Innovating with Suppliers and Procurement Performance Management

Innovating with Suppliers and Procurement Performance Management A.T. Kearney’s sixth West Chief Procurement Officer (CPO) Strategy Session in Burbank...
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Innovating with Suppliers and Procurement Performance Management A.T. Kearney’s sixth West Chief Procurement Officer (CPO) Strategy Session in Burbank, California, on January 26, 2012, outlined strategies for innovating with suppliers and managing procurement performance.

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The sixth West CPO Strategy Session opened with an overview of The Walt Disney Company’s procurement organization presented by Senior Vice President, Strategic Sourcing & Procurement, Steve Miller. Senior Director of A.T. Kearney’s Global Business Policy Council Martin Walker then shared his current research on global business trends and outlook. Martin was followed by A.T. Kearney Partner Mike Hales, who shared the firm’s insights on game-changing supplier collaboration. A.T. Kearney Vice President Carrie Ericson concluded the day by leading an interactive workshop on the drivers of procurement performance management. This paper highlights some of these interactive presentations and the open roundtable discussions that followed.

The World of 2025: Trends in the Global Economic Outlook Martin Walker, Senior Director, A.T. Kearney Global Business Policy Council The global economy is currently in a state of transition in the aftermath of the 2008 global fuel, food, and financial crises. Despite $5 trillion in new liquidity from the world’s central banks, the recovery has been weak. European economies have been especially hampered, while the U.S. has been slowed but not stopped. We are moving toward a “new reality.” China and India have reaped much of the benefit of globalization; combined, the two countries already have more than 500 million middle-class consumers. Growth will also be seen in Africa. Overall, we are moving toward a “two-speed” global economy in which the economic growth rate of the G7 nations will be dwarfed by that of the emerging market. China’s economy has slowed due to a credit crunch and other events; where it once took 2.5 yuan of investment to create a yuan’s worth of growth, it now takes 7. Changing trade patterns Global trade patterns will change in coming years. As China’s labor costs continue to rise, companies will move away from sole-sourcing arrangements to ensure supply continuity and transportation costs will increase. Manufacturing is returning to G7 nations and “near shores” like Mexico, the Balkan states, and North Africa, while sub-Saharan Africa may be the new source of low-cost labor. Due to phenomena like the Japan tsunami, flooding in Thailand, and the Icelandic volcano eruptions that disrupted global trade, the present-day geographic concentration of some key manufacturing sites is projected to decrease. An aging population Demographic changes, especially with regard to birthrates, will drive the fate of future economies. We are already seeing dramatic shifts, and projections give clear indications as to which countries will grow and which will decline—population growth correlates strongly with economic growth. Among the developed countries, the U.S. appears most immune to a population decrease due to the current birthrate and its immigration policy. The populations of France and Britain are increasing, while a number of other European nations—including Ukraine, Italy, Greece, Portugal, and Spain—will see their populations halve in the next 65 years due to their current low birthrates, with Germany and Russia also poised to drop significantly. Across

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the Islamic world, birthrates are on the decline in many countries. China is aging rapidly and will grow old before it can grow rich—by 2032, nearly one-third of its population will be over the age of 60. Women on the rise Another major shift is centered on the role of women, who are quickly becoming the more qualified gender in most fields. In the U.S. and European Union, women earned 60 percent of all university degrees. Similar advances are being seen in many emergent countries. Women continue to take on prominent roles in government and business, and it may well be that the “Arab Spring” would not have taken place were it not for the advances made by women. Constrained consumers in the West While a “new normal” is expected to take hold in coming years, individual U.S. consumers continue to spend. But with fewer Americans employed, there is less money overall with which to shop. In European nations like Spain, Italy, and Germany, people are saving more and spending less. Lost American jobs are expected to take years to return. Net investment as a share of net national product is also low in the U.S., and almost half of capital spending is in information technology. Yet the U.S. is poised to prosper in the long run due to four key long-term trends. Shale gas is bringing an energy revolution that should see the nation becoming energy self-sufficient by the 2020s, which will by itself cut the country’s trade deficit in half. With a relatively high birthrate, the U.S. labor force will be strong relative to those countries with shrinking populations. More households are forming, and a pent-up demand for housing will increase property values. Finally, U.S. manufacturing is becoming more competitive. By 2020, the U.S. GDP could have a higher growth rate than China. Future growth markets Each of the BRIC countries, which have long been believed to be in ascendancy, face challenges with continued growth. Brazil has seen a cessation of growth and has troubles around education, labor laws, and an over-generous social welfare system. Russia’s growth has been fueled by energy revenues that are not sustainable in the long run, as alternate sources of oil and gas are coming online. India’s industrial output declined in late 2011, and inflation has been running rampant. China is butting up against a number of threats, including unfavorable demographics, social unrest, rising wages, and pollution. The rise in the population of middle-class consumers around the globe continues; their numbers will more than double by 2025, predominantly in Asia. While sustainability is a significant trend at present, there are questions about how the surging global demand for consumer goods will be met. The people of China, India, Japan, and Korea will lead this consumerist charge. A tidal wave of information A wealth of information is available to anyone with an Internet connection; this empowers consumers around the world. By 2015, half of the global population is expected to have smart phones with Internet access. Consumers will increasingly have instant access to information on the go. Companies will attempt to manage the flow of information, adapt to transparent ways of working, and aspire to be trustworthy. The power of brands will be tested as online social Innovating with Suppliers and Procurement Performance Management

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networks allow positive and negative experiences to be shared instantaneously. Social networks based on common interests point the way to the affinity groups (such as, the elderly, students, vehicle owners, religious faith) that may well come to define markets in the future the way that language and nationality do today.

China is butting up against a number of threats, including unfavorable demographics, social unrest, rising wages, and pollution. Getting energized Despite the move to renewable energy sources, fossil fuels will remain a significant part of the picture moving forward. Shale gas, which is present in a number of locations around the globe, is poised to be a game changer. Natural gas will replace coal for generating electricity; the U.S. has the lead in the drilling rigs and fracking technology needed to extract gas from shale. Once thought to be imminent, the global energy crisis appears to be on hold. The new challenges will be related to natural gas distribution and how today’s oil-exporting nations react to the changing dynamics. Changing tides The world continues to invest in places like China, the U.S., India, Brazil, and Germany. Increasingly, however, this investment is coming from emergent countries. China and India will continue to buy American and European companies, tightening globalization. This move will also tighten completion, as newly bought-out companies will have access to their home government resources, including long-term capital, patient shareholders, and even state espionage resources. While world trade has been growing more quickly than GDP, this trend will be reversed by the energy revolution. At present, world trade and shipping are dominated by oil and coal, which will be traded less frequently as shale gas comes to dominate and pipelines replace ships. The future of trade will be more about the flow of funds, designs, and executives than about actual goods, mirroring the way in which American and European companies currently invest in one another. Cross-ownership and manufacturing sites located abroad will increase in number; Chinese factories will open in the U.S. just as Japanese and German ones have. An optimistic outlook Overall, there may be more reasons for optimism than pessimism about the future. While it is likely that one or more menacing “wild cards”—including bioterror or nuclear attack, conflict in the Straits of Hormuz, a global pandemic or currency collapse—will come into play by 2025, the world order has proven resilient, and global ties make worldwide conflict almost unthinkable. New technologies mix wonder with worry, as each tends to have some potential downside.

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With each generation, globalization is doubling the deployed human skills and brain power at the service of the global economy. We are finally coming to use the talents and brains of the entire human race. The challenge lies in charting the pathway to arrive at this prosperous future in light of potential missteps.

Game-Changing Collaboration: Winning Together to Fuel Growth Mike Hales, Partner, A.T. Kearney Supplier relationship management (SRM) is not a mature process, nor is it one that is consistently applied across the entire enterprise. Yet, according to A.T. Kearney’s 2011 Assessment of Excellence in Procurement (AEP) study, within three years almost all companies expect to have a structured SRM capability in place. SRM consists of both transactional and strategic components. The former is becoming increasingly technology-enabled, while the latter centers on determining which suppliers are best suited for investments and collaboration in order to work toward potential breakthroughs. No company should expect to undertake collaborative efforts with the entire supply base; doing so would be akin to beginning a sourcing effort by addressing 100 percent of spend. Prioritization is essential, as is acceptance of the fact that measuring the return on investment will not be as straightforward as it is with sourcing. The most important aspect of true collaboration is that it be cooperative rather than competitive. If multiple suppliers are brought in to compete to develop an innovation, this requirement is not met. Sourcing for innovation can be done, certainly, and may be the best way to solve some problems, but it is only on the midpoint of the overall spectrum of collaborative techniques. These efforts also fall short of true collaboration because the focus of the benefits is chiefly on the company that is pitting supplier against supplier. Strategic relationships should create win-win situations, whether they are between two companies or among a small network. A retailer seeking to increase innovation and a consumer packaged goods (CPG) company seeking to enter into low-cost segments worked together to explore how they could achieve their complementary goals, with A.T. Kearney acting in a clean room capacity to help envision how this “virtually vertical company” could work. Through this collaboration, the typical time-to-market process was halved and new product revenue doubled in three years. Concerned that it had tapped out the value from its strategic suppliers, a global chemical manufacturer selected seven of them to pilot a structured value creation process. The pilot unearthed joint insights to increase innovation and enter new segments and markets, gave access to proprietary products and technology, and enabled increased cost competitiveness. The chemical company estimates that it can unlock nearly $400 million in value by working with all of its strategic suppliers in this fashion. In both instances, procurement was an important part of the company’s team. Value can also be unlocked by working with suppliers in the indirect category space. For example, a company can innovate with an outsourced contact center provider to achieve improvements that increase customer experience scores, or it can work with an information technology provider to actually improve rather than simply maintain systems.

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The partner identification process is crucial. While most companies consider their largest suppliers to be their most strategic ones, collaboration requires a look at which suppliers will be most important in meeting the corporate strategy several years down the road. By the same token, companies may have to earn “customer of choice” status from an in-demand supplier before any deep efforts can be undertaken; companies that are mistrusted by suppliers will find their overtures rebuffed. Game-changing collaboration offers benefits sufficient to justify the case for change. For companies that have yet to undertake this type of work, early steps can center on encouraging select suppliers to work on joint process improvement efforts in order to reduce cost and maintain supply. As collaborative skills increase, a company can partner with suppliers to create new value and improve quality. At their highest level, collaborative efforts focus on creating mutual business value and strategic advantage with partners across the value chain, at which point key partners are fully integrated into operations, systems, and processes.

Strategic relationships should create win-win situations, whether they are between two companies or among a small network. Achieving game-changing collaboration requires selection of the right partner based on complementary capabilities and resources; mutual strategic impact that supports all parties’ strategies; process management that can drive repeatable, scalable efforts; and enablers to strengthen the partner relationship. Trust and gain-sharing will increase as relationships mature, while continuity of purpose will keep all parties focused on continuous results. While it is important that both parties gain from these partnerships, not every win will be equal—the key is that both parties understand that they will be better off by engaging in this activity. While personalities are important to success, collaborations have to be stronger than just a handful of key individuals who work well together, lest the typical movement of executives to other roles and other employers nullify these efforts. Cultural, process, and competency matches are all critical to long-term collaborative success, as is the governance model. Collaborative suppliers may not be open to strategic sourcing efforts; astute companies will be able to deter-mine whether the top-line benefits outweigh potential bottom-line improvements. Upfront agreements around aspects like exclusivity can help steer participants clear of such pitfalls. While it is not yet as proven as the standard strategic sourcing methodologies, an external collaboration process has been designed by A.T. Kearney to be repeatable across multiple collaborative relationships. As with sourcing, strict attention to “prework” is key; a company cannot rush into discussions with potential partners. Instead, it should: 1. Define the strategic rationale for the collaboration 2. Select partners and affirm alignment 3. Develop opportunities jointly

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4. Initiate joint implementation 5. Capture value and build the partnership Collaboration succeeds when expectations are defined up front, executives support the effort, and adequate time is invested to create alignment. Trust must be balanced with rewards to create win-win situations that will motivate both parties to work on the relationship for the long term, with transparency through data sharing and a commitment to joint value sharing.

Procurement Performance Management— Interactive Workshop Carrie Ericson, Vice President, A.T. Kearney In this session the participants reviewed and debated the merits of A.T. Kearney’s Return on Supply Management Assets© (ROSMA) framework, which is designed to measure and communicate procurement performance. Benchmark data shows that for the typical company, merely achieving average performance across all ROSMA metrics will result in a doubling of the aggregate ROSMA score. This means that a series of small improvements will bring significant overall improvement. ROSMA provides a framework for examining where and how procurement delivers value in order to support discussions with stakeholders and executives about where change needs to occur to improve results. While ROSMA has several embedded metrics, the participants chose to debate some of the key ones, including spend influence, spend governance, and project velocity or throughput. Spend influence looks at how much spend is actually “touched” or influenced by procurement, either through engaging in formal strategic sourcing or contracting initiatives, or through compliance with traditional purchasing processes designed and deployed by procurement. Participants generally agreed that a distinction has to remain between total external spend and influenced spend in order to clarify where results are being achieved—and to point out the need to close the gap between the two figures by unleashing procurement’s power in more areas. Initial ROSMA results from A.T. Kearney’s 2011 Assessment of Excellence in Procurement (AEP) study participants reveal little correlation between the total amount of spend influence at a company and its ROSMA score, which runs counter to the assumption that those procurement departments that are able to get their arms around most of their companies’ spend would be high achievers across the board. Spend governance can be viewed as a continuum ranging from those companies that adopt procurement strategies on an ad hoc basis and emphasize year-over-year cost savings in their measurement of procurement performance, to those that include procurement in the development and execution of corporate business strategies and measure procurement performance as part of a set of business-specific objectives that are jointly set with relevant stakeholders. Not every company needs procurement to reach this latter state, of course, but companies operating in this way can leverage the supply base in order to grow the top line. Session participants had a wide range of experience—from sourcing work that results from the business planning cycle to sourcing that occurs on a more ad hoc basis during the course of the year. One participant reported that almost all sourcing is planned while another said that as much as 40 percent of sourcing gets “dropped in” over the course of the year. Another

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participant said he farms out unplanned sourcing projects to an external service provider that is already contracted to perform transactional sourcing. Velocity considers how many sourcing events are completed in a given time period. In terms of sourcing velocity, a rough cut of the data shows a strong correlation between the number of events a company executes and cycle times—those that can perform sourcing more quickly are able to perform many more projects, in part because they use e-tools for a greater percentage of their spend. Participants discussed that in contrast to manufacturing, where cycle times are known and predictable, the many resource-dependent variables present in sourcing work make it harder to predict how long an effort will take. They agreed that discipline is needed to get stakeholders engaged in the process as soon as possible to define requirements, often one of the most time-consuming steps in the process.

Collaboration succeeds when expectations are defined up front, executives support the effort, and adequate time is invested to create alignment. Another participant commented that lean manufacturing and Six Sigma programs have not had the impact in the procurement function that they have had in manufacturing. One session participant noted that it might be an issue of motivation and recognition—suppliers that make continuous improvement in quality are rewarded and publicly recognized for their outstanding work, whereas procurement receives limited acclamation. At the same time, several participants noted that lean approaches introduce some risk, as every member of the value chain must perform in order to avoid potentially devastating out-of-stock situations for key materials and components. Keys to driving supply management performance include ensuring alignment between business and procurement strategies, establishing common terminology to help keep people on the same page, creating transparency and accountability for performance, promoting stakeholder engagement and alignment, designing efficient processes, and effectively leveraging technology.

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A.T. Kearney is a global team of forward-thinking, collaborative partners that delivers immediate, meaningful results and long-term transformative advantage to clients. Since 1926, we have been trusted advisors on CEO-agenda issues to the world’s leading organizations across all major industries and sectors. A.T. Kearney’s offices are located in major business centers in 39 countries. Americas

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