points, and missinghere, meaning that while policies are evident and created the opportunity to improve their standing with Finance.Figure 5a: Degree of maturity relating to Procurement Policy (for direct spend) Financial Services 17% 50% 33% Health 12.5% 50% 37.5% Manufacturing & CPG 12.5% 62.5% 12.5% 12.5%Public Sector Organisations 12% 59% 29% Retail 100% TMT & Business Services 22% 55.5% 18.5% 4% Transport & Logistics 67% 33% ENR, Chems, Pharma 81% 13% 6% & Infrastructure Not-for-Profit 100% 0 20 40 60 80 100 Level 1 – Foundation 0-30 Level 2 – Established 31-60 Level 3 – Leading 61-80 Level 4 – Excellence 81-100Figure 5b: Degree of maturity relating to Procurement Policy (for indirect spend) Financial Services 8.3% 58.3% 33.3% Health 12.5% 50% 37.5% Manufacturing & CPG 25% 45% 20% 10%Public Sector Organisations 8% 83% 8% Retail 100% TMT & Business Services 19% 69% 8% 4% Transport & Logistics 67% 33% ENR, Chems, Pharma 89% 5.5% 5.5% & Infrastructure Not-for-Profit 50% 50% 0 20 40 60 80 100 Level 1 – Foundation 0-30 Level 2 – Established 31-60 Level 3 – Leading 61-80 Level 4 – Excellence 81-100 Level 1 – Foundation 0 -30 Level 2 – Established 31-60 Level 3 – Leading 61-80 Level 4 – Excellence 81-100 • Procurement policies exist, • Policies are evident across most • Policies are embedded in • Policy is used as a mechanism but are not consistent, widely categories of spend, processes, Purchase to Pay systems for driving behavioural change communicated, or adhered to and systems • Non-compliance is reported and throughout the organisation • Policies are created in actively managed • Non-compliance is exceptional collaboration with the organisation and publicised© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of theKPMG network are affiliated. All rights reserved.
  15. 15. The Power of Procurement | 10 KPMG VIEWPOINT The evidence indicates that the majority of Procurement functions still don’t have a strategic role and are generally not considered (nor optimally delivering) as a true business partner to the organisation. In many cases, this is a direct outcome of ineffective governance, policies and procedures or a lack of appropriate Procurement engagement during the early stages of the procurement process. As a result, those organisations are failing to make effective purchasing decisions, not fully leveraging their spend and economies of scale, and leaving themselves open to significant business and commercial risk. So whilst early Procurement involvement has been proven to deliver higher savings, the reality is that Procurement is usually brought into the process to either close a deal or advise on the contract terms, when it is often far too late to add significant value – or often only when the commercial process has already broken down. The results also show that Procurement is not placing sufficient focus on monitoring and tracking compliance across the organisation and – with no real repercussions for non­ compliance – is facing real challenges in maintaining control over both direct and indirect spend, and in supporting demand management activities. Across the board, CPOs will need to place more focus on becoming effective change leaders and in engaging internal customers to better communicate the value of Procurement. According to one respondent “We use a lot of buzzwords like SRM and category management, but it doesn’t mean much to the business. We must start to communicate in a language that the business understands.” Of course, this will also require Procurement to refocus their efforts to include other value-added services to the business besides simply reducing purchasing costs. However, this usually requires a culture-shift, taking Procurement away from the tactical, category-focused culture that seems to dominate most functions, to one that is fully aligned with the organisational goals and active in the strategic decision-making processes of the business. For example, by helping the organisation to develop a ‘cost conscious culture’, the function can drive greater strategic value and fill the role of change leader rather than order taker.© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of theKPMG network are affiliated. All rights reserved.
  16. 16. 11 | The Power of Procurement1.2 STRETCHING BEYOND SAVINGSHow will Procurement elevate their game beyond savings to deliver real value to the organisation?Whilst most Procurement functions have made great Figure 6: Correlation between SRM maturity and % cost reduction savings (direct spend)progress in terms of creating value for their organisations,our research indicates that momentum has somewhat 100 4.2% 5.6% 11.1%stagnated recently. In large part, this is because much Supplier relationship management maturity (%) 90 8.3%of the ‘low hanging fruit’ has already been harvested in 80terms of cost savings, leverage and price. As a result, 33.3%Procurement functions will need to stretch to identify 70and capitalise on opportunities to add value, while also 60securing appropriate organisational investment to enable 70.8% 83.3% 90% 50Procurement to develop into this more strategic role. 40Our research indicates a direct link between an ability to 33.3%achieve greater cost savings and an overall maturity in 30category management, strategic sourcing and SRM (see 20figure 6). Indeed, those organisations that reported either 22.2% 10‘excellence’ or ‘leading’ maturity in these areas tended to 16.7% 11.1% 10%deliver a higher percentage of savings than their slightly 0 <1-2% 2-5% 5-8% >8%less mature peers. Direct cost reduction savings as a percentage of direct spendFor example, in ‘mature’ Procurement functions, SRM Foundation 0-30 Established 31-60is seen to provide a structured approach to contract Leading 61-80 Excellence 81-100or service performance management that offersProcurement an opportunity to leverage the relationshipand drive continuous incremental value to both the top Figure 7: Correlation between maturity in Category Managementand bottom line. However, outside of the Manufacturing and Strategic Sourcing, and % cost reduction savings (direct spend)and Consumer Packaged Goods industries, our research 100indicates that only around half of all Procurement 3.8% 5.3% 10.0% Supplier relationship management maturity (%) 90 11.5% 5.3%functions currently lead the SRM process within 22.2%their organisation. 80As illustrated in figure 7, focus must also be placed 70 22.2%on category management and strategic sourcing. 60Only four percent of Procurement functions claim to 61.5% 50 80.0%have achieved ‘excellence’ for direct spend – defined 84.2%as having a strategic place within the organisation as 40 33.4%a generator of value beyond merely savings through 30competitive negotiations. Rather, the vast majority(64 percent) fell into the ‘established’ category, where 20category management and strategic sourcing processes 10 23.1% 22.2%have been created, but were not fully recognised within 5.3% 10.0% 0the organisation as potential sources of value. <1-2% 2-5% 5-8% >8% Direct cost reduction savings as a percentage of direct spend Foundation 0-30 Established 31-60 Leading 61-80 Excellence 81-100© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of theKPMG network are affiliated. All rights reserved.
  17. 17. The Power of Procurement | 12 Our research indicates a direct link between cost savings and maturity in category management, strategic sourcing and SRMDemand management is another key lever of value imply a larger focus on negotiating commercial termscreation available to Procurement functions. But, as we rather than achieving specific functional requirements,see in figure 8, only 17 percent of respondents said that it is likely a result of Procurement either being broughtthey lead their organisation’s demand management into the process late in the business cycle, or notactivities and more than a quarter admitted that they do being sufficiently engaged within the business innot participate in this activity at all. And whilst this may the first place.Figure 8: Level of involvement in Operational Demand Management activities 100 90 18% 18% 23% 24% 27% 80 36% 36% 36% 41% 70 60Percentage 50 64% 69% 52% 54% 40 66% 46% 46% 64% 47% 30 Dont Participate 20 25% Participate 10 18% 18% 18% 22% 13% 12% 7% Lead 0 Financial Health Manufacturing Public Retail TMT & Transport ENR, Chems, Not-for- Services & CPG Sector Business & Logistics Pharma & Profit Organisations Services Infrastructure Sector 17% of Procurement functions lead demand management activities and 29% do not participate in this activity at all© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent memberfirms of the KPMG network are affiliated. All rights reserved.
  18. 18. 13 | The Power of Procurement Only 4% of respondents claimed to have achieved ‘excellence’ in strategic sourcing and category management for direct spendThe other discipline critical to helping Procurement three-quarters of respondents suggested that they hadfunctions add value is supply base management (see achieved a risk-based segmentation of suppliers andfigure 9), where savings can often be achieved through realised a contract management database (or equivalent)approaches such as supply chain simplification, product that covered at least three-quarters of their direct andand service consolidation, or joint supplier / customer indirect spend, suggesting strong progress in this areainnovation. On the more positive side, more than for many organisations.Figure 9: Degree of maturity in Supply Base Management (direct spend) Financial Services 50% 50% Health 25% 75% Manufacturing & CPG 15% 69% 8% 8%Public Sector Organisations 6% 94% Retail 67% 33% TMT & Business Services 8% 73% 15% 4% Transport & Logistics 100% ENR, Chems, Pharma & Infrastructure 12.5% 87.5% Not-for-Profit 100% 0 20 40 60 80 100 Level 1 – Foundation 0-30 Level 2 – Established 31-60 Level 3 – Leading 61-80 Level 4 – Excellence 81-100 Level 1 – Foundation 0 - 30 Level 2 – Established 31- 60 Level 3 – Leading 61- 80 Level 4 – Excellence 81-100 • Suppliers are qualified using a • Supplier performance • Contractual obligations are • Significant contracts and/or balanced set of criteria management is established tracked throughout the whole suppliers have active executive • Supplier performance and includes customer contract management life cycle level involvement measurement is limited to generated data • Supplier development • Collaboration with suppliers supplier generated data • Contract and/or supplier is an integral part of the occurs regularly and drives • Contract and supplier specific reviews are held periodically organisation’s supply base tangible additional value from interventions are reactive against a defined agenda management strategy the relationship • Supplier management • The supply base management activities lack formal processes strategy is defined for delivery • Supplier performance • Significant contracts and/or management includes a suppliers are identified using a commercial element and is risk-based evaluation linked to the award of future contracts; poor performance is escalated in a controlled manner to executive level and leads to exit over time© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of theKPMG network are affiliated. All rights reserved.
  19. 19. The Power of Procurement | 14 KPMG VIEWPOINT Clearly, Procurement recognition and investment in the role of strategic Procurement is essential in enabling the function to functions will need to place renewed deliver a greater contribution to the business. That said, the data also demonstrates that many focus on building capacity in a number of key disciplines if they hope to deliver greater value to organisations are progressing along a value creation their organisations. Across category management, journey. So whilst some organisations that achieved strategic sourcing, SRM, demand and supply base ‘excellence’ or ‘leading’ rankings in key areas reported management, our research suggests that significant a lower percentage of cost reduction savings, this opportunities still remain to drive sustainable bottom is more likely indicative of organisations that are line and top line value. well progressed along this journey rather than an unsophisticated Procurement function. This is also Some of the ‘heavy lifting’ in this regard will fall on the the case for certain sectors (such as Retail) where the shoulders of Procurement, who will need to stretch supply market is largely inflationary. beyond savings to become a centre of value creation throughout the organisation. Executives will also need Similarly, a number of respondents to our survey to play a part. Poor results in category management, reported achieving relatively high cost savings for example, often reflects a lack of understanding on while at a ‘foundation’ or ‘established’ level of maturity the part of the executives who – without an immediate in the core processes, indicating the reaping of low need to drive out costs – may not see the full value in hanging fruit. category management. Indeed, a wider organisational The Evolution of Supply Chain Finance access to rebates, but the fees charged by card providers can make it an expensive option for As capital becomes increasingly dear, many the supplier. Procurement organisations are starting to explore innovative Supply Chain Finance models aimed at In buyer-driven receivables models, a company that freeing up working capital and ensuring productive has a good credit standing sets up an arrangement relationships with key suppliers. with a bank to provide funding to the company’s suppliers. The programme allows suppliers to sell or There are various structures of Supply Chain Finance discount their receivables from their sales invoices programmes: and get immediate cash payments. The discount rate • Supplier-driven programmes (or Receivables depends on the credit rating of the buyer rather than Financing); the supplier. The buyer has the benefit of an enhanced relationship with its suppliers and, through helping the • Inventory Finance; supplier gain funding, is reducing risk within its own • Purchasing Cards, and supply chain. Appropriate IT systems and effective communication between parties is critical to enable • Buyer-driven programmes. this type of programme. In supplier-driven programmes, suppliers ‘sell’ their More recently, buyer-driven payables programmes receivables to a bank in exchange for a fee (typically have emerged whereby the buyer pays early in return in the range of 2-4 percent). In return, the supplier for early payment discounts from suppliers. In some is immediately advanced 80 percent of their invoice cases, buyers arrange a preferred rate with a bank value, thereby providing instant access to working which is used to settle invoices within a shortened capital. However, the model is often considered to be timeframe. However, buyers with strong balance sheets expensive for suppliers and costs are generally added may consider funding the mechanism themselves, into the price offered to buyers. essentially allowing the buyer to turn cash into With inventory financing, suppliers own stock held additional revenue. The model is considered to be a on the buyer organisation’s site until the buyer uses fairly straightforward but innovative option that provides it. While this means that less of the buyer’s cash a win-win situation for both buyers and sellers. is tied up in stock, it can lead to increased cost of Selecting the appropriate model will depend on the goods. Purchasing cards can be an excellent tool for specific drivers and circumstances of an organisation, consolidating low spend transactions and can provide as well as the internal capability to deliver. KPMG formed part of the Supply Chain Finance working group, chaired by The Association of Corporate Treasurers, which reviewed the supply chain finance market in 2010. The report of this working group can be found at www.treasurers.org/scf© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of theKPMG network are affiliated. All rights reserved.
  20. 20. 15 | The Power of Procurement1.3 CENTRING ON VALUEDoes a centralised Procurement operating model provide better value and performance to the organisation?As the global business landscape becomes increasingly Our research demonstrates that the majority ofcompetitive and complex, many organisations are organisations around the world now subscribe to a moreadjusting their Procurement operating models to achieve centralised operating model (figure 10), enabling businessesgreater value creation and operational performance. to leverage their buying power across the globe, gain greaterHowever, over the long-term, few organisations regularly control of their spend and build core standard businessreview their operating models or make the necessary processes to drive greater consistency and value fromadjustments to continuously ensure that Procurement Procurement. It is not surprising, therefore, that centralisedis integrated into the business and delivering increasing organisations tended to report the greatest value from a costlevels of value. savings perspective (as shown in figure 11).Figure 10a: Percentage of spend managed by various operating models (direct spend) 100 90 80 Financial Services 70 Health Percentage in sector 60 Manufacturing & CPG 50 Public Sector Organisations 40 Retail 30 TMT & Business Services 20 Transport & Logistics 10 ENR, Chems, Pharma & Infrastructure 0 Not-for-Profit Level 1 – foundation Level 2 – established Level 3 – leading Level 4 – excellence (90%-100% decentralised) (50%-89% decentralised) (1%-49% decentralised) (centralised) Maturity levelFigure 10b: Percentage of spend managed by various operating models (indirect spend) 100 90 80 Financial Services 70 Health Percentage in sector 60 Manufacturing & CPG 50 Public Sector Organisations 40 Retail 30 TMT & Business Services 20 Transport & Logistics 10 ENR, Chems, Pharma & Infrastructure 0 Not-for-Profit Level 1 – foundation Level 2 – established Level 3 – leading Level 4 – excellence (90%-100% decentralised) (50%-89% decentralised) (1%-49% decentralised) (centralised) Maturity level© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of theKPMG network are affiliated. All rights reserved.
  21. 21. The Power of Procurement | 16 Half of all respondents indicated that they had adopted either a centralised or centre-led operating modelFigure 11a: Average cost reduction savings for various Figure 11b: Average cost reduction savings for variousoperating models (direct spend) operating models (indirect spend) 10 10 9 9 8 8 7 7 6 6% cost saving % cost saving 5 5 9.5% 4 4 3 3 6.3% 5.9% 2 4.3% 4.4% 2 3.7% 3.2% 3.5% 1 1 0 0 Direct – Direct – Direct – Direct – Indirect – Indirect – Indirect – Indirect – Centre-led Decentralised Centralised Hybrid Centre-led Decentralised Centralised Hybrid Centralised and centre-led functions report the highest levels of cost reduction and spend under management© 2012 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent memberfirms of the KPMG network are affiliated. All rights reserved.

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