Innovative Procurement Strategies for Thriving in a Networked Economy

HR EAP Advisory Program Introduction | 1
© 2014 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.
Innovative Procurement Strategies for Thriving in a Networked Economy
Ariba Commerce Summit – October 2014
Amy Fong
Senior Director, Procurement Executive Advisory
The Hackett Group
Ariba Commerce Summit

Statement of Confidentiality and Usage Restrictions
This document contains trade secrets and other information that is company sensitive, proprietary, and confidential, the disclosure of which would provide a competitive advantage to others. As a result, the reproduction, copying, or redistribution of this document or the contents contained herein, in whole or in part, for any purpose is strictly prohibited without the prior written consent of The Hackett Group.
Copyright © 2014 The Hackett Group, Inc. All rights reserved. World-Class Defined and Enabled.

Challenges and Priorities: What Keeps Procurement Executives up at Night?
Capabilities: How can we Leverage Supplier Network Technology to Address Key Procurement Challenges?
Outlook: What Lessons and Trends are Emerging from Supplier Networking?
Agenda

The Hackett Group A leader in organizational effectiveness and best practice insight
Mission
Hackett is an IP-based Global Advisory and Consulting firm helping clients implement and sustain World-Class business performance across General and Administrative Services
Hackett’s Value:
We formulate strategies based on our proprietary repository of Certified Hackett best practices and competitive insights
We design and implement sustainable performance improvement solutions
Results
Our efforts have delivered 20%-40% in sustainable cost savings and over $25 billion of improved cash flow for clients across the globe
Hackett Group Solutions:
Finance
Enterprise Performance Management
Human Resources
IT
Procurement & Sourcing
Supply Chain
Operations, Strategy, and Marketing Performance
Working Capital
Global Business Services/ Outsourcing
Workforce Solutions
Technology Implementation Oracle, SAP, Hyperion, Kronos, and Business Objects
97% of the Dow Jones Industrials
73% of the Fortune 100
88% of the Dow Jones Global Titans
73% of the DAX 30
45% of the FTSE 100
35% of the CAC 40

Enabling World-Class: Hackett’s Solution Portfolio Benchmarking, Advisory, Business Transformation
Membership Advisory Insight into World-Class Performance
Benchmarking Assess World-Class Performance
Business Transformation Consulting Transforms Performance
Deliverables
Peer & world-class comparison performance metrics
Detailed analysis
Stakeholder survey
Executive presentation Benefits
Objective comparison to peer group and world-class performers
Quantify performance gaps
Uncover hidden costs
Prioritization of improvement initiatives
Deliverables
Strategic direction
Detailed business case
Initiative plans & detailed designs
Implementation of best practices Benefits
Reduced cost
Working capital optimization
Enhanced service delivery
Business insight
Sustainable benefits
Speed of solution delivery
Merger integration
Risk mitigation
Deliverables
Best practice research
Advisor access
Best Practice Intelligence Center
Peer interaction
World-Class Progress Report Benefits
Identify the strategies and practices employed by Leaders
Validation of current initiatives
Determining what’s possible (World- Class Performance Metrics)
Process implementation support
Continuous best practice adoption

Value
Evolve the Service Value
What do we aspire to be?
Where is time actually being spent?
What does want Procurement to do?
Performance
Capability
Business
Requirements (and investments)
Procurement Value
Procurement
Suppliers
Requirements & Spend
Spend / Supplier Value
Recalibrate the Service Execution
What is the level of efficiency and effectiveness?
How well is Procurement delivering?
How are my peers doing?
Redevelop the Service Capability
What capabilities do we have today or need to acquire to change?
What capabilities are strongest? weakest?
What barriers hinder evolution?
Supply Assurance
Purchase Cost Reduction
TCO Reduction
Demand Mgt
Value Mgt
1. Lagging
2. Achieving
3. Exceeding
4. Leading
Building an agile procurement organization requires a focus on Value, Performance, and Capabilities

Value Proposition of Procurement Services
Role of Procurement
Right goods /services at the right time & place
Right goods and services AND at the right price
Shift from lowest price to Total Cost of Ownership
Reduce demand activity, complexity and variability
Increase business value derived from spend
Supply Assurance
Buyer / Planner
Negotiator
Supply expert (SCM, SPM), team leader, project manager
Spend/ budget consultant & relationship manager
Trusted business advisor and change agent
Purchase Price Reduction
Total Cost of Ownership
Demand
Management
Value Mgmt.
Procurement must evolve its own value proposition and that of the supply base to create more “Bang for the Buck”
VALUE
+
Role of Supply Base
Innovative / Flexible
Aligned / Loyal
Operationally Excellent
Priced Fairly
Reliable, Solvent
Every Major Service you Perform has a Value Evolution!

Top 5 Trends Cited by Hackett Clients
1.In 2014, procurement’s first priority was to expand its scope/influence.
2.This requires procurement to reinvent its value proposition and revisit how success is monitored, measured and reported on.
3.Supplier networks, master data management (MDM), and analytics are key enablers... but the strategy is to reconfigure (versus replace) existing tools.
4.Organizations continue to search for the right combination of outsourcing, in- sourcing, offshore and onshore work. Procurement organizations are selectively using outsourcing for supply market intelligence and supporting/maintaining master data and legacy applications.
5.There’s a real shortage of great procurement talent out there. To adapt, procurement leaders are taking a hard look at redefining the required competencies (and measurement tools) to move from optimizers to innovators.
2014 Procurement Trends – Hackett Key Issues Study
Source: Enterprise Key Issues Study, The Hackett Group 2014

Priorities for Procurement Technology – Collaborative Tools and Self-Service are increasingly important to procurement executives
14%
17%
21%
21%
24%
31%
31%
38%
41%
41%
52%
55%
55%
Acquire other technology or services
directly within the function without…
Acquire cloud-based business
application services directly within…
Invest in mobile technology
Invest in data storage and data
management infrastructure
Implement Procurement point
solutions with functionality not…
Move more Procurement processes
and/or business units to the…
Implement more Procurement
functionality/modules to the…
Roll out web-based and self-service
tools for third parties (e.g.,…
Maintain existing technology platform
and minimize new investment
Invest in collaboration technology
(including social media,…
Implement BI/analytics applications
Roll out web-based and self-service
tools for internal employees
Establish data stewardship,
standardize master data and…
Key takeaways
•Self-service and collaboration tools for procurement executives are gaining steam... but the strategy is to reconfigure (versus replace) existing tools.
•Supplier networks are a good example of where these reconfigure/recalibrate efforts will be focused

29%
21%
22%
32%
25%
36%
11%
11%
30%
14%
29%
18%
11%
4%
11%
7%
11%
Collaborate on demand forecasts
Network with peers to share risk and
perform. info on specific suppliers
View supplier credentials (insurance,
compliance, tax forms)
Measure and track supplier
performance
Maintain supplier master data
(items/catalogs, contracts, pricing)
Identify new suppliers and market
opportunities
Current
Limited Use
Moderate Use
Significant Use
23%
31%
8%
15%
23%
12%
38%
27%
50%
31%
35%
42%
15%
19%
31%
38%
31%
31%
In 2-3 years
77%
76%
89%
84%
89%
85%
65%
61%
57%
56%
43%
40%
Future Changes in Procurement Technology – Usage of supplier networks will continue to evolve over the next 2-3 years
Definition: Supplier networks refer to any system used to exchange data electronically between buyers and suppliers using a common standard; also a web-based trading community that connects trading partners and provides a platform for collaboration -- including but not limited to supplier discovery, e-procurement and e-invoicing

Challenges and Priorities: What Keeps Procurement Executives up at Night? Capabilities: How can we Leverage Supplier Network Technology to Address Key Procurement Challenges?
Source
Purchase
Pay
Manage Outlook: What Lessons and Trends are Emerging from Supplier Networking?
Agenda

Source-to-Manage in a Networked Community – What information is exchanged with suppliers
and other trading partners?
Supplier
Community
Requisition
and PO
Processing
Supplier
Scheduling
Supply Data
Management
Receipt
Processing
Accounts
Payable
Supplier
Management &
Development
Source Purchase Pay Manage
Sourcing &
Supply Base
Analysis
Sourcing
Execution
Trading Partners /
Service Provider
Compliance
Management
Catalog
Requisition
ASN
Delivery
Schedule
Self-service
Inquiry
Invoice
Market
Intelligence
Purchase
Order
Order Change /
Cancellation
Order
Confirmation
Risk
Assessment
Certifications
Sourcing /
eRFX
SRM /
Performance
Supplier
Qualification
Contract
Supply Chain
Finance
Payment
P-card File
Requisition
Partnering /
Collaboration
Sarbanes Oxley
IRS, OFAC
Diversity
Workforce
Audit
Hazmat
Item/Catalog
Dynamic
Pricing
Payment
Terms
Data
Enrichment
Barcode /
Label Data
Level 2 / 3
Data
Card Issuer or Network SIM
Provider
Financial
Institution
Regulatory
Authority
E-payment
Dynamic
Discount
Shipment
tracking

Strategic Sourcing
The Gap Not transactional, but still managed through transactional buying channel (if at all)
Spend Importance
(magnitude, risk, business outcomes)
Recurrence of Spending
High
(Highly
Recurring)
Low (One-off, ad hoc)
High
(Strategic)
Low
(Tactical)
Transactional
Buying
Sourcing – There’s a gap in traditional procurement approaches, leaving “tactical” spend poorly supported
Purchase
Pay
Source
Manage
Catalog or rate-based lower-value goods and services (e.g. print, temp labor, promotional items, etc.) – “three bid” process
Large, predictable purchases of goods and services (e.g. telecom, advertising, recruiting services, etc.)
Critical, non-recurring spend (e.g. custom software, special marketing campaign, specialized training, facility refurb, one-off M&A services, etc.)
The problem: Critical project purchases being underserved (IT, HR, Finance / Corp. Service, Marketing & Sales, Capital Equip & Services). This results in lost savings and longer cycle times.

Establishing a Tactical Buying Desk with supporting “Rules and Tools” is the most commonly employed practice
67%
67%
56%
39%
33%
22%
0%
10%
20%
30%
40%
50%
60%
70%
“Buying Desk” group to handle specific tactical purchase transactions routed to them
eSourcing tools (ex. eRfX, eAuctions)
Established business rules or “triage” process for request routing
Multiple language requirements to manage tactical
sourcing activities
Workflow tools
Guided buying
Tactical Sourcing Capabilities (% of respondents – multiple answers allowed)
Correlation to Purchased Cost Reduction Savings
Medium
Medium
High
High
Source: Tactical Sourcing Survey, The Hackett Group 2011
Purchase
Pay
Source
Manage

The evolution of networked Supplier Discovery and E-Sourcing tools makes tactical buying easier
“Consumerized” experience for casual buyers
–Supplier Networks facilitate easier buyer-seller discovery and collaboration
–Self-service, fast and with minimal (if any) support required from software provider
–Improved matching algorithms to find more relevant suppliers
Light-touch with software-as-a-service (Saas)
–Quickly deployed to start conducting market research and seller identification
–Supplier-funded marketplaces lower the barriers to entry for buyers
Supplier networks have grown in breadth and depth
–More supplier information is available than ever
–Not just supplier self-reported information but also community references and ratings
–The size of the networks have grown substantially (e.g. more than 190 countries on a single network)
Improved sourcing decisions
–Manage complex bid optimization
–Run tender events and make better supplier selections
–Migrate from tactical procurement to strategic sourcing when necessary
Purchase
Pay
Source
Manage

Hosted & Managed Internally
Hosted Internally
Managed by Service
Hosted &
Managed by Service
Hosted & Managed
by Supplier
(Punch Out)
Hosted & Managed
by Supplier
(Search Agent)
Internal Catalogue Support Resources
Internal User Acceptance
Supplier Onboarding
Overall Cost of Ownership
Compliance to Agreed Pricing
Highest
Lowest
Level of Enablement
Purchase
Pay
Source
Manage
Purchase – The e-Catalog strategy must be aligned with the organization's objectives to be successful

$8.57
$10.82
$22.82
40%
14%
1%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
$0.00
$5.00
$10.00
$15.00
$20.00
$25.00
High
Medium
Low
Indirect E-Catalog Spend vs. Order Processing Cost
Process Cost per Order
Percent of Indirect Spend on E-Catalog
Order Processing Cost: Requisitioning & PO Processing (Labor + Outsourcing)
Source: P2P Performance Study, The Hackett Group 2013
$2.84
$3.32
$3.75
90%
53%
15%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
$2.50
$2.70
$2.90
$3.10
$3.30
$3.50
$3.70
$3.90
High
Medium
Low
Order Automation vs. Invoice Processing Cost
AP Process Cost per Invoice
Order Automation
Automated Orders: Orders that require no (or minimal) intervention from a buyer (e.g. system generated, e-catalog)
Purchase
Pay
Source
Manage
Order automation strategy drives greater activity through e-Catalog and achieves lower costs as a result

80%
70%
45%
82%
75%
70%
90%
53%
15%
20%
30%
40%
50%
60%
70%
80%
90%
High
Medium
Low
Order Automation vs. Spend Visibility and Invoice Match Rate
Spend Visibility at Line Item Level
First Pass Match Rate
Order Automation
3.79%
5.95%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
High Adoptors of E-
Catalogs
Low Adoptors of E-
Catalogs
Indirect E-Catalog Adoption vs. Average Negotiated Cost Reduction Lost to Non-Compliance
57%
Automated Orders: Orders that require no (or minimal) intervention from a buyer (e.g. system generated, e-catalog)
Source (left): P2P Performance Study, The Hackett Group 2013
Source (right): Procurement Benchmark, The Hackett Group 2014
Purchase
Pay
Source
Manage
Order automation also drives higher levels of spend visibility, first-pass yield, and contract compliance

Invoice-to-Pay technology should complement a Channel Strategy that simplifies P2P execution options
System Receipt Entry
Automated Inventory/ MRP
Pcard or Travel Card
Requisition
Requisition to Transmit
No System Req
Invoice Approval
(Workflow)
Order
Transmit Order
Receive
No PO (Invoice Only)
Receive
Invoice
Invoice to Pay
Charge Card
eInvoice
Pay
1
2
3
4
5
Catalog (Internal and External)
Non Catalog (Text Based)
Charge Card
Non PO
Automated Requisition (Inventory)
Channel
Automated (no touch)
Automated (no touch)
SC
(text based)
Electronic Payment
No System Receipt
Work Order System
SRM Sourcing Cockpit
7
Manual
ERS (no invoice)
Maintenance & Repair
Non-System Ordering
Shopping Cart
Auto Ordering
SAP ME21N Requisition Process
Pull From Stock
On Hand Goods
Done
SC
(Catalog)
6
Recurring Payments
Purchase
Pay
Source
Manage

AP automation strategy should balance transactional efficiency with the ability to enable a broad base of suppliers
1 Based on organizations with high percentage of transactions through dominate strategy
$2.22
$4.24
$6.85
E-invoicing
Invoice Capture
and Imaging &
Workflow
Paper
AP Process Cost per Invoice
(labor & outsourcing)1
Difficulty of Enablement
20,314
9,484
7,459
E-invoicing
Invoice Capture
and Imaging &
Workflow
Paper
AP Invoices Processed per FTE
Purchase
Pay
Source
Manage

An end-to-end automation strategy also drives savings from increased capture of early-payment discounts
Early Payment Discounts Taken as a Percent Of Spend
0.015%
0.164%
Non Top performer
Top Performer
Early Payment Discounts Taken as a Percent Of Those Available
79%
69%
High Adoptors of E-
Catalogs
Low Adoptore of E-
Catalogs
Source (left): P2P Performance Study, The Hackett Group 2013
Source (right): P2P Performance Study, The Hackett Group 2011
Purchase
Pay
Source
Manage

Dynamic Discounting Strategies
(Percent of all Participants)
42%
30%
19%
14%
None planned at this time
None currently in place but are implementing or currently evaluating
Allow suppliers that are setup on standard net payment terms with no discount to
elect an early payment discount once the invoice is approved for payment
Take a pro-rated portion of a discount if paid before net term but after discount
term (e.g. payment term is 2% 10 Net30, if paid on day 20 take a 1% discount)
Buyer
Supplier
Dynamic Discounting Overview
Technology
Platform
1. Invoice
2. Approval
3. Timing decision
4. Discount payment
Source Purchase Pay Manage
With a supplier network, organizations can more easily pursue Dynamic Discounting to drive
added savings

Internally gathered performance data
Financial results
•Merger, acquisition activity
•Credit ratings
Pricing/benchmarking
•Price variance % - external benchmark
Global trade
•Restricted party alerts
•Customs compliance issues
Regulatory
•Criminal check alerts
•EPA violations
Receiving, quality control systems
•Delivery time variances
•Number of rescheduled deliveries
•Receipt variances
•Reasons for receipt rejection
Customer returns
•Return reason
•Quantity returned
Compliance and automation data
•Procurement cycle time
•Labeling accuracy
•EDI compliance
•ASN accuracy
Support feedback
•Feedback score
•Issue
Pricing accuracy and benchmarking
•Price variance % - internal benchmark
•Invoice accuracy %
Surveys results
•KPI calculations
Externally gathered performance and risk data
Supplier networks are increasingly being used as a platform for enabling supplier performance and risk management
Purchase
Pay
Source
Manage

The use of niche risk software and business intelligence platforms are on the rise
Q5.4 How extensively do you rely on each of these technology tools to support your risk management efforts today vs. expected within two to three years?
50%
84%
9%
19%
56%
50%
23%
19%
41%
25%
42%
22%
19%
9%
47%
25%
27%
13%
31%
16%
31%
34%
34%
38%
17%
6%
44%
34%
26%
25%
39%
16%
31%
19%
20%
6%
Future
Current
Future
Current
Future
Current
Future
Current
Future
Current
Future
Current
Future
Current
Future
Current
Future
Current
Microsoft Office
Home-grown/
custom-built
solutions
Financial risk
content providers
Governance, risk
and compliance
(GRC) software
ERP solution
Spend
management
suites
News aggregators
Business
intelligence (BI)
solutions
Purpose-built/
niche supply risk
software
Current High
Current Medium
Future High
Future Medium
The tools being used today and in the future to support risk management efforts
Fastest growing
Most used today
Source: Supply Risk Management Study, The Hackett Group 2014
Purchase
Pay
Source
Manage

The ability to segment suppliers by risk category, criticality, or other user-defined fields are key features
65%
58%
58%
58%
52%
48%
45%
29%
32%
26%
32%
23%
32%
35%
29%
45%
3%
16%
10%
16%
13%
13%
23%
19%
3%
3%
3%
3%
6%
Risk segmenting
Risk analytics
Risk prioritization
Alerting
Risk scoring automation
Supplier risk scoring surveys
Third-party inputs/data feeds
Risk dependency
High / "Must Have"
Medium
Low
Not important
Q5.3 Please rank the importance of each feature below when selecting a supplier risk management software solution.
Risk management: Importance of specific features when selecting supply risk management software
Purchase
Pay
Source
Manage

Q2.2 What level of granularity do you segment and report on supply risk today? (multiple selections allowed)
The level of granularity of supply risk segmentation and reporting
68%
56%
50%
26%
26%
12%
Individual supplier level
Product/service category level
Supplier segmentation level (i.e.
critical or strategic suppliers only)
Regional level
Item or component level
Other
“Other” write-in responses:
•Business-unit level
•By type of compliance risk
•Commodity level and by manufacturing site
35% of respondents measure risk at both the category and supplier segmentation levels.
Only 14% selected ‘Individual supplier level’ alone. The remainder selected multiple segmentation criteria.
Risk is being measured at different levels of granularity across multiple segmentation criteria
Purchase
Pay
Source
Manage

Challenges and Priorities: What Keeps Procurement Executives up at Night? Capabilities: How can we Leverage Supplier Network Technology to Address Key Procurement Challenges? Outlook: What Lessons and Trends are Emerging from Supplier Networking?
Agenda

Fact Check – How are organizations implementing supplier networks and what are the primary challenges being faced?
Issues with leveraging supplier networks
Cost: overwhelming integration costs when it comes to using older EDI-VAN frameworks. High cost of subscription for suppliers to certain networks.
Coverage: Inadequate supplier adoption. Limited interoperability between disparate global networks. Low levels of participation make proprietary networks hard to justify
Variability: Too many competing networks to support. Inconsistent application and agreement of data interface standards
Legacy: Continued use of email and fax. Pre-existing data quality issues were never resolved (ex. outdated items/specifications, inaccurate prices, incorrect lead times)
18%
24%
24%
33%
0%
5%
10%
15%
20%
25%
30%
35%
We do not use a supplier network
PO/ AP
RFx
All 3
AP
RFx
PO
None
Source: Supplier Networks Webcast – Real-time Poll Results, The Hackett Group 2014
Does your company use multiple supplier networks to support the source-to-pay process?
57% of respondents are not using a single platform

Looking Ahead – Emerging Trends in Supplier Network Technology
1.Buyer organizations are pursuing broader connectivity strategies with suppliers, peers, and trading partners (banks, outsource providers, etc.). A greater emphasis on peer-to-peer sharing will support improved supplier discovery and risk assessment.
2.Cycle times for supplier qualification and setup will decrease as more organizations use credentials (insurance, tax) and master data (items, pricing) pulled directly from the network
3.Companies will need to invest heavily in data cleansing and process re-engineering to take full advantage of network capabilities, while total synchronization between supplier network and the ERP will remain elusive.
4.Pricing structures are becoming more complex for buyers and sellers to navigate (e.g. volume-based pricing, value-based pricing, fixed-fee models, “free” networks, etc.); suppliers are passing certain costs onto buyers and will also limit the number of networks they can support.
5.The business case for supplier networks will continue to improve, but the sale to internal stakeholders may not be any easier in the current climate (i.e. long list of competing priorities)
6.Leveraging existing connectivity, strategically-paired buyers and sellers will look to adopt common supply chain operations data standards, tools, and governance structure to drive broader supply chain collaboration and shared demand forecasting.

The Hackett Group Suite N500 1117 Perimeter Center West Atlanta, GA 30338 Phone: +1 770 225 3600 Martin House 5 Martin Lane London EC4R 0DP Phone: +44 207 398 9100 Torhaus Westhafen Speicherstrasse 59 60327 Frankfurt am Main, Germany Phone: +49 69 900217 0 8, rue de Port Mahon 75002 Paris, France Phone: +33 1 53 43 0400 Strawinskylaan 3051G, 1077 ZX Amsterdam, The Netherlands Phone: +31 20 301 2210
Amy Fong
Senior Procurement Advisor and P2P Program Leader
Phone: + 408-887-7335
afong@thehackettgroup.com
1-888-8HACKETT
advisor@thehackettgroup.com
www.thehackettgroup.com
Contact Information

Innovative Procurement Strategies for Thriving in a Networked Economy

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