2005 National Procurement Summit Presentation 1st September

8/16/2019 2005 National Procurement Summit Presentation 1st September

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! Importance of measuring Procurement

! Key measures

!

Examples of different measuring techniques: – Procurement Savings Scorecard

– Industry Benchmarking

– Integration Savings Scorecard

! Next steps


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! Procurement needs to demonstrate value deliveryto the organisation

! Appropriate measures ensure Procurement ismotivated and activities are aligned with thecorporate strategy

! Other parts of the organisation may also need

Procurement related KPIs, to ensure they complywith Procurement initiatives


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STRATEGY

Financial

!Production costs!

COGS savings!Payment Terms

!Leveraged agreements

!Supplier consolidation

!Low cost countrysourcing!Competitive bidding

OrganisationalCapacity

!Team Satisfaction!Turnover

!Development

!Procurement Training

Business Processes

!Spend under contract!eProcurement usage

!Reverse auction use

!Purchasing card usage

!PO-invoice match rate

Customers & Stakeholders!Customer Satisfaction!Procurement team utilisation

!Cross Functional Groups

!Communication


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Tactically……

! A scoreboard for procurement which - – Tracks progress toward financial goals – Quantifies procurement’s value contribution

! Which leads to - – Improved respect for procurement’s achievements – Attracting higher quality talent – Best-practice sharing within the procurement function

– Improved internal morale & unity within procurementStrategically……

! Leading companies will need to quantify value to its businesscustomers and the financial market


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2 31


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2 31PLAN


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2 31What is the strategic landscape?

Why track savings?

What is the goal?

Who are the players?Decision to proceed

PLAN


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DESIGN


Why track savings?

What is the goal?


PLAN


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DESIGN


Why track savings?

What is the goal?


Reporting format & process

Categories

Reporting Rules

Approval ProcessReporting mechanism

PLAN


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IMPLEMENTDESIGN


Why track savings?

What is the goal?



Categories

Reporting Rules


PLAN


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IMPLEMENTDESIGN


Why track savings?

What is the goal?



Categories

Reporting Rules


Communication

Training

Ensuring Compliance

ReportingReview

PLAN


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There is little or noprocurement savingsreporting and what is

reported is discounted bythe rest of the

organisation.

Procurement savings reportsare widely available and

believed by the rest of thecompany. Bottom line

benefits can be clearly traced

to procurement savings.

1 2 3 4 5

HighLow

Reporting must be:

! Endorsed by senior management

! In-line with financial reporting procedures

! Supported across the organisation

!

Easy for “savings reporters” to understand

The Faculty Optimal Business Practice Scale

! Develop purchasing performance metrics

! Establish regular savings reporting process

! Develop a savings target work plan for each

Division

Define CurrentState (As-Is)

1

Define IdealState (To-Be)

2

Undertake GapAnalysis

3

Develop Plan toaddress gaps

4

Cost BenefitAnalysis of

options

5

Approverecommendations

6

ImplementPlan

7


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Senior management

!Commitment to cost

reduction!Current cost reductioninitiatives

!Support level for leveragedprocurement


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Senior management

!Commitment to cost



Finance

!Challenges in cost reporting,

including systems!View of procurementorganisation

!Challenging savings claims

!Where in the “bottom line”?

Procurement

!Current climate?

!Unquantified value contribution

!Concerned reporting is a nonvalue-add process

!Cautious of corporate“scorekeepers”

!Double-dipping, who takes glory?


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! Who ‘owns’ cost reduction reporting within the organisation?

! How is procurement contribution optimised and recognised?

Senior management

!Commitment to cost



Finance





Procurement

!Current climate?






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! Who ‘owns’ cost reduction reporting within the organisation?

! How is procurement contribution optimised and recognised?

! Further complicated with Division – Region – Corporate loyalties

Senior management

!Commitment to cost



Finance





Procurement

!Current climate?






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! The spend

– Assets, goods, services – Strategic, Leveraged, Local

– Corporate, Divisional

! The savings type

– Structural – Cyclical

– Punctual

– Cost Avoidance

! The “saver” – location,

division, region! Time period – annual,

quarterly

! Actual vs projected

savings

How can savings be categorised to maximise value and havemeaning within, and outside of, the organisation?


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Structural

Sustainable, medium-longterm price change

Cyclical A savings that wasachieved based onmarket factors,

rather than purenegotiation skills

Punctual

A one-off savingsachieved through anidentified marketopportunity

Cost Avoidance

‘Holding the line’ oncosts, when anincrease wasproposed


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Finance & Procurement need to work closely to developthe procurement savings reporting rules, considering –

! Positive and adverse cost movements

! Cost issues outside the control of procurement

! Consolidated account rules – minority shares etc

! Inter-company/division price reductions

! Savings passed on to customers

! Currency or hedging gains/losses! Total cost of ownership issues - defining “value-add” vs

bottom line benefits such as improved vendor terms

! Timing differences – lagging & leading indicators


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Each Division’s Procurement Manager & CFO agree on the procurement savingsachieved, based on the categories and “rules” developed for the system and report

the agreed upon numbers to their respective corporate functions

Corporate Finance and Procurementreport the same numbers to senior

management


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! How are you going to gain commitment to reporting?

! What is procurement’s current attitude to being measured/accountable?

! What is the relationship between procurement & finance? And other groups?

! Is procurement a unified group? Is there a procurementcommunity within the organisation?

! How is a reporting system going to be used/easy forreporters?

! Who “owns” cost reduction reporting within the organisation


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! Comprehensive Benchmarking Study to measureand compare performance of the Procurementfunction

! Gathers feedback from internal customers, teammembers, managers and peers to provide a 360degree review of Procurement

! Involves qualitative and quantitative measures aswell as comparison against other industry bestpractices


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I n d u s t r y C o n t e x t

p p

l y B

a s e

D y

n p


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GOVERNANCESTRATEGYSYSTEMS

PEOPLE & COMMUNICATIONSCORPORATE SPONSORSHIP & CULTURE I n

d u s t r y C o n t e x t

p p

l y B

a s e

D y

n

ENABLERS ENABLERS


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PEOPLE & COMMUNICATIONSCORPORATE SPONSORSHIP & CULTURE

PAYORDER

NEGOTIATE

I n d u s t r y C o n t e x t

p p

l y B

a s e

D y

n

RESULTS

ENABLERS ENABLERS

IMPACTIMPACT

EXECUTIONEXECUTION


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PAYORDER

NEGOTIATE

RESULTS


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Cost CultureInfluence & ScopeSenior ManagementCommitmentOrganisationalComplianceMetrics & Alignment

StructureKnowledege & SkillsCareer Development

CommunicationTraining

ControlsAuthoritiesSystem Controls

System SuitabilityReporting & DecisionSupporteProcurement

StrategyUnderstandingStrategy RelevanceSpend Segmentation

Category Strategy

New Supplier OutreachCreating CompetitionTenderingContract NegotiationSupplier SelectionContract StructureContract ManagementSupplier ManagementSupplier PerformanceManagement

Ordering Tools

Payment Tools

Payment Terms

ReportingKey IndicatorsValue Add /Effectiveness



PAYORDER

NEGOTIATE

RESULTS


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The Faculty Definition:

Influence and scope describes

the procurement department’s

ability to penetrate and

influence the way the company

buys. A high level of influence

and scope means procurement

is deeply involved in all

purchasing decisions and is

very well integrated into theorganisation.

Procurement is apart time job for anoperator or clerical

employee.

Procurement has ahigh level ofrespect and

influence over theorganisation’s

purchasingdecisions.

1 5

The Faculty Optimal Business Practice Scale

V. Low V. High

V .

L o w

V .

H i g h

Improve

HighLow

Org

Primary role is tokeep the factory

running. All majordecisions made by

user of thecategory/

commodity.

Procurement isassigned a large

number ofcategories, butmajor areas arestill under controlof operations or

end-users.

Procurementmanages the

majority ofcorporate spend

2 3 4

Organisation’s Internal Perspective/Rating


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1. Structure and influence of Procurement within theorganisation

2. The direct/indirect dichotomy

3. Developing people and procurement as a place towork

4. Communicating the value of procurement

5. Total Cost of Ownership

6. Supplier management

7. eProcurement and systems to drive Procurementinitiatives


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! Identify, quantify and establish plan to capture synergyopportunities

! Base all savings estimates on chosen Financial year

budget! Quantify unit cost savings by estimated volume

! Pro-rata volume across combined companies

!Factor in adjustments for timing and cashflowconsiderations

! Becomes key action plan for delivering synergy benefits


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Procurement Integration ScorecardSummary of Individual Initiatives

Year 1

Black: $1.2

Green: $2.4

Red: $5.2

Amber: $3.3

Year 2

Black: $1.4

Green: $2.8

Red: $6.1

Amber: $3.7

Year 3

Black: $1.6

Green: $3.2

Red: $7.4

Amber: $4.6

$5.6

TotalOpportunity

$6.5

TotalOpportunity

$7.7

TotalOpportunity

Black = Banked

Green = High confidence

Red = Low confidence

Amber = Medium confidence

Opportunity Key


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Documents

2005 National Procurement Summit Presentation 1st September