Breaking the ceiling through effective procurement transformation 19 oct13

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The presentation I made at the CPO Forum Conference on 19th Oct 2013 at Delhi.

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Breaking the ceiling through effective procurement transformation 19 oct13

  1. 1. CPO Forum, Delhi, 19Oct13 Breaking the Ceiling through Effective Procurement Transformation
  2. 2. Do you face these situations? Constant pressure from Management to reduce material costs My team doesn’t have full visibility of spend across the supply chain We initiate many cost reduction initiatives but they linger on for long before implementation We have lot of ideas but our daily routine activities keep us from focusing on them 2
  3. 3. Contents How Companies respond to today’s reality How can we make Procurement transformation programs effective? Case : Delivering Procurement transformation program at leading EPC company 3
  4. 4. Many Internal & External factors affect the industry dynamics and increase pressure on company’s margins Leverage and Routine Suppliers     Have higher COGS, low profitability Quality inconsistencies Weak Management Controls Poor working capital conditions My Organization Strategic and Bottleneck Suppliers     Have more buying power Limited supply base Significant P&L impact Unique specifications 4
  5. 5. Many Internal & External factors affect the industry dynamics and increase pressure on company’s margins Customer Leverage and Routine Suppliers        Have higher COGS, low profitability Quality inconsistencies Weak Management Controls Poor working capital conditions   Has More choices Wants More convenience Rising costs of customer acquisition Wants more value for money Higher disposal income My Organization Strategic and Bottleneck Suppliers Competition          Have more buying power Limited supply base Significant P&L impact Unique specifications 5 Merger and acquisitions consolidating industry Increase in global supply bases Rapid innovation pace Intense fight for Market Share Blurring product segments
  6. 6. Companies take host of measures to maintain and improve the bottom-line… What Companies typically do?   Take Annual Targets for cost reduction Non standardised Standard Polymers Standard Polymers Consolidate initiatives product wise, category wise or BU wise For new products Not for new products Polymers only used locally  Procurement Form Cross Functional Teams  Engage with suppliers for cost reduction initiatives Manufacturing Specialist Team Suppliers Quality Sales R&D Logistics  Plan for implementation  Monitor and report results Realisation plan 6
  7. 7. Companies take host of measures to maintain and improve the bottom-line… But what eventually happens… What Companies typically do?   Take Annual Targets for cost reduction Standard Polymers Standard Polymers Consolidate initiatives product wise, category wise or BU wise For new products Not for new products Form Cross Functional Teams  Engage with suppliers for cost reduction initiatives Manufacturing Suppliers Quality Sales R&D Logistics  Plan for implementation  “Procurement department claims cost reduction but it doesn’t show in the balance sheet” Polymers only used locally  Procurement Specialist Team “Our product mix changed by the time of implementation” Non standardised “Many of our initiatives are stuck in approval stages. What is the result of so much effort?” Monitor and report results Realisation plan “We implemented the savings but it looks like we are back on the original condition now” “We realized that the cost reduction initiative created more complexity and cost leakages in other areas” The results are not as effective…. 7
  8. 8. Contents How Companies respond to today’s reality How can we make Procurement transformation programs effective? Case : Delivering Procurement transformation program at leading EPC company 8
  9. 9. Procurement leaders strive for achieving excellence in procurement and not only cost reduction Process Performance Strategy      Tailored Category Sourcing Strategy Supplier Relationships and Alliances Supply Risk Management Make v/s Buy Decisions     Process checks and balances Timelines adherence for initiatives Adequate IT systems Supplier payment process Supplier development PROCUREMENT EXCELLENCE People and Skills     Innovation Organization Structure KPIs, Rewards and Recognition Skill set for Procurement Professionals Cross Functional Teams Effectiveness      9 Simplifying/Optimizing supply chains Backward integration Joint R&D with suppliers Product Innovation Use of alternate materials
  10. 10. Procurement Excellence can be achieved by undertaking initiatives systematically & in a phased manner PROCUREMENT LEADER BEST PERFORMANCE WITH CURRENT PRACTICES 10 CURRENT PERFORMANCE
  11. 11. Procurement Excellence can be achieved by undertaking initiatives systematically & in a phased manner • • • • • • Invest in upgrading skills and train procurement team Invest in upgrading IT systems across • supply chain Integrate procurement strategy as part of business strategy • Mapping supply chain risks Enter into strategic alliances with key • suppliers • Invest into product innovation and Joint R&D with suppliers… • PROCUREMENT LEADER Design, Plan and execute procurement cost reduction programs Stress on strategic sourcing initiatives Restructure procurement team Implement robust management controls to achieve yearly targets Closer integration with R&D and supplier development teams… BEST PERFORMANCE WITH CURRENT PRACTICES 11 CURRENT PERFORMANCE
  12. 12. An Effective Procurement Transformation Program must be holistic to deliver the targeted benefits DESIGN PLANNING 12 EXECUTION
  13. 13. An Effective Procurement Transformation Program must be holistic to deliver the targeted benefits DESIGN  Establishing Strategic Goals  Mission & Vision  3- Year, 5-YearPlans   PLANNING Annual Targets Key Identifications  Current Challenges  Mindset issues  Organization restructuring  Core Team to drive change  Knowing the as-is current procurement performance  Create the ‘bigger picture’ of change 13 EXECUTION
  14. 14. An Effective Procurement Transformation Program must be holistic to deliver the targeted benefits DESIGN  Establishing Strategic Goals    3- Year, 5-YearPlans Annual Targets  Conducting detailed diagnostic study and identify opportunities  Detailed level target and expectation setting  Documenting knowledge and establishing SOPs Mission & Vision  PLANNING Key Identifications  Identification of priority areas Mindset issues   Organization restructuring Department level KPI setting and program governance structure      Current Challenges Core Team to drive change  Knowing the as-is current procurement performance Rolling out weekly, monthly and half yearly plans  Create the ‘bigger picture’ of change Setting up MIS to track progress and achievement  Team formations and communication platforms  Identifying right tools & approach for initiatives 14 EXECUTION
  15. 15. An Effective Procurement Transformation Program must be holistic to deliver the targeted benefits DESIGN  Establishing Strategic Goals    3- Year, 5-YearPlans Annual Targets Key Identifications Detailed level target and expectation setting Motivate and re-enforce key ideas and thoughts in team members  Documenting knowledge and establishing SOPs Set-up reviews for progress check  Train procurement professionals on relevant tools & techniques  Handling Change Management  Rolling out weekly, monthly and half yearly plans Course corrections and scope expansion  Setting up MIS to track progress and achievement Set-up audit mechanisms for review  Team formations and communication platforms Sharing information and best practices  Setting responsibility for continuity Conducting detailed diagnostic study and identify opportunities    Identification of priority areas Mindset issues   Organization restructuring Department level KPI setting and program governance structure      Current Challenges Core Team to drive change Knowing the as-is current procurement performance Create the ‘bigger picture’ of change     EXECUTION   Mission & Vision  PLANNING Identifying right tools & approach for initiatives Each phase of the program is critical to the success of the program 15
  16. 16. DESIGN phase : Establish expectations and articulate the scope and deliverables of the program The CEO Agenda  The management team identifies and articulates its strategic goals in procurement    The CPO Agenda What is our business strategy for 3-Year, 5-Year Horizon and how will it affect procurement?  What current challenges will keep us from achieving our goals?  What are the team’s mindset issues? What are our key annual targets and performance measures?  What goals we are trying to achieve through the procurement transformation program?   Do I need to restructure my team?  How do I drive the change? How do we execute? 16 Core team to drive program  Setting performance measures for the department   Broad level targets and timelines  What is our as-is procurement performance? Areas for intervention  Who will constitute the core team to drive the change?  Identified  Do I have the right skills and adequate resources to carry out the transformation?  What we want to do? The Transformation Program Challenges that will affect the program and mitigation measures Agreement on additional resources required
  17. 17. PLANNING phase : Establish current performance and plan for implementing the identified opportunities Setting Baselines  Detailed level assessment of the current procurement performance   Review and definition of categories Expenditure mapping      Current supply chain processes review Current Supply Chain Metrics Opportunity identification  Identification of key opportunities and improvement areas  Estimation of savings potential on all important categories Plan for Roll-Out  Established Defining roles and responsibilities Target setting and identification of priority areas Where are we at present? Estimate ease of realization   Consider setup to enable savings (e.g. organization, IT support, KPIs/KRAs) Weekly, Monthly, Half Yearly Plans  Teams for implementation  ‘Benefit Tracker’ with timelines  Priority Areas  Process formats, SOPs  Department performance metrics, KPIs/KRAs  Key Stakeholders taking part in transformation program  Governance structures  Identifying ‘quick-wins’ to create excitement  Identify necessary functional intervention from teams such as R&D and Quality What are the opportunities? 17
  18. 18. EXECUTION phase : Track and support to deliver sustainable benefits Tracking Actions and Progress  Tracking actions for implementation at project levels  Tracking of benefits accrual  Regular progress reviews at management level     Risk mitigation measures in projects Roadblocks removal by senior management Establishing visual management systems and stakeholder management processes Enabling course corrections and scope expansions Supporting Execution  Handling change management  Managing individual and group communication  Creating motivation in teams by reinforcing key ideas     Where are we headed? Closure and Continuity  Bringing projects to closure  Managing non-performance of members/teams Setting responsibilities and ownership for continuity  Setting the right and adequate Rewards and Recognition Information and best practices documentation  Skill building of team on a need basis Ensure established processes adherence  Ensure discipline in reporting and adherence to process standards Establish platforms for generation of future initiatives  Establish audit mechanisms to avoid slippages What are the support mechanisms? 18
  19. 19. CHALLENGES : Anticipate your challenges and plan to mitigate - than be hit by them DESIGN  No visibility of company agenda  Pressures for focusing on cost, cost and cost    Risk of ‘individual agenda’ being driven by top-management members Inappropriate/ inadequate long term vision … PLANNING   Non-availability of data/ information Non-committal people/ functions to targets and objectives EXECUTION  Delays in management approvals for resources/ investments  X-functional coordination failures  Road-blocking by ‘stalwarts’  Too many priorities  Everyone plans  Changing product mix  Sub-optimal plans – generated based on available skills/ resources  Discovery of ‘holy cows’  Vendor non-cooperation  Delivery disruptions  Lack of awareness of methodologies/ tools   … Data/ information nonavailability  Inadequate skill levels  … 19
  20. 20. TIPPING POINTS : Certain factors, if ignored, have the potential to derail the entire program DESIGN     KPIs/KRAs should be designed carefully People skills and resource allocation should be accounted for Look out for management commitment issue PLANNING  Risks that might affect project outcome should be mapped and measures should be taken Sustenance measures should be agreed at start of projects  Look out of risk of active or passive sabotage possibility  Finance should be onboard with benefit calculations  … 20  Robust Change Management  Look out of drop in motivation levels during the course of project  Negative Communication should be carefully delivered  Friction between teams must be eliminated quickly  Prevent people from falling back on old practices   … EXECUTION …
  21. 21. Successful Transformation takes place only when all elements of change are addressed in the journey Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Successful Change Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Confusion Vision Robust methodology Structure & Resources Skills Motivation Action-plan Incremental Benefits Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Frustration Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Anxiety Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Slow progress Vision Robust Methodology Structure & Resources Skills Motivation Action-plan False start 21
  22. 22. Successful Transformation takes place only when all elements of change are addressed in the journey Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Successful Change Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Confusion Vision Robust methodology Structure & Resources Skills Motivation Action-plan Incremental Benefits Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Frustration Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Anxiety Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Slow progress Vision Robust Methodology Structure & Resources Skills Motivation Action-plan False start 22
  23. 23. Successful Transformation takes place only when all elements of change are addressed in the journey Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Successful Change Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Confusion Vision Robust methodology Structure & Resources Skills Motivation Action-plan Incremental Benefits Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Frustration Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Anxiety Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Slow progress Vision Robust Methodology Structure & Resources Skills Motivation Action-plan False start 23
  24. 24. Successful Transformation takes place only when all elements of change are addressed in the journey Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Successful Change Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Confusion Vision Robust methodology Structure & Resources Skills Motivation Action-plan Incremental Benefits Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Frustration Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Anxiety Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Slow progress Vision Robust Methodology Structure & Resources Skills Motivation Action-plan False start 24
  25. 25. Successful Transformation takes place only when all elements of change are addressed in the journey Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Successful Change Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Confusion Vision Robust methodology Structure & Resources Skills Motivation Action-plan Incremental Benefits Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Frustration Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Anxiety Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Slow progress Vision Robust Methodology Structure & Resources Skills Motivation Action-plan False start 25
  26. 26. Successful Transformation takes place only when all elements of change are addressed in the journey Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Successful Change Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Confusion Vision Robust methodology Structure & Resources Skills Motivation Action-plan Incremental Benefits Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Frustration Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Anxiety Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Slow progress Vision Robust Methodology Structure & Resources Skills Motivation Action-plan False start 26
  27. 27. Successful Transformation takes place only when all elements of change are addressed in the journey Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Successful Change Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Confusion Vision Robust methodology Structure & Resources Skills Motivation Action-plan Incremental Benefits Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Frustration Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Anxiety Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Slow progress Vision Robust Methodology Structure & Resources Skills Motivation Action-plan False start 27
  28. 28. Successful Transformation takes place only when all elements of change are addressed in the journey Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Successful Transformation Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Confusion Vision Robust methodology Structure & Resources Skills Motivation Action-plan Incremental Benefits Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Frustration Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Anxiety Vision Robust Methodology Structure & Resources Skills Motivation Action-plan Slow progress Vision Robust Methodology Structure & Resources Skills Motivation Action-plan False start 28
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  31. 31. Contents How Companies respond to today’s reality How can we make Procurement transformation programs effective? Case : Delivering Procurement transformation program at leading EPC company 31
  32. 32. BUSINESS NEED Client aimed to develop India sourcing center to support turnover growth by 1.5 times and increase profitability by 5% within 5 years  Client strategy in India was to increase turnover 1.5 times over the next 5 years  Competitive offering to customers was a pre-requisite for the winning the volumes game  At the same time target was to increase EBIT rate by 5% over the current base rate  Turnkey projects in combination with O&M contracts could deliver the desired hike in turnover. The challenge was to win these orders and at the same time increase profitability  Client’s supply chain had to more competitive than equivalent competitor’s China based supply chain for gaining volumes in the market  Many global companies had started to develop alternative supply chain capacity outside China. Client had a strong presence in India and was in a good position to develop a world class sourcing centre in India  Client had already developed a global supply chain strategy. The challenge was now to design the local supply chain setup for India that supports the global strategy and at the same time delivers the elements that the global supply chain cannot deliver 32
  33. 33. SCOPE AND PURPOSE Program objective was to reduce procurement cost in India and increase group spend sourced from India India spend – driven by India supported by Group Development of India supply chain  Reduced cost of equipment, e.g. reduced cost of BOM items/tonnes plant output  Increased procurement productivity (procurement spend/employee)  Improve supplier performance e.g. ontime delivery  Optimize/implement process for systematic category sourcing, supplier development and operational procurement Develop current practice Local Categories Group categories Group spend – driven by Group supported by India Increase group spend through India sourcing  Lower Cost for group globally  Develop Indian Suppliers to support further group spend sourcing from India (for example improved quality, higher supplier capacity and aligned QA setup)  Improve supplier performance for example ontime delivery  Increase operational purchasing off-shored to India Group spend India sourced Group spend 33
  34. 34. SCOPE AND PURPOSE The objectives were further broken down into high-level actions to realize the targets 5-step sourcing efforts Reduce BOM Cost Costing analysis to benchmark & drive down costs Identify & develop new vendors Supplier development – help suppliers lower costs Expand sourcing categories Increase sourced volume out of India Identify & develop new vendors Improve vendor competitiveness in terms of quality and price Integrate cement & minerals procurement Improve procurement productivity Create lean processes in procurement Improve call off process Improve supplier quality & delivery reliability Supplier development – help suppliers improve operations & quality (lean suppliers) 34
  35. 35. Supply chain optimization was carried out taking a comprehensive approach covering all relevant areas of procurement APPROACH Programme Management Aimed at making procurement: 2. Organisation integration and building 8. Building Perf. Management & regular KPI follow-up 3. Process devp., standardisation BETTER 4. Supplier development 1. Sourcing Waves 5. Develop global procurement setup 7. Spend management and analysis FASTER CHEAPER 6. Master data building and maintenance 35
  36. 36. APPROACH The project involved use of 6 ‘sourcing levers’ in varying degrees to create value Leverage Buying Power Create Value Volume Concentration  Coordinate volumes across the organization  Allocate volumes with selected suppliers  Explore if providing volume commitments could improve pricing from suppliers  Assess risks involved Product / Service Specification Improvement Volume Concentration Best Price Evaluation  Compare prices and terms across divisions and leverage best prices and terms  Assess price break-down from suppliers to the extent possible to enable transparency Best Price Evaluation Product /Service Specification Improvement  Identify cost drivers and use the info to standardise/ simplify specifications  Develop long-term relationship with vendors to improve specifications for future  Integrate inputs from Procurement, Projects & site team Sourcing Strategy Import Substitution / Global Sourcing Process Improvement Process Improvement  Process improvement across Source to contrac & Procure to Pay lifecycle  Improve productivity, costs & timelines Relationship Restructuring Relationship Restructuring  Consider splitting orders in the value chain  Consider making one supplier accountable for a “basket” and reduce transactions  Consider entering into agreements with selected suppliers Import Substitution / Global Sourcing  Investigate use of local suppliers instead of imports  Supplier development activities 36
  37. 37. Several business benefits accrued from the procurement transformation program Cost Competitiveness Enabled Annual Savings of INR 800+ Mn Improved supplier payment terms and compliance. New tools like “e-auction” introduced to accelerate savings Significant reduction in Vendor Documentation errors-speeding up invoicing. Supplier development Supplier rationalisation carried out and 148 new vendors approved; 20000 T of capacity added in fabrication category. More than 350 improvement actions implemented at key vendors. 5 critical vendors being run through a dedicated development programme to improve their process and performance System improvement and transparency Uniform procurement process across divisions. Planning and reporting systems strengthened. Systematic sign off and tracking of savings Data categorization to improve quality of spend analysis. More streamlined and transparent interaction with estimation BENEFITS Delivery Performance Supply chain war rooms commenced for new projects for monitoring projects even more closer. On-time ordering is under focus by clubbing items of different projects and negotiating rates during estimation phase itself. A cross functional Lean initiative on speeding up Drawing Approvals has enabled tackling challenges in reduction of delivery times for bought out items. Control Structured category management focus. Weekly internal project reviews for Delivery & Quality Objective measurements(25 metrics established and being tracked periodically) Cultural/Competence Way of working is changing – more cross-divisional, more cross-functional and more fact-based There has been an increased confidence in leadership and the new way of working(Based on internal survey carried out) Competency development programme under implementation for key procurement staff based on assessment by Third party agency. 37
  38. 38. CASE Efforts to consolidate volume yielded phenomenal savings to the procurement organization Spend Break-up across vendors Product: Steel in various forms BEFORE Fragmented Vendor Base Challenges: Purchase requests were generated by different departments, at different points of time. Vendor 1  Orders were placed on both traders & manufacturers, based on the best spot price 55 AFTER Consolidated Vendor Base Vendor 1 45 65 34  Organization lost on consolidation opportunities 36 10 Approach: Processes were installed to consolidate various purchase requests. 40 8 7  Agreements were made with steel manufacturers for annual discounts based on turnover, and bulk discounts based on volume. 6 30 4 3 3  Spend was moved from high-cost traders to lowcost manufacturers; traders were used only in emergency 3 35 2 2 Benefits: The organization reduced the steel procurement cost by 5%. 2 20 2 2 2 Vendor 20 38 1 1 Vendor 6 10
  39. 39. CASE By setting up best-in-class procurement processes, the company gained immensely on cost and delivery Product: Key equipment for bulk material handling Process Mapping on Cost & Lead Time Challenges: The equipment that constituted 40% of the category spend, was procured by two divisions in two different ways. Before Process Improvement High Cost  One division fully designed the equipment in-house, and also split the component orders on suppliers.  The other division relied on supplier design, and consolidated component orders on one supplier Approach: The two different processes were separately analyzed for cost & delivery Low High  We considered cost of material, cost of logistics, cost of co-ordination & cost of design Low Process Lead Time After Process Improvements  We found that the cost of procurement could be cheaper, and delivery time faster by deploying the latter method. High Cost  The best process was implemented. Benefits: Cost of procurement reduced by 40%, and lead time improved by 20% , for both divisions Low High Low Process Lead Time 39
  40. 40. CASE The engagement was not limited to procurement department – it extended to engineering and other departments to improve process and product designs Product: Bearing liners for an equipment BEFORE Sand Casting process High cost of procurement Procurement cost reduced by 50% High Lead time for delivery Lead time reduced by 20% No reliable suppliers in India  No reliable suppliers for centrifugal casting in India, hence company was forced to import AFTER Centrifugal casting process Challenges: As per original design, bearing liners were specified to be manufactured through centrifugal casting process. This posed following challenges Reliable suppliers developed locally  High cost of procurement  Delivery delays Approach: By co-ordinating with engineering & quality teams, it was found out that sand casting could be used in place of centrifugal casting.  Hypothesis was validated by cross-functional team  Sand casting suppliers were identified & qualified  Jointly with the client, prototype was made & tested okay. Specification was hence changed. Benefits: Cost reduced by 50%, delivery improved by 20% 40
  41. 41. CASE Purchase cost of a material handling equipment was reduced significantly by substituting imports at a system level Product: Hydraulic system for material handling Indian manufacturers of equivalent Hydraulic system bring down the Import cost significantly Challenge: The market share of the company in an equipment used in material handling was not improving, in spite of a growing market  BEFORE AFTER New players were entering the market and posed significant threat Approach: A complete BOM assessment to figure out high cost items  The Hydraulic system constituted 30% of the total equipment cost  Carried out a local supplier landscape assessment  Invited local suppliers for Product knowledge sessions and encouraged them to respond to RFQ Benefits:  The cost of the Import Substituted Hydraulic system was 40% lesser than the Imported cost  It also brought down the service costs, since the local supplier had service centers across project sites Total Procurement Cost 41 Cost of imported Hydraulic system Total procurement after sourcing Hydraulics from India Cost of Indigenized Hydraulic system

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