December is almost here…the critical planning season. Organizations are budget planning and goal setting for 2019.
Typically, this is when leadership starts to challenge Procurement for savings targets, value forecasts and projects for inclusion in budget and resource planning.
As we all prepare for a new year of aggressive targets, rising costs, and increased supply chain challenges, these sound procurement strategies will help you tackle the shifting dynamics with a confident plan.
But first, let’s touch on the balancing act procurement professionals must manage between external risks and internal corporate objectives. If we take today’s most pressing external factors for procurement, the list would look something like this:
- The health of the economy and the effect on currency fluctuations and demand on global pricing
- Political policies driving potential trade wars and increased tariffs on foreign imports
- The threat of supply chain disruptions from natural disasters and weather – just this quarter we’ve seen earthquakes, tsunamis, hurricanes, and most recently the devastating wildfires on the west coast
- And as always, the ever-evolving technology landscape
Now, let’s take all these external forces that impact global procurement and attempt to balance them with the internal pressures from the business:
- Year on year cost savings
- Driving procurement organizations to be leaner, smarter, faster (that age-old tale to do more with less)
- Manage supply assurance and protect quality and service for the business
- Manage supplier relationships
- Overcome internal technology and data gaps
- And, of course … win with stakeholders
To be truly impactful in our roles, we must strike an effective balance between looming external forces and internal business needs to drive both near and long-term value. This leads us to our 2019 Checklist to Maximize value, taking a fresh perspective on four key procurement elements:
- Spend Analysis
- Category Management
- Strategic Sourcing
- Contract Management
Now, we’ve all heard the saying that “The whole is greater than the sum of its parts.” This is especially true with the execution of these elements. Individually, they are important, but together the synergistic value is undeniable. Against the backdrop of the unique challenges we'll face in 2019, these elements will allow you to identify opportunities, strategically manage categories, mitigate risks, execute with excellence, and solidify that value with meaningful legal agreements.
Let’s be completely honest with ourselves....is this your organization?
- Does your reporting lack line level information and a category hierarchy to make spend data useful?
- Are Technology solutions to aide in spend review non-existent?
- Is your vendor master redundant and inaccurate?
- Is the team trained on analyzing spend and have the appropriate access to tools?
Without spend analysis, how do we know where the opportunities are, let alone how to execute on them?
The importance of spend analysis is often underestimated. However, according to a 2013 Bain study, companies with the most advanced analytic capabilities are…
- Twice as likely to be in the top quartile of financial performance
- Three times as likely to execute decisions as intended
- Five times as likely to make decisions faster than their peers
This is where we want to live!
Now, let’s translate that to today’s environment. According to CNBC, the latest round of U.S. tariffs is a 10 percent levy on $200 billion worth of Chinese goods, which is set to rise to 25 percent by year end. That's on top of the $50 billion worth of tariffs on Chinese goods that went into effect in August. With today’s tariffs and the looming threat of a trade war, companies must understand the origins of their supply, know who their supplier’s suppliers are, track feedstock costs, and understand the potential impact on the business. With robust spend analytics comes more visibility regarding spend, risk, and performance. Access to accurate, timely, and structured data enables the processing of vital information to support decision making.
Surprisingly, it’s not uncommon for spend reporting to be lacking due to access, time, accuracy and tools.
The adoption of procurement software and tools in this space is still emerging, but it’s a game changer. Many companies haven’t invested in a technology to streamline and enhance their spend analysis processes. However, those who have are seeing tremendous ROI and results.
Use the data to drive creative thinking and challenge the status quo. That’s where the opportunities await.
Now, let’s have a category management reality check. Is this your organization?
- Ad hoc sourcing activities with no defined long-term category vision
- Limited stakeholder engagement
- A lack of category segmentation, business integration, or defined business requirements
- Limited category and market knowledge
- Reactive project environment
Category management is a buzz word that is significantly misused today. At a high-level, there are a few key factors to keep in mind with effective category management:
- It all starts with stakeholder engagement and jointly establishing business requirements, the objectives for the category and how the spend will be managed
- Effective category and subcategory mapping to understand spend, suppliers, geography, stakeholders, and requirements
- Assessing the market dynamics provides insights into how your organization is positioned in the market. Who has the power? Are you an attractive customer? What threats may impact supply or drive pricing?
- A strategic review using the outputs from the previous steps to determine the multi-year vision and strategy for the category.
The final result of the category management process is a prioritized portfolio of projects based on value, complexity, effort, time and risk that enables enterprise wide planning and resource allocation. These are the exact questions we are preparing to answer in our 2019 planning sessions.
What are some benefits of category management that can be realized right away in 2019?
- Prioritizing project opportunities to drive value across business requirements
- Enabling a deeper understanding of category dynamics (which will lead to more impactful sourcing, supplier management, and other procurement activities)
- Identifying and reducing risk
Other long-term positive impacts include:
- A shift in procurement to drive proactive rather than reactive behavior
- Raising the profile and value proposition of procurement so stakeholders are eager to engage
- Moving from an operations focus to a strategic business focus
To be fully transparent, we find that most clients actually start at this step, with almost complete disregard of the first two elements we reviewed – spend analysis and category management. This is why their efforts aren’t generating long term, sustainable value, their resources or bandwidth is limited, and meeting aggressive savings targets is increasingly difficult.
Here is your reality check. Is this your organization?
- Are you just going out for quotes every year when contracts expire?
- Is there no time for thorough market analysis, so you just negotiate with incumbent suppliers and hope they know all your business requirements?
- Are you so overloaded with going out for quotes and putting out fires, that you just want to cry?!
The truth is, sourcing this way is not sustainable. Today’s Procurement organizations are extremely lean. Managers and buyers find themselves struggling to keep up with savings targets and the flow of RFPs and contracting tasks thrown at them. There’s hardly any time for STRATEGIC sourcing based on a Total Cost of Ownership approach.
What is strategic sourcing and what steps can you take in 2019 to maximize value from your sourcing efforts?
- Define the category or sub-category, stakeholders, and project plan.
- Determine the baseline spend and Total Cost of Ownership, conduct an external market analysis at the project or sub-category level, and work with stakeholders to agree on business requirements and KPI’s.
- Create a strategy to determine the appropriate approach to the market. It’s important to understand that not all sourcing projects should be RFP’s. There are a number of market strategies that can lead to winning results such as volume leverage, supply base changes, specification changes, joint process improvements and collaborative relationships to build the business and drive innovation.
- Execute the sourcing event.
- Report and track the value created.
With an effective sourcing initiative, the benefits can be far more than just cost savings, such as the introduction of long-term agreements to eliminate the annual bidding process and give valuable time back to Sourcing Managers, or a new level of cost component transparency that can enable deeper market understanding and new negotiating levers for future value creation years down the line.
Contract management is the last critical step in our upstream value creation chain; it is the building block for delivering and sustaining value over the life of an agreement.
So once again, let’s check reality….
- Is the majority of your spend covered by a contract?
- Is the contracting process long and cumbersome?
- Do you know whether you’re actually paying the price negotiated or contracted?
- Is there an electronic repository with search features to locate the contract you’re looking for?
- What we’ve found in our practice is that while some organizations have done relatively well analyzing spend and sourcing, it all falls down at the contracting step.
You’ve done all this great work to define the category strategy and implemented a great sourcing effort. But, now what? Well executed contracts should clearly and accurately capture business terms, be executed in a timely manner to enable value realization and incorporate appropriate risk mitigation. Without a well-executed agreement to lock in those terms and a system in place to monitor compliance, it could all go out the window.
Let’s look at strategies to capture quick wins in 2019…
- The biggest step is to actually put contracts in place. Many clients have a significant amount spend NOT covered by a contract. If terms are not documented and protected, suppliers have nothing to be held accountable to.
- Check for Compliance – Select key contracts and audit the prices paid vs. terms agreed. Is there variance? If so, is that variance allowed? Correcting variances provides measurable and immediate impact. It also signals to suppliers that they can’t just charge what they want!
- Leverage templates - Ensure the appropriate agreement types and templates are established with Procurement and Legal for ease of use and correct application. Perform an audit exercise. Is there an opportunity to consolidate templates? Or conversely, should category specific templates be created if there is frequent activity within a particular spend area? These are small steps that could streamline the process for all.
- Create Terms Awareness – If a guide hasn’t already been provided from Legal on explanations of terms, proper use, and alternative language, why not make the request? Legal should empower Procurement to efficiently execute agreements via pre-approved templates and terms.
Longer term opportunities include collaborating with Legal to establish pre-approved clause libraries with guidance on usage and investing in technology solutions to author, negotiate, manage and store contracts.
Delivering value through category management and strategic sourcing is very visible. However, the real challenge is finishing the job and realizing the value created from these efforts. Robust contract management is one of the key components to securing the value created, yet it is often an afterthought in many Procurement organizations. With the right processes, technology and people effort, contract management will help deliver the value created by the Procurement team.
Today’s focus was on upstream processes to create value through spend analysis, category management, strategic sourcing, and contract management. However, let’s not downplay or ignore the immense value of downstream processes…supplier management, eProcurement, invoice & payments, and governance.
- Effective supplier management ensures that suppliers that are critical to operations are identified and classified and appropriate plans are developed to manage risk, performance and relationships.
- eProcurement is the electronic purchase of goods and services; the primary principle is to make life simple and easy for users. Through eProcurement, the efficiencies gained from strategic sourcing and contract negotiation are operationalized within your procurement process.
- Invoice & Payment focuses on automation within Accounts Payable, specifically around invoice automation and sales and use tax automation.
- The final element is Governance, which includes policies and procedures, procurement metrics, and value tracking.
Start the year off right by planning how to manage the unique challenges we’ll face in 2019. The elements reviewed will allow you to identify opportunities, strategically manage categories, mitigate risks, execute with excellence, and solidify that value with meaningful legal agreements. Happy New Year!