Procurement Process & Application Strategy: IT-savvy CPOs are more successful (Detecon Executive Briefing)

8/8/2019 Procurement Process & Application Strategy: IT-savvy CPOs are more successful (Detecon Executive Briefing)

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Detecon Executive Briefing

Procurement Process &Application Strategy

IT-savvy CPOs are moresuccessful

Procurement leaders manage their IT systems. Leading

purchasing organizations systematically exploit the benefits

of innovative procurement applications to the full and are

equipped with a goal-oriented, strategically aligned process

and application landscape.

Chief procurement officers (CPOs) who do not understand

IT as a critical success factor allow their purchasing systems

to be managed from the outside by finance and controlling,

the business departments, or the IT department. But if they

are to meet rising efficiency and value contribution targetssustainably, they must ensure that procurement defines its

core processes itself and, in close cooperation with IT,

comes up with the strategically best-fitting target application

landscape to drive forward the transformation without loss of

consistency.

Large, cross-functional process optimization programs of the

type demand-to-pay are alluring from a methodological

standpoint, but in actual practice they frequently have a

paralyzing effect. Maintaining the indispensable autonomy in

the design of purchasing and securing its embedding in the

overall process and application architecture becomespossible with the aid of a service-oriented encapsulation of

the purchasing processes and systems.

We make ICT strategies work


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Detecon International GmbH 11/2010 2 www.detecon.com

Strategic significance of procurement applications

Over the past decade, the role and importance as well as the working methods of purchasinghave changed fundamentally; the consistent IT support of both operative and strategic

procurement processes has played a decisive role here. The procure-to-pay (P2P) process

is more or less inconceivable without IT, but the source-to-contract (S2C) and the strategic

supplier and material group management without the support of state-of-the-art applications

are far removed from best practice.

Procurement applications are a major success factor and strategic enabler for mastering

long-term the steadily rising challenges facing purchasing directors with respect to efficiency

and value contribution. In the end, CPOs cannot solve the challenge of doing more with

less without state-of-the-art processes and applications.

This may come as a surprise because CPOs are usually dissatisfied with their procurement

applications and view IT less as an enabler and more as an obstacle. Their complaints

concern poor purchasing reporting, bad data quality, meager support of strategic purchasing

professionals, high expenditures of manual work, dissatisfaction of the users, system

heterogeneity, and inadequate flexibility.

Case Study 1:

While many purchasing organizations have resigned and accepted unsatisfactory

purchasing systems, procurement leaders prove that this is not a law of nature. For

example, one utility corporation has consistently consolidated and standardized its

heterogeneous procurement application landscape, including master data management,throughout the group. The operative procurement processes are largely automated and

the strategic purchasers are supported by business intelligence which actually deserves to

be called such. The procurement system landscape is designed for change so that

organizational units can be quickly integrated (M&A) or divested (carve-out). Clear targets

and persistence in the implementation were the success factors.

Process-oriented application clusters

Procurement applications are characterized by a relatively high level of complexity because,like a spider sitting in the middle of its web, they are connected or integrated with a broad

diversity of internal units and external suppliers. Usually procurement applications support

continuous end-to-end processes which go beyond the core processes of procurement itself.

So self-service e-procurement solutions always include the requisition and approval process,

too. The purchasing process does not end with the order; it is not finished until payment,

including the reconciliation of the order, goods receipt, and invoice (three-way matching),

has been effected. Similarly, sourcing begins right from target costing and budget planning,

not with the later concrete requisition.


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Focusing on definite procurement application clusters has proven to be an effective method

for handling this complexity. The figure below shows the Detecon reference model Supply

Management Processes and Applications, which distinguishes between twelve different

application clusters. Detecon has examined both the market of solution providers and hasdocumented best practices of leading procurement organizations for each of these

application clusters.

Supplier MgmtContract

MgmtCall-off &

Purch. OrderControlling &

ReportingSourcing Requisition

Receiving &Payment

Content &Master Data

Operational Procurement (P2P)Strategic Sourcing Purchasing Support

ERP Backend Systems(Supply Mgmt Modules)

Self-service eProcurement

Solutions

Services ProcurementSolutions

CatalogEngines

CatalogContent

eSourcing, Rfxand Auction Tools

Contract MgmtSolutions

Business

Intelligence

Spend Analysis& Compliance

Supplier Mgmt

Solutions

MasterData Mgmt

Portals, Collaboration and Integration Solutions(not specific for Supply Management)

Direct / Plan-drivenSCM Solutions

Figure 1: Detecon Reference Model Supply Management Processes and Applications

Solution provider market and fields of innovation

The solution providers can be roughly divided into three groups: ERP solution providers,

best-of-breed specialists, and local niche providers. Moreover, legacy systems and custom

developments are still relatively common in procurement, but they are seldom justifiable from

a business viewpoint.

Leading ERP providers such as SAP and Oracle offer a standard solution for all twelve

application clusters, thus allowing in principle for a single vendor procurement applicationlandscape. By their nature, the strength of the ERP solution providers is in the operative P2P

process, while the best-of-breed providers who have specialized in a limited number of

application clusters still have the lead with regards to the strategic procurement processes.

Innovation pressure is not only created by the best-of-breed providers, but lately also by the

ERP solution providers, who are successively closing remaining functional gaps. Current

innovation fields include contract management, service procurement, supply base

management, and new approaches in procurement data quality management.


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Case Study 2:

Following a long drought period, SAP offers with the release of SRM 7.0 quite a promising

procurement solution. Its extended functional scope goes far beyond simple catalog-based

e-procurement. However, purchasing departments should not be bedazzled by the newfeatures, but should assess their business value and strategic potential. For example, the

new SRM 7.0 feature of central contracts represents a strategic value add only if a

central procurement organization works in many ERP backend systems and has

crossover frame agreements in place. In this constellation SAP SRM 7.0 is a strategic

enabler driving forward the centralization strategy.

Procurement systems excellence

Case Study 3:

Excellence is not only evidenced by the implementation of innovative solutions, but also by

the consistent and full usage of existing procurement applications. A telecommunications

corporation has achieved a catalog ratio of more than 60%, while many companies never

go any farther than office supplies when applying e-procurement. The applications are the

same! But astonishing improvements in efficiency are still possible even for office

supplies. This corporation came to an agreement with its auditor that for some defined

low-value material groups it is no longer necessary to book goods receipt manually. As a

consequence, the substantial clarification effort caused by missing goods receipt postings

was eliminated.

An ideal process and application landscape which is generally suitable for everyone cannotbe defined; the concept must always be drawn up individually, taking into account the

specific context, conditions and procurement strategy. Nevertheless, it is possible to define

criteria for maturity levels and universal characteristics of excellent procurement process and

application landscapes:

Procurement

systems

excellence

Procurement strategy alignment and innovation

Alignment of the purchasing processes andapplications with the purchasing strategy

Specific use of innovative purchasing solutionswith strategic added value

Final control of purchasing and of thepurchasing processes and systems

Prioritization of the transformationsteps in conformity with the strategy

Flexible and agile purchasing system architecture

Uniform standard purchasing systems throughout the groupand minimization of special solutions and redundancies

Service-oriented encapsulation of purchasing functions

Rigorous governance based on business case observation

IT-empowered procurement processes

IT-Architecture & Total Cost of Ownership (TCO)

Standardized procurement processes andapplications group-wide

Complete integrated IT support for allprocurement processes

Harmonization: minimization of processvariants specific to material groups

Service-oriented process encapsulation

Figure 2: Characteristics of Procurement Systems Excellence


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Case Study 4:

The purchasing department of a global communications company has been organizedaccording to its commodity structure. The commodity managers were given extensive

authority to realize their challenging targets. This freedom resulted in a large number of

innovative ideas, but also in myriad process variants and solutions. For example, several

service procurement solutions which could have been realized with a single application

were implemented. This example shows that a crossover governance of procurement

processes and applications should not be neglected.

Successful transformation

Since the target state can be described quite well, the question arises as to how

procurement systems excellence can be achieved and why so many fail. The following

straightforward procedure has proven itself:

Define target land-

scape for the pur-

chasing processes

and systems

Analyze current

situation and strategic

goals

Prioritize

transformation steps

and draw up road

map

Be determined in

moving ahead with

the transformation

Upon completion of the analysis phase, the purchasing department must clearly define itsarea of process responsibility and as necessary take firm command of the process

ownership. If the procurement department does not stake out a strong position here, the

procurement processes and applications will be defined by finance and controlling, the

business departments, or the IT department. But then it would be pure luck if the purchasing

departments requirements were given adequate consideration.

It is essential for the procurement department to design its core processes itself and, acting

jointly with the IT department, to define the best-fitting target application for these processes.

The specified target process and application landscape must be decided formally on top

management level. Keeping this approved target picture in mind, the transformation steps

are defined, prioritized and planned in a road map while costs and benefits are constantly

considered. Finally, persistence is all that is required during implementation.

Large, cross-functional process optimization programs such as the end-to-end optimization

of the demand-to-pay process are a two-edged sword. The objective is the master stroke

which eliminates all pain points at once and results in an overall optimum. But such success

cannot be achieved unless all of the involved stakeholders and departments pull together

over the long run. Unfortunately, practice shows that all too often such highly ambitious

initiatives fail or progress much too slowly.


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Case Study 5:

The example of two manufacturing corporations will make this clear: while the purchasing

organization of the one manufacturer consistently and on its own authority designed its

procurement processes and applications itself and successfully optimized them step bystep, the second manufacturer chose the path of a cross-departmental optimization

program comprising finances, controlling, and purchasing. Despite a textbook end-to-end

approach in terms of methodology, the optimization program got stuck during the

concept phase. The optimization of the procurement processes and applications did not

make any progress until the overall program was broken down into manageable, agile

transformation blocks and the high-flying expectations were lowered.

The consequence is that purchasing departments are well advised to drive forward their

transformation on their own and not to wait for the miracle of a crossover optimization

program. The guideline of an overall, end-to-end process and application architecture in

which the service-oriented encapsulated procurement processes and applications can beembedded has proven to be successful. This approach assures continuous processes, is

tolerant of differing transformation speeds, and preserves the procurement departments

design autonomy.

Case Study 6:

Despite its heterogeneous ERP system landscape, an automotive supplier succeeded in

managing the requisition-to-order process exclusively via a central SAP SRM hub. In the

sense of a service-oriented approach, the SRM hub provides the requisition-to-order

process as a service. This service is called from all ERP systems. All requisitions and

purchase orders are centrally managed in the SRM hub, irrespective of its ERP origin.

This centralization and process encapsulation also enabled business process outsourcing.

All of the purchase orders for non-critical material groups and below a certain value

threshold are handled by a nearshore service provider.


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Procurement leaders manage their IT systems

In summary, it can be stated that an optimized, best practice procurement process andapplication landscape is a strategic asset which enables the purchasing department to

achieve its challenging objectives sustainably. Conversely, inadequate procurement

applications are a permanent strategic burden preventing procurement excellence.

CPOs who do not understand IT as a critical success factor and do not consider the

continuous optimization of the procurement process and applications as one of their key task

are less successful and may even be doomed to failure in the end. It is becoming

increasingly difficult to meet the growing challenges and to master the increasing complexity

of purchasing when using inadequate applications. The gap to excellence grows inexorably.

Of course, CPOs need not be concerned with system details, but procurement processes

and applications must be tightly enshrined in their management agenda. CPOs must ensure

that their organization takes control of the design and determinedly drive forward the

transformation towards the defined target procurement process and application landscape in

alignment with the procurement strategy. To put it briefly: procurement leaders manage their

IT systems.

The author

Felix Theisinger

[email protected]

Documents

Procurement Process & Application Strategy: IT-savvy CPOs are more successful (Detecon Executive Briefing)