Making Procurement Performance Count - A 3 Step Approach

Making Procurement Performance Count - A 3 Step Approach

Procurement has always been integral to the performance of an organization. However, it is now with increasing unpredictability in the market, cut throat competition and looming recession fears that procurement has become a highly topical area for the senior level management. Let's have a look at how procurement has evolved over a period of time.

Prior World War

Prior to World War I, purchasing was regarded as primarily clerical.

During World War I & II

During World War I & II - The function increased due to the importance of obtaining raw materials, supplies, and services needed to keep the factories and mines operating.

1950s & 1960s

1950s & 1960s - Purchasing continued to gain stature as the techniques for performing the function became more refined and as the number of trained professionals increased. The emphasis became more managerial. With introduction of major public bodies and intergovernmental organizations, such as United Nations, procurement becomes a well-recognized science.

1970s & 1980s

1970s & 1980s - More emphasis was placed on purchasing strategy as the ability to obtain needed items from suppliers at realistic prices increased.

1990s
1990s - Procurement starts to become more integrated into the overall corporate strategy and a broad-based transformation of the business function is ignited, fueled strongly by the development of supply management software solutions which help automate the source-to-settle process.

2000s
2000s - The leader of the procurement function within many enterprises is established with a CLevel title - the Chief Procurement Officer. The global recession of 2008-2009 places procurement at the crux of business strategy.

2010s
2010s - The elevation of the function continues as Chief Procurement Officers are recognized as important business leaders and begin to take on broader operation responsibility

Procurement is now being considered as a strategic business function. The increasing share of material costs and purchased services in major global organizations Profit & Loss account highlights its growing significance. The need to align procurement objectives with that of the organization is becoming a necessity.

This can be understood with the help of the chart below

The CPO's Top Metrics Identified Savings Spend under management Implemented savings Cost avoidance 48% 44% 41% 30%

Enterprise's Top Procurement Performance Metrics Implemented savings Booked saving Identified savings Cost avoidance Spend under Management 53% 43% 38% 38% 36%
Source : Ardent Partners 2012

As seen above, for a CPO the top metrics is Identified Savings whereas at the enterprise level the top metrics is Implemented Savings. Thus there is a stark difference in the priorities which need to be aligned.

This whitepaper will focus on problems prevalent in the process followed to measure procurement performance and how technology can be leveraged to improve procurement performance.

Neil Deverill former CPO of Anglo American and Royal Philips quoted in Procurement Intelligence Unit (PIU), "what gets measured

gets done". It literally conveys that it in order

to improve efficiency of any process it is mandatory to have the correct metrics to measure it. Procurement is largely judged by the savings it generates. Measuring procurement should be a part of an improvement process. The key is not to measure for measurement's sake, but to indentify gaps which can be filled timely to prevent any kind of savings leakages. Procurement is a complex function with tiers of suppliers and stakeholders spread across geographies. The performance measurement process should thus consider the key aspects, agreed upon by all the stakeholders and give results that are widely in line with the organization goals.

Measuring the performance of a procurement department can be a very complex process but, in 2013, more CPOs will work aggressively and proactively to define the performance criteria (and the methodology used to track it) that will be used to measure procurement department performance.
-Ardent partners 2012

Let us understand the procurement performance measurement woes with the help of an example.
Mr. John has been newly appointed as CPO of a manufacturing company with workforce of 10,000+ employees. The company has its offices spread across the globe. John has an upcoming meeting with the CFO where he needs to present the performance of his function. However with the present process of measuring procurement performance involving data spread across excel sheets, John was unable to comprehend the existing state of performance.

Some of the key pain areas for John were;

+ Difficulty in tracking procurement savings due to multiple stakeholders across

commodities and divisions

+ Lack of transparency in maintaining and comparing forecasted and actual savings + Difficulty in collating all procurement savings from different sources and generating
savings report for top management

+ No visibility into procurement savings obtained from supplier negotiations + Overcoming disconnect with finance division over savings definition + Difficult to demonstrate procurement's impact on company's bottom-line + Difficult to shift focus from cost savings to growth
What John needed was an effective measurement process that would overcome these odds and ensure overall sustainability and success of the procurement function which is aligned with the organizational targets. Using tools like excel sheets to track savings results in disparate data spread across the globe or having homegrown tools are most likely to put one in John' position. Apart from being difficult to manage data, these tools also suffer from other issues like lack of or expensive upgradation, inability to configure with the spend analysis tool, lack of security, lack of collaborative platform or user role definition mandating the use of an advanced technology to manage procurement performance. Having seen the challenges the following section will focus on the process that procurement needs to adopt for having a better performance tracking system in place. Organizations need to + Develop a function-specific view into individual projects and associated savings. This increases the visibility into organization wide savings a key to improving resource planning + Establish a common savings definition and baseline agreed upon by finance and procurement savings is an important factor for defining success for both Procurement and Finance. However, there has always been disconnect between the functions as savings generated by procurement is not reflected in the financial statements

+ Map the impact of procurement savings by collaborating with the finance team + Streamline savings approval process thus ensuring the right information reaches the

right authority
+ Track savings at a multi-dimensional level + Map forecasted savings to budgets - Project have multiple stages. It is important to be able to track forecasted savings vs. actual savings against the fixed budget at every stage

Process

Configuration

Execution

Reports

In this section we will focus on how technology can be leveraged to streamline the entire process of mapping procurement performance. In this whitepaperwe propose a 3 step process to mapping procurement performance.

Step 1: Configuration
This is the basic step which starts with defining the structure and boundary of the project.

1.

Project type
The procurement team along with the other stakeholders needs to decide the project type. For instance, cost avoidance, cost reduction, CAPEX, inflation management, revenue returns etc. Benefit types expected from the category i.e. various categories of savings whether it impacts P&L directly or indirectly, savings by cost avoidance etc.

2. Customization
Performance measurement tools/systems cannot adopt one for all strategy. It will vary depending on the organization structure, business and the industry it is functioning in. Thus it is necessary to have an option of customizing the fields as necessary. For instance track savings as per different business units, functions, plants etc.

3. Defining user roles

The data used to measure and manage the procurement performance is highly confidential to the organization. Thus care should be taken that right people have the right access. Technology enables defining user roles i.e. the access rights for the users. For instance, some users can have the right to create and edit the project while some users can only view the reports etc.

4. Customized approval workflow

In order to align the procurement function objectives with that of the organization, high level of collaboration is needed amongst the stakeholders of any given project. Building a workflow ensures the information is passed through the correct channel i.e. set of individuals and the end result is accurate and relevant. Multi level workflow is required to ensure correct flow of most relevant information. For instance,

Level 1
Reporting Manager Reviewer

Level 2
Commodity Leader Approver

Level 3
Financial Controller Approver

5. Project stages
A project has multiple stages. Typically 5 viz. 1. Supplier discovery 2. Creating a sourcing event 3. Negotiating a contract with the selected supplier 4. Managing and building supplier performance 5. Spend analysis The project will have a fixed overall budget. Savings should be forecasted at every stage. This forecasted savings should be compared with the actual realized savings. This helps the organization to track the status and success of project at every stage.

6. Customized savings formula

Just like flexibility is needed in defining the required fields and approval workflow, savings formula used to calculate the performance of procurement should also be customizable. Different projects have different requirements and so a rigid savings formula will not do justice to the procurement evaluation.

7.

Configure savings target

In order to ensure clear communication of savings target to the teams/individual, top management should have the ability to configure targets on any parameter - for instance an individual, a team, unit, geography etc. so that they can plan the resources accordingly.

Step 2: Execution
After the project basics have been defined and configured, the next step is to execute it. Execution involves 2 stages.

1.

Manage savings
As the project goes through different stages, savings also has multiple stages. At each stage there is a fight between forecasted saving vs. actual savings. Saving Stages

Stage 1
Potential Savings

Stage 2
Target Savings

Stage 3
Negotiated Savings

Stage 5
Realized Savings

Stage 4
Implemented Savings

The savings are calculated as per the agreed savings formula and its impact is mapped on the relevant financial statement.

In case of any changes at any stage, the user should have the option, depending upon the access rights to add comments or add an attachment or revise the data.

2.

Approve savings
Savings approval follows the path defined by the multi level workflow. The reviewer/approver checks the savings and its impact on the financial statements and accordingly approves them or otherwise.

Step 3: Report Savings

Once the savings have been approved, the last step involves reporting them. Reports help in analyzing the reasons for project success or failure. An ideal reporting system should be customizable and provide an in-depth analysis of where and how savings were generated. Dashboards with ability to track target v/s forecasted v/s actual savings provides the necessary visibility to the top management for actionable decision making.

Conclusion
Thus we see that for procurement to successfully measure and manage performance, the key is to effectively leverage technology which is less time consuming and gives accurate savings while maintaining a single version of truth, and at the same time ensuring transparency. Auto conversion of procurement savings to show its impact on P&L and balance sheet gives the company valuable insights and opportunities to grow which is the need of the hour today.

Z
About Zycus

At Zycus we are 100% dedicated to positioning 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 innovation and a passion to help procurement create 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.

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