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It's About People
How Talent & Mindset Makes All the Difference
12th EIPM Annual Purchasing ConferenceArchamps, December 6, 2007
2
What we would like to believe …
•Due to the large depth of externalvalue-add we have a substantialbottom-line impact
•Due to the cross-functionalnature we draw the best talent
•Due to the strong commercialrequirements we breedmanagement material
… and what the reality oftenlooks like
•Procurement is the graveyard ofthe enterprise
•Procurement is a professionalsilo
•The CPO is often based in thefinancial community
3
Content
Procurement people pay
When structure matters
Collaborate to prosper
Getting from here to there
Human resources for PSM 101
4
Content
Procurement people pay
When structure matters
Collaborate to prosper
Getting from here to there
Human resources for PSM 101
�
5
Foremost it’s all about Performance … and cost is no small part of that
PSM performance
"Contribution to companysuccess relative to cost,revenues, quality andexecution speed"
Source: McKinsey
PSM health
Capabilities &Culture"The way PSMprofessionals think,feel, and conductthemselves in theworkplace,individually andcollectively"
Strategic alignment andposture"PSM alignment and support ofbusiness strategy"
Categorymanagementand execution"What PSMstrategies andprocesses thecompany followsto create value"
��
Structure &Systems"How the resourcesof the PSM functionare managedthrough formalstructures and howthe function interactswith other companyfunctions"
Source: GPE Team of McKinsey and SMI
6
Source: GPE Team of McKinsey and SMI
Let the facts get in the way of a sad story
Surveyed and/or interviewed over 300 best in classcompanies from all geographies and majorindustry sectors; 70% with > 5 USD bn in revenue
�
�
Developed a qualitative survey based on acomprehensive performance framework of driversand best practices
�Research was conducted in collaboration withSupply Management Institute (SMI) of EuropeanBusiness School
� Results statistically correlated and validatedconfidence level >95%
Conducted deep dive interviews with McKinseyexperts with experience from 1000+ procurementengagements over the last 5 years
�
7
0.6
2.33.5Average survey scores across
all driversScale 1 - 5
An evolution in PSM practices … … results in higher performance
-0.5
0.8
1.4
12.7 15.5 17.7
AnnualPSMsavings
AverageEBITDAmargin
Annualreductionof COGS
Percent
2.1
2.8
3.4
Absolute valuesAverage acrossindustries
Source: GPE Team of McKinsey and SMI
Purchasing pays – cost do matter … (1/2)
Low Medium High
Confidence level ofcorrelations > 99%!
PerformersLow Medium High
Performers
8
An improvement by 1.0 averagesurvey score … … results in higher performance
* Relative to revenues, i.e., controlling for product price decreaseSource: GPE Team of McKinsey and SMI
Percentage points +2.2
+1.1
+4.5
Average survey scores acrossall driversScale 1 - 5
AverageEBITDAmargin
Annualreductionof COGS*
+1.0
AnnualPSMsavings
Purchasing pays – cost do matter … (2/2)
Confidence level ofcorrelations > 99%!
Absolute valuesAverage acrossindustries
9
* Overall performance calculated as average of standardized PSM savings, reduction of COGS, and EBITDA marginSource: GPE Team of McKinsey and SMI
15%
25%
Talent andcapabilities
16%
Mindsets andaspirations
Strategicalignmentand posture
Other44%
Capabilities & cultureand business strategyalignment make thedifference between lowand high performance
… but people matter mostRELATIVE SHARE OF IMPACT ON OVERALL PERFORMANCE*
10
Source: GPE Team of McKinsey and SMI
High
Medium
LowHighMediumLow
Survey scores
Self-assessment
Low performers areoverly optimistic and donot see the potential
Overestimationby 0.5
Underestimationby 0.5
High performersare very criticalin their self-assessment
The best see the journey – while high performers recognize theyare on a journey low performers fail to see their opportunitiesSURVEY SCORES
11
Content
Procurement people pay
When structure matters
Collaborate to prosper
Getting from here to there
Human resources for PSM 101
��
12
38
342135
11 10
27
0
30
25
34
35
Decentralized
Mixture of centralizedand decentralized
Centralized
Lead-buyer network
100%
Source: GPE Team of McKinsey and SMI
High performers to a greater extent operate a center-leadorganization that balances coordination and flexibility …Percent
Low Medium HighPerformers
13
Top 10 companiescenter-lead theirorganization tomaximize PSMvalue creation
31
2016
30
23
All remainingcompanies
0
50
30
Top 10companies
DecentralizedMixture of centralizedand decentralized
Centralized
Lead-buyer network
100%
Source: GPE Team of McKinsey and SMI
… and for the top 10 performers the difference is even strongerin favor of a center-lead modelPercent
14
… and in realized influence on spendThere are differences in formalPSM spend controlled …
Percent of total spend controlled* Survey score 'Influenceand reach of PSM'**
7177 79
1.8
2.4
3.1
* Spend figures stem from baseline survey, i.e., are self-reported by CPOs** Survey scores stem from interview, i.e., are rated by interviewers; drivers included: Influence of PSM function,
Business compliance, Demand and specification managementSource: GPE Team of McKinsey and SMI
"Winners always want the ball!"
Low Medium
Performers
High Low Medium
Performers
High
15
6570
61
2312 12
93
414
7
20
CPO reporting below seniormanagement team
CPO reporting to seniormanagement team member
100%
CPO is member of seniormanagement team
CPO reporting to CEO
Source: GPE Team of McKinsey and SMI
Low Medium
Performers
High
Strong organizations are heard – with the CPO reporting directlyto the CEOPercent
16
54
58
62
80
75
67
19
33
66
8
11
15
8
19
14
56
70
29 8Automotive & assembly
21 11Chemicals and pharma
23 0Others*
17 0 3Materials and construction
17 0High tech and telecoms
105Energy and utilities
011Packaged goods
011Financial institutions
14 6
100%
Total
* Including retail, travel and logistics, entertainmentSource: GPE Team
Averagesurveyscore
3.24
2.88
2.88
2.65
2.67
3.19
2.43
3.19
2.49
• CPOs in high-performingindustries such as A&Aare often member of themanagement team
• CPOs in low-performingindustries such asFinancial Institutions orEnergy and Utilities mostoften report below seniormanagement
Expectation is KingPercent
CPO reporting belowsenior management teamCPO reporting to seniormanagement memberCPO reporting to CEOCPO is member of seniormanagement team
17
Source: GPE Team
Expectation about PSM value creation
31
1217
41
110
0
50
35
3
03
28
58
11
100%
It is indeed not only about cost – the expectation is higher!
69 percent of CPOs in top-performing are expected todo more than cut cost…
…they have the support ofthe organization, right upto the top
…and they negotiate withother business units aspeers and argue their caserobustly
Performers
Low Medium High
Very low
Survey score
Low
Medium
High
Very high
18
Content
Procurement people pay
When structure matters
Collaborate to prosper
Getting from here to there
Human resources for PSM 101 �
��
19
Medium and high performersrealize USD 15 - 20 mn moresavings
Example(USD 1 bnspend)
Medium and high performersinvest USD ~1.5 mn* into morestrategic buyers
* Assuming USD 0.2 million costs per strategic buyerSource: GPE Team of McKinsey and SMI
1921
13
-0.5
0.8
1.4
Per USD 1 billion spend Percentage points
Number of strategic buyers Annual reduction of COGS
A people ROI of 10 - 15x is not bad
Low Medium
Performers
High Low Medium
Performers
High
20
Top 10 companiesemploy asignificantlyhigher share ofstrategic buyersthan the rest ofthe companies
72
50
50
28
Transactional buyers
100%
All remainingcompanies
Top 10companies
Strategic buyers
Source: GPE Team of McKinsey and SMI
For the top 10 performing companies, the focus on strategicbuyers is very strongPercent
21
Training
Tailored trainingHigh-performing purchasingfunctions tailor the training thatpurchasers receive, e.g., throughjob rotation (76 vs. 36 %)
PSM career paths
Broad experiencePurchasing managers in top-performing purchasing functionshave worked in other functionsbefore (86 vs. 23 %)
Source: GPE Team
Individual categorymanager capabilities
23
34
29
31
60Low
4
47
23
3Medium
03
46
44
7
High
100%
23
34
11
54
20
30Low
4
47
132
Medium
3
47
36
3High
100%
34
2529
98
26
110Low
34
32
0Medium
5
21
46
20
High
100%
Strong raw materialsHigh performing PSM functionsemploy purchasing managerswith analytical expertise andgeneral management back-grounds, in addition to deepcommodity knowledge(6 vs. 51 %)
Very low
Low
Medium
Survey score
High
Veryhigh
To build the PSM organization capabilities, the CPO has toselect the right people, and then develop and train themPercent
22
Source: GPE Team
PSM vision Change readiness Focus on strategy execution
26
3034
29
110Low
3
43
23
1Medium
25
35
43
15
High
100%
Communicate the visionCPOs in in top-performingpurchasing functions articulate aclear vision for achieving a broadset of goals (58 vs. 11 %)
Build a culture of innovationPurchasing executives in high-performing functions contributeto a culture of continuousimprovement (62 vs. 11 %)
Focus relentlessly on executionHigh-performing purchasingfunctions achieve or exceed theirgoals (63 vs. 9 %)
Very low
Low
Medium
Survey score
High
Veryhigh
Right people and effective training is not enough, CPOsalso need to foster an entrepreneurial mindsetPercent
34
2617
0Low
3
50
20
1Medium
02
36
55
7
High
100%
37
11
44
187
18
29
90
30
22
Low
0
57
100%
21
High
4
Medium
0
41
23
Content
Procurement people pay
When structure matters
Collaborate to prosper
Getting from here to there
Human resources for PSM 101
�
���
24
5
5
20
15
10
10
35
10
Source: GPE Team of McKinsey and SMI, McKinsey experience
… high performing program
… high performing SM buyer
Skills needed for implementation
• Negotiation skills• Market/supplier know-how• Incentive contracts, index/cap prices,
competitive bidding
Leverage purchasing power
• Close cooperation betweenR&D, purchasing, andproduction departments
Leverage product changes• Standardize• Find substitutes• Change product specification• Design to cost• Demand management• ...
• Close cooperation among sites,site management buy-in necessary
• Internal knowledge transfer• Joint-efforts with suppliers• Supplier management strategies
(make vs. buy, modular sourcing, etc.)
Optimize processes• Optimize handling, administration,
processing• Reduce inventory• Reduce joint costs with suppliers• Design to process• ...
Total
CM skills MFTcollaboration
Program
… by fully working in a MFT
5
30
40
30
Impact by …
Impact mainly through:
• Change suppliers• Renegotiate contracts• Bundle• ...
25
15
45
Tight price control is a start, product definitions andprocess optimization create the bulk of PSM impactINDEX (100 = Total savings in Percent TCO)
25
PSM impact on productdevelopment
Product developmentGet involved during theconcept phase(78 vs. 13 %)
PSM impact on manu-facturing and distribution
PSM impact on marketingand sales
PSM value creation in M&Asituations
Source: GPE Team
38
26
20
49
10
1300
Low
38
23
3
Medium
2
32
31
15
High
100%
39
23
11
39
8
19
30Low
44
23
2
Medium
4
36
36
13
High
100%
21
31
25
2510
58
21
00Low
29
141
Medium
37
23
5
High
100%
19
19
53
166
4
22
17
4
Low
35
25
5
100%
High
19
Medium
10
46
Manufacturing anddistributionContinuously interact(85 vs. 21 %)
Marketing and salesActively engage (65 vs.21 %)
Merger or acquisitionGet involved in the due-diligence phase(43 vs. 75 %)
Very low
Low
Medium
Survey score
High
Veryhigh
Top performing PSM functions work in cross-functionalteams to realize impactPercent
26
Content
Procurement people pay
When structure matters
Collaborate to prosper
Getting from here to there
Human resources for PSM 101
�
����
27
Key elements to anchor sustainable change
Operationalactions for
change
Foundationfor change
3 Build required skills andcapabilities
• Build skills and capabilities inPSM unit
• Leverage skills and capabilitiesinto business unit organizationsthrough multifunctional team work
• Upgrade talent pool as necessary
4 Establish necessary formalmechanisms
• Establish PSM organization(s) cross-functionally linked into business units
• Define clear savings targets andmetrics
• Establish incentive scheme and holdpeople accountable for results
• Establish required PSM informationsystems
1 Foster understanding andconviction of the team
• Develop story for change andsuccess in PSM consistent with theoverall company story
• Actively create occasions to deliverthe story PSM internally and tointernal customers
2 Role-model new behavior
• Initiate visible PSM leadershipactions
• Establish opinion leaders for changein PSM group as well as businessunits
• Foster cross-functional interaction inmultifunctional teams
28
The CPO should take the lead in moving the purchasing organizationto the next level
Increase the rawtalent base
• Hire young, high-potential individuals with little direct experience
• Consider a wider range of possible sources of talent (e.g.,different internal functions, diverse industries and back-grounds)
Develop talenteffectively
• Teach fundamental tools through a basic PSM curriculum
• Build high-level skills through an apprenticeship approach todeliver tailored continusous development and learning throughexperience
• Install mentoring and buddy systems
Influence mindsetsand aspirations
• Develop a compelling, positive and personal reason for change
• Choose effective role models to pioneer new approaches (e.g.,“connectors”, “mavens”, “salesmen”)
• Identify specific training needs and deliver tailored help
• Remove structural barriers to change
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