SAP Strategic Sourcing Whitepaper


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SAP Strategic Sourcing Whitepaper

  1. 1. SAP Thought Leadership Paper Strategic Sourcing The Strategic Sourcing Imperative Using Best Practices and Automated Processes to Achieve Sourcing Excellence
  2. 2. Table of Contents 4 Managing Procurement Costs Best-in-Class Sourcing Organizations Win Measurable Success Sourcing Best Practices Contract Management Best Practices Supplier Management Best Practices SAP Solutions – Enabling Sourcing Excellence 9 Conclusion
  3. 3. Strategic sourcing offers a proven way for organizations to drive cost out of procurement activities and cultivate efficiencies across the supply chain. Sourcing, contract, and supplier management can be improved using automated processes and applying best practices. Sourcing technologies such as the SAP® Sourcing OnDemand solution deliver even greater efficiencies by providing collaborative resources to manage procurement projects and increase cost savings. 3
  4. 4. Strategic sourcing challenges Managing Procurement Costs Implementing lasting, positive, and integrated change to business processes is crucial for organizations to meet strategic goals and gain a competitive advantage. Strategic sourcing has long been established as a valuable set of processes for companies that want to reduce procurement costs. Organizations are increasingly viewing sourcing as a critical function with management-level objectives that tie in to the needs of the wider organization. The recent fiscal crisis, which brought many procurement teams to the front lines of business, created impetus behind the emergence of the chief procurement officer (CPO) as an executive peer in large organizations. While approaches to sourcing are evolving over time, the primary driver continues to be the need for cost savings. In fact, this is the top priority for CPOs and procurement leaders. Ardent Partners’ chief research officer, Andrew Bartolini, found that “when it comes to procurement pressures in today’s global enterprise, there are savings and then there is everything else.”1 A 2011 Aberdeen Group Inc. report reaches a similar conclusion.2 Lower-ranking priorities include the need to improve sourcing performance, mitigate overall sourcing risk, and improve supplier relationship management (see Figure 1). Sourcing is an increasingly popular choice for supplementing corporate efforts to stem an issue that continues to plague most organizations: savings leakage. Savings leakage can be defined as savings negotiated by the procurement team versus savings realized. According to Aberdeen Group, the average organization stands to lose nearly 2.7% of its identified cost savings through savings leakage. The resulting annual losses for enterprises are in the millions of dollars.3 Why and how does savings leakage occur? The trend toward globalization and expanded supply chains has impacted the enterprise in unexpected ways. For example, incidents around the world, such as changing economic conditions or unpredictable environmental disasters, may cause sourcing disruptions and inflationary pressures that affect operations, suppliers, and customers. Procurement organizations must now perform risk analyses that take such scenarios into account when making sourcing decisions. More predictably, savings leakage can also occur when business units fail to follow company policy and, instead, make purchases outside of existing contracts at prices higher than those negotiated by the procurement team. This is a scenario over which procurement can take greater control. The challenge lies in developing a collaborative working model with the finance team and other functions within the enterprise that brings more spend under the management of the CPO and the procurement organization. The increased emphasis on cost control that has come out of the most recent global recession has accelerated the growing trend toward centralized sourcing and automated processes. Many organizations continue to do much of their initial work in spreadsheets that must be uploaded into the sourcing systems rather than capturing all process steps within a sourcing tool at the start. This means that creating a request for proposal (RFP), running an online auction, or analyzing spend data must be repeated with each sourcing project, thus impacting the productivity and flexibility of the procurement team. Some organizations also lack centralized insight into prior and current sourcing activities, making it difficult to arrive at the right procurement decisions. To address these challenges, enterprises must adopt automated, repeatable processes and invest in sourcing technologies. Figure 1: Top Strategic Sourcing Priorities Top-down directives to increase cost savings 60% Need to improve sourcing performance 40% Need to mitigate overall sourcing risks Need to improve supplier relationship management 32% 19% Source: Aberdeen Group – The State of Strategic Sourcing – Building a Context for the Next Decade, April 2011 SAP Thought Leadership Paper –The Strategic Sourcing Imperative 4
  5. 5. Despite the focus on the growing importance of the CPO, procurement, and supplier relationships, only a small percentage of organizations in a recent Ardent Partners survey have made the required technology investments (see Figure 2). These few organizations have begun to achieve basic visibility into supplier information management, performance management, and risk management. Without this technology, manual sourcing events such as RFPs can be time consuming and burdensome, often taking months to execute offline. Organizations also risk missing important compliance mandates by not having a single version of the truth for sourcing data. Best-in-Class Sourcing Organizations Win Measurable SuccesS Creating a clear sourcing methodology and process up front goes a long way toward establishing sourcing best practices and realizing significant, measurable results. Aberdeen Group has identified several performance metrics that distinguish “best-in-class” companies – the top 20% – from the rest.4 Each of these metrics has a bottom-line benefit. “Best-in-class” companies have achieved the following: •• 80% of spend under management – This represents the percentage of nonpayroll spend actively managed by the procurement group. For every dollar of spend under management, Aberdeen has historically quantified cost savings between 5% and 20%. Top-performing enterprises place nearly 37% more spend under management than all other organizations in the Aberdeen survey. Figure 2: Percentage of Companies with Automated Sourcing Management Functionalities •• 78% procurement contract compliance – This represents the percentage of procurements that have been made within existing negotiated contracts. •• 12% realized or implemented procurement cost savings – This represents the actual cost savings that are delivered to an organization after supplier invoicing. •• 0.26% rate of savings leak – This number is compared to a 2.70% rate of savings leak for average companies. The majority, 52%, of best-in-class organizations have enhanced their spend analytics capabilities. Spend analysis has become a critical strategic tool that can funnel valuable corporate spend data into improving the planning and execution of sourcing. This spending intelligence can also be useful when negotiating with suppliers. It requires development of specialized capabilities, including an active spend analysis program and cross-functional collaboration with finance, product, and sourcing groups, as well as enterprise-wide visibility into spend across all commodities and services categories. Best-in-class companies are also 30% more likely to use sourcing technology tools than other companies. Sourcing automates multiple strategic sourcing processes, including event creation, electronic bidding, scenario development, and supplier optimization to help ensure that organizations use analyzed spend data to negotiate effectively with suppliers. Aberdeen Group statistics provide validation and a compelling business incentive for organizations to improve the effectiveness of their sourcing, contract, and supplier management processes by adopting best practices to achieve a superior standard of performance. Source: Ardent Partners – CPO Rising 2011: Innovative Ideas for the Decade Ahead, July 2011 5 SAP Thought Leadership Paper –The Strategic Sourcing Imperative
  6. 6. Sourcing Best Practices To help procurement professionals achieve best-in-class sourcing performance, Aberdeen Group has identified the following best practices (see Figure 3): •• Alignment of sourcing, contract, and supplier management activities and objectives with the greater organization •• Enhancement of spend analytics capabilities •• Automation of strategic sourcing processes, such as requests for information, quotes, or proposals (RFx) and online auctions A key objective for the CPO and procurement team is to expand the percentage of corporate spend under their management and eliminate spend that is out of compliance. Thus, a sourcing best practice to consider is fostering open collaboration between the procurement organization and the business units. Such an approach can make it easier for departments throughout an organization to request and obtain support for sourcing activities. This can be accomplished through a corporate portal or through a sourcing tool that is universally accessible. The procurement team can more readily leverage its expertise and align its efforts with the overall organization and ultimately increase the percentage of corporate spend under management. Another sourcing best practice is to provide a centralized repository of all related sourcing documents that are accessible to all stakeholders. Documents and records can then be used for spend analytics, repurposed for new projects, or leveraged for standard reporting purposes. This approach also generates additional visibility for the procurement department. Automation of strategic sourcing processes, such as an RFx or online auction, through a sourcing solution can enable new cost-saving functionalities. For example, the reverse auction is considered the most powerful way to drive down costs. However, it is nearly impossible to run a reverse auction without a sourcing tool.5 A sourcing solution can produce substantial benefits over traditional software, such as e-mail, Microsoft Word, and Microsoft Excel, and it can help ensure the least risk and greatest success for an auction event. Contract Management Best Practices Without proper insight into its contracts, a company cannot effectively control its top or bottom line. Nor can it easily access the data needed to comply with legal and regulatory requirements. Lack of contract visibility affects most companies that have not implemented a contract lifecycle management (CLM) solution. A CLM solution can be used to maintain an electronic contract repository and make contract information more accessible. Contract visibility allows employees to proactively manage business relationships. Purchasing managers are able to see when agreements will expire and can renegotiate contracts ahead of time for more favorable terms. Accounts payable and accounts receivable employees are able to see agreed-upon payment terms and pricing and match that information to invoices. Figure 3: Best-in-Class Sourcing Strategies Source: Aberdeen Group – The State of Strategic Sourcing – Building a Context for the Next Decade, April 2011 SAP Thought Leadership Paper –The Strategic Sourcing Imperative 6
  7. 7. CLM solutions can bring significant benefit to not only procurement departments but also legal and sales teams. For example, close collaboration between the procurement and legal departments helps ensure that the proper terms, conditions, and clauses are leveraged when contracts are being authored. Effective contract management technologies help organizations implement savings programs more quickly by closely linking the sourcing and contracting processes. This includes having the line items, pricing, and any preapproved terms and conditions of an RFx cascade into a contract after an award decision has been made. Such tools can also enable companies to monitor compliance and re-source contracts before their expiration. Contract management technology can further drive value by linking buyer compliance to supplier terms and invoices, including proactive compliance tools in both electronic-sourcing and direct purchasing systems. If prespecified contract conditions are not met, purchase orders or invoices are flagged. Properly deployed, CLM solutions can contribute to cost savings by reducing savings leakage and helping ensure that all purchasing activity is compliant with existing supplier agreements. CLM is in use at 63% of the organizations that are identified as best in class. Aberdeen Group found that companies using CLM solutions have a 32% higher rate of procurement contract compliance than companies without this key enabling technology. If you do not measure and monitor contract performance, you cannot know whether you are actually realizing the contractual benefits. Having the ability to enforce both internal and external compliance to your contracts is the only way to maximize and unlock identified opportunities. To address performance management, a typical CLM solution includes audit functionality and a scorecard, or key performance indicator, tracking against a contract and enables usage reporting from the back-end system. CLM adoption is taken in steps, beginning with the establishment of a wellstructured and readily searchable central repository of contracts. Reports can be generated from this repository to get an understanding of what goods and services are being contracted, and with which suppliers. With the repository in place, organizations can then focus on improving contract authoring and track the performance of contracts for compliance with negotiated prices, rebates, thresholds, and penalties. Supplier Management Best Practices Procurement organizations, as well as other functions within the business, can achieve significant savings and cost avoidance by effectively managing the performance of suppliers. Supplier management technology leverages supplier-specific metrics to track, monitor, and analyze the performance of key suppliers. Procurement teams are able to analyze forecast savings, compliance, and delivery metrics and convert that information into meaningful data that can aid in the negotiation process during supplier renewal time. Supplier management technology improves the process of adding new suppliers, provides continuous validation of supplier-provided information, and reduces the cost of managing supplier diversity programs. The ability to manage against a range of supply risk–related elements is also enhanced. It is often possible to build a business case for supplier management purely on cost-avoidance savings, such as the time and effort that are required to collect and maintain supplier registration details. However, organizations typically consider a range of other factors, including the ability to improve capital management within the supply chain. “When it comes to procurement pressures in today’s global enterprise, there are savings and then there is everything else.” Andrew Bartolini, Chief Research Officer, Ardent Partners 7 SAP Thought Leadership Paper –The Strategic Sourcing Imperative
  8. 8. Organizations that leverage a common supplier management solution and portal for supplier registration, data validation, and continuous profile management can significantly advance the achievements of the procurement team within the business. Procurement teams gain benefits from automated data gathering, such as contact details and banking information that enable new discounting and working capital management programs. This data can drive and support sourcing strategy, supplier implementation, and overall program compliance. Technology tools, such as spend analysis, contract lifecycle management, sourcing, and supplier performance management, contain the elements needed to help companies achieve greater efficiencies (see Figure 4). These include higher rates of realized and implemented cost savings, higher rates of spend under management, and lower rates of savings leakage. Best-in-class organizations are able to understand spend behavior in actionable detail. Sourcing and procurement teams can analyze data by supplier, category, time period, and geography, for example, and develop intelligence on corporate spending. This intelligence can then be used to help ensure contract compliance and help the CPO and team negotiate better contract terms, resulting in improved cost savings. SAP Solutions – Enabling Sourcing Excellence Internal and external collaboration are key to the strategic sourcing process. SAP Sourcing OnDemand enables crossTo enable the strategic sourcing process, functional teams to provide internal feedSAP Sourcing OnDemand delivers a flexi- back on sourcing activities. For example, ble project management solution, includ- stakeholders within the business can help ing a shared, online sourcing project plan develop an RFP or score an RFP submission from a supplier. Externally, suppliers and savings-tracking functionalities. can communicate with the business Also, the solution provides extensive through an intuitive, user-friendly intertools and templates to create and manface to create a profile, submit bids, and age requests for information, requests receive feedback. SAP Sourcing OnDefor quotation, requests for proposal (RFP), and online auctions, which help an mand can also integrate with back-end enterprise resource planning systems, organization effectively evaluate supplienabling procurement teams to compare ers, negotiate terms, and award concontracts with supplier invoices and help tracts. The solution supports strategic ensure supplier compliance with negotiatsourcing across all categories of spend, ed contract terms. including goods and services. Figure 4: Best-in-Class Technology Use Source: Aberdeen Group – The State of Strategic Sourcing - Building a Context for the Next Decade, April 2011 SAP Thought Leadership Paper –The Strategic Sourcing Imperative 8
  9. 9. Automate Your Strategic Sourcing Process Conclusion Procurement professionals are on the front lines when it comes to managing supplier relationships. How well they perform has a significant and lasting impact on the overall success of the business. At the core of a modern strategic sourcing program is business intelligence, which can be obtained through improved collaboration among procurement, finance, and other groups across the organization. With strong leadership from the CPO, these teams can develop a proactive plan to adopt innovative approaches, best practices, and proven technology solutions to automate strategic sourcing, contract management, and supplier management activities. Successful execution of this strategy can result in significant cost savings as well as greater competitive advantage for the forward-looking enterprise. Learn More To learn more about how you can accelerate your strategic sourcing initiative, increase cost savings, and improve your sourcing performance with the SAP® Sourcing OnDemand solution, please visit Develop a proactive plan to adopt innovative approaches, best practices, and proven technology solutions to automate strategic sourcing, contract management, and supplier management activities – and realize significant cost savings. references 1. Ardent Partners – CPO Rising 2011: Innovative Ideas for the Decade Ahead, July 2011. 2. Aberdeen Group – The State of Strategic Sourcing – Building a Context for the Next Decade, April 2011. 3. Ibid. 4. Ibid. 5. Gartner Group – Magic Quadrant for Strategic Sourcing Application Suites, February 2010. 6. Aberdeen Group – The State of Strategic Sourcing – Building a Context for the Next Decade, April 2011. 9 SAP Thought Leadership Paper –The Strategic Sourcing Imperative
  10. 10. CMP ID 19909 (12/07) ©2012 SAP AG. All rights reserved. SAP R/3, SAP NetWeaver, Duet, PartnerEdge, ByDesign, , SAP BusinessObjects Explorer, StreamWork, SAP HANA, and other SAP products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of SAP AG in Germany and other countries. Business Objects and the Business Objects logo, BusinessObjects, Crystal Reports, Crystal Decisions, Web Intelligence, Xcelsius, and other Business Objects products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of Business Objects Software Ltd. Business Objects is an SAP company. Sybase and Adaptive Server, iAnywhere, Sybase 365, SQL Anywhere, and other Sybase products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of Sybase Inc. Sybase is an SAP company. Crossgate, m@gic EDDY, B2B 360°, and B2B 360° Services are registered trademarks of Crossgate AG in Germany and other countries. Crossgate is an SAP company. All other product and service names mentioned are the trademarks of their respective companies. Data contained in this document serves informational purposes only. National product specifications may vary. These materials are subject to change without notice. These materials are provided by SAP AG and its affiliated companies (“SAP Group”) for informational purposes only, without representation or warranty of any kind, and SAP Group shall not be liable for errors or omissions with respect to the materials. The only warranties for SAP Group products and services are those that are set forth in the express warranty statements accompanying such products and services, if any. Nothing herein should be construed as constituting an additional warranty.