2. 2 EY’s Asia Pacific Advisory Center 2014
Procurement centralization is
vital to driving productivity gains
while assuring compliance and
appropriate controls are in place
3. 3Centralizing China Procurement
Welcome
Welcome to Centralizing China Procurement.
China for China. These three words have been a driving tenet of executive decision making
for their operations in China for quite some time now. But what do they mean exactly?
Under the lens of market penetration, quite clearly the primary interpretation was to localize
management to drive growth and expansion. Given the remarkably dynamic and emerging
state of affairs of the past two decades, who better to understand and navigate the terrain
than a native?
Unfortunately, the broad application of “China for China” has had some unintended
consequences for Supply Chain and Procurement operations.
The push to localize and expand autonomy on a regional level has warped into mass
decentralization, in many cases down to a provincial basis or worse. Functionally speaking,
this level of laissez-faire management is anathema to a strong corporate compliance and risk
mitigation culture.
Recently, with the slowing of growth and shift to a cost productivity focus, the pendulum has
swung. Many multi-national firms have begun to look at reining in maverick outposts under
the corporate umbrella of Supply Chain and Procurement Centralization through ERP. But
as any parent can tell you, behaviors forged from years of lax oversight cannot be changed
overnight.
Jonathan Wright
EY Asia-Pacific Supply Chain Leader
jonathan.wright@sg.ey.com
Alan Beebe
Executive Director, Advisory Services
alan.beebe@cn.ey.com
Kyle M Hill
Senior Manager, Advisory Services
Kyle-M.Hill@cn.ey.com
4. 4 EY’s Asia Pacific Advisory Center 2014
Opportunities from
procurement centralization
• When purchasing and contracting are more ad-hoc and end-user driven, it increases the number of contracts and
orders and drives up purchase cost and overheads, versus using strategic sourcing to optimize the supplier base
and establish long-term contracts.
• By maximizing participation in a well-designed, centralized P2P platform, Procurement and AP performance and
results will improve. Additionally, Contractual compliance will also increase.
• Strategic sourcing and supplier management will be better enabled and informed from the improved processes
and information of Centralized Procurement to maximize participation and compliance.
• Rational and balanced internal controls will allow for end-user time efficiency and fast order fulfilment, while
mitigating significant risks.
• eProcurement and Electronic Invoice Presentment & Payment (EIPP) network solutions import electronic data into
ERP, increasing efficiency and lowering administrative costs.
• Our approach typically begins with an assessment and an initial, high-level design to make clear what spend will
stay offline, what will be catalogued by item, what will be matched and verified.
Sourcing Contracting
Appraise TCO
including Process
Manage Contract
Master File
Manage Catalogs
Manage Item
Master File
Transmit Orders
Administer
Workflow Rules
Supplier
Management
Strategic Processes
Transactional Processes
2-Way MatchERS
Supplier
OnBoarding
3-Way Match PCard
Appraise Supplier
Performance
Database
Administration
Enforce Buy-Pay
Channels
Prescribe Buy-
Pay Channels
Manage Supplier
Master FIle
Monitor Supplier
Performance
Provides
Spend
Visibility,
Supplier
Performance
Data and
enforces
Contract
Compliance
Drives
Supplier e-
Enablement,
Suppliers’
Process
Quality, Risk
Mitigation &
Contract
Compliance
Define
and Convey
Requisition
Complete
and Place
Orders
Invoice
& Payment
Processing
Receipt
Processing
5. 5Centralizing China Procurement
Operational procurement
models
Decentralized
Low Coordination
Decentralized
High Coordination
Lead Buyer Centralized
• Each BU manages own
requirements with control over
supply, process, technology
decisions and strategic sourcing
and procurement execution
• Reports into operations or BU
manager
• Coordination of sourcing
strategies by category
leaders
• No business (site, BU, etc.)
specific resources reporting
hierarchically to CPO
• Commodity supply council
sets overall procurement
strategy and policy and
coordinates Lead Buyers
• Lead Buyers negotiate
framework agreements but
do not buy or take title
• BU’s call off from existing
agreements, taking legal title
to goods and services
• Regional/Global Center
takes legal title to goods
and sells on to BU
• All procurement activities
executed centrally,
including strategic
sourcing and buying
activities
• Center has some logistics
and planning capability
• Local BU feels in control
• Speed and flexibility of response
• Knowledge of local procedures
and requirements
• Greater accountability
• Coordinated Sourcing
Strategy, Leverage
knowledge base across
geography
• Good transition step to begin
to test the lead buyer model
• Improved strategy setting,
spend leverage within
framework agreements
• Supplier engagement more
focused and category skills
concentrated
• Often more acceptable to
BU because perceived to
be more connected to local
business
• Leverage corporate
spend, sharing best
practice & lower cost
• Improve strategic
supplier relationships
and minimize supply and
reputation risks
• Smooth forecasting and
planning
• Able to hedge & place
forward contracts
• Fails to leverage spend
• Inconsistent supplier engagement
• Low planning capability
• Too much focus on local sources
• Inconsistent processes
• Increased likelihood of business
risk
• Unable to manage inconsistent
supply patterns
• Not formally designed to
coordinate and is more
organic in nature
• Lower levels of spend
leveraged
• Can lead to conflicting
priorities across hubs
• Low planning capability
• Perceived slow decision
making
• Inconsistent processes
• Conflicting priorities for lead
buyers
• Unable to hedge / place
forward contracts
• Maverick spend occurs
• Perceived lack of
flexibility
• Can be too insular
• Non-traditional
procurement skills
required
• High technology
dependency
ProcurementModelsCharacteristicsProsCons
6. 6 EY’s Asia Pacific Advisory Center 2014
One size rarely fits all &
changes should be gradual
Objectives
• Effective organization
structure, that supports
the procurement strategy
• Encourage collaborative
organizational culture
within the company
• Continuous skill
improvement
• Labor cost reduction
Benefits
• Effective human resource
allocation through an
adequate organization
and a goal-oriented task
allocation to achieve
Procurement strategy
and goals
Procurement Organizational Approach
An effective Procurement organizational structure highly depends on the company’s operational values and its
subsequent Procurement strategy. For businesses operating in China the prevailing attitude has been to allow
local divisions or acquisitions to control their own spend and rarely stand in the way.
Moving along the Centralization path above will require deep knowledge of the current organization and the
latitude to make significant and fundamental changes that will effect existing power structures. Serious and
debilitating friction could occur if appropriate change management techniques and local sensitivities are not
applied and considered.
Degreeof
Synergylowhigh
Degree of
Centralization
low high
Decentralize
Cooperation
Hub concept
Lead buyer
concept
Shared Service
Center
Central
Organization and
Strategy
7. 7Centralizing China Procurement
Centralization can elevate &
drive sustainable benefits
Based on our findings and experience:
• Demand management and sourcing opportunities
generate ‘potential savings’ of between 5-15% at
contract award
• Process efficiency through the introduction of
automation and systems delivers a savings of
between 1-3% of the ‘cost to procure’
• Up to 50% of ‘potential savings’ are often lost through poor compliance and supplier management
1 Sourcing capability
2 Procurement centralization
3 P2P processes and systems
• Significant savings, up to 18%, are left on the table from poor execution of centralization and the
achievable benefits through focused effort on the procurement organization and category management
Maverick buying and lack of
contract management quickly
erode value (-10-50%)
Supplier collaboration
(2-5%)
2
Contractual compliance and
continuous improvement
Break through performance
improvement
Value
Time
Demand and
Sourcing
(5-15%)
Efficiency benefits
Strategic sourcing Compliance and Supplier relationship
management
Contract award
1
3
2
2
8. 8 EY’s Asia Pacific Advisory Center 2014
Leverage your spend for
optimal supplier service
Methodologies and sourcing
strategies
• Centralizing and leveraging
suppliers is a strong methodology
with a set of value levers to optimize
Spend – addressing both demand
management and commercial
initiatives
• Each subcategory is evaluated
against tactical value levers to
ensure that all options have been
applied as appropriate to maximize
savings and achieve desired supplier
behaviors
Price Attack
High
Low
Financial Impact
Price Down
Competitive
Leverage
Volume
Consolidation
Cost and
Remuneration
Model Analysis
Demand
Management
Specification
Optimization
SSC, Small
Country
Solutions, MSP
Supplier
Integration
PurchasingCapabilityand
Internal/SupplierCollaboration
Price Attack Cost Down Cast Out
Price
Benchmarking &
Leveling
9. 9Centralizing China Procurement
Initial step on centralization
path is a quick health check
Case study: Category management and standardization
Rapid Procurement diagnostic detailed overlap across 6 separate Chinese entities of over 50% of
spend across 2 primary categories, compelling the introduction of centralized commodity / category
management.
Project benefits:
Pooled China-wide demand and went direct to vendors, eliminating local / regional agent and
distributor relationships. Improved supplier service levels and increased participation in annual
supplier volume rebate programs. Saved $2M USD in first year of program.
► Procurement activities are
strategy driven
► Global Procurement Shared
Services (e.g. for indirect material)
► Strategy for key commodities
► Center lead procurement
organization
► Fully integrated policies &
responsibilities
► Trained & certified procurement
teams
► Carbon footprint
requirements
► Documented environmental
concerns and resolution
approach
Profit&ProcessLeadership
EffectiveCapitalExpenditure
► Procurement Metrics alinged to
business objectives
► Benchmarking against best in
class
► Internal and External customer
satisfaction
► Balanced scorecard approach
► Central supplier mgmt.
database (supplier performance,
contracts, etc.)
► e-based procurement processes
(auctions, catalogue systems,
etc.)
► Supplier self service
► Optimized process across business:
Consistent application of TCO
Commitment visibility & controls
Automated invoicing & payments
► Tax optimization (input tax deduction)
► Management of payment obligations
► Build-up supplier mgmt. approach
and monitoring system
(performance & risk)
► Carry-out supplier qualification
& development
► Leverage supplier innovation
► Implement cost optimization
programs with suppliers
► Maximum leverage &
aggregation
Effective demand bundling
for standardized material
and services
Global standard contracts
► Optimization of payment terms
and conditions
► Consideration of total cost of
ownership
►
►
►
►
►
Provides holistic picture of what needs to be done and helps to
benchmark against leading procurement organisations
Key Current State Desired State Basic Leading Practice
10. 10 EY’s Asia Pacific Advisory Center 2014
From the market leader in
supply chain management
Clients consider EY to be better
than many of its peers in the areas
of challenging corporate culture,
directly improving the client’s overall
commercial performance and meeting
project timelines. Additionally, EY’s
consultants are perceived as better at
helping enterprises drive supply chain
innovation through the organization,
creating a more effective supply chain
and leveraging supply chain talent.
Cushing Anderson
Vice President
Business Consulting Services
IDC
Case study: Merger led centralization
As a result of large scale M&A activity, the China procurement functions of two newly joined companies,
representing a total of 10 separate entities, were mandated to be centralized. Business Unit buy-in was
critical to achieving project goals.
Project benefits:
Identified quick win synergies in supplier rationalization, volume aggregation and leverage, payment
terms and pricing totaling $3M USD in cost reductions in first year of transition ($5M USD annualized).
EY ranked best in class for
Supply Chain Management
Source: IDC MarketScape Vendor Assessment 2014
IDC MarketScape: SCM Business Consulting Services
Strategies
Capabilities
Participants
Contenders
Major Players
Leaders
EY
IBM
PwC
Deloitte
CSCKPMG
McKinseyCapgemini
BCG
Accenture
11. 11Centralizing China Procurement
Jonathan Wright
EY Asia-Pacific Supply Chain Leader
jonathan.wright@sg.ey.com
Alan Beebe
Executive Director, Advisory Services
alan.beebe@cn.ey.com
Kyle M Hill
Senior Manager, Advisory Services
Kyle-M.Hill@cn.ey.com
