Purchasing Transformation

Transformation des achats Einkaufsumgestaltung Hankinnan muutos Indkøbstransformationer Innkjøpsforandring Inköpsförändring Trasformazione dell’acquisto Cambio en compras Transformation des achats Einkaufsumgestaltung Hankinnan muutos Indkøbstransformationer Innkjøpsforandring Inköpsförändring Trasformazione dell’acquisto Cambio en compras Transformation des achats Einkaufsumgestaltung Hankinnan muutos Indkøbstransformationer

Purchasing Transformation Innkjøpsforandring Inköpsförändring Trasformazione dell’acquisto Cambio en compras Transformation des achats Einkaufsumgestaltung Hankinnan muutos Indkøbstransformationer Innkjøpsforandring Inköpsförändring Trasformazione dell’acquisto Cambio en compras Transformation des achats Einkaufsumgestaltung Hankinnan muutos Indkøbstransformationer Innkjøpsforandring Inköpsförändring Trasformazione dell’acquisto Cambio en compras Transformation des achats Einkaufsumgestaltung Hankinnan muutos Indkøbstransformationer

Leif Bohlin Ann-Sofie Flodin Christer Hallqvist Gustav Hasselskog Björn Stenecker Abdülkadir Tekin Torbjörn Thorsén (Editor)

Purchasing Transformation

Purchasing Transformation Leif Bohlin Ann-Sofie Flodin Christer Hallqvist Gustav Hasselskog Björn Stenecker Abdülkadir Tekin Torbjörn Thorsén (Editor)

Copyright © 2008 IBX Group AB All rights reserved For information about permissions to reproduce selections from this book, write to Marketing, IBX Group AB, Box 24236, 104 51 Stockholm, Sweden. Phone: +46 8 50 30 42 00.

Authors: Leif Bohlin, Gustav Hasselskog, Björn Stenecker, Christer Hallqvist, Abdülkadir Tekin and Ann-Sofie Flodin Editor: Torbjörn Thorsén Cover design: Blinkers® Brands (www.blinkers.se) Copy editing: Jennifer Palley/Word Sculpture (www.wordsculpture.se) Photography: Jenny Gaulitz (www.gaulitz.net) Book design: Torbjörn Thorsén Production manager: Andreas Bernhard IBX Group AB Box 24236 104 51 Stockholm, Sweden www.ibxeurope.com Printed in Sweden ISBN 978-91-633-2494-9

Contents Introduction

VII

Value Assessment Assessing Your True Potential The qualitative assessment The quantitative assessment The transformation program Being bold

3 5 19 23 26

Organization and Governance Transforming the Organization Organizational models Focus and competence shift Transforming your organization Governance (KPIs, measurements and control) Delivering on the expectations

29 30 35 36 42 46

Sourcing Ensuring High Usage of Strategic Sourcing The mirror of sales The concept of strategic sourcing Getting higher usage of strategic sourcing It’s all about people, the rest is technology

49 49 50 64 72

Procurement A Pragmatic Approach to Spend Capture The one channel approach Rolling out e-procurement Measuring success and improving on failure Closing the loop between procurement and settlement Soft focus is the key to success

75 75 82 94 98 99

Author Profiles

101

Glossary

105

Introduction

Sustainable Purchasing Transformation

Sustainable Purchasing Transformation Introduction by Leif Bohlin When I started my career in purchasing, only a select few industries saw this role as a strategic vehicle for success.

Most companies relied on the purchasing function to reduce costs and ensure supply quality and availability.

Today purchasing functions in every sector are playing an increasingly important role in corporate value creation.

Take a look at Dell or IKEA, two of the most successful manufacturing companies over the last 15 years, or examine the success stories Ryanair and Walmart. All owe their success to efficient purchasing and cost leadership.

In a fiercely competitive global economy, purchasing and the supply chain have become so important that, in effect, they have become a core aspect of any business model.

The evolution of the purchaser For years many purchasing organizations have taken the two-fold road of cost and compliance towards purchasing excellence. It’s the foundation of corporate purchasing, yet I’d like to add another parameter to this simple equation: the purchasing organization.

Leif Bohlin CEO IBX Group AB

In order to excel in purchasing and generate sustainable value, I believe that the purchasing function should rest on three pillars; the strategic sourcing process, compliance to corporate contracts and the focus of the purchasing organization.

Leif Bohlin’s has a solid industry background from the automotive industry. He spent several years at various managerial positions at Saab and General Motors. Prior to joining IBX he spent five years at AT Kearney and Booz-Allen Hamilton as a management consultant.

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Purchasing Transformation

In a recent report issued by Aberdeen Group, 65 percent of the 350 surveyed companies stated that expanding their organization to meet the demands of strategic purchasing was on the top of their agenda. This is because, in order to meet the supply market at eye level, the purchasing function needs to attract and retain talent. Competence asymmetry at the negotiation table should be seen as a cardinal sin of purchasing.

In Efficient Purchasing magazine (Issue 1, 2005), Bo Andersson, Chief Purchasing Officer of General Motors was quoted saying: “…the single area where I spend most time, [is] choosing and recruiting the right people.

I don’t personally make any decisions on which supplier to work with, but I am deeply involved in all important recruiting issues.”

In his eyes an efficient purchasing organization is a vital condition for success. I couldn’t agree more.

With supply chain issues on the corporate agenda, purchasing will start to be seen as a springboard for an executive career. Given that the purchasing function has a reputation for delivering results, purchasing is going to rise in corporate status. A higher status attracts the upwardly mobile.

As a result, I foresee a frantic hunt for purchasing talent during the coming years.

Getting the work done I’m the first to admit it – there is nothing new to strategic purchasing, but in a world where trade barriers are down, low-cost countries are increasing their manufacturing capacity by the hour and customers expect lower prices, the companies that have implemented a best practice purchasing function will emerge as winners.

So how does one identify a best practice purchasing function?

First and foremost, the purchasing function must focus on the big picture.

Gone are the days when a purchaser’s work was done after a hard day of negotiations. The modern purchaser knows that time spent in analysis, base-lining and sourcing strategy pays off in the negotiation phase of the strategic sourcing process. With modern tools and processes, the purchasing function will yield better results with less effort. Then, when VIII

Sustainable Purchasing Transformation

the contract is signed, the purchasing functions ensure that the contracts are implemented and exposed to all affected users.

Savings on paper are one thing. Savings on the bottom line are something completely different. These savings will only be generated if the contracts are actually used.

Secondly, in order to be sustainable for the long term, the corporate purchasing strategy has to be in line with the business goals of the corporation and appropriate for the purchasing maturity of the organization.

Purchasing maturity is measured by the level of professionalism and competence of the purchasing function. It is expressed by the status and strategic position of the purchasing function within the organization and the usage of modern tools and processes for both strategic and operational purchasing.

Thirdly, the purchasing function must have the support and commitment of top management. Interaction between the major stakeholders (top management, business unit managers and corporate purchasing managers) is crucial. A center-led purchasing organization with a CPO that reports directly to the CEO and is part of the management team greatly improves the chances of successful purchasing transformation.

EFFORT

PREPARATION

NEGOTIATION

IMPLEMENTATION

TRADITIONAL FOCUS

OPTIMAL FOCUS

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Purchasing Transformation

Sustainable purchasing transformation When we initiated this book project, I was not sure where it would lead us. As I read the manuscript I started to hope that the book would inspire purchasing functions to assess their current situation and act on the results.

Why might it do this? Because this is not just another book on purchasing theory; it is a book that provides perspectives on a pragmatic approach to purchasing transformation drawing on hands-on experience. Authors Gustav Hasselskog, BjĂśrn Stenecker, Christer Hallqvist, AbdĂźlkadir Tekin and Ann-Sofie Flodin all possess deep purchasing knowledge and experience gathered from a variety of fields.

I urge you to use their collective writings as input into your purchasing transformation. Let their expertise guide you through the value assessment phase, help you design the best fit purchasing organization, increase your usage of strategic sourcing and provide you with vital insights into procurement and settlement.

Some say that you cannot teach an old dog new tricks. I beg to differ, if the motivation is strong enough, anyone can change. But at the end of the day, the transformation will only be sustained if the hearts and minds of those affected are reached. I hope that this book does just that.

As a final note, I’d like to thank Peter Lageson, co-founder of IBX, for instigating and fuelling this book project. Without him, this book would not have come to be.

X

Value Assessment

Value Assessment

Assessing Your True Potential Value Assessment by Gustav Hasselskog Over the past few decades, the purchasing environment has been subject to more change than most aspects of global business. As companies specialize, more goods and services need to be purchased from external sources. At the same time, global trade has replaced closed local markets. In our global village, there is always a market where you can buy something better at a lower cost. Unfortunately, most purchasing functions are still stuck in the 1970s. The importance of purchasing in today’s economy is not fully reflected in how purchasing operates.

I believe that most companies’ purchasing departments have a huge potential – a potential to leverage the benefits that global productivity and innovation improvements have made possible.

But to show this potential, I believe that you need to have a value assessment methodology that identifies the potential and generates a pragmatic road map for action.

A proper value assessment methodology provides a comprehensive framework for analyzing the current state of the purchasing function. It should create a plan and build a business case for the transformation of the purchasing function. My experience is that this value assessment process takes between four to twelve weeks, depending on

Gustav Hasselskog Senior Vice President Consulting Gustav Hasselskog is one of Sweden’s leading purchasing theorists.

He has more than ten years of experience from line management positions. Prior to joining IBX he was head of Product Development at Gambro, where he managed a global restructuring project of the purchasing function.

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Purchasing Transformation

the assessment depth and the size of the organization. The result is a realistic hands-on plan with some imposed stretch.

I believe that business excellence is based on excelling in a few areas, not in many. Therefore, this methodology is highly pragmatic, looking into the corners where you expect to make a difference in terms of increased competitiveness. The areas with the highest potential are singled out to make sure that focus is on the correct matters.

But a plan on paper has no value if it does not reach the hearts and minds of the people who are to deliver on it. Hence, a successful assessment and planning process has to involve relevant parts of the purchasing organization. You can let others find the data for you, but you need to jointly agree on what and how to go about the change.

The value assessment methodology should cover two parts: one qualitative and one quantitative. The qualitative covers an assessment of everything from the current strategy to processes and incentive systems. The quantitative part gathers, classifies and analyzes spend and transaction data. The two parts are summarized in an analysis and a business case accompanied with a set of activities that typically span a two-year period.

QUALITATIVE ASSESSMENT

ACTIVITY PLAN

DESCRIPTION OF FUTURE STATE

QUANTITATIVE ASSESSMENT

Figure: The overall value assessment framework.

4

BUSINESS CASE

Value Assessment

The Qualitative Assessment The current state of the purchasing function is analyzed in five dimensions as shown in the figure below: strategy, processes, organization, performance and technology.

STRATEGY

PROCESS

ORGANIZATION

PERFORMANCE

TECHNOLOGY

Figure: The assessment framework.

Strategy A lot can and has been said about strategy. When all is said and done, however, a strategy needs to answer two basic questions: What is the mission of the purchasing function? How do I complete this mission?

What is the mission of the purchasing function?

I believe that if the answer to this question is clear and easy to understand, it is highly likely that the purchasing function is a low performer. But remember, the answer depends highly on the situation of the company or industry.

For example, if the company is active in an immature industry (such as software and medical technology) where innovation and growth are the most important aspects, the purchasing function should focus on creating a supplier base that can contribute to the innovation (often referred to as technology sourcing). This ensures that the company really gets the products and services it needs in time so that the race for market share is not lost. On the other hand, if the industry is mature or even on the

5

Purchasing Transformation

decline (such as cars or textile), the purchasing function should focus on cost, quality and supply-chain efficiency.

Equally important is the scope of the function. What are the responsibilities of purchasing? The answer should take into account both the process and category perspectives.

These questions about process responsibilities need to be taken into account: â– Is the purchasing function responsible for technology sourcing? â– Does the purchasing function participate in the development of new products? â– Is the purchasing function responsible for frame-agreement sourcing, spot sourcing, call-off and reconciliation, or do the responsibilities cover a subset of these activities?

From the category perspective, things get a little more blurry. Do the responsibilities cover all categories, even categories such as printed circuit board assemblies and PR services, or do the responsibilities cover only some categories? My experience is that many companies have an unclear position on this. Some categories have previously not been managed by the purchasing function (typically IT and marketing services), and now the management question can cause trouble.

How to get there?

A proper value assessment methodology not only visualizes the current strategy, but also, and more importantly, defines the strategy for the future.

We will not dwell on the first strategy question (why purchasing exists) but rather move on to the next one: How do we get to where we want to be?

Most companies that I have met are in need of an action-oriented strategy.

Process Depending on your personality, you may like or dislike processes. No matter what, you need them to make sure that you do the right things at the right time. You also need a process to make sure that you increase your efficiency.

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Value Assessment

Key questions addressed in the strategy phase ■ The purchasing organization has a formal and established strategy that is in line with overall business targets.

■ The purchasing organization has a defined scope of responsibility including category scope, process scope and internal service level.

■ The purchasing organization has defined how it will achieve the targets in terms of process, organization, HR, measurements and technology.

I believe companies should establish the following key purchasing processes: ■ Strategy review process ■ Sourcing planning process ■ Sourcing group strategy process ■ Sourcing process ■ Procure to pay process ■ Supplier development process We will discuss these processes in further detail below.

Strategy review process After the summer, but before work on the budget starts, most companies work on their strategy. At the same time, the purchasing department should work on its own strategy. The purpose of the strategy review process is to review and update the core elements of the strategy: both what the function is responsible for and what the key initiatives should be for the next year. The outcome is an updated strategy document.

Sourcing planning process It is wise to plan for next year’s sourcing initiatives in parallel with the strategy review process. A quick and easy acid test is to divide the total

7

Purchasing Transformation

purchasing value by three. If the average contract length is three years, that number represents what you should source next year. If it is lower, it indicates that you will leave parts of your supplier base unchallenged, which will decrease the competitiveness of the company.

Sourcing group strategy process Most sourcing groups deserve a sourcing strategy. The strategy should answer how you aim to secure what is important for the company for that specific sourcing group (innovation, cost, control, quality, etc.). A sourcing group strategy tends to be rather static over time, and a complete makeover is seldom needed. However, internal factors (strategy change, volume increase/decrease, the current setup does not work) or external factors (industry consolidation, technology shift, globalization or new customer demands) may call for a change.

One sourcing group that is currently under review in many companies is IT services. During the 1990s, many companies decided to outsource whole IT functions. The strategic logic was simple: IT is not our core business, and a competitive supplier market exists. According to most books on strategy, you should outsource such a category. During the outsourcing process, you are in the driver’s seat: The suppliers bend over backward to win the deal. But when the ten-year agreement is signed, not only are you no longer in the driver’s seat, you are lucky if you are still in the car. IT services depend on a number of criteria; specifications change rapidly and so do prices. Therefore, many companies have changed their strategies to a hybrid model with both in-house services and several external sources that keep up the competition even after the agreements are signed.

It is my belief that a proper sourcing strategy needs to take into account the difference between pre- and post-deal power balance. The entire value chain needs to be taken into consideration. If a supplier operates in a highly competitive environment, but its main supplier is a monopolist, then the lack of control, high prices and severe supply risks are inherited from your supplier to you.

8

Value Assessment

Procurement and settlement process The procurement and settlement process is very different for direct material and indirect material and services. The key targets of the process for direct material are typically to: ■ Secure supply while minimizing inventory (supply chain integration with production planning) ■ Lower process costs and minimize risk for manual failures through a high degree of automation including invoice matching and goods receipt Indirect material and services have other challenges: ■ Secure that the people in the organization know what agreements to buy from, and ensure they buy from those agreements (visibility and service) ■ Lower process costs through a high degree of automation including invoice matching Most manufacturing companies are rather advanced when it comes to procurement and settlement processes for direct material. My experience is, however, that the maturity is lower within indirect material and services. Companies need to expose their indirect material and services agreements to employees and facilitate easy ordering through IT solutions and a procurement service desk.

Supplier development process Supplier development is like dental floss: Your dentist tells you to use it and you say that you do (despite the fact that your dentist gets 40 minutes to investigate the facts), but the truth is that you do not do it at all. Sensitive dentists tell you to either lower your ambitions or start using an electric toothbrush. I believe that the same recommendation is sensible for supplier development: Do it for the suppliers in categories that are crucial to your business. Do it for the suppliers that you expect it to affect. Forget about the rest.

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Purchasing Transformation

For example, if you have Dell as your IT hardware supplier, it is senseless to send one of your employees to one of Dell’s factories to run an audit. Companies that are successful in supplier performance development have IT support to ensure a consistent process and transparency on issues.

Key questions addressed in the process phase ■ A strategy review process that secures annual realignment of the purchasing strategy is in place.

■ A sourcing planning process is in place where sourcing initiatives for each commodity group are planned.

■ A sourcing group strategy process is used to adjust the sourcing strategy to changing internal and external factors.

■ A sourcing methodology is established and used. It covers data gathering, specification reviews, sourcing strategy, supplier search, competitive bidding, negotiating and contracting. Approximately 80 percent of sourcing is done though this process.

■ A procurement and settlement process is in place that secures delivery, low inventories, high contract compliance, low process costs and high service level. Approximately 80 percent of purchases should be made through this channel.

■ A process for supplier development is in place and used selectively.

Organization If you have the right people onboard, you can go anywhere.

On average, the purchasing function is responsible for a cost corresponding to nearly 50 percent of a company’s revenue. Your counterparts do not hesitate to have their best people – their sales force – at the

10

Value Assessment

negotiation table so that they can convince your staff to buy more at a higher price. I know for a fact that if you have a competence asymmetry at the negotiation table, your company is likely to lose money.

Your staff needs to act like a sales force, mirroring their strategy. When sales representatives talk customization and bundling, your staff needs to talk standardization and debundling.

Within the value assessment framework, the following topics are addressed when assessing the organization: ■ Purchasing governance ■ Organizational level ■ Organizational structure ■ Headcount ■ Competence ■ Status ■ Compensation and incentive systems Purchasing governance In most companies, purchasing is serving several business units or business areas. Therefore, it is not always easily decided to whom the CPO should report. In such cases, there is a need to form a steering function that acts as the Board for the CPO. The advantages of such a construction are several.

First, the units benefiting from a professional function has to formulate its expectations: what is the role of purchasing? That involves defining the scope of responsibilities to annual target setting. Second, a Board can facilitate resolutions on disparate interest. Third, the CPO has a counterpart for budget decisions. Fourth, the company as a whole ensures that its resources are used in a wise manner.

The role for such a Purchasing Board can vary a lot depending on the type of company and structure of the purchases. It may, except for the above mentioned overall steering aspects, also involve decisions on

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supplier selection, demand management, supply risk management and so forth.

Organizational level The position of the purchasing director in the organizational structure has to reflect the importance of purchasing for the organization. For instance, a bank, where purchasing represents some 10 to 15 percent of the operatiing income (revenue) and mainly operates in mature and competitive supplier markets, a third- or fourth-level position is reasonable. However, for an automobile or electronics company where purchasing represents 60 to 70 percent of the revenue and the supplier market is complex, a secondlevel position is needed in order to get the necessary operational platform.

Organizational structure The theories around how to design an organizational chart for the purchasing function change as organizational theory evolves. Most often, the battle stands between a centralized function covering all business units and countries and a decentralized structure with dotted-line reporting to a lean central function. I believe that companies should stick to a fairly simple design principle: The design should effectively balance volume aggregation, business closeness and supply market structures.

This means that all three counteracting factors need to be taken into consideration: Volume aggregation: If more than one business unit or country is buying within the same category, this calls for centralization. There are three arguments for this: you get better deals with a larger volume; the tedious sourcing work is more efficient if it is done once instead of three or four times; and most importantly, competence is a bottleneck, which is why you need to focus on a few high-caliber individuals.

Business closeness: The drawback with the centralization of any function is that a central person does not feel the heat from local business and thus has a hard time understanding local needs. Therefore, any purchasing that contains limited potential for aggregation should remain local.

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Value Assessment

Supply market structures: Some markets are national, others European and some global. Therefore I recommend that purchasing be organized accordingly.

I believe that an effective purchasing organization most often is a hybrid between local and central responsibilities. This is often referred to as the center-led organization model. Yet my experience is that most immature purchasing organizations are too decentralized, lacking competence and the ability to aggregate volume.

Competence and status An easy check on the competence level of the purchasing organization is to rank the perceived internal order of status. In some companies, research is ranked number one. In others, it is sales. Where is the purchasing function?

If you are on the bottom of the list, you have a competence problem on your hands. Highly competent staff gets recognition, and with it, your ability to drive change and to attract new talent increases.

Another test that you can do to self-assess your organization is to measure how many staff members have an academic degree. I know this is a very rough measurement of competence, but it can definitely give you some eye-opening insights. In a purchasing function that includes both strategic sourcing and operational tasks, my experience is that the share of staff with academic degree should exceed 50 percent.

Sourcing in particular requires high-caliber personnel who are able to analyze markets and numbers and who can lead internal stakeholders toward changes in specifications and suppliers. If you intend to transform the purchasing function and deliver fast bottom-line improvements, you need to have the right people onboard.

Compensation and incentive systems The new heroes of the financial markets, private equity firms, have not only changed the balance sheets of many companies but also the compensation models for professionals who have a high impact on shareholder value

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Purchasing Transformation

creation. For purchasing staff, the straightforward profit-maximizing reasoning goes like this: If a purchasing manager is responsible for €100 million in purchasing value and can save ten percent, profit can be increased by €10 million. That in itself is a lot of money. But if the value/profit multiple of the industry that the company is operating in is 15, the value to the shareholder of that saving is €150 million.

Suddenly it makes a lot of sense to use salary levels to attract the right personnel and to use incentive models that are in line with the shareholder value creation. Companies that fail to realize this will lose in competitiveness and get unhappy shareholders.

Key questions addressed in the organization phase ■ Purchasing has an effective overall steering.

■ Purchasing is a part of top management.

■ The purchasing organization is designed with an effective balance between volume aggregation, business closeness and supply market structures.

■ Each sourcing group, BU/BA and country has a defined sourcing responsible.

■ Purchasing has enough status and recognition to attract and keep talent.

■ The headcount is in balance with the spend – €20–30 million per headcount (excluding accounts payable).

■ Staff members have the competence in their areas of specialization and get respect among stakeholders, also within tricky sourcing groups such as marketing and IT. ■ More than 50 percent of the staff has an academic degree.

■ Compensation and incentive systems reflect the purchasing function’s impact on shareholder value creation.

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Value Assessment

Performance In my experience, there is a very clear connection between performance measurements and performance. Good companies measure their progress and act on their weaknesses. The introduction of measurements has a strong psychological effect – just by implementing and visualizing measurements you will start to see the effect. Hidden functions with low status will suddenly appear. They feel pride in the improvements delivered.

In one of my projects, we set up a service desk for all operational and tactical purchases. The company had been doing these tasks before, but now we put it all at one site, introduced standard help desk tools, focused on the high value tactical purchases and pushed the rest into a self-service e-procurement system. We branded the function “The Purchasing Service Desk.” These were all seen as positive changes, even by the employees who had worked at the previous service desk.

But as soon as we started to discuss performance measurements, we ran into problems. The employees were very negative to the changes. They felt that the project was Tayloristic and that management was becoming Big Brother-like. But after several meetings, where the discussion focused on why the staff was employed by the company and how they could contribute to the company’s success, it became easier. By making it clear that the service desk is important for the company, we agreed, as a first step, to start measuring two things: internally perceived service level (measured with an easy Web-based survey) and share of the total spend managed according to the new purchasing policy. When I visited the company six months later, the first thing they did was show me the impressive graphs on the wall. They felt pride and I was delighted to have been part of the process that made their 40 hours per week more meaningful.

A key recommendation is to use the introduction or change of measurements as a vehicle for change. Connect it to the discussion about why the function exists at all. This will generate a common understanding of the mission, and before you start to measure, you will start to experience the effect.

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Purchasing Transformation

Below are some examples of measurements that are the most common after a joint review of the performance measurement process: Common measurements in the process phase ■ Spend analysis ■ Sourcing volume/throughput ■ Process and contract compliance ■ Cost development per commodity ■ Price savings (percent reduction x compliance) ■ Process savings ■ Perceived internal service level Technology With the transformation from craftsmanship to standardized machine production, the industrial revolution had a dramatic impact on poverty reduction. Now administrative functions, such as purchasing, undergo the same transformation. Instead of machinery, the vehicle for change is now information technology. Most of the benefits from the two “revolutions” can be described in the same way. With information technology in administrative functions, we see three high level drivers for productivity improvements: Automation: Routine tasks are taken over by machines at a lower cost.

Process standardization: The rigidity of all IT systems makes it possible to drive a standardization of how things are done. Best practices can be embedded in the systems.

Make information accessible: You can get more information faster, which improves any decision process.

The use of technology within purchasing is running across all these lines. Purchase order/invoice matching is automated. Sourcing and call-

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Value Assessment

off processes are standardized, ensuring better suppliers and contracts as well as higher contract compliance. Supplier search or performance tracking benefits from more assessable information.

Installed or on-demand?

Another important trend within IT is the increasing use of on-demand solutions. Companies no longer have to spend 12 months and a lot of money on consultants to implement a system that feels like a used car by the time of go-live. Instead they can rely on service providers that follow the market and that make sure the systems are up to date. And they can do this to a fraction of the cost.

I have seen too many companies that start off with an ambitious change agenda within purchasing but end up in an IT mess. The technology is initially only one of many important aspects of the initiative, but after a while, purchasing is swamped with technology issues and forgets the planned competence shift, the quick win sourcing program, the performance measurements and the low-cost country sourcing. So purchasing starts to hope that whenever the new system is in place, the rest will be an easy ride. Unfortunately, history speaks against this. If I could give some general recommendations on purchasing technology, it would be to: ■ Take it step by step ■ Use on-demand solutions from a sustainable provider as much as possible ■ Focus on ensuring the benefits of the systems (that is, that they get used), not on functionality A focused approach A number of software packages are available for purchase today. Which solution you choose depends on your type of business. However, indirect material and services are similar from company to company, which is why some general guidelines can be made: ■ Start with e-procurement. The benefits with e-procurement are many: You get an interface to your internal customers which is 17

Purchasing Transformation

instrumental in order to expose your contracts. You drive spend toward your preferred suppliers, which has a dramatic impact on the total purchasing cost. You off-load the tactical and operational purchasing staff so that they can start to focus on high-value tactical purchases – that is, spot buying of non-contracted products, investments and services.

■ In parallel, start small with e-sourcing. Although e-sourcing can be used by a much smaller number of people in the organization, my experience is that it can be rather hard to make the professional buyers start to use e-sourcing. Therefore, there is a need to start with a limited, tech-savvy group that can produce success stories and be the ambassadors for further change.

■ Then introduce e-invoicing and invoice matching. With e-procurement, you get electronic purchase orders and can start to benefit from automatic invoice matching. Make sure the finance department gets involved early. Focus initially on a limited number of high volume suppliers for e-invoice, and make sure the invoice quality is good before you take the next batch of suppliers. I have seen many initiatives fail due to lack of involvement from the finance department and big-bang low-quality roll-outs.

■ Make sure you have all the above parts properly in place before you go on with more sophisticated tools such as contract management, spend analysis and supplier performance management. Firstly, many of the tools that support these processes are still immature. Secondly, you are now into areas with much lower benefits than the three above. Thirdly, you do not want to distort the organization from the key technology initiatives or from the other initiatives you run within purchasing.

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Value Assessment

Check technology maturity using these parameters ■ Systems are in place to track actual spend.

■ Contracts are stored centrally and made available to relevant staff.

■ Tools are used to standardize and streamline sourcing and to increase competition.

■ Call-off systems cover all relevant sourcing groups.

■ Call-off systems are easy to use for casual users.

■ Invoice scanning and/or e-invoices are used.

■ Purchase orders and invoices are automatically matched.

■ Relevant integration with other business systems (supplier master data, contracts, spend analysis, etc.) are in place.

■ Internal feedback on supplier performance is easily gathered and can be used to improve supplier quality.

The Quantitative Assessment The qualitative part of the value assessment is focused on a spend analysis.

In my opinion, the spend analysis is the most important piece of information for any purchasing function. It is the map that directs you in your daily efforts to excel in purchasing. I believe that this should be performed at least once a year.

How to do it – Spend analysis for dummies Disclaimer: I am going to go in more detail here. If you do not want to read about the details of a spend analysis, please skip this section.

A pragmatic approach to spend analysis focuses on getting the correct big picture yet still allows for some degree of errors (say for ten percent of the spend). The objective of a spend analysis is to get the complete map of company spend. Two types of dimensions are of interest: the 19

Purchasing Transformation

amount and the number of transactions (the latter captured as the number of invoices).

To get a reasonable workload, manually categorize only the largest suppliers. The rest are categorized using a mapping of the client’s chart of accounts to the agreed spend tree.

A spend analysis is done in these steps: 1. Agree on a spend tree, transaction period and business unit split 2. Pull supplier data 3. Pull chart of accounts 4. Categorize supplier data 5. Agree on a spend tree A dirty source If you are looking for an IT solution for full spend analysis, you will have to wait. Although there is a lot of development in this area, there are few solutions on the market, and you still need to do quite a bit of manual labor. Therefore, as long as you do not have all of your spend in your e-procurement solution, you will have to rely on the data from accounts payable. Such data normally: ■ Resides in several separate systems ■ Has different supplier masters (that is, suppliers have different names in different systems) ■ Uses a different chart of accounts ■ Contains a lot of account coding errors ■ Uses account coding that has little relevance for a sourcing group categorization

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In a workshop, agree on a spend tree, a transaction period and the business unit split. The workshop should contain the key buyers in the organization and preferably someone from accounting who can help with pulling the necessary data.

One full year of data is preferable. It does not have to be January to December. If a full year of data is not available, shorter periods may be used, although this will cause some errors since some spend categories have seasonal spend patterns.

The data should be separated by business units, countries, sites or whatever other parameters that might be relevant. Keep it simple, and use a split that corresponds to the planned roll-out. If the plan is to roll out country by country, split it on that level. If the plan is to roll it out on division X first and then division Y, use divisions as the split.

Pull supplier data The transaction data needed are found in accounts payable and the general ledger. The latter is sometimes used for transactions that do not involve invoicing. Travel is just one example; the travel agency may have an account that they withdraw money from without any direct invoicing. However, in many companies all transactions are done through accounts payable. Ask an accounting specialist.

Pull the following fields from accounts payable and the general ledger: 1. Supplier name 2. Business unit (country, division or the entire company as agreed) 3. Number of invoices 4. Total spend If you have a heterogeneous system landscape and/or accounting procedures, you may need to pull data from several systems. Try to get one person from accounting to keep this information together to avoid getting into the deep waters of overlapping or missing data. Note: All

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internal transactions have to be taken out from the data. Also, only the spend categories that you have agreed on are to be covered.

Pull chart of accounts The charts of accounts are needed for the automatic mapping between the chart of accounts and the spend tree. Ask the accounting department to provide you with the lists (can be many in a heterogeneous company) and to meet with you so that you can prepare a mapping table together.

Categorize the spend data Depending on the time available, either you sit down with purchasing representatives from each division to categorize the largest suppliers or you ask them to do it themselves. The former option gives higher quality and in most cases more timely results, but it requires more resources. In any event, never do the categorization yourself.

Aim to manually categorize at least 90 percent of your spend. Depending on the size of your company, this can involve between 500 and 2000 suppliers. The rest can be categorized based on automatic mapping.

Make the data actionable After you are done acquiring, cleaning and categorizing the data, the interesting part starts. Now you can analyze the data to plan some of the activities for the year. My experience is that you get the most out of the spend analysis if you: ■ Classify suppliers into “Good,” “OK” or “Bad/No contract” categories. With this simple analysis, you can see where you have potential for sourcing. It can also be used as a measurement: Share on spend on good contracts. A good contract is established following a best practice sourcing process.

■ Classify supplier spend into “Locked into contract” or “Open for sourcing” categories. For some suppliers, you have long-term contracts with commitments. These need to be removed from the sourcing planning.

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■ Calculate supplier base consolidation. For each sourcing group, calculate the number of suppliers that account for 80 percent of the spend. A low number indicates that you have taken full advantage of your purchasing power by aggregating volume. A high number indicates sourcing potential.

■ Classify the sourcing groups into “Commodities,” “High competition” or “Low Competition” categories. Commodities such as raw materials, electricity or standard chemicals have open markets and published spot prices. Hence, the sourcing potential is limited.

Sourcing groups that are not commodities but still have competitive markets are the sourcing groups with the highest savings potential.

Sourcing groups with low competition may have very large potentials, but they typically require actions that take longer time to benefit from.

■ Classify sourcing groups into “Products” or “Services” categories.

Combined with the number of transactions and the total spend, this classification will help you in structuring the call-off and invoice methods to be used.

With these straightforward add-ons, you have a spend analysis that will help you to plan the sourcing for the next year as well as the roll-out or enhancement of your e-procurement and invoice solutions.

The transformation program Throughout this book, we will describe in more detail how to go about developing your purchasing function. However, on a high level, most change programs tend to contain some of these elements: ■ Organization ■ Sourcing ■ Procurement and settlement

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ORGANIZATION AND PERFORMANCE TRACK

SOURCING TRACK

PROCUREMENT AND SETTLEMENT TRACK

Figure: A typical purchasing transformation program has three tracks that run in parallel.

Organization track I cannot emphasize enough the importance of a good organization. You can achieve a lot with management and IT consultants, but the improvements will not last very long if the organizational aspects are not addressed thoroughly.

I have seen cases where the purchasing function had a headcount of 50, of which only two had an academic degree. The total spend was €500 million, indicating overstaffing. Everyone agreed that purchasing had the lowest internal status of all business functions. There was no reliable data points on spend, suppliers, supplier performance, spend under management, etc. The company had grown through several mergers and acquisitions with, so far, limited ambitions to make any synergy gains, making the transformation process even harder. Each of the former companies still had their own – very different – organization.

In this case, it was agreed that we had to deal with all organizational changes in parallel: Six centrally placed strategic buyers were recruited.

To focus the team, nonstrategic aspects were outsourced and a self-service e-procurement solution introduced. Headcount was reduced to 21,

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Value Assessment

and a service desk for all tactical and operational purchases was established, servicing all companies within the corporation. The new organization achieved one of the most remarkable transformations I have ever seen. Savings, contract compliance and service levels all beefed up in 18 months’ time.

Sourcing track At the end of the day, a purchasing function is expected to deliver savings. In a global economy with constant productivity improvements, the job is to ensure that your company gets a fair share of the decreasing prices. This is not a one-off job; it is a constant hunt throughout world markets.

However, most companies do not survive on lower costs alone. They need to innovate and introduce new or improved products and services.

With value chains breaking apart and companies becoming more specialized, companies need to rely on external innovation to a higher degree to be successful.

Savings and innovation are therefore the areas where you need to excel.

If the purchasing function is immature, the natural starting point is to look for savings. Start with the low-hanging fruit and go higher; this typically takes 18 months to accomplish.

In my view, it is important that all sourcing in the company follows a best practice sourcing process. This ensures volume aggregation and competition and thereby the sourcing process secures the best deals. To facilitate process standardization, reuse and efficiency, most companies introduce an e-sourcing solution at the same time.

Procurement and settlement track A procurement and settlement initiative has three main targets: to increase the internal service level, to secure contract compliance and to reduce administrative costs through automation.

The program should focus on activating suppliers for electronic ordering

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and invoicing, establishing a purchasing portal, and setting up an internal or external procurement service desk.

As outlined above, I recommend that the procurement and settlement program is given high priority. It will take some time to reach full implementation, which is why you need to start as soon as possible.

Being bold Throughout this brief introduction of value assessment, I have tried to outline one way to plan for a purchasing transformation program.

There are a few vital aspects that cannot be stressed enough. My first recommendation is: Be bold!

In many companies, purchasing is still a low profile function. To change that image and to get the funding and trust necessary for the proposed changes, you need to be as bold as possible, and when you get the chance, you need to jump. There are certainly some parts of your plan that most probably will fall short on expectations, but the good news is that there is probably no other function in your company in which the likelihood for successful transformation is as large as it is in purchasing. Most probably you will start off with low expectations, yet you are responsible for a lot of money.

Secondly, a proper value assessment improves your chances for success because it provides you not only with an as-is analysis and a business case, but it also provides a realistic hands-on activity driven plan for action. In nearly all the cases in which I have been involved, the rate of return measured over only three years has been five to ten times the investment. Can any other function in your company present such a strong case?

Thirdly, to be able to deliver this kind of value, you need to pay attention to the organizational aspects and you need to secure quick wins in sourcing and contract compliance. Make sure you are correctly staffed; top it off with some external help for learning and speed; kick off your strategic sourcing projects; and make sure you have an e-procurement solution in place to capture the spend.

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