2. It has been well documented how the role of procurement has drastically shifted in
the past decade. The questions, that CPOs today face, are far removed from those
that they faced, even five years ago. With the supply base for almost all
organizations having gone global, the measurement of procurement efficiency is
not just the amount of cost reduction achieved. Also with a global supply base
come the challenges of ensuring seamless supply in the face of new challenges
like economic and political differences or even geographical catastrophes. Rather
than making things more difficult these challenges can be looked at as an
opportunity for procurement departments to replace cost reduction as an aim and
instead focus towards value addition. As the economy moves towards recovery
from the events of the last couple of years, procurement needs to look at
becoming more pro-active to issues and challenges that it might face compared to
being the fire fighting, reactive approach that it generally resorts to.
The infusion of technology like spend analysis, e-sourcing and others has to be
supplemented with market intelligence and analytics to ensure that procurement
moves beyond the role of a buyer and becomes a business advisor, adding
strategic value to the organization.
u re m ent
R o le o f P r o c
Buyer
Negotiator Supply
Spend Trusted
expert
consultant business
advisor
Supply Price Total Cost of Demand Value
Assurance Right goods Ownership Management Management
Right goods and services Shift from Reduce Increase
/services at AND at the lowest price to demand business value
the right time right price Total Cost of activity, derived from
& place Ownership complexity and spend
variability
Source: CPO Agenda
3. Volatility is the new normal? "The crisis that began
with the earthquake of
Volatility in the supply chain has always been March 11 has created
a challenge procurement departments have
shortages at the
accounted for. With a rapidly expanding
global supply base the degree of this
operations of more than
volatility has increased and so has the scale 25 companies with some
of disruption that this volatile ecosystem organizations lacking as
creates. The recent Japanese many as 300 different
earthquake/tsunami coupled with the electronic components.
nuclear disaster that followed has affected For each week that supply
the global supply chain for technology goods is not available, it takes
and services and delayed production lines by approximately four to six
months. Considering that Japan supports weeks to recover overall
nearly 12% of all technology related goods supply-demand balance,
and services demands and more than 40% re-prime, and rebuild
of technology component supply this should inventories across the
come as no shock. So what changes need to
value chain. In the case of
be looked at to counter this kind of large
scale volatility not just in prices and suppliers
Japan, the disruptions to
but the overall ecosystem in which the electronics supply
organizations exist today? There are several could last two to three
viable strategies to counter this volatility. quarters as original
These may range from fairly basic steps like equipment manufacturers
creating an alternate supply base to more work through the chaos to
complex activities like using cost intelligence re-balance supply chains
to drive down prices during negotiations with and customer
suppliers. Supply and market intelligence is commitments."
a key enabler to any strategy-technology
based or otherwise- used to counter market Report from PRTM
changes or aimed at achieving a stable consultants
supply base.
4. The changing role of procurement: Beyond buying and
negotiating
As mentioned earlier this volatility in spite of being a major challenge also provides
the procurement function an opportunity to grow. Every CPO today aspires to take his
rightful place on the organization’s board. For him to do that his procurement
function has to go beyond its current role as a buyer or even a supply consultant and
become a strategic business advisor. Traditionally depending upon the maturity of the
organization, procurement departments have delivered one or a combination of these
values
[ A reliable supply base devoid or minimally affected by supply disruptions
[ The best quality goods at the best negotiated price
[ And in the case of advanced or mature organizations, a small level of demand
planning
Based on these values procurement functions within organizations are looked at as
operational or functional executors. This perception needs to be shifted to that of
being an agent of transformation and an organizational level business consultant. To
achieve this shift, procurement has to help organizations predict demand and
ultimately reduce demand variability as well as discover ways to drive business value
from spend. To do this procurement functions need the right kind of tools and more
importantly the right kind of intelligence. The key here is intelligence - not data, not
information-intelligence. Organizations across the globe have identified this as a
priority and have also realized the importance of technology as an enabler to achieve
this intelligence. This can be seen from the priorities of procurement departments as
seen below.
% respondents citing these procurement application initiatives as priorities in 2011
Implement BI/Analytics applications (e.g., spend/supplier analysis) 74%
Establish data stewardship, standardize master data and cleanse data 62%
Roll out Web-based and self-service tools(e.g., eProcurement, eSourcing) 53%
Integrate processes, systems and information flows with external... 44%
Implement Knowledge management-oriented solutions... 41%
Implement extensions to the common ERP platform that have been released... 35%
Consolidate the application portfolio by moving to ERP platform 35%
Selectively source application through a software as a service (SaaS) model 24%
Maintain existing technology platform and minimize new investment 24%
Implement extensions to the common ERP platform that have been released... 15%
Ensuring that Procurement is at the forefront of adoption of collaboration... 9%
Source: CPO Agenda 2011
5. Most organizations begin their process of garnering and analyzing intelligence
with the process of spend analysis which is an excellent starting point. What
organizations should do is supplement this spend data with market and supplier
intelligence to ensure maximum value from their endeavors. Let us take a look at
each piece of this puzzle individually.
Spend is the start
Organizations looking for
intelligence from their buying
processes generally resort to
spend analysis as a first step to
their process.
Top Pressures driving eProcurement Initiatives
Incomplete coverage of spend types / catalog categories 36%
Confusion on policy and requirements for buying products or services 28%
Employee reluctance to use the eProcurement system(s) currently in place 28%
Difficulty in understanding/leveraging information generated in the eProcurement system 22%
Increased operational cost of IT Management for existing procurement solutions 19%
Difficulty in finding desired products or services in the eProcurement system's catalog(s) 14%
Percentage of Respondents, n=156
Source: Aberdeen Group, Nov 2010
Top Actions for Improving eProcurement
Increase visibility into spend 49%
Simplify the buying experience for the end user 39%
Measure compliance against negotiated contracts 29%
Set targets to improve the efficiency of the procurement process 28%
Institute a change management program or internal marketing campaign for eprocurement 16%
Cleanse data being used in the system 15%
Lower the capital cost of IT management(hardware, facilities, software licenses) 11%
Percentage of Respondents, n=156
Source: Aberdeen Group, Nov 2010
6. Spend analysis is nothing but the process of extracting and collating spend data,
analyzing it and using it for reporting trends and opportunities.
If done efficiently Spend
analysis provides
spend portfol
organizations with item te a io
ea
level visibility that can help Cr
them
[ Create a spend portfolio
i.e.
strategies
SPEND
Identify
> Identify
! how much is spend ANALYSIS
! in what category
ing
sav
! With which
urc
ing
suppliers
so
so
e
r pp
or
[ Devise future sourcing fu
tu tun
se
strategies
iti
Devi es
[ Identify savings
opportunities
Before we discuss how organizations can gain real value and intelligence from their
spend data by collaborating it with supplier and market intelligence, it is necessary to
understand that there is no universal spend analysis strategy that fits all companies.
This is where internal intelligence is required in identifying what is the aim of the
exercise and prioritize what information is essential for your organization. It always
helps to build an internal task force focused towards driving the spend analysis
project. The primary aim of this task force should be to identify the information
needed and map the information mined, to business challenges that need to be
addressed.
7. Based on the level of process quality, mode of conducting spend analysis and the
value derived from these processes organizations can be classified according to the
following spend analysis matrix,
BASIC MINIMAL
[ Manual Data [ No item level spend
Processing visibility
[ Supplier Level Manual [ Limited savings
Classification Mode opportunities
[ Elementary spend [ Time spent on
reports tactical activities
INTERMEDIATE HIGH
[ Item level data [ Granular spend
classification visibility
[ Supplier data [ Accurate & up-to-
PROCESS
enrichment date spend reports
VALUE
[ Savings Automated [ Reduced supply
Identification & Mode risks
Management [ Easy savings
[ Opportunity identification &
execution via e- tracking
sourcing [ Minimized savings
ADVANCED MAXIMUM
[ Real time [ Simplified buying
classification at experience
source [ Strictly enforced
[ Real time contract compliance
classification Automated [ Advanced savings
updates Mode realization
[ Enrichment with [ Process efficiency
commodity prices across entire
[ Integration with procurement setup
Typically it is seen that small scale organizations generally resort to manual data
processing that result in elementary reports. Investments in technology are not really
prioritized and at times not even an option. Most companies fall in the intermediate
category for spend analysis with item level classification supported by savings
identification modules as well as contract compliance modules. This delivers value in
the form of granular visibility and minimized savings leakages. This level of spend
analysis though is much more reactive than what is necessary for the procurement
function today.
8. Intelligence beyond historical spend data
Reactive spend analysis though
important is not going to help
procurement functions become
more strategic in their role within
the organization. Achieving this will
require procurement to contribute
or in fact drive demand planning,
demand-supply matching as well
focus towards innovation that can
help reduce complexity in the
supply chain. Planned spend (not
historical spend) analysis is about
translating demand plans to supply
plans and cost plans. Add to this
the ability to have data from market indices as well as supplier intelligence and you
have a proper real time model in place that helps predict the likely effects of demand
variation and create strategies to counter it as well as mitigate supplier risk.
The Spend analysis process is a great way to gain internal intelligence by getting a
hold on to your spend data. Although the process can be done internally it is best to
have an external technology provider involved with an internal task force to get the
best out of this exercise. Also spend data essentially will provide a limited insight into
your procurement process unless paired or supplemented with supplier intelligence
and market intelligence.
Supplier Intelligence- What to get, where to get it from
and how to get it.
With the increasing length of the supply chain and more and more products being
outsourced the ripple effect of even minor supply chain disruptions is huge. Couple
this with increased regulatory requirements and government mandates and the need
for supplier intelligence is obvious. It is imperative though to understand what
information needs to be accessed and what are the multiple sources that can be used
for accessing the same.
Risk assessment for large public companies is often restricted to analyzing common
financial statements such as balance sheets and income statements. On the other
hand for smaller/private companies often financial reports from external
consultancies like D&B are referred to. It's not the numbers themselves but the
message that the numbers deliver which is important. Important ratios like the quick
ratio, the debt/asset ratio and the profit margin ratio might be useful performance
indicators to start risk assessment but these are just foundation data points.
9. There are several factors that can be incorporated in calculating supplier risk
profiles which help to give a more all-round view of supplier stability.
[ Past performance of the supplier in terms of on time delivery and
discounts
[ Industry trends in the supplier's industry
[ Supplier's competitive position with respect to its peers and competitors
[ Events that take place in the supplier's immediate business environment
[ Regulatory and compliance reports
Combine this with targeted negative news about suppliers. This can be supplier news
about certain factors say- bankruptcy, regulation violations or employee
dissatisfaction related- or even restricted to supplier operations in certain
geographical regions. A track on these factors and daily updates on the same can
provide major insight into your suppliers. With thousands of news sources now
accessible this can be achieved easily.
All this information can be leveraged from a multitude of sources like financial
websites, periodicals or even company data providers like D&B, Equifax etc
Concrete and real time supplier information provided can help mitigate supplier risks
as well as help in price negotiation. Supplement your spend analysis data with this to
provide an excellent platform for driving sourcing strategies and discover savings
opportunities.
Market Intelligence
As explained earlier market volatility has
been higher than ever before. The impact
on business by these rapid changes in
commodity prices can be severe if they
are not tracked on a regular basis. A major
part of your external intelligence which
should be added to your internal spend
analysis data should be the variation in
prices of commodities integral to your
processes.
The challenges that arise in managing this data are,
[ Complex behavior of market pricing
[ Collecting data for analysis
[ Limited visibility : 'What goes into pricing on the supplier side?’
[ Inability to analyze this data against organization's spend data
10. To ensure that this data is transformed into intelligence that can be used in
collaboration with your spend data the following steps need to be taken,
[ Identify critical cost drivers
[ Monitor variables & commodity indices Consider a Tequila Manufacturer
affecting cost drivers. For e.g. who depends heavily on “agave”
transportation costs are affected by the the plant used to make tequila.
fluctuations in fuel prices which can be The company would be in deep
easily tracked. Similarly prices of steel, trouble if the price of agave were
aluminium and copper are major cost to skyrocket, which would severely
drivers for manufacturing units. eat into profit margins.
[ Implement a mechanism to analyze this Appropriate market intelligence
information would help the manufacturer plan
[ Use the output to guide long and short for the future without worrying
term sourcing strategies about the fluctuating commodity.
[ Create internal benchmarks, alerts and link
this to spend data to get a complete picture
Use technology to collate data and spot trends. Spend analysis solutions can
have modules that track data from external commodity indices and leverage it
to generate savings opportunities through cost v price models. These inputs
can be used to leverage better prices from existing suppliers or develop better
sourcing strategies by combining with the supplier intelligence that was
discussed earlier.
So, with the challenge of a volatile business ecosystem comes the opportunity
for procurement to move out of its tactical and operational shell and shine as
a value driver within the organization. To do this it needs the right kind of
intelligence. Traditionally historical spend data has been a starting point for
procurement to find opportunities to drive down costs and maintain a steady
supply base. But to move beyond these reactive objectives spend data needs
to be reinforced with real time intelligence about your suppliers as well as
market indices. This will help procurement functions perform spend analysis
that is pro active and identify opportunities that add direct value to the
bottom line. Technology should be leveraged to drive procurement insight and
enable the addition of value not just to the organization's buying process but
to the business strategy as a whole.
11. At Zycus we are 100% dedicated to positioning
Z procurement at the heart of business performance. For
more than a decade we have been the world's most
trusted leader in Spend Analysis. With our spirit of
About innovation and a passion to help procurement create
Zycus even greater business advantages, we have evolved our
portfolio to a full suite of Procurement Performance
Solutions — Spend Analysis, e-Sourcing, Contract
Management, Supplier Management, and Financial
Savings Management.
Behind every Zycus solution stands an organization that
possesses deep, detailed procurement expertise and a
sharp focus on being responsive to customers. We are a
large — 600+ and growing — company with a physical
presence in virtually every major region of the globe. We
see each customer as a partner in innovation and no
client is too small to deserve our attention.
With more than 200 solution deployments among
Global 1000 clients, we search the world continually for
procurement practices proven to drive competitive
business performance. We incorporate these practices
into easy-to-use solutions that give procurement teams
the power to get moving quickly — from any point of
departure — and to continue innovating and pushing
business and procurement performance to new heights.
NORTH Princeton: 103, Carnegie Center Suite 117, Princeton, NJ 08540 Ph: 609-799-5664
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