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High Performance Through Procurement: The Role of Technology
 

High Performance Through Procurement: The Role of Technology

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An Emptoris and Accenture white paper discussing the role of technology on the journey to procurement excellence. ...

An Emptoris and Accenture white paper discussing the role of technology on the journey to procurement excellence.

For more information, please visit:
Emptoris website: http://www.emptoris.com/
Emptoris blog: http://blog.emptoris.com/
YouTube channel : http://www.youtube.com/emptoris

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    High Performance Through Procurement: The Role of Technology High Performance Through Procurement: The Role of Technology Document Transcript

    • High Performance ThroughProcurement:The Role of TechnologyKevin Potts, Emptoris, and Rob Woodstock, AccentureConsulting Technology Outsourcing
    • “ Procurement mastery”—significantly Not, at all. Like supply chain outpacing competitors in areas such as management in general, procurement’s sourcing, category management and potential to foster growth and reduce supplier relationship management— costs is significantly greater than can be immensely profitable. A recent most companies imagine. The mission Accenture study1 makes this clear: of this Point of View—a collaboration “Procurement masters achieve 30 between Accenture and Emptoris—is percent higher savings than companies to help readers understand the with lesser capabilities. Yet masters’ nature of procurement mastery procurement organizations cost about (how we define it), the rewards half as much to run.” of procurement mastery (why the investment and effort are worth it) With such stellar potential, it’s and, most germane to this paper, the surprising how many companies tools and technologies that connect never move ahead with a major procurement mastery with high procurement-optimization effort. To performance. some extent, their reticence indicates old school thinking: “Procurement is basically a clerical function—a cost center. As long as we’re reasonably efficient, there’s more benefit in devoting our strategic energies to other things. Right?” Contents Procurement Insights, Research and Rewards............................................. 3 Four Technology Keys to Procurement Mastery.......................................... 5 1. How Technology Improves Spend Management................................... 6 2. How Technology Improves Supplier Performance Management...........................................................................10 3. How Technology Improves Sourcing.........................................................13 4. How Technology Improves Contract Management..............................17 High Performance and Procurement Technology........................................191High performance through procurement: Accenture research and insights into procurement performance mastery. 2
    • Procurement Insights, Research and Rewards" For a company with In late 2006, Accenture solicited management; workforce/organization; procurement-related input from and technology. For example, in US$1 billion in controlled executives at leading companies sourcing and category management, spend, a procurement across North America and Europe. we asked respondents about formal master would incur costs Information from 225 respondents was supplier collaboration processes (1 = ultimately gathered. Eighty two percent minimal, 5 = extensive). For requisition of US$8 million and of that group are chief procurement to pay, we asked about the use of savings of US$82 million, officers or directors of procurement. common requisition portals (1 = none, while a procurement low 5 = fully standardized). In this way, Via the survey and follow-on Accenture was able to create basic performer would incur interviews, Accenture’s goal was distinctions between low performers costs of US$16 million to establish clear, measurable (17 percent of the survey population), and savings of only distinctions among procurement midrange performers (67 percent) and “masters,” “midrange performers” US$63 million." and “laggards.” Using these metrics- procurement masters (16 percent). based distinctions, we would then be To understand the relative rewards able to determine the relative level attained by each performer category, of benefit (particularly cost savings) Accenture then tracked low achieved at each level. Details on performers, midrange performers this categorization process—how and masters to the documented procurement masters were defined benefits attained by the respondents’ and how their success was measured— procurement organizations: is detailed in “About the Study”. y Total cost of ownership savings (compared to “controlled, normalized About the Study spend”) To understand the nature and y Total cost of ownership savings rewards of procurement mastery, as a percentage of procurement the study first sought to develop operating costs criteria for defining procurement y Percentage of spend controlled by masters, midrange performers and the procurement organization low performers. Our research team asked 225 executives 25 questions y Percentage of new product designs/ for each of six core components of introductions in which procurement procurement: strategy; sourcing and has a material role category management; requisition y Share of suppliers managed through to pay; supplier relationship a formal process Low Performer Midrange Master (17%) Performer (16%) (67%) -1 +1 3
    • Survey results confirm that Accenture also observed that 4. Supplier Relationshipprocurement masters achieve procurement masters enjoy a Management: Eighty four percentsignificantly greater financial benefits significant edge in every one of the of masters use a supply-basethan the balance of the survey six procurement specialty areas that segmentation strategy that alignspopulation. The right side of Figure were used to segment respondents approaches and types of relationships1 shows that survey respondents (Figure 2). For example, with specific supply markets andqualifying as masters achieve supplier characteristics. Almost nosavings equal to 10 times the cost of 1. Procurement Strategy: Masters low-performing organization operatesrunning their organizations, based are five times more likely than similarly.on controlled normalized spend from low performers to use a balancedone year to the next. By contrast, the scorecard approach and almost 20 5. Workforce and Organization:savings achieved by procurement low times more likely to benchmark Procurement masters face fewerperformers are only four times their procurement performance against organizational challenges. And thecosts (left side of Figure 1). In effect, competitors. Masters also were found challenges they do confront aremasters spend half as much as low to be almost four times more likely generally less constrictive or severeperformers, yet they save 30 percent than low performers to outsource one than those faced by procurementmore. For a company with US$1 or several procurement functions. organizations of lesser stature.billion in controlled spend, this means This implies that a more effective 2. Sourcing and Category operation structure encouragesa procurement master would incur Management: Procurementcosts of US$8 million and savings of pursuit of greater savings and masters are 16 times more likely increased effectiveness.US$82 million, while a procurement than low performers to have alow performer would incur costs of dedicated sourcing analyst pool that 6. Technology: The use of technologyUS$16 million and savings of only provides support during the sourcing to support sourcing programs isUS$63 million. and category-management process. 10 times more prevalent among And procurement management is masters than low performers. Plus, $82 centrally led at 100 percent of masters’ 10x 87 percent of masters report that $63 organizations, compared to only 26 they harmonize master data and use 4x percent of low performers’ organizations. common technologies to support their requisition to pay processes. Less than 3. Requisition to Pay: Seventy 5 percent of low performers do either. nine percent of masters have $16 successfully implemented a common $8 and automated requisition-to-pay Low Performer Master platform, compared to just 3 percent Cost to procure Savings delivered of low performers. Vision, mission, core values Performance managementFigure 1. Comparing cost savings. On 1. Procurement Strategy Operating model Category strategic planningUS$1 billion of controlled, normalizedspend, procurement masters save Strategic sourcing Category mgmt. framework 2. Sourcing and Category Mgmt.10 times as much as it costs them Category policy setting Compliance monitoringto operate their procurement 3. Requisition to Pay (R2P) Transaction processing Master data managementorganizations. Assisted buying Fulfillment Supplier performance mgmt . Supplier development and 4. Supplier Relationship Mgmt. Contract management integration Having the right network Organization that facilitates 5. Workforce & Organization of competent people working together Technology that delivers Systems cover all functions: 6. Technology right information strategy to operations Figure 2. The six procurement characteristics assessed for Accentures High performance through Procurement research.4
    • Four Technology Keys toProcurement MasteryThe Accenture survey makes it remainder of this report looks atabundantly clear that procurement some of the key challenges faced byperformance pays—that companies procurement organizations and thewilling to invest in better processes technology innovations available toand technologies are amply rewarded. surmount those barriers.Better processes are difficultto achieve but somewhat self-explanatory. They are: collaborative,information-driven strategy setting;exceptional supplier relationshipmanagement; holistic procure-to-pay cycles, and so forth. But whatabout procurement technology? Weknow that procurement mastersmake better decisions becauseof technology and that they aremore likely to leverage cutting-edge tools to make a financial andcompetitive difference. But whatare the specific challenges thatprocurement technology can helpcompanies surmount? What do thosetechnologies look like? And how cancompanies quantify their value? The 5
    • 1. How Technology ImprovesSpend AnalysisFrom a technology perspective, limited than those of their customers. procurement leaders recently lobbiedexceptional spend analysis is Classification and naming schemes for actually produce the 23 percentsynonymous with two interconnected may also be different. savings they predicted? How much hascapabilities: maximizing organization- “rogue spending” dropped as a result?wide visibility and (then) tracking, Visibility problems undermine What is the exact level (and impact) ofmonitoring and enforcing spend companies’ ability to produce ”leakage” and what can we do aboutactivity. At most companies, spend actionable business insights. Instead— it? Most companies lack the data-visibility is limited to “spend by vendor” without clean, consistent information gathering and measurement abilities toand “spend category.” This is a complex on stock keeping units (SKUs), prices, answer such questions with certainty.problem that has only gotten more stakeholder preferences and supplierdifficult as companies’ spend becomes performance—they develop ad-hocmore global. Nowadays, for example: (workaround) processes to manage sourcing events. These companies arey Spend data is generally dispersed similarly ill positioned to quantifyacross myriad internal data sources. savings opportunities to C-levelThe ability to draw and consolidate executives, and thus to secureinformation from multiple locations in approval for budget increases oran efficient, repeatable manner is rare. improvement initiatives.y To maximize procurement efficiency, Not surprisingly, visibility problemscompanies need highly accurate and sabotage companies’ ability to trackgranular classifications of spend data. and monitor spend activities and thusHowever, the information available attain high levels of compliance. Thisto them is frequently “dirty” or is actually the heart of the spend-incomplete. management challenge: Businesses must be able to identify opportunitiesy The most significant shortcomings and track savings. Have we chosenare often outside the company. Vendors the most-fruitful spend-reductionsystems may be just as (or even more) initiatives? Did the program which6
    • " Best-in-class applications go beyond providing basic spend visibility by zooming into real opportunities and tracking the results of savings initiatives for those opportunities. Users can make better decisions about what they are buying and what those items actually cost." Technology Solutions for These applications extract transaction databases that consolidate transactions Spend Analysis data from multiple systems and (for example, across “parent-child” databases, and then represent organizations), cluster them (for Leading-edge procurement technology (normalize) the data in a single example, across similar suppliers) and is geared to maximizing visibility— format. Best-in-class applications go map them to various commodities, using “spend analysis” to acquire, beyond providing basic spend visibility contracts and other sources of data. update, consolidate and share by zooming into real opportunities Armed with this capability, companies information in ways that encourage and tracking the results of savings can discover when multiple business and support the identification of initiatives for those opportunities. units are sourcing from the same savings opportunities. Users can make better decisions supplier but possibly working with about what they are buying and different price and payment terms Best-in-class spend-analysis what those items actually cost. They (this scenario is common in companies technology combines three key also can begin quantifying spend for that have grown through mergers or capabilities: a deep knowledge specific commodities or categories, acquisitions). Together, extraction, base, automation and content. The eliminating spend duplication across normalization and data-enrichment knowledge base provides extensive multiple suppliers, and doing a better capabilities help companies attain a vendor and item information: millions job of leveraging discounts and early single-lowest price for each supplier, of vendor names, item descriptions and payment options (some suppliers along with new opportunities to associated information. Automation offer discounts of up to 2 percent capture volume discounts. (for example, machine-learning algorithms incorporated in trainable for payments made within 10 days). auto classifiers) helps to rapidly and Simply put, spend analysis helps accurately relate spend data to a companies make better procurement commodity structure. Content (aka, a decisions and build a stronger case for library of information) contains data continuous improvement. on spend transactions, ”parent-child” Complementing these extraction and commodity structures, etc., and thus normalization capabilities are data- provides maximum visibility into enrichment functions: intelligent companies’ spend initiatives. 7
    • Spend Analysis and makers’ needs with aggregated, procurement organization instead of IT.Data Warehouses normalized and enriched data. Users Reports can be examined collectively can parse data in myriad ways to rather than sequentially, thus makingQuite often data warehouses are gain greater spend visibility and tap the company more responsive toconsidered to be able to provide the improvement opportunities that market dynamics. Bottom line? Spendthe same results as spend analysis. greater visibility provides. analysis provides data enrichment,This is not true. Data warehouses do consolidation, speed, accuracy,aggregate information, but it usually is Key metrics such as lowest potential granularity and sophisticated,too broadly based—too likely to be “all cost, percentage of spend under proactive reporting.things to all people.” Data warehouses’ management and suppliers’approach to spend analysis is to roll commitments to their contractual A related spend-tracking/monitoringup information and then analyze the obligations shift regularly. That’s issue is contract compliance—data offline, without making changes why spend analysis also provides understanding the extent to whichto the data in real time. Because the frequent (monthly or even weekly) contractual obligations are beinguser is working with summary data, data refreshes that help companies followed. Most companies have notthis approach limits the ability to slice acquire, consolidate and present implemented a contract managementand dice in a way that is specific to the latest spend, sourcing and (CM) solution. But those that have—andthe user’s needs. To drill down and do contract information. Procurement integrated the solution with accountsfurther analysis, a user must leverage organizations that rely solely on payable information—enjoy particularlyspecialized spend-analysis technology. traditional data warehousing fall detailed data that are tightly short in this area as well. Most data associated with terms and conditionsWith spend analysis, data is held warehouse reports are insufficiently and service-level agreements.in memory, which allows a user granular and wait times for theto drill down into the spend data information are often lengthy.(physical transactions, not just Delays also ensue when a differentroll-up summaries) in real time. view is requested. Spend analysisSpend analysis attacks one problem— avoids this problem by putting themanaging spend—in a focused manner reporting process in the hands of thethat targets procurement decision8
    • The Next Big Thing(s) in Spend Recipe for GrowthAnalysis TechnologyBeyond the benefits they currently Syngenta is among the world’s than 15 different types of systems,enjoy, spend analysis users are better top agribusinesses, with revenue including every major Enterprisepositioned to leverage capabilities exceeding US$9 billion and more than Resource Planning (ERP) platform.”whose unveiling is just around 21,000 employees in 90 countries.the corner. A good example is The company is also a leader in crop Low-cost-country sourcing, e-sourcingbenchmarking and best practices. protection and is fully committed and spend analysis have contributedToday’s tech-savvy company knows to sustainable agriculture through significantly to the company’swhat it is paying and is confident that innovative research and technology. attainment of all its merger-relatedits costs are low and that its suppliers Syngenta was formed nearly eight sourcing goals. For example, the teamare in compliance. But no commodity years ago—a spin-off of Novartis’ and used to only have visibility datingmanager really knows what (or how AstraZeneca’s agribusinesses. Innovative back a year or more. But it now knowswell) the company’s competitors approaches to procurement and exactly what the company is spendingare doing. In the near future, spend procurement technology have played a at any given time—past or present—analysis technology will incorporate big role Syngenta’s meteoric rise. and with what suppliers (Syngentadata on what the market is doing works with 45,000 suppliers on sixwith respect to direct and indirect Early on, Syngenta senior executives continents). Looking more broadly, the(MRO) spend. insisted that the company’s newly company now is able to: formed procurement group develop y Take a global, holistic view of spend.Another looming innovation is the best-in-class sourcing principlesability to more-rapidly refresh the supported by best-in-class technologies. y Rapidly transform raw data intospend dataset. Companies that use Sourcing and spend analysis were actionable information.spend analysis to track savings and deemed particularly critical. y Make that information “rich” andcompliance generally need weekly easy to find.(rather than monthly) visibility y Sourcing. The Syngenta procurement team launched a highly successful y Readily understand the supplyinto new data. They may also want low-cost-country sourcing program markets and cost drivers within eachtheir commodity managers to make for chemical intermediates and active category of spend.changes to commodity structuresor to improve data accuracy by ingredients. E-sourcing became the Upcoming procurement projects forreclassifying transactions that weren’t focal point on the technology side. Syngenta will focus on enhancingappropriately categorized the first Syngenta now uses “e-RFX” across all supplier relationship managementtime around. Changes such as these categories of direct and indirect spend. capabilities, contract managementneed to be controlled with appropriate y Spend Analysis. As the sourcing and supplier negotiation. Theauthorizations, approvals and rules function evolved, the procurement company thus will be embracing andand applied to the dataset in real- or team recognized the need for highly engraining new tools and processesnear-real time. Conflicting rules must accurate and consistent data with across the organization, segmentingbe arbitrated. Virtually none of these which to inform the company’s and categorizing suppliers basedcapabilities are present in current sourcing priorities and decisions. It first on multiple attributes that definedata-warehouse-type solutions, which tried using a global data warehouse relationships, and ensuring proactive,rely on rigid schemas without means supported by a business intelligence best-in-class management ofto submit corrections and changes. tool. This proved ineffective. Its contractual relationships throughout next recourse—an advanced spend- their life cycle.A third pending advance is the abilityto forecast spend for several upcoming analysis solution—is now being usedyears based on historical information. by more than 180 trained users acrossTraditionally, planning and forecasting purchasing, finance and at the costfunctions have interacted with center level. According to Dr. HansOperations and Sales organizations, Elmsheuser, Syngenta’s head of globalbut not with procurement. Tomorrow’s purchasing, “The solution allows us tospend analysis technology will analyze spend on up to 30 differentexamine historical and predicted usage dimensions or axes, including category,and connect forecasting/planning, cost center, GL account, geography,operations, sales and marketing time, payment terms, UNSPSC codedepartments with procurement. and supplier diversity status. It also helps us aggregate data from more than 45 countries retrieved from more 9
    • 2. How Technology Improves SupplierPerformance ManagementAccenture’s research on procurement partnering agreements, and even this approach is neither scalable normastery reveals that significant rewards developing joint operations based cost efficient. Even at the master level,accrue to supplier-management on knowledge sharing, seamless most supplier management programsleaders. Specifically, masters achieve 5 processes and mutually beneficial are managed manually. Such programspercent savings from both sourcing and product improvements. Perhaps most also are likely to be reactive, withpost-contract activities against total revealing, Accenture research shows companies constantly putting outprocurement operating spend, versus that procurement masters are three fires that result from undermanaged3 percent savings for the remaining times more likely than low performers supplier performance.survey respondents. to have a formal program for managing their supply base. Figure 3 depicts otherAs noted earlier, masters achieve supplier-management advantagesmuch of their edge by using supply- enjoyed by procurement masters.base segmentation strategies thatalign approaches and types of Despite the advantages, few companiesrelationships with specific supply actually use specific suppliermarkets and supplier characteristics— performance management technology.including relevant strengths and Some have patched together Excel-weaknesses, product complexities based systems to track performanceand geographies. It is this proficiency but find this approach onerous.that abets other capabilities, such Others have invested in armies ofas forging deeper relationships with assessors who systematically log thekey suppliers, establishing long-term performance of key suppliers. However, Segmenting the supply base 84% 1% Partnering with key suppliers on a 46% risk-reward sharing basic 3% Central logging and proactively 80% managing contracts 8% Automatically tracking/reporting 83% supplier performance 1% Master Low Performer Figure 3: Percentage of survey respondents (masters versus low performers) that engage in, or perform, specific supplier relationship management activities.10
    • Technology Solutions for to make the right moves in responseSupplier Performance to the supplier information they’veManagement acquired. SPM technologies also are key to the successful application“Opportunity identification” is the most of best practices and improvementimportant contribution that advanced methodologies, such as Lean Enterpriseprocurement technology brings to and Six Sigma.supplier performance management(SPM). Basically, technologyautomates the collection, analysis anddissemination of supplier performance " Consider anmetrics. Using a standardized approach organization with ato measuring supplier performance,it links the setting of metrics at the total cost of ownershipstart of the supplier relationship (TCO)-based SPMwith processes for monitoring andcommunicating actual supplier system. When aperformance. Supplier scorecards also supplier delivers abecome part of the equation—ensuringthat buyers can factor quantifiable part, a first inspectionsupplier-performance levels into their is performed. If thepurchase decisions (figure 4). part is rejected, extraLeveraging SPM technology, supplier costs are automaticallyperformance credentials (qualitativeand quantitative) are consolidated assigned to thein a supplier performance repository relationship, not justthat is tightly integrated with spendanalysis, sourcing and contract the part."management processes. This makes itpossible to determine on an ongoingbasis the total cost of doing businesswith a supplier and to track more ofthe supply base without incurringadditional overhead. Companies also B gcan minimize leakage and discover Supplier Supplier oin ef Assessment Qualifications o rehidden costs by determining which g On-going Who? On-suppliers are not performing and, certifications Meet standards?more importantly, why they are not Root cause Risks? analysisperforming. It thus becomes possible Continuousto work proactively with suppliers to Improvementdevelop fixes, curtail purchases fromunderperformers, develop new suppliers Supplier Performanceand/or ratchet up business with Monitoringother (nonsuspect) vendors. Consider Timeliness?an organization with a total cost of Quality?ownership (TCO)-based SPM system. Service?When a supplier delivers a part, a firstinspection is performed. If the part isrejected, extra costs are automatically Duringassigned to the relationship, not justthe part. Costs are similarly associatedwith every aspect of the procurement Figure 4: Supplier scorecards alsoprocess. In effect, SPM technology become part of the equation—helps companies develop a holistic ensuring that buyers can factorview of the hard and soft costs of quantifiable supplier-performancedoing business with suppliers, and levels into their purchase decisions. 11
    • The Next Big Thing(s) practices. Green supplier managementin Supplier Performance capabilities could even spearheadManagement Technology new component- and material- standardization programs that extendTools for supplier performance the life of various products, whilemanagement will soon become more making them more scalable, reusablevaluable because they will “embrace or recyclable.diversity.” With additional weightingand analysis capabilities, technology In a larger sense, you could sayenhancements will help companies that increased compliance andincorporate regulations for working (consequently) lower risk arewith small, minority-owned or the hallmarks of tomorrow’sfemale-run businesses into their supplier-management technology.supplier-management and supplier- Economically speaking, supplierassessment operations. relationships that seamlessly conform to internally and externally mandatedThose same capabilities will make it rules and key performance indicatorseasier and more economical to meet (KPIs) will provide a clear competitivegovernment- or self-imposed standards edge. Monitoring and pursuingfor green operations and sustainability. formal certification programs (for“Green rules” embedded in technology example, Lean Enterprise, Six Sigma,streamline the quantification Supply Chain Operations Reference)and comparison of a product or become more automatic, whichcomponent’s lifetime environmental increases the value and decreases theimpact. It thus becomes simpler to cost of those programs.identify and winnow out sourcingpartners that sell environmentallyunsound items or engage in antigreen12
    • 3. How Technology Improves SourcingAmong the more than 25 metrics that y Activities that are formally tracked.Accenture used to identify leading y A tight focus on total cost ofpractices in sourcing and category ownership.management, the five described inFigure 5 are particularly noteworthy. y An end-to-end, supply chain-For example, all companies classified wide orientation, with top-downas procurement masters have administration from a procurement orimplemented a centrally guided category board. These boards typicallycategory- management structure that include senior people from differentcuts across organizational entities. And technical and user departments, as wellalmost 90 percent of masters have a as the procurement organization and“leading practice” strategic sourcing project leaders.process and structure in place—onethat emphasizes:y Common processes across thecompany.y Widespread use of cross-functionalsourcing teams for coordinatingprojects, formulating strategies,managing supplier selection andimplementing contracts. Centrally led category 100% management structure 26% Leading practice strategic 89% sourcing process & structure 5% 80% Focused sourcing analyst pool 5% Maximum leverage of 81% global sourcing 5% Value tracking & budget 76% integration with full control over non-compliance 5% Master Low performer Figure 5: Percentage of survey respondents (masters versus low performers) that engage in, or perform, specific sourcing and category management capabilities. 13
    • Technology Solutions for constantly refined. It remains intact Sourcing regardless of turnover and can be shared across the enterprise. An audit But what about technology? What trail of what has and hasn’t worked exactly is sourcing technology and is also kept. The net effect is that, what does it seek to accomplish? How as buyers shift from one category much further could it take companies to another or new buyers join the along the road to high performance? organization, they can contribute To answer these questions, consider immediately and meaningfully four of the most prevalent/pressing by leveraging embedded best problems encountered by many practices. Even relative novices can companies’ sourcing organizations. quickly grasp a category’s sourcing dynamics—for example, relevant Low levels of credibility and suppliers and corresponding KPI recognition. Sourcing and scores, cost components/attributes procurement organizations often find and attachments. it difficult to quantify the value they bring to the company’s bottom line. As Inability to see beyond cost. Manual a result, recognition from the executive (spreadsheet) systems, and even some ranks is hard to secure—as is approval of the more-advanced solutions, for improvement initiatives or new don’t provide the deep analytical technology implementations. This is information that sourcing professionals one reason why reporting capabilities really need. As a result, item cost are so important. Executive summary continues to be the sole basis upon reports developed by leading-edge which too many of their sourcing sourcing solutions provide both decisions are made. It’s not unusual, program and project-level metrics (for for example, for a supplier’s quoted example, number of programs run, unit price to be prohibitively high due number of events run, total and per- to difficulties procuring a particular item spend, total and per-item savings). raw material. However, that same These solutions can also help identify supplier might be extremely effective contents of the sourcing pipeline, at processing the raw material. For this document-sourcing opportunities reason, it could be considered a worthy on an annual or quarterly basis, and supply candidate if the buyer can track savings by providing projected, purchase the raw material elsewhere forecasted and actual spend figures and then leverage that supplier’s based on the events already run. In net, production efficiency and lower the impact and value of the sourcing manufacturing cost. Of course, without organization become more quantifiable. advanced sourcing analyses, none of this will happen. Unable to quantify Loss of knowledge due to talent non-direct costs and requirements, turnover. When sourcing professionals our hypothetical buyer will have little" Summary reports leave the organization, processes choice but to pay less (in the short and category expertise often go with developed by leading- them. New and remaining employees term) but get substantially less in the long term. edge sourcing are consequently left with more responsibility but fewer sourcing Sourcing it is not just about finding solutions provide both insights. They may have no choice but the best price. It is about finding the program and project- to spend less time on each category optimal mix of suppliers to meet all and thus are more apt to pursue/renew of the buyers needs based on price, level metrics (e.g., contracts at noncompetitive prices or performance, purchasing policies number of programs to engage less-qualified suppliers. and supplier relationships, all in a run; number of events Sourcing and category management highly dynamic environment (figure 6). Sourcing technology makes it run; total and per- technology addresses this problem possible to run hundreds of “best-fit” because it is built around a central item spend; total and repository of best practices. scenarios—objective pictures with far more detail than just acquisition per-item savings)." Information is stable, cumulative and 14
    • cost. Basically, buyers define their data, buyers can easily createspecifications, business needs and category-specific sourcing modelspreferred options. Suppliers respond that are as simple or as detailed aswith their unique advantages, necessary. For example, a particularcompetencies, prices and even category model might show 20 piecesalternative approaches (for example, of item information and 10 elements“bundle bidding”). New acquisition of total-cost-of ownership informationavenues open up for the buyer, who for a particular strategic category.is also capturing more information in However, it might capture only onethe process. Leveraging the technology, data-point (most likely, price) for anhe or she scrutinizes hundreds of indirect category.complex “what-if” analyses in a matterof minutes and consequently makes Unlimited numbers of unique,far more holistic buying decisions. template-driven category structuresLonger term, the buyer has identified a can then be stored in a “smart datasourcing allocation plan that balances library.” This makes it possible forprice components with qualitative companies to make more and betterfactors (for example, supplier scores decisions about a wider range ofby KPI) or location-specific constraints contracts and purchases. They’re(for example, 35 percent domestic also better equipped to take a morecontent for an international plant). commodity-driven approach toIn addition, suppliers appreciate the procurement in general, and to slicecollaborative process and are more and dice data as needed to makeinclined to work with the buyer’s firm better risk assessments, developin the future. “what-if” scenarios and negotiate more effectively.Lack of key performance indicators.Advanced analyses are essential.Without them, buyers have little Flexible Supplier Biddingchoice but to overemphasize basic Bundlingacquisition costs. However, advanced Multiple Price Breaks Rebatessourcing tools actually do more Substitutionsthan gather and track purchase Quality and Quantity Rangesconsiderations. They also help buyersaggregate, organize and prioritize Supplier Performancethose considerations. Basically, key Flexible Total Cost Ratingperformance indicators (KPIs) are Modeling Lowest Total Supplier category and Item item leveldeveloped. Buyers use these KPIs to Spec Cost of Qualificationassess and quantify the relative value Quantity Ownership Quality Due Date On-time deliveryof hard and soft costs, such as: Proprietary Attributes Item attributes (i.e. tolerance)y Expedite fees resulting from asupplier’s inability to deliver in atimely manner. Scenario Modelingy Risk to reputation resulting from a Budget Limits Award Splitssupplier’s poor product quality and the Switching Costsimpact on finished product. Contractual Obligation Preferred Suppliersy Poor procurement decisions resultingfrom a dearth of buyers available toscrutinize and make purchases.Consider the many actions involved Figure 6: Sourcing it is not just aboutin analyzing supplier responses to finding the best price. It is aboutrequests for information (RFIs). Armed finding the optimal mix of supplierswith the ability to capture and weigh to meet all of the buyers needs basedquantitative and qualitative (business on price, performance, purchasingconstraint and supplier performance) policies and supplier relationships, all in a highly dynamic environment. 15
    • The Next Big Thing(s) in Superior Sourcing Another up-and-coming practice isSourcing Technology tighter control of prices and pricing Wolters Kluwer, a leading provider of opportunities during the sourcingGreen is red hot. Customers and business-information services, grew and supplier-negotiation processes.consumers support it. Governments rapidly in the 1990s through several Consider that most allocation decisionsand regulatory bodies increasingly acquisitions. It subsequently moved are made shortly after the conclusioninsist upon it. And, by identifying, from a holding company model to a of a sourcing event. But becauselogging, assessing and comparing multidivision company, with divisions price is executed at purchase time, asuppliers, sourcing technologies can acting autonomously. This change buyer’s actual cost may change duehelp companies cash in on it. It won’t prompted a need for more formal, to fluctuations in commodity prices.be long, in fact, before green is an company-wide procurement processes In fact, the actual allocation oftenentrenched part of how procurement that could scale with the business and changes as market factor valuesorganizations do business—a basic reduce the cost of Wolters Kluwer’s change. Sourcing professionals sooncriterion for evaluating suppliers, will be able to use technology to US$1billion annual spend.products and business processes. As specify a range for a particular marketthat happens, systems that can fully Toward these ends, Wolters Kluwer value, thereby obtaining allocationsquantify green tradeoffs—for example, created a shared-services strategic that align closely with best price. Forjustifying the plant-wide replacement sourcing department and acquired example, as resin prices rise or fall,of incandescent bulbs with (initially the best allocations across suppliers additional technology capabilities inhigher cost) compact fluorescents (Supplier A: 60 percent; Supplier B: sourcing and contract management.light (CFL) bulbs to reduce energy 40 percent) should also change. New The company also expanded itsconsumption (including cooling costs sourcing algorithms will make thisassociated with bulb-generated heat)— technology scope with advanced possible, along with the ability towill be essential. It’s a largely new supplier-selection capabilities. identify which factors/items/suppliersaspect of cost/benefit analysis that will most dramatically affect allocations These innovations made it possibleinevitably apply to scores of categories, and costs. for the company to develop moreincluding transportation services, officeequipment, business materials and standardized, collaboration-intensiveutilities. Imagine, for example, if large sourcing processes and templates, whileretailers were forced to contribute to reducing the effort needed to draft,the “green costs” of stocking bottled review, approve and file contracts. Thewater. Even ignoring the fact that a result is continuous improvementslot of bottled water is from public across the contract management andwater sources (i.e., tap water) yet costs sourcing spectrum:about 100 times as much, there are y A more efficient contract-still extensive environmental penalties,particularly 1) pollution caused by management process.trucks shipping thousands of tons of y Fewer inadvertent contract lapses orproduct each year, 2) huge amounts of automatic renewals.plastic waste and 3) increased crude oil y Improved contract compliance.requirements resulting from production y Faster, more precise spend baseliningof plastic bottles. and supplier consolidation. y Improved control of the contracting process. y More thorough contract reviews, resulting in more favorable terms and less risk. y Reduced administrative overhead. y New opportunities to leverage best practice templates. y Better visibility into events in progress. y Collaboration in parallel, rather than in serial.16
    • 4. How Technology Improves ContractManagementSourcing skills, experience and approach: the contract is literallyleading practices make procurement placed in a file cabinet, along with anyopportunities clear. But contract amendments, and forgotten about untilmanagement makes those a problem arises. Inefficiency reigns.opportunities real. And leading-edgetechnology is key to effective (cost- It also is common for companies’efficient, accurate, timely, insightful) contract-documentation mechanismscontract management. to not connect with their Enterprise Resource Planning (ERP) systems. As aSourcing bids are not legally binding result, business entities are unable towithout a contract in place. However, track all contract terms and conditionsroughly 80 percent of companies (pricing, service level agreements,still depend on a manual contract performance and delivery guidelines)management process, which nearly or to monitor compliance with internalalways results in contract delays. and external (regulatory) mandates.Collaboration across departments (for This is crucial step—making sure thatexample, procurement, purchasing, final purchases are compliant withlegal, IT) also is compromised. And prices and terms negotiated in thecompared to procurement masters contract. Failure to do so makes it(who nearly always log and manage doubly hard to enforce compliance tocontracts centrally), manual users contract terms.lack visibility into, control over andcompliance with the sourcing awards.They simply have less understanding(and thus less control over) contractterms and conditions, service levelagreements and amendments. Mostsimply follow a file-and-forget 17
    • Technology Solutions for Efficiency and control also come The Next Big Thing(s) in Contract Management together in one technologically Contract Management Coming to the rescue, procurement advanced system. Imagine that the Technology procurement organization needs technology is all (and always) Contract management will become its legal department to approve about visibility. With an automated increasingly central to the sourcing changes made to a contract. However, enterprise contract management (ECM) process. More contract negotiations procurement only wants Legal system, companies have a single, will happen in parallel with sourcing to approve changes that deviate easily searchable repository for all events. Exceptional visibility into a from approved company language. contracts. That repository is end-to- supplier’s (and their own) performance Procurement masters can make this end and cradle-to-grave—a living, against contract will move users happen quickly and accurately by accessible home for contract-related of advanced contract management using a template-based library of information. ERP systems are not technology ahead of the competition. preapproved clauses within its contract the place to keep this information. For them, contract management will be management system. Without this Nor are file servers or document the basis of compliance. capability, the wheel must be recreated management systems. Only ECMs each time there is a contract clause Contract management and supplier are designed to accept contract change. It also becomes less likely that governance systems also will mature data; manage contract workflows compliance statutes will be adhered to. to include contract rating and scoring (contract creation, approval, review, negotiation); compare products and models. Buyers and legal departments Improved supplier performance performance to compliance-related thus will be able to set up standards management is another byproduct. conditions; and track, monitor and for judging and measuring contract When a company and supplier forge enforce legally binding terms and risk. Those standards could include a contract, both must approve its conditions. component quality, delivery accuracy, requirements and expectations. For previous on-contract performance and example, is the buyer expecting so forth. Currently, there is no objective the supplier to respond within 30 way to determine the quality/viability minutes of the first call? To make of a contract. The ability to measure sure, the tech-savvy buyer can load contract risk will also extend to sales average response times (by supplier contracts, covering areas where or by category) into its contract revenue recognition could be affected. management system, and thus have an increasingly vast and reliable library A third contract management of key performance indicators. Per the breakthrough focuses on easier above example, the buyer can set a management of multiple contract baseline measurement to the contract layers. A business relationship is rarely value of, say, 30 minutes. If the represented in a single document. supplier fails to meet that requirement, More likely, these relationships are it receives an alert stating that the represented by multiple contracts, contract has been violated. which change over time and can involve master/subordinate hierarchies. In net, contract management is" Procurement the final piece in the procurement- In addition, contracts frequently involve relationships across multiple technology is all integration equation: seamless, partners. Managing all this requires enterprise-wide data flows that (and always) about encompass the process and the technology that provides immediate and efficient management and visibility visibility. With an relationship. Companies can drill down of the complete business relationship. into spend to see how much is on and automated enterprise off contract. They are managing the content management entire process and ensuring the quality of the entire relationship. (ECM) system—fully integrated with ERP—companies have a single, easily searchable repository for all contracts." 18
    • High Performance andProcurement TechnologyResearch into achieving high investments. One reason for this is y Reduce sales cycle time.performance through procurement the many forms that procurement y Stimulate new product developmentconfirms that huge disparities exist technology value can take, including: with supplier innovations.in the degree to which companies y Capture savings year-after-year.leverage technology. As shown in This is not to say that implementingFigure 7, the six technology-enabled y Bring more spend under leading-edge procurement technologybehaviors presented to survey management. is a “walk in the park” or that anyrecipients are deployed by an average y Optimize supply base in order to company investing in procurementof 70 percent of masters, but less than balance cost, performance and risk technology will become a procurement5 percent of low performers. y Reduce maverick spending and drive master or high performance business down contract risk. overnight. However, it’s reasonablyFrom the data presented in this Point certain that, without a firm handle onof View, two broad conclusions are y Maintain auditable supply and today’s and tomorrow’s procurementinescapable. The first is that high contract management processes. technologies, procurement masteryperformance—the characteristics y Identify procure-to-pay process and high performance will remain littleexhibited by companies that violations. more than aspirations.consistently outperform theirpeers—is more likely to be attained y Improve deal quality and optimizeby organizations that excel in renewals.procurement. The second is thatprocurement mastery is largelysynonymous with the ability to Technology support 82%leverage technology. Processexcellence is certainly key. An aligned, 8%committed workforce is vital. Senior- Common and automated 79%level buy-in is essential. And theimportance of collaborative, win- R2P platform 3%win relationships with suppliers andother business partners is undeniable. 46% Self-service e-invoicingHowever, technology proficiency is 5%what spans the entire procure-to-pay Supplier integration 65%cycle. No company can be a SupplierRelationship Management (SRM) technology 5%leader or a procurement strategyleader or a sourcing leader without Procurement master data 76%the tools to maximize each part’s harmonization 1%contribution and ensure enterprise- Reporting excellence 71%wide synergy. 5%Despite these “conditions,” there isa clear upside: compared to many Master Low performersystems, implementing leading-edge procurement technology is notunusually difficult nor does it take Figure 7: Percentage of surveylong to build out the infrastructure. In respondents (masters versus lowaddition, value may be captured more performers) that leverage variousquickly than with other technology technology-based capabilities. 19
    • About Accenture About Accenture Supply Chain ManagementAccenture is a global management The Accenture Supply Chain We collaborate with clients toconsulting, technology services Management service line works implement innovative consultingand outsourcing company. with clients across a broad range of and outsourcing solutions that alignCombining unparalleled experience, industries to develop and execute operating models to support businesscomprehensive capabilities across operational strategies that enable strategies, optimize global operations,all industries and business functions, profitable growth in new and existing enable profitable product launches,and extensive research on the world’s markets. Committed to helping clients and enhance the skills and capabilitiesmost successful companies, Accenture achieve high performance through of the supply chain workforce.collaborates with clients to help them supply chain mastery, we combine For more information, visitbecome high-performance businesses global industry expertise and skills in www.accenture.com/supplychain.and governments. With 178,000 supply chain strategy, sourcing andpeople in 49 countries, the company procurement, supply chain planning,generated net revenues of US$19.70 manufacturing and design, fulfillment,billion for the fiscal year ended Aug. and service management to help31, 2007. Its home page is organizations transform their supplywww.accenture.com. chain capabilities.Copyright © 2008 Accenture About the Authors About EmptorisAll rights reserved. Rob Woodstock is a partner in the Emptoris is a world leader inAccenture, its logo, and Accenture Supply Chain Management innovative supply and contractHigh Performance Delivered service line. Rob has expertise with management software solutionsare trademarks of Accenture. helping clients across industries that empower enterprises to realize to improve the performance of best value and accelerate profitable their procurement operations growth. Emptoris solutions are used through process improvement, by successful Global 2000 companies organization development and system in every industry. Customers implementation initiatives. Based in include American Express, Boeing, London, he can be reached at rob. ConocoPhillips, GlaxoSmithKline, Kraft, woodstock@accenture.com. Motorola, Owens Corning, Syngenta, and Vodafone. Kevin Potts is the Vice President of Marketing at Emptoris. Kevin works closely with customers, industry leaders, and the business and technology press to share the companys vision for how its innovation can accelerate profitable growth. Kevin has over 9 years of enterprise software marketing experience, including 7 years directly in the supply and contract management arena.