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1Procurement-Powered Business Performance
Assessment of Excellence
in Procurement Study, 2014
Procurement-Powered
Business Performance
Leaders use procurement to catalyze lasting, superior
business performance through excellence in managing
categories, suppliers, and teams.
Over the past 20 years, businesses have come to expect increasing value from
procurement. Our recently completed global Assessment of Excellence in
Procurement Study finds that:
•	 Leading companies get twice as much measurable cost reduction as typical
companies, while capitalizing on their supply base for competitive advantage
through supplier-driven innovation, risk management, and
other means.
•	 Since 2011, progress in the typical company has leveled off, leaving executives
to ask: “What’s next for procurement?”
•	 Leaders use procurement as a catalyst to drive durable superior business
performance through excellence in managing categories, suppliers, and teams.
1Procurement-Powered Business Performance
About the Study
A.T. Kearney’s 2014 Assessment
of Excellence in Procurement
study is the eighth in the series
since 1992. The objective of this
latest study is threefold:
•	 Evaluate how procurement has
progressed since 2011
•	 Determine how ready
procurement is for the future
•	 Identify lessons learned from
leading procurement
organizations
The study includes input from
procurement and supply chain
executives at more than 185
companies in the manufacturing
(33 percent), process industries
(41 percent), and services (26
percent) sectors, with average
annual revenues of approximately
$15 billion. Participants are from
all regions of the world: 43
percent from Europe, the Middle
East, and Africa, 41 percent from
the Americas, and 16 percent
from Asia Pacific. Participants
completed a comprehensive
online survey with more than
1,000 elements spanning eight
dimensions of purchasing and
supply management covered by
our House of Purchasing and
SupplySM
(see figure) and were
evaluated and scored on their use
of leadership practices on each
dimension.
Companiesdesignatedasoverall
AEPleadersexhibitacombination
ofoverallstrongperformancein
theuseofprocurementpractices
acrosstheeightdimensions,
togetherwithhighfinancial
impactasmeasuredbyreturnon
supplymanagementassets,or
ROSMASM
.Additionally,leaders
were designated for each
dimension, based on those
companies scoring in the
top 20 percent.
Source: A.T. Kearney analysis
Figure
A.T. Kearney’s House of Purchasing and SupplySM
forms
the basis for the AEP study
Supply
management
strategy
Performance management
Information and
knowledge management
Human resources management
Organizational
alignment
Sourcing
and category
management
Supplier
relationship
management
Operating
process
management
The rush to cut costs in the wake of the 2008–09 Great Recession propelled procurement
organizations to the forefront at companies around the world. Faced with so much uncertainty,
companies raced to shed costs—and procurement rose to the challenge, delivering exceptional
results. With this came an increase in procurement’s stature, influence, and reach. A.T. Kearney’s
Assessment of Excellence in Procurement (AEP) 2011 study saw a doubling in the rate of benefits
achieved by the procurement functions since the 2008 study, yielding the highest percentage
gains seen in the more than two decades since we began conducting this study.1
(For
information about AEP 2014 goals and demographics, see the sidebar: About the Study.)
In 2011, we projected that this upward trajectory would continue: procurement appeared poised
to deliver even greater impact to the business. Our 2014 AEP study finds that while leading
companies continued their trajectory, most procurement organizations only sustained the gains
in influence and reach made between 2008 and 2011. In short, the typical company may be
“wasting a crisis” by not continuing to enhance one of the most powerful levers to improve
profitability and competitive advantage.
1
	 See “Follow the Procurement Leaders: Assessment of Excellence in Procurement Study, 2011” at www.atkearney.com.
2Procurement-Powered Business Performance
The Typical Company Has Leveled Off
To be clear, procurement performance at most companies has not declined since the previous
AEP study. Figure 1 shows some key ways in which the procurement function’s status has slightly
increased since then. Procurement has kept its seat at the executive table and better aligned
itself with the overall business strategy. Most companies recognize sourcing’s unique power to
deliver major cost reduction and have mastered basic sourcing and contracting principles.
Many have even awakened to the need to measure procurement performance.
But we are not seeing the progress we expected coming out of our 2011 study. Gains from
sourcing have slowed, as multiple waves of “brute force” sourcing approaches such as volume
bundling, supplier consolidation, and competitive bidding have led to resistance from suppliers
and yielded diminishing returns. Procurement benefits as a percentage of influenced spend
have returned to the historical average following the heights reached in 2009 and 2010 (see
figure 2). The use of leadership practices for procurement has not increased substantially,
limiting companies’ ability to generate new streams of cost reduction and deliver value through
supplier relationship management (SRM). Finally, at many companies, procurement lacks the
additional influence and reach needed to achieve the next level of performance. What is holding
them back? The reasons include the lack of designated responsibility to take the lead for all
major spend categories and explore broader value creation opportunities, weak strategic and
organizational links to the rest of the business, and difficulty communicating the function’s
return on investment (ROI). Quite simply, procurement organizations at many companies have
maintained the status quo when they should have continued increasing their business impact.
Figure 1
Procurement’s stature has solidified and slightly increased between 2011 and 2014
Source: A.T. Kearney Assessment of Excellence in Procurement Study
Leadership for all key
expenditure areas
23
32 32
Mandate communicated
and accepted
19
53 55
Extended mandate to
explore broader value
creation opportunities
19
41
46
Extended mandate to
identify and recommend
new business opportunities
13
22 25
2008
2011
2014
Procurement organization stature (% of companies selecting “fully agree’’)
Source: A.T. Kearney Assessment of Excellence in Procurement Study
Figure 2
Procurement benefits are returning to the historical average
Procurement benefits (% of influenced spend)
2008
3.9
2009
7.9
2010
7.2
2013
4.3
3Procurement-Powered Business Performance
The Leaders Are Showing the Way
In contrast, leading procurement organizations have found ways to advance, delivering even
greater impact since our 2011 study. Integrating more closely with the business units and
regions has increased their relevancy, influence, and impact. They have continued their journey
toward procurement excellence by expanding their use of leadership practices. They have
achieved breakthrough financial results from procurement—generating double the Return on
Supply Management Assets (ROSMASM
) performance levels compared to the typical company
and delivering benefits at a rate ten times greater than the cost of their people, technology, and
external support (see the sidebar: ROSMASM
Basics).
Leaders have achieved this performance by:
•	 Building high-performance teams as a catalyst for business alignment
•	 Reducing costs through category excellence
•	 Creating competitive advantage through supplier capabilities
•	 Investing in the procurement team to deliver durable superior performance
The sections below examine these four key differentiators.
Building high-performance teams as a catalyst for business alignment
Leading procurement organizations are maximizing benefits by improving performance both
internally and externally. They are closely aligning procurement with the business at the corporate,
business unit, and regional levels. They begin by developing a compelling vision for procurement
excellence that is shared at all organization levels. Leaders look ahead of the current year’s budget
to imagine and articulate how they will sustain present-day benefits, while reaching beyond
traditional sourcing to find ways to deliver value that transcends mere cost savings. As part of
this company-wide benefits and value discussion, procurement leaders communicate what the
function delivers to the company in terms that the business can understand, typically by using the
finance organization’s language to measure and share performance data. They also ensure that
their own organization is aligned by regularly engaging the entire procurement function around
the three- to five-year vision.
Leaders focus on achieving tight coordination with both internal and external organizations
through practices such as mutual goal setting with business units, regional organizations,
ROSMASM
Basics
A company’s Return on Supply
Management Assets (ROSMASM
)
score measures procurement’s
contributions to the business and
articulates those benefits in
financial terms.2
A ROSMASM
score is calculated by dividing
procurement’s Financial Results
Delivered by the Invested Supply
Management Assets, whereby:
•	 Financial Results Delivered =
Spend Actively Sourced * Yield *
Compliance + Additional
Benefits
•	 Invested Supply Management
Assets = Total Procurement
Costs
ROSMASM
offers a sustainable
framework to assess
procurement performance
management and offers insight
into supply management value
drivers. Additionally, it provides a
platform for holistic discussions
with stakeholders and a way to
benchmark performance on a
peer-to-peer basis or among
industries.
2
	 For more information, please see www.atkearney.com/rosma.
4Procurement-Powered Business Performance
and functional stakeholders—and use reward systems that encourage cooperation among
the parties. Excellence in stakeholder relationship development and management is
recognized and nurtured as a critical foundation for success, both at the individual and
functional level.
Transparent communications around the value that procurement brings help leaders earn the
support needed to continue with and advance their value-added efforts. Leaders have earned
a much broader mandate and far greater organizational acceptance to generate value for the
enterprise. Procurement leaders share procurement performance data beyond their function
to ensure that company-wide stakeholders are kept aware of procurement’s contributions.
Finally, leaders have greater credibility with business leaders than has the typical procurement
organization—they have invested in the systems, data management, and capabilities to
ensure their benefits reports and other data are accepted and trusted by finance and other
leaders within the business.
Reducing costs through category excellence
To help portray the full array of methods at procurement’s disposal to reduce cost and increase
value, A.T. Kearney developed The Purchasing Chessboard®, a two-by-two matrix that portrays
64 of these methods—including advanced analytical approaches—mapped to different degrees
of supply and demand power in the marketplace.3
AEP study leaders systematically use more of
these methods than the average company across every chessboard quadrant, as demonstrated in
figure 3. Leaders extensively use these techniques to leverage competition and internally manage
Source: A.T. Kearney Assessment of Excellence in Procurement Study
Figure 3
Leaders use a broader set of improvement methods
High
Low
Low High
Supplypower
Demand power
7.6
1.9
12.0
4.3
4.2
1.2
11.0
5.2
The Purchasing Chessboard® (% of companies selecting “systematically used”)
Leaders
Typical companies
Key
90%
10%
50%
Change nature
of demand
Seek joint advantage
with suppliers
Manage
spend
Leverage competition
among suppliers
3
	See www.purchasingchessboard.com.
5Procurement-Powered Business Performance
spend. More importantly, where supply power is high, leaders employ advanced methods in order
to change the nature of demand or work with suppliers to seek joint advantage.
In addition to applying the chessboard methods to today’s spend, leaders are positioning
themselves for long-term success by developing “strategic playbooks”—plans for key
categories designed to better help the company meet its future needs and, if possible, shift
the supply-demand balance in the company’s favor. Leaders incorporate a broad set of
elements into these strategic playbooks, including continuous monitoring of supply markets
and company requirements, identification and development of alternative sources of supply,
and supply chain and logistics considerations, including contingency plans (see the sidebar:
On the Road to Category Excellence).
On the Road to Category Excellence
Over20yearsago,amultinational
company began its journey
toward category excellence.
It adopted a formal sourcing
process, which it systematically
applied over three years to the
majority of its spend. As the years
passed, the company revisited
the categories using a broader
range of improvement methods,
adding deeper category
expertise, and applying new
analytical techniques. These
additional actions gave it an
ongoing stream of additional
cost savings for several years.
But competition was beginning
to catch up, and the company
was not satisfied; it was time to
take the next leap forward in
category management to stay
ahead. That involved developing
“strategic playbooks” that would
define the moves needed over
three to five years in order to
better position the company and
(if possible) fundamentally
change supply and demand
power for select categories.
It chose to pilot the approach with
two categories. One category
involved purchased technology
that was changing rapidly. The
company needed a strategy to
slipstream the new technology
into its product development and
production processes while
continuing to manufacture and
service its legacy products that
used the old technology. The
other category involved a risk
with a sole-source supplier three
tiers upstream in the supply
chain. For this category, they
needed a strategy to mitigate risk
in the short term while creating
options in the longer term.
For each category, a cross-
functional team including
procurement, manufacturing,
marketing, R&D, and new product
development researched the
situation in depth and developed
scenarios. They then brain-
stormed options and analyzed the
most promising among them.
Finally, the strategies, short- and
longer-term actions, and contin-
gency plans were documented,
and implementation began.
Forthetechnology-based
category,thestrategywasto
integrateitsproductdevelopment
planswithsupplier“A,”judgedto
havethemostpromising
technology road map. For its
existing product line, the
company chose to continue dual
sourcing from supplier “A” and
supplier “B,” while adding
contract provisions that would
guarantee availability for legacy
products and warranty coverage
for the installed base.
For the risk-vulnerable category,
the strategy was to go directly to
the tier 3 supplier to evaluate its
risk readiness—including
financial health, management
stability, quality assurance,
production stability processes,
and potential for a natural
disaster. In the short term, it
concluded that it should direct
upstream suppliers to stockpile
inventory of the tier 3’s goods in
the event of a failure. Longer term,
two alternatives were under
consideration: work with tier 1 and
2 suppliers to find a substitute for
the tier 3’s products, or redesign
the tier 1 and 2 components to
avoid using the tier 3 at all.
While the company is just
beginning to execute these two
playbooks, the near-term actions
are already in place. As the future
unfolds and situations change,
the company will refine these
playbooks and develop new ones
for other important categories.
6Procurement-Powered Business Performance
Besides tracking more conventional supply and demand conditions, procurement leaders
closely monitor and prepare to deal with disruptive technologies that could change demand for
their end products and services. They also actively scan for the emergence of new technologies
and nontraditional suppliers that can increase market competition. Additionally, they recognize
the importance of supply risk management: nearly all use techniques such as continuous risk
monitoring, scenario planning, value chain modeling, disaster planning, and secondary supply
sourcing, while barely half of typical companies do the same.
Creating competitive advantage through supplier capabilities
Procurement leaders are finding ways to harness the suppliers’ capabilities, work
collaboratively with them to benefit from excellence in their supply base, and thus achieve
competitive advantage. Leaders have generated significant value from their SRM efforts.
In fact, one-third of the value their organizations create comes from SRM, versus about
one-quarter for the typical company.
Achieving high SRM performance requires developing a common, cross-enterprise
understanding of what we call “TrueSRMSM
” in order to drive value throughout the supplier
life cycle (see sidebar: TrueSRMSM
). Leading procurement organizations have developed and
continually demonstrate their SRM understanding by using a consistent, repeatable, and
commonly understood SRM process and vocabulary that is embraced throughout the
company and the supplier community. Using SRM, leaders address a broad range of business
goals beyond the basics of supply continuity and lower unit costs, including innovation and
growth, asset optimization, and risk mitigation (see figure 4 on page 7).
Successful strategic SRM efforts also require selecting the right suppliers. The best candidates
show longer-term alignment with the company’s business strategy as well as the capabilities to
enhance the company’s growth. In identifying these suppliers, leaders develop hypotheses
about potential mutual value creation opportunities to discuss with suppliers, jointly agreeing
with them on implementation plans that include improvement recommendations.
Leaders deliver value beyond cost from SRM by integrating suppliers into the company’s
own processes. They use a range of methods to streamline supply chains with their strategic
suppliers, including collaborative capacity management, collaborative cost reduction,
integrated operations planning, and virtual inventory management. Additionally, procurement
TrueSRMSM
TrueSRMSM
is A.T. Kearney’s
approach for converting SRM
from a purely tactical realm
focused on process into a
strategic agenda to:
•	 Manage all supplier interactions
in relation to business
objectives
•	 Encourage desired behaviors
at suppliers
•	 Achieve internal alignment on
the above points
The key to meeting these
challenges is to rigorously
manage suppliers in a highly
differentiated way. This is based
on a rigorous corporate-wide and
top-down assessment of perfor-
mance and strategic potential,
which then leads to nine differen-
tiated interaction models for
dealing with suppliers. Exponents
of TrueSRMSM
focus their time,
effort, and resources on the
“critical cluster” of relationships
that have the true potential to
bring competitive advantage. 4
4
	For more information, see the book Supplier Relationship Management: How to Maximize Vendor Value and Opportunity.
7Procurement-Powered Business Performance
leaders integrate key suppliers into innovation and growth initiatives (see the sidebar:
Innovation through Collaboration on page 8). All AEP 2014 study leaders have an innovation
target for procurement, and nearly half have a major open-innovation effort underway to
integrate suppliers into their innovation stream.
Investing in the procurement team to deliver durable superior performance
To help ensure that their procurement organizations will continue to deliver and
sustain superior results, leaders are investing in their teams’ capabilities, technology,
and performance management.
Leaders invest to increase procurement team members’ capabilities, including subject
matter knowledge, analytical capabilities, leadership abilities, and teaming skills. They use a
planned training and development road map, invest to ensure the skill advancement takes
place, and routinely review the capabilities required to realize the procurement vision. With
continued globalization of supply and customer markets, leaders are actively addressing the
needs of a diverse and dispersed workforce. They employ strategies to attract the best talent
in every market and promote interactions and collaborations around the globe. Leaders are
relentless about shifting responsibility for transactional processes outside of procurement
(either via migration to an outsourced provider, shared service center, or automation) to free
up resources for high-value activities.
To enhance their teams’ capabilities, leaders are leveraging enabling technologies to strengthen
analytics and support broader and deeper knowledge management. Because spend visibility is
so critical to cost management, they are investing in systems that provide current spend data for
ongoing analysis. Almost all leaders capture and share procurement knowledge and invest in
intellectual capital development. They train their teams to use spend analytics, supply market
analysis, and other procurement information technology tools. Over half of our study leaders
have introduced new tools for optimization and other emerging techniques.
Figure 4
Leaders use SRM to address a broader range of business goals
SRM capability
(% of companies selecting “significant results” or “breakthrough results”)
Source: A.T. Kearney Assessment of Excellence in Procurement Study
77
Meet current
business or
supply
requirements
59
73
Reduce
supplier
unit cost
50
71
Mitigate
risks
28
57
Improve asset
or capital
structure
13
55
Drive
end-to-end
cost down
32
45
Pursue
innovation
development
14
44
Grow existing
markets
or enter
new ones
21
40
Develop or
leverage
differentiating
supplier
capabilities
14
“The basics” Advanced dimensions
Leaders
Typical companies
8Procurement-Powered Business Performance
Leading procurement organizations make broader and more robust use of performance
management metrics than the average company. They do not simply measure quantitative
results; they also measure the effectiveness and efficiency of the underlying processes
that drive those results. The metrics and dashboards they use provide insights that help
drive continuous improvement. To reinforce teamwork, leaders also link compensation to
performance that reflects both group and individual performance. Leaders tie compensation
to the achievement of measureable benefits, with clear differentiation in rewards between
high and low performers. Leaders also benchmark compensation levels externally to stay
competitive in talent attraction and retention.
In terms of procurement operating models, leaders focus on strategic activities and develop
specialists in areas such as category management, SRM, analytics, and process design and
implementation. Procurement outsourcing is targeted toward more tactically and operationally
focused activities.
The Path Forward
Procurement organizations face a choice: maintain the status quo or reach higher by
unleashing the full potential of their supply base. Over the next few years, for the typical
company, maintaining the present course will almost certainly lead to a reduction in
procurement‘s impact on company performance and diminished stature for the function.
Innovation through Collaboration
With only two manufacturers
of long-distance aircraft,
long-haul airlines have a very
limitedchoiceofsuppliers.While
volume purchases provide an
opportunity for savings, other
sources of value beyond cost are
available by collaborating with
suppliers on design.
In the late 1980s, one aircraft
manufacturer started to develop
a new ultrahigh-capacity airliner
that would break the dominance
of its competitor in that segment.
Developing new technologies and
designing aircraft is a long-term
process with significant financial
risk. A leading global airline
recognized the opportunity to
build a strong relationship with
this aircraft manufacturer and
influence the design. Both sides
had high win-win expectations.
The airline wanted first-mover
advantage as the launch
customer, but it had a primary
interest in influencing the
development process, specifi-
cally the passenger cabin design.
Its premium class cabin was
designed around luxurious suites
targeted at passengers who do
not want to compromise on
sleeping, seating, or working
while in air. Each “suite” has a
full-size mattress, sliding doors,
and pull-down windows. This
innovation propelled the airline to
the top as the trendsetter for
luxury air travel.
The airline had great success as
the launch customer for the new
jumbo jet. It significantly
expanded its brand value,
customer base, and new services.
In less than 18 months, the
one-millionth passenger flew
with the airline on the new
aircraft. A big marketing effort,
followed by extensive media
coverage, turned the airline into
the best-known international
airline carrier. Especially
successful was a charity auction
on eBay, in which passengers
bought seats paying between
$600 and $100,000 for the first
scheduled flight of the aircraft.
The manufacturer’s early-stage
cooperation turned into a big
success for them as well, as it not
only heard the voice of the
customer through the entire
product development process but
also profited from free media
coverage. And even more
importantly, the buying
commitment from one of the
largest and most admired airlines
positively influenced buying
decisions from other airlines.
9Procurement-Powered Business Performance
The second path suggests procurement soars as it becomes an even greater strategic
business contributor with a strong internal brand and advanced capabilities, staffed by
procurement athletes who are widely recognized as a valued asset throughout the company.
What will happen to the procurement organizations that opt to maintain their present heading?
Inaction will do more than simply erode some of the gains recently achieved; it could bring
about deeper repercussions. Already, the typical finance organization views the procurement-
reported results with a raised eyebrow, according to a recent A.T. Kearney survey that found
less than one-third of finance executives widely accept these reports. Credibility will be lost
by those organizations that do not reach higher. Failure to act could also lead to a lower profile
for procurement organizations, which will bring about changes in reporting relationships and
potentially lead to outsourcing of strategic procurement activities. Most damagingly, inaction
could negatively impact procurement’s financial contribution to the bottom line, ultimately
hindering the overall business’s performance. Without the procurement engine to deliver a
stream of ongoing benefits, fewer funds will be available to support important growth initiatives
such as innovation and market expansion or to directly boost earnings per share.
Companies that adopt the procurement practices that separate the best from the rest will have
a much brighter future. Procurement leaders provide insights into how to apply world-class
procurement practices to achieve team, category, and supplier excellence, while demonstrating
the economic benefits of doing so. Continued growth will lead to a strong procurement brand as
executives throughout the company come to acknowledge procurement as a strong, consistent
value generator, leading to increased stature, influence, and reach. Key suppliers will recognize
that the company can be trusted to partner for longer-term joint advantage. Procurement will be
known for attracting, developing, and retaining premier talent. A portion of the increased return
on the procurement investment achieved by leading organizations can be reinvested in enhanced
skills, tools, and capabilities. As procurement excellence helps to generate benefits and have
greater business impact, companies will be more inclined to free up more funds for innovation,
growth, and improved shareholder value.
The time is now for procurement to reassert its position as a critical value driver.
Authors
John Blascovich, partner, New York
john.blascovich@atkearney.com
Stephen Easton, partner, London
stephen.easton@atkearney.com
AlejandroFerrer,director, San Francisco
alejandro.ferrer@atkearney.com
The authors would like to thank Sonali Agarwal and Bill Markham for their valuable contributions.
A.T. Kearney is a leading global management consulting firm with offices in more
than 40 countries. Since 1926, we have been trusted advisors to the world's foremost
organizations. A.T. Kearney is a partner-owned firm, committed to helping clients
achieve immediate impact and growing advantage on their most mission-critical
issues. For more information, visit www.atkearney.com.
Americas
Asia Pacific
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Middle East
and Africa
Atlanta
Bogotá
Calgary
Chicago
Dallas
Detroit
Houston
Mexico City
New York
Palo Alto
San Francisco
São Paulo
Toronto
Washington, D.C.
Bangkok
Beijing
Hong Kong
Jakarta
Kuala Lumpur
Melbourne
Mumbai
New Delhi
Seoul
Shanghai
Singapore
Sydney
Tokyo
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Doha
Dubai
Johannesburg
Manama
Riyadh
For more information, permission to reprint or translate this work, and all other
correspondence, please email: insight@atkearney.com.
The signature of our namesake and founder, Andrew Thomas Kearney, on the cover
of this document represents our pledge to live the values he instilled in our firm and
uphold his commitment to ensuring “essential rightness” in all that we do.
A.T. Kearney Korea LLC is a separate and independent legal entity operating under the A.T. Kearney name in Korea.
A.T. Kearney operates in India as A.T. Kearney Limited (Branch Office), a branch office of A.T. Kearney Limited,
a company organized under the laws of England and Wales.
© 2014, A.T. Kearney, Inc. All rights reserved.
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Bip assessment-of-excellence-in-procurement-2014

  • 1. 1Procurement-Powered Business Performance Assessment of Excellence in Procurement Study, 2014 Procurement-Powered Business Performance Leaders use procurement to catalyze lasting, superior business performance through excellence in managing categories, suppliers, and teams.
  • 2. Over the past 20 years, businesses have come to expect increasing value from procurement. Our recently completed global Assessment of Excellence in Procurement Study finds that: • Leading companies get twice as much measurable cost reduction as typical companies, while capitalizing on their supply base for competitive advantage through supplier-driven innovation, risk management, and other means. • Since 2011, progress in the typical company has leveled off, leaving executives to ask: “What’s next for procurement?” • Leaders use procurement as a catalyst to drive durable superior business performance through excellence in managing categories, suppliers, and teams.
  • 3. 1Procurement-Powered Business Performance About the Study A.T. Kearney’s 2014 Assessment of Excellence in Procurement study is the eighth in the series since 1992. The objective of this latest study is threefold: • Evaluate how procurement has progressed since 2011 • Determine how ready procurement is for the future • Identify lessons learned from leading procurement organizations The study includes input from procurement and supply chain executives at more than 185 companies in the manufacturing (33 percent), process industries (41 percent), and services (26 percent) sectors, with average annual revenues of approximately $15 billion. Participants are from all regions of the world: 43 percent from Europe, the Middle East, and Africa, 41 percent from the Americas, and 16 percent from Asia Pacific. Participants completed a comprehensive online survey with more than 1,000 elements spanning eight dimensions of purchasing and supply management covered by our House of Purchasing and SupplySM (see figure) and were evaluated and scored on their use of leadership practices on each dimension. Companiesdesignatedasoverall AEPleadersexhibitacombination ofoverallstrongperformancein theuseofprocurementpractices acrosstheeightdimensions, togetherwithhighfinancial impactasmeasuredbyreturnon supplymanagementassets,or ROSMASM .Additionally,leaders were designated for each dimension, based on those companies scoring in the top 20 percent. Source: A.T. Kearney analysis Figure A.T. Kearney’s House of Purchasing and SupplySM forms the basis for the AEP study Supply management strategy Performance management Information and knowledge management Human resources management Organizational alignment Sourcing and category management Supplier relationship management Operating process management The rush to cut costs in the wake of the 2008–09 Great Recession propelled procurement organizations to the forefront at companies around the world. Faced with so much uncertainty, companies raced to shed costs—and procurement rose to the challenge, delivering exceptional results. With this came an increase in procurement’s stature, influence, and reach. A.T. Kearney’s Assessment of Excellence in Procurement (AEP) 2011 study saw a doubling in the rate of benefits achieved by the procurement functions since the 2008 study, yielding the highest percentage gains seen in the more than two decades since we began conducting this study.1 (For information about AEP 2014 goals and demographics, see the sidebar: About the Study.) In 2011, we projected that this upward trajectory would continue: procurement appeared poised to deliver even greater impact to the business. Our 2014 AEP study finds that while leading companies continued their trajectory, most procurement organizations only sustained the gains in influence and reach made between 2008 and 2011. In short, the typical company may be “wasting a crisis” by not continuing to enhance one of the most powerful levers to improve profitability and competitive advantage. 1 See “Follow the Procurement Leaders: Assessment of Excellence in Procurement Study, 2011” at www.atkearney.com.
  • 4. 2Procurement-Powered Business Performance The Typical Company Has Leveled Off To be clear, procurement performance at most companies has not declined since the previous AEP study. Figure 1 shows some key ways in which the procurement function’s status has slightly increased since then. Procurement has kept its seat at the executive table and better aligned itself with the overall business strategy. Most companies recognize sourcing’s unique power to deliver major cost reduction and have mastered basic sourcing and contracting principles. Many have even awakened to the need to measure procurement performance. But we are not seeing the progress we expected coming out of our 2011 study. Gains from sourcing have slowed, as multiple waves of “brute force” sourcing approaches such as volume bundling, supplier consolidation, and competitive bidding have led to resistance from suppliers and yielded diminishing returns. Procurement benefits as a percentage of influenced spend have returned to the historical average following the heights reached in 2009 and 2010 (see figure 2). The use of leadership practices for procurement has not increased substantially, limiting companies’ ability to generate new streams of cost reduction and deliver value through supplier relationship management (SRM). Finally, at many companies, procurement lacks the additional influence and reach needed to achieve the next level of performance. What is holding them back? The reasons include the lack of designated responsibility to take the lead for all major spend categories and explore broader value creation opportunities, weak strategic and organizational links to the rest of the business, and difficulty communicating the function’s return on investment (ROI). Quite simply, procurement organizations at many companies have maintained the status quo when they should have continued increasing their business impact. Figure 1 Procurement’s stature has solidified and slightly increased between 2011 and 2014 Source: A.T. Kearney Assessment of Excellence in Procurement Study Leadership for all key expenditure areas 23 32 32 Mandate communicated and accepted 19 53 55 Extended mandate to explore broader value creation opportunities 19 41 46 Extended mandate to identify and recommend new business opportunities 13 22 25 2008 2011 2014 Procurement organization stature (% of companies selecting “fully agree’’) Source: A.T. Kearney Assessment of Excellence in Procurement Study Figure 2 Procurement benefits are returning to the historical average Procurement benefits (% of influenced spend) 2008 3.9 2009 7.9 2010 7.2 2013 4.3
  • 5. 3Procurement-Powered Business Performance The Leaders Are Showing the Way In contrast, leading procurement organizations have found ways to advance, delivering even greater impact since our 2011 study. Integrating more closely with the business units and regions has increased their relevancy, influence, and impact. They have continued their journey toward procurement excellence by expanding their use of leadership practices. They have achieved breakthrough financial results from procurement—generating double the Return on Supply Management Assets (ROSMASM ) performance levels compared to the typical company and delivering benefits at a rate ten times greater than the cost of their people, technology, and external support (see the sidebar: ROSMASM Basics). Leaders have achieved this performance by: • Building high-performance teams as a catalyst for business alignment • Reducing costs through category excellence • Creating competitive advantage through supplier capabilities • Investing in the procurement team to deliver durable superior performance The sections below examine these four key differentiators. Building high-performance teams as a catalyst for business alignment Leading procurement organizations are maximizing benefits by improving performance both internally and externally. They are closely aligning procurement with the business at the corporate, business unit, and regional levels. They begin by developing a compelling vision for procurement excellence that is shared at all organization levels. Leaders look ahead of the current year’s budget to imagine and articulate how they will sustain present-day benefits, while reaching beyond traditional sourcing to find ways to deliver value that transcends mere cost savings. As part of this company-wide benefits and value discussion, procurement leaders communicate what the function delivers to the company in terms that the business can understand, typically by using the finance organization’s language to measure and share performance data. They also ensure that their own organization is aligned by regularly engaging the entire procurement function around the three- to five-year vision. Leaders focus on achieving tight coordination with both internal and external organizations through practices such as mutual goal setting with business units, regional organizations, ROSMASM Basics A company’s Return on Supply Management Assets (ROSMASM ) score measures procurement’s contributions to the business and articulates those benefits in financial terms.2 A ROSMASM score is calculated by dividing procurement’s Financial Results Delivered by the Invested Supply Management Assets, whereby: • Financial Results Delivered = Spend Actively Sourced * Yield * Compliance + Additional Benefits • Invested Supply Management Assets = Total Procurement Costs ROSMASM offers a sustainable framework to assess procurement performance management and offers insight into supply management value drivers. Additionally, it provides a platform for holistic discussions with stakeholders and a way to benchmark performance on a peer-to-peer basis or among industries. 2 For more information, please see www.atkearney.com/rosma.
  • 6. 4Procurement-Powered Business Performance and functional stakeholders—and use reward systems that encourage cooperation among the parties. Excellence in stakeholder relationship development and management is recognized and nurtured as a critical foundation for success, both at the individual and functional level. Transparent communications around the value that procurement brings help leaders earn the support needed to continue with and advance their value-added efforts. Leaders have earned a much broader mandate and far greater organizational acceptance to generate value for the enterprise. Procurement leaders share procurement performance data beyond their function to ensure that company-wide stakeholders are kept aware of procurement’s contributions. Finally, leaders have greater credibility with business leaders than has the typical procurement organization—they have invested in the systems, data management, and capabilities to ensure their benefits reports and other data are accepted and trusted by finance and other leaders within the business. Reducing costs through category excellence To help portray the full array of methods at procurement’s disposal to reduce cost and increase value, A.T. Kearney developed The Purchasing Chessboard®, a two-by-two matrix that portrays 64 of these methods—including advanced analytical approaches—mapped to different degrees of supply and demand power in the marketplace.3 AEP study leaders systematically use more of these methods than the average company across every chessboard quadrant, as demonstrated in figure 3. Leaders extensively use these techniques to leverage competition and internally manage Source: A.T. Kearney Assessment of Excellence in Procurement Study Figure 3 Leaders use a broader set of improvement methods High Low Low High Supplypower Demand power 7.6 1.9 12.0 4.3 4.2 1.2 11.0 5.2 The Purchasing Chessboard® (% of companies selecting “systematically used”) Leaders Typical companies Key 90% 10% 50% Change nature of demand Seek joint advantage with suppliers Manage spend Leverage competition among suppliers 3 See www.purchasingchessboard.com.
  • 7. 5Procurement-Powered Business Performance spend. More importantly, where supply power is high, leaders employ advanced methods in order to change the nature of demand or work with suppliers to seek joint advantage. In addition to applying the chessboard methods to today’s spend, leaders are positioning themselves for long-term success by developing “strategic playbooks”—plans for key categories designed to better help the company meet its future needs and, if possible, shift the supply-demand balance in the company’s favor. Leaders incorporate a broad set of elements into these strategic playbooks, including continuous monitoring of supply markets and company requirements, identification and development of alternative sources of supply, and supply chain and logistics considerations, including contingency plans (see the sidebar: On the Road to Category Excellence). On the Road to Category Excellence Over20yearsago,amultinational company began its journey toward category excellence. It adopted a formal sourcing process, which it systematically applied over three years to the majority of its spend. As the years passed, the company revisited the categories using a broader range of improvement methods, adding deeper category expertise, and applying new analytical techniques. These additional actions gave it an ongoing stream of additional cost savings for several years. But competition was beginning to catch up, and the company was not satisfied; it was time to take the next leap forward in category management to stay ahead. That involved developing “strategic playbooks” that would define the moves needed over three to five years in order to better position the company and (if possible) fundamentally change supply and demand power for select categories. It chose to pilot the approach with two categories. One category involved purchased technology that was changing rapidly. The company needed a strategy to slipstream the new technology into its product development and production processes while continuing to manufacture and service its legacy products that used the old technology. The other category involved a risk with a sole-source supplier three tiers upstream in the supply chain. For this category, they needed a strategy to mitigate risk in the short term while creating options in the longer term. For each category, a cross- functional team including procurement, manufacturing, marketing, R&D, and new product development researched the situation in depth and developed scenarios. They then brain- stormed options and analyzed the most promising among them. Finally, the strategies, short- and longer-term actions, and contin- gency plans were documented, and implementation began. Forthetechnology-based category,thestrategywasto integrateitsproductdevelopment planswithsupplier“A,”judgedto havethemostpromising technology road map. For its existing product line, the company chose to continue dual sourcing from supplier “A” and supplier “B,” while adding contract provisions that would guarantee availability for legacy products and warranty coverage for the installed base. For the risk-vulnerable category, the strategy was to go directly to the tier 3 supplier to evaluate its risk readiness—including financial health, management stability, quality assurance, production stability processes, and potential for a natural disaster. In the short term, it concluded that it should direct upstream suppliers to stockpile inventory of the tier 3’s goods in the event of a failure. Longer term, two alternatives were under consideration: work with tier 1 and 2 suppliers to find a substitute for the tier 3’s products, or redesign the tier 1 and 2 components to avoid using the tier 3 at all. While the company is just beginning to execute these two playbooks, the near-term actions are already in place. As the future unfolds and situations change, the company will refine these playbooks and develop new ones for other important categories.
  • 8. 6Procurement-Powered Business Performance Besides tracking more conventional supply and demand conditions, procurement leaders closely monitor and prepare to deal with disruptive technologies that could change demand for their end products and services. They also actively scan for the emergence of new technologies and nontraditional suppliers that can increase market competition. Additionally, they recognize the importance of supply risk management: nearly all use techniques such as continuous risk monitoring, scenario planning, value chain modeling, disaster planning, and secondary supply sourcing, while barely half of typical companies do the same. Creating competitive advantage through supplier capabilities Procurement leaders are finding ways to harness the suppliers’ capabilities, work collaboratively with them to benefit from excellence in their supply base, and thus achieve competitive advantage. Leaders have generated significant value from their SRM efforts. In fact, one-third of the value their organizations create comes from SRM, versus about one-quarter for the typical company. Achieving high SRM performance requires developing a common, cross-enterprise understanding of what we call “TrueSRMSM ” in order to drive value throughout the supplier life cycle (see sidebar: TrueSRMSM ). Leading procurement organizations have developed and continually demonstrate their SRM understanding by using a consistent, repeatable, and commonly understood SRM process and vocabulary that is embraced throughout the company and the supplier community. Using SRM, leaders address a broad range of business goals beyond the basics of supply continuity and lower unit costs, including innovation and growth, asset optimization, and risk mitigation (see figure 4 on page 7). Successful strategic SRM efforts also require selecting the right suppliers. The best candidates show longer-term alignment with the company’s business strategy as well as the capabilities to enhance the company’s growth. In identifying these suppliers, leaders develop hypotheses about potential mutual value creation opportunities to discuss with suppliers, jointly agreeing with them on implementation plans that include improvement recommendations. Leaders deliver value beyond cost from SRM by integrating suppliers into the company’s own processes. They use a range of methods to streamline supply chains with their strategic suppliers, including collaborative capacity management, collaborative cost reduction, integrated operations planning, and virtual inventory management. Additionally, procurement TrueSRMSM TrueSRMSM is A.T. Kearney’s approach for converting SRM from a purely tactical realm focused on process into a strategic agenda to: • Manage all supplier interactions in relation to business objectives • Encourage desired behaviors at suppliers • Achieve internal alignment on the above points The key to meeting these challenges is to rigorously manage suppliers in a highly differentiated way. This is based on a rigorous corporate-wide and top-down assessment of perfor- mance and strategic potential, which then leads to nine differen- tiated interaction models for dealing with suppliers. Exponents of TrueSRMSM focus their time, effort, and resources on the “critical cluster” of relationships that have the true potential to bring competitive advantage. 4 4 For more information, see the book Supplier Relationship Management: How to Maximize Vendor Value and Opportunity.
  • 9. 7Procurement-Powered Business Performance leaders integrate key suppliers into innovation and growth initiatives (see the sidebar: Innovation through Collaboration on page 8). All AEP 2014 study leaders have an innovation target for procurement, and nearly half have a major open-innovation effort underway to integrate suppliers into their innovation stream. Investing in the procurement team to deliver durable superior performance To help ensure that their procurement organizations will continue to deliver and sustain superior results, leaders are investing in their teams’ capabilities, technology, and performance management. Leaders invest to increase procurement team members’ capabilities, including subject matter knowledge, analytical capabilities, leadership abilities, and teaming skills. They use a planned training and development road map, invest to ensure the skill advancement takes place, and routinely review the capabilities required to realize the procurement vision. With continued globalization of supply and customer markets, leaders are actively addressing the needs of a diverse and dispersed workforce. They employ strategies to attract the best talent in every market and promote interactions and collaborations around the globe. Leaders are relentless about shifting responsibility for transactional processes outside of procurement (either via migration to an outsourced provider, shared service center, or automation) to free up resources for high-value activities. To enhance their teams’ capabilities, leaders are leveraging enabling technologies to strengthen analytics and support broader and deeper knowledge management. Because spend visibility is so critical to cost management, they are investing in systems that provide current spend data for ongoing analysis. Almost all leaders capture and share procurement knowledge and invest in intellectual capital development. They train their teams to use spend analytics, supply market analysis, and other procurement information technology tools. Over half of our study leaders have introduced new tools for optimization and other emerging techniques. Figure 4 Leaders use SRM to address a broader range of business goals SRM capability (% of companies selecting “significant results” or “breakthrough results”) Source: A.T. Kearney Assessment of Excellence in Procurement Study 77 Meet current business or supply requirements 59 73 Reduce supplier unit cost 50 71 Mitigate risks 28 57 Improve asset or capital structure 13 55 Drive end-to-end cost down 32 45 Pursue innovation development 14 44 Grow existing markets or enter new ones 21 40 Develop or leverage differentiating supplier capabilities 14 “The basics” Advanced dimensions Leaders Typical companies
  • 10. 8Procurement-Powered Business Performance Leading procurement organizations make broader and more robust use of performance management metrics than the average company. They do not simply measure quantitative results; they also measure the effectiveness and efficiency of the underlying processes that drive those results. The metrics and dashboards they use provide insights that help drive continuous improvement. To reinforce teamwork, leaders also link compensation to performance that reflects both group and individual performance. Leaders tie compensation to the achievement of measureable benefits, with clear differentiation in rewards between high and low performers. Leaders also benchmark compensation levels externally to stay competitive in talent attraction and retention. In terms of procurement operating models, leaders focus on strategic activities and develop specialists in areas such as category management, SRM, analytics, and process design and implementation. Procurement outsourcing is targeted toward more tactically and operationally focused activities. The Path Forward Procurement organizations face a choice: maintain the status quo or reach higher by unleashing the full potential of their supply base. Over the next few years, for the typical company, maintaining the present course will almost certainly lead to a reduction in procurement‘s impact on company performance and diminished stature for the function. Innovation through Collaboration With only two manufacturers of long-distance aircraft, long-haul airlines have a very limitedchoiceofsuppliers.While volume purchases provide an opportunity for savings, other sources of value beyond cost are available by collaborating with suppliers on design. In the late 1980s, one aircraft manufacturer started to develop a new ultrahigh-capacity airliner that would break the dominance of its competitor in that segment. Developing new technologies and designing aircraft is a long-term process with significant financial risk. A leading global airline recognized the opportunity to build a strong relationship with this aircraft manufacturer and influence the design. Both sides had high win-win expectations. The airline wanted first-mover advantage as the launch customer, but it had a primary interest in influencing the development process, specifi- cally the passenger cabin design. Its premium class cabin was designed around luxurious suites targeted at passengers who do not want to compromise on sleeping, seating, or working while in air. Each “suite” has a full-size mattress, sliding doors, and pull-down windows. This innovation propelled the airline to the top as the trendsetter for luxury air travel. The airline had great success as the launch customer for the new jumbo jet. It significantly expanded its brand value, customer base, and new services. In less than 18 months, the one-millionth passenger flew with the airline on the new aircraft. A big marketing effort, followed by extensive media coverage, turned the airline into the best-known international airline carrier. Especially successful was a charity auction on eBay, in which passengers bought seats paying between $600 and $100,000 for the first scheduled flight of the aircraft. The manufacturer’s early-stage cooperation turned into a big success for them as well, as it not only heard the voice of the customer through the entire product development process but also profited from free media coverage. And even more importantly, the buying commitment from one of the largest and most admired airlines positively influenced buying decisions from other airlines.
  • 11. 9Procurement-Powered Business Performance The second path suggests procurement soars as it becomes an even greater strategic business contributor with a strong internal brand and advanced capabilities, staffed by procurement athletes who are widely recognized as a valued asset throughout the company. What will happen to the procurement organizations that opt to maintain their present heading? Inaction will do more than simply erode some of the gains recently achieved; it could bring about deeper repercussions. Already, the typical finance organization views the procurement- reported results with a raised eyebrow, according to a recent A.T. Kearney survey that found less than one-third of finance executives widely accept these reports. Credibility will be lost by those organizations that do not reach higher. Failure to act could also lead to a lower profile for procurement organizations, which will bring about changes in reporting relationships and potentially lead to outsourcing of strategic procurement activities. Most damagingly, inaction could negatively impact procurement’s financial contribution to the bottom line, ultimately hindering the overall business’s performance. Without the procurement engine to deliver a stream of ongoing benefits, fewer funds will be available to support important growth initiatives such as innovation and market expansion or to directly boost earnings per share. Companies that adopt the procurement practices that separate the best from the rest will have a much brighter future. Procurement leaders provide insights into how to apply world-class procurement practices to achieve team, category, and supplier excellence, while demonstrating the economic benefits of doing so. Continued growth will lead to a strong procurement brand as executives throughout the company come to acknowledge procurement as a strong, consistent value generator, leading to increased stature, influence, and reach. Key suppliers will recognize that the company can be trusted to partner for longer-term joint advantage. Procurement will be known for attracting, developing, and retaining premier talent. A portion of the increased return on the procurement investment achieved by leading organizations can be reinvested in enhanced skills, tools, and capabilities. As procurement excellence helps to generate benefits and have greater business impact, companies will be more inclined to free up more funds for innovation, growth, and improved shareholder value. The time is now for procurement to reassert its position as a critical value driver. Authors John Blascovich, partner, New York john.blascovich@atkearney.com Stephen Easton, partner, London stephen.easton@atkearney.com AlejandroFerrer,director, San Francisco alejandro.ferrer@atkearney.com The authors would like to thank Sonali Agarwal and Bill Markham for their valuable contributions.
  • 12. A.T. Kearney is a leading global management consulting firm with offices in more than 40 countries. Since 1926, we have been trusted advisors to the world's foremost organizations. A.T. Kearney is a partner-owned firm, committed to helping clients achieve immediate impact and growing advantage on their most mission-critical issues. For more information, visit www.atkearney.com. Americas Asia Pacific Europe Middle East and Africa Atlanta Bogotá Calgary Chicago Dallas Detroit Houston Mexico City New York Palo Alto San Francisco São Paulo Toronto Washington, D.C. Bangkok Beijing Hong Kong Jakarta Kuala Lumpur Melbourne Mumbai New Delhi Seoul Shanghai Singapore Sydney Tokyo Abu Dhabi Doha Dubai Johannesburg Manama Riyadh For more information, permission to reprint or translate this work, and all other correspondence, please email: insight@atkearney.com. The signature of our namesake and founder, Andrew Thomas Kearney, on the cover of this document represents our pledge to live the values he instilled in our firm and uphold his commitment to ensuring “essential rightness” in all that we do. A.T. Kearney Korea LLC is a separate and independent legal entity operating under the A.T. Kearney name in Korea. A.T. Kearney operates in India as A.T. Kearney Limited (Branch Office), a branch office of A.T. Kearney Limited, a company organized under the laws of England and Wales. © 2014, A.T. Kearney, Inc. All rights reserved. Amsterdam Berlin Brussels Bucharest Budapest Copenhagen Düsseldorf Frankfurt Helsinki Istanbul Kiev Lisbon Ljubljana London Madrid Milan Moscow Munich Oslo Paris Prague Rome Stockholm Stuttgart Vienna Warsaw Zurich