Big Bang Benchmarking - Spend Optimization

Will YOUR 2010 be a…

Showcase your successes

Demonstrate your impact

Keep the organization spending smarter

Deliver REAL savings

Make 2010 the year procurement is remembered!

Today’s Session

Why Measure?

The Measurement Maturity Model

10 Must Measure Metrics

Establish Your Baseline Benchmark

See How You Stack Up

Ask the Experts – YOUR spend measurement & benchmarking questions answered!

Introducing the Experts

Mickey North RizzaResearch Director, AMR SC Leaders, Gartner Inc.

Mickey has twenty two years of supply chain management and global sourcing experience. She is a research director in the supply management practice at AMR SC Leaders, Gartner Inc. Mickey is a key member of the supply chain team and works to communicate effective supply chain, procurement, and sourcing strategies to Gartner’s clients.

Prior to joining AMR SC Leaders, Mickey worked at Moduslink Corporation, where she held the positions of Vice President of Global Supply Management and Director of Procurement and Sourcing. At Moduslink, she was responsible for implementing strategic sourcing programs, driving strategic positioning of materials in Europe and the Americas, and introducing new supply management technology.

During her career, Mickey has aided many companies as they built their supply chain strategies including as a Purchasing Manager of Advanced Techcom, Inc., Innova Corporation, and Motorola.

Mickey earned a B.A. in Material Logistic Management from Michigan State University, is a member of Institute for Supply Management, Founding Member of the ISM Risk Board Of Directors, a member of Cambridge Who’s Who and is a former Board of Trustee for the Delta Gamma Foundation. Mickey has been awarded several AMR Research awards including Money Analyst and Research Analyst. She is also a Delta Gamma Cable Award recipient.

Introducing the Experts

Ravi Thakur

Coupa Vice President of Services & Implementation Expert

Prior to joining Coupa, Ravi spent over ten years at Oracle building and leading a variety of teams in the applications product line. He was instrumental in leading a number of cross functional teams to streamline the product management and development processes after the Peoplesoft, Siebel, and JDE acquisitions.

Throughout his career, he has worked with a number of Fortune 500 companies to ensure successful deployments of Oracle solutions. He was also responsible for the hosting infrastructure and operational processes for Oracle Exchange, Oracle’s first multi-tenant SaaS offering in 2000.

Ravi holds a Bachelor of Science Degree in Engineering from UC Berkeley and an MBA from UCLA Anderson.

Building an Effective Measurement Strategy

Challenges of Measuring

Too many metrics!

Endless debate over definitionConstantly changing metrics

Data too old by the time it’s collected

Silo behavior

Gaming the system

Define a clear strategy

Cultural wars; lay down the lawImplement measurement strategy now

Fix data issues

Cross-functional metrics

Motivate consistently

A Three-Step Plan: Performance Improvement

Develop a metrics strategy that includes:

WHY?

Identify Goals

WHAT?

Define Metrics Hierarchy

HOW?

Implement for Repeatability

Step 1: Why? Identify Goals

“Why” Drives “What”: Goals Drive The Metrics That Matter

Different Metrics for Different Goals

Managing the

business(Diagnose & correct)

Guide for ongoing decisions(Scenario planning)

Financial reporting(Complianc

e & transparenc

y)

Governance & Oversight

Supplier

Quality

Supplier On-Time

Purchase

Costs

Dir Mtl

Costs

RM Inv

Cost Detail

Production

Schedule Variance

Plant Utilizatio

n

WIP + FG

Inventory

Order Cycle Time

Perfect

Order Detail

AP ARInventory Total

Cash-to-Cash

Forecast Accuracy

SCM Cost

Perfect Order

Step 2: What? A Network of Hierarchies

Define Metrics that Matter for different parts of business and interdependencies among them

Demand• Market

• Features• Pricing

Supply• Capacity• Flexibility• Quality

Product• Innovation• Options• Roadmap

Applistructure

Applistructure

XYZ

XYZ

XYZ

XYZ

XYZ

XYZ

XYZ

XYZ

XYZ

XYZ

XYZ

XYZXYZ

XYZ

XYZ

XYZ

XYZ

Balance Sheet Income Statement

XYZ

XYZ

XYZ

XYZ

XYZ

XYZ

XYZ

Finance

DEF

Marketing

Sales

Service

DEFDEF

DEF DEF DEF DEF

DEF DEF

DEFDEF

DEF DEF DEF

DEF DEF

DEF

Step 2: What? A Network of Hierarchies

Manufacturing Logistics

Demand

Supply

Product

ABC

ABC

ABCABC

ABC

ABC ABC ABC ABC ABC

ABC ABC

ABC ABC

Supplier

Quality

Supplier On-Time

Purchase

Costs

Dir Mtl

Costs

RM Inv

Cost Detail

Production

Schedule Variance

Plant Utilizatio

n

WIP + FG

Inventory

Order Cycle Time

Perfect

Order Detail


Cash-to-Cash

Forecast Accuracy

SCM Cost

Perfect Order

The Hierarchy of Supply Chain Metrics

Supplier

Quality

Supplier On-Time

Purchase Costs

Dir Mtl Costs

RM Inv

Cost Deta

il

Production

Schedule Variance

Plant Utilization

WIP + FG

Inventory

Order Cycle Time

Perfect Order Detail

Correct

DiagnoseAP AR

Inventory Total

Cash-to-Cash

Assess

Demand Forecast

SCM Cost

Perfect

Order

The Hierarchy of Supply Chain Metrics Example

Supplier Quality

Supplier On-Time

Purchase Costs

Dir Mtl CostsRM Inv

Cost Detail

Production Schedule Variance

Plant Utilization WIP + FG Inventory

Order Cycle Time

Perfect Order Detail Correct

DiagnoseAP AR

Inventory Total

Assess

Demand Forecast

SCM Cost

Perfect Order

(Weak)

(Strong)Demand Forecast

Perfect Order

SCM Cost

APInventory Total

AR

Cash-to-Cash

Supplier Quality

Supplier On-Time

RM Inv Purchase Costs Dir Mtl Costs

Cost Detail



Order Cycle Time


High Inaccurate Shipments

Balance in the Details

Company A

Company B

Company C

Company D

Purc

h

Mfg

Tran

sp

WH/D

C

Cust

Svc

Best

O

ver All

SCM Costs

Inv

Hol

d

Excellence is a Balancing Act

CostServic

e

What Does Good Look Like?

Level 1 Level 2 Level 3 Level 4

Reacting Anticipating

Collaborating

Orchestrating

Business Process

Organization

Measurement

Continuous Improvement

Technology

Culture Inside out Outside in

Unconsciouslyincompetent

Consciouslyincompetent

ConsciouslyCompetent

ConsciouslyExcellent

On par

Below par

Above par

Key:

Example Company A: Reacting

Supplier Quality

Supplier On-Time

Purch Costs Dir Mtl Costs

Cost Detail

Production Sched

Variance

Plant Utilization

Order Cycle Time


Cash-to-Cash

Perfect Order

SCM Cost

Demand Forecast

Assess

Diagnose

CorrectNew

Product Time to Market


“Unconsciously Incompetent”




Collaborating

Orchestrating

Business Process

Non Standard, hottest item

Localized

W/in Function

Believes are getting better

Little, disparate

Internally cost focused

Organization

Measurement


Technology





Example Company B: Anticipating

Supplier Quality

Supplier On-Time

Purchase Costs

Dir Mtl CostsRM Inv

Cost Detail



Order Cycle Time


Diagnose AP ARInventory Total

Assess SCM Cost

Perfect Order

Demand Forecast

Perfect Order

SCM Cost

APInventory Total

AR

Cash-to-Cash

Supplier Quality

Supplier On-Time

RM Inv Purchase Costs Dir Mtl Costs

Cost Detail



Order Cycle Time


Correct

On par

Below par

Above par

Key: “Consciously Incompetent”




Collaborating

Orchestrating

Business Process

Standardized starting lean

Consolidated Shared services

Standardized but inside out

Internally focused

ERP plus stand alone apps

Improve but as a centralized effort

Organization

Measurement


Technology





On par

Below par

Above par

Key:

Supplier Quality

Supplier On-Time

Purch Costs

Dir Mtl Costs

Cost Detail

Production Sched

Variance

Plant Utilization

Order Cycle Time

AP ARInventory

Total

Cash-to-Cash

Perfect Order

SCM Cost

Demand Forecast

Assess

Diagnose

Correct

WIP & FG

Inventory


RM Inv

Example Company C: Collaborating

“Consciously Competent”




Collaborating

Orchestrating

Business Process

Global integrated w/suppliers

Center led

Outside in metrics and w/suppliers

Taking costs out

Bus – IT partnership/Suite functionality

Leverage best of best – includes suppliers

Organization

Measurement


Technology





On par

Below par

Above par

Key:

Supplier Quality

Supplier On-Time

Purch Costs

Dir Mtl Costs

Cost Detail

Production Sched

Variance

Plant Utilization

Order Cycle Time

AP ARInventory TotalCash-to-Cash

Perfect Order

SCM Cost

Demand Forecast

Assess

Diagnose

Correct

WIP + FG Inventory


Example Company D: Orchestrating

“Consciously Excellent”




Collaborating

Orchestrating

Business Process

Procurement portfolio

CPO w/CFO & COO

Outside in aligned with biz

Profit, joint value

Advance use, cutting edge to drive business

Competitive Advantage/Market

Organization

Measurement


Technology





DemandDemand SupplySupply

ProductABC

ABC

ABCABC

ABC

ABC ABC ABC ABC ABC

First Pass Yield

% Customer Needs Met

DEF

Marketing

Sales

Service

DEFDEF

DEF DEF DEF DEF

DEF DEF

DEFDEF

DEF DEF DEF

DEF DEF

DEF

XYZ

XYZXYZ

XYZ XYZ

XYZ

XYZ

XYZ

XYZ XYZ

XYZ

XYZ

XYZXYZXYZ

XYZ

XYZ

Balance Sheet Income Statement

XYZ

XYZ

XYZXYZ XYZ XYZ XYZ

Time to Market

Customer Incentive

Effectiveness

Inventory Goodwill

Accts Rec Trade Promotion

Adjustments

Profit/Loss

Forecast Accuracy

SCM Cost

Perfect Order

APInventory

Total

Cost Detail

Supplier On-Time

Order Cycle Time

RM Inv

Prdctn Sched

Variance

PurchCosts

Plant Util WIP + FG

Inventory

Cash-to-Cash

Supplier Quality

AR

Dir MtlCosts


Time to Breakeven

ForecastAccuracy

Perfect Order

WIP + FG Inventory

Network InterdependenciesExample

Performance Measurement Maturity

Results Actionability

Measu

rem

en

t A

pti

tud

e

LOW

HIGH

LOW HIGH

Measurement Maturit

y Curve

Organizational culture is key!

Ingrained Inertia

The Right StuffThe Right Stuff

Excellence Addict

Analysis ParalysisAnalysis Paralysis

Measurement Best Practices

Measurement Program Implementation Plan: Develop migration plan for the metrics with timeframes

and milestones Scope: Define feasible and actionable scope, by supply chain,

end-to-end Process: Pay attention to ownership, roles, responsibilities, and

structure Culture: Manage the culture and motivation Tools: Invest in the tools that will enable repeatability Pilot: Use pilots to test the approach Tradeoffs: Beware of tunnel vision and understand the

interdependencies Turning data into action: Identify conclusions using patterns

and levers, prioritize results, and manage the communication Power through Process: Institutionalize the measurement

program through a business process (e.g., S&OP) to make it “sticky”

Develop a metrics strategy

Making performance management

sustainable over timeWhat makes it “sticky”?

Leadership

Power Through Process

(e.g. S&OP)

“East-West”

ProcessPerformanc

e

Measurement

Aptitude

Continuous Improveme

ntCulture

“North-South”

GoalAlignment

Set Targets

Achieve Targets

Stay Excellent

The Benefits of Measurement

• Determine realistic and desirable performance targets

• Use data to analyze:• Tradeoffs and

interdependencies• Root cause

• Measurement excellence = capability to improve and stay ahead

How To Demonstrate Success

Spend management success measured by improvement in:

Efficiency Removing road blocks that cause delays

Eliminating need for manual intervention

Driving user adoption of system

Effectiveness Ensuring purchase policy compliance

Getting 100% of spend under management

Delivering savings to the organization’s bottom line




Collaborating

Orchestrating

Business Process

Organization

Measurement


Technology








Efficiency

1.Req & PO Approval Cycle (Time)

2.Orders & Invoices Processed per FTE (#)

3.Purchasing Operating Costs (USD)

4.Days Payable Outstanding (DPO)

5.‘Touchless’ Procurement

Effectiveness

1.Savings / spend

2.Quality - Rejection %

3.Cost of Processing per Order & per Invoice (USD)

4.Spend Under Management

5.Customer Satisfaction Ratings

Why Transactional Benchmarks?

Necessary to track your performance and demonstrate success

Without true measurement, you cannot quantify results or define action plans

Tremendous value to measure oneself against other organizations by industry, employees, spend, etc.

Establishing Benchmarks

Benchmarks are only as good as the data being collected!

The Cloud can help organizations incorporate benchmarks as a part of business flows Multi-Tenant architecture on one code line allows

for the same set of measurements for the same metrics

Instant scaling and load balancing for real-time data collection and calculation

Ways to Improve

•Allow for mobile approvals

•Provide pertinent information in requisition emails

•Give real time budget information to approvers

Important Requisition Benchmarks

Requisition Approval Cycle Time

Amount of time taken to approve a requisition from the time it is submitted

Important to track the velocity of business

Important Requisition Benchmarks

Percentage of Requisitions Rejected How many requisitions are being

rejected to eliminate wasteful spend

High percentage could indicate: Poorly documented/visible

A lot of off contract spend that is reigned in via the approval process

Ways to Improve •Policies available at time of requisition

•Flexible catalogs and e-forms to drive employee request process

Important Purchase Order Benchmarks

Number of order line items processed per FTE

A large amount of orders should be processed by each FTE

Should not touch each order, simply review exceptions

Ways to Improve

•Identify contributing factors for high touch orders

•Streamline processes with advanced approval workflows, contract checks, etc.

Important Purchase Order Benchmarks

Cost of Process Purchase Orders

Based on the loaded cost per FTE and the number of requisitions processed

Should be as low as possible

Ways to Improve

•Utilize automation to continually drive this metric down

Important Invoice Benchmarks

Number of invoice line items processed per FTE

A large amount of invoices should be processed by each FTE

Should not touch each invoice, simply review exceptions

Ways to Improve

•Enable invoice submission vis cXML or EDI

•Utilize a supplier network to flip PO’s into invoices

•Drive adoption with an incentive program

Important Invoice Benchmarks

Cost of processing invoices

Based on the loaded cost per FTE and the number of invoices processed

This number should be as low as possible

Ways to Improve

•Utilize automation to continually move this metric down

Important FTE Related Benchmarks

Savings as a % of spend

Total amount saved through discounts, negotiated prices, avoidance, etc. across all spend

Low percentage would indicate that certain areas of spend are not being covered by strategic activities

Ways to Improve •Understand why employees are not using negotiated pricing

•Sole-source or find two or three vendors that can fit your needs

•Negotiate with vendors to gain favorable pricing

•Put controls in place to route employees to use the new negotiated pricing

Finish 2010 with a BANG!

YOUR Mid-Year Check Up

Efficiency MeasuresReq Approval Cycle (Time)Average cycle time from requisition submission to approval =

Orders / Invoices Processed per FTE (#)

=

Total Procurement CostsSG & A as a % of revenue and spend =

Days Payable Outstanding

=

Touchless Procurement# of manual intervention points in P2P Process =

Number of Approved POs / Invoices

Number of FTEs processing POs / Invoices

5.79 - 9.35 days

5.79 - 9.35 days

.34 -.38% of revenue.80-.85% of spend

.34 -.38% of revenue.80-.85% of spend

DPO increasing on average

DPO increasing on average

Average is 5

Best is 2

Average is 5

Best is 2

YOU Market

Accounts Payable

Total Revenue/# of days )(90 or 365)

19 hours

19 hours

PO: 29,467Invoice: 35,147

PO: 29,467Invoice: 35,147

CSM / Trans

YOUR Mid-Year Check Up

Effectiveness MeasuresSavings / spend

=

Quality: Rejection %

=

Cost of Processing per Order / Invoice (USD)

=

Spend Under Management

=

Customer Satisfaction Ratings

=

Total Savings

Total Spend

Loaded cost of FTEs processing POs / Invoices

Number of Approved POs / Invoices

Total Requisitions Rejected

Total Requisitions Approved

Maturity is issue: 2 –

8%

Maturity is issue: 2 –

8%

PO: $217 averageInvoice:

PO: $217 averageInvoice:

48% - 87%48% - 87%

30% - >90%30% - >90%

YOU Market

Spend Actively Managed

Total Spend

Satisfied Customers

Total customers

13.5%

13.5%

PO: $8.70Invoice: $2.18

PO: $8.70Invoice: $2.18

4.1%4.1%

CSM / Trans

Ask the Experts

YOUR Spend Measurement & Benchmarking Questions

Answered

How to forecast spend based on current figures?

How does that help to reduce spend or what are the key areas to look at in order to reduce spend based on current / forecasted data?

How can Procurement deliver operational efficiencies and bottom line savings to my firm which do supply oil & gas tools to Chevron Nigeria Limited - CNL (especially - some of my main functions is to receive Purchase Requisition, Purchase Order from CNL; provide quotes to win bids, contact suppliers/manufacturers; ensure delivery of orders at when due?

What is DACeasy and SAP and how do they relate to Procurement?

What training and/or seminars/books do you recommend for me as a Procurement Officer? How can I be part of your Procurement Leaders Network?

Can you elaborate on aligning the "procurement savings" with "budget / financial savings" in the context of providing meaningful results to the CFO and Financial Group?

What is the best practice when it comes to the optimal number of measurements for a service oriented government organization?

What are the standard measurements to measure Customer Service ?

How many levels of drill down is recommended?

How to position e-Procurement systems like Coupa against Oracle e-Procurement ERP systems and SAP, and MS?

Showcase your successes

Demonstrate your impact

Keep the organization spending smarter

Deliver REAL savings

Make 2010 A Year to Remember!

Mickey North Rizza

AMR Research Analyst & Supply Chain Expert

[email protected]

Ravi Thakur

Coupa Vice President of Services & Implementation Expert

[email protected]

THANK YOU!