detecon opinion paper honeycomb management excellence: sustainable performance excellence in...

8/8/2019 Detecon Opinion Paper Honeycomb Management Excellence: Sustainable performance excellence in procurement

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Opinion Paper

HoneycombManagement Excellence

Sustainable performance

excellence in procurement

2010 / 01

We make ICT strategies work


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Honeycomb Management Excellence

Opinion Paper 2 Detecon International GmbH

Table of Contents

1 Sustainable Performance Excellence in Procurement ........................................32 Procurement Strategy..........................................................................................53 Procurement Organization...................................................................................84 Procurement Processes .................................................................................... 125 Procurement Applications..................................................................................156 Procurement Intelligence...................................................................................187 HR Management in Procurement ...................................................................... 228 The Authors.......................................................................................................269 The Company....................................................................................................27


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1 Sustainable Performance Excellence in Procurement

Being a CPO these days is not as comfortable as it used to be some 20 or 30 years ago.Almost everything has changed since then. Fierce challenges have come up from beyond

the horizon. Here are the most common and important ones:

Top management expects procurement to become a main contributor to cost

reductions and to profit increases.

In financial and enterprise risk management procurement starts to play a major

role.

Procurement is at the forefront of dealing with globalization issues.

Best cost country sourcing has become a permanent challenge for

procurement.

Companies compete for procurement professionals in a world-wide battle for

talent.

There is permanent pressure to save costs: Do more with less!.

These are the major challenges to be tackled. For the CPO it is therefore most important to

know which fields of action he/she has to face and what measures to take. With its

honeycomb model Detecon presents a holistic view for the CPO on all relevant fields of

action, the honeycomb model.

HR Management inProcurement

SustainablePerformanceExcellence inProcurement

ProcurementStrategy

ProcurementOrganization

ProcurementApplications

ProcurementIntelligence

ProcurementProcesses

Figure 1: The Detecon Honeycomb Model of Procurement


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The Detecon procurement honeycomb visualizes a management philosophy based on the

cross-links and interdependencies of the individual cells and points out where to act and

what to do. The six cells strategy, organization, processes, intelligence, applications and

human resources need to be targeted in order to identify actions and measures.

The challenge is to keep all these actions and measures well-balanced, because pushing

one and disregarding the other(s) will produce unsatisfying results. CPOs who are among

the leaders of the pack have mastered the challenge of identifying their needs and of

balancing the honeycomb as a whole. Their departments deliver a sustainable performance

excellence, which makes them valued enablers for the competitiveness of their company as

a whole.

In this opinion paper we describe every honeycomb cell, showing the challenges as well as

the most common problems. In examples from our daily consulting work we demonstrate

how to stay best-in-class. Feel invited to share our practical experience in facing andaddressing CPO challenges in order to find new ways to turn problems into challenges and

challenges into manageable solutions.


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2 Procurement Strategy

a) CPO Challenges

Year after year CPOs are facing new challenges. Just picking a few CPO issues from a

comprehensive list you will find on almost all CPO agendas in 2009

a. pressure for spend savings and improvement of cash flow,

b. supplier risk management, trouble shooting or even rescue management for

financially staggering strategic suppliers,

c. need for cost cutting within procurement organization,

Those issues significantly vary from yesterdays challenges, when supplier sales forces were

dictating prices in seller markets with climbing raw material price levels and supplyshortages. Accordingly the focus of procurement strategy might have been on low-cost

country sourcing, partnership management and supply chain integration.

Resume: Procurement challenges are continuously changing and what CPOs obviously

need is a strong strategic capability which is able to

anticipate major changes in the business environment and their impact on

supply markets as well as management expectations towards procurement

(e.g. savings on top of budget, cash flow contributions versus EBIT effects),

provide profound supply market and supplier intelligence (e.g. price dynamics,

emerging suppliers, financial supplier performance and risks) and

transfer those findings into strategic plans for implementation within the

procurement organization (e.g. breakdown of saving targets to category

leaders or divisional procurement heads, setup and tracking of saving

programs, setup of supplier risk management).

b) Reality Check

Frankly spoken we only partly observe strategic procurement capabilities in the market

place. Of course most CPOs will state that procurement strategies are in place but on the

other hand significant challenges are not fully under management control.

Just a few questions as a kind of self assessment for CPOs:

How transparent are

committed savings targets per sub-category versus

achieved and approved savings year-to-date versus

opportunity assessment for further savings per category,

impact of budget changes on procurement targets and planning,

planning and tracking of measures for target fulfilment?


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How transparent is the financial constitution of your key suppliers and how fast

would you be able to fully substitute financially staggering strategic suppliers?

What about your insights into price dynamics of supply markets? Do you have

access to broad-range price benchmarks and understand your gaps againstbest price as well as strategic levers for price optimization?

While many procurement organizations might answer those questions with YES in terms of a

high level understanding they are not able to provide facts and figures with the necessary

level of quality and detail (e.g. per sub-category and planned sourcing event). But exactly

those insights are necessary to get full management control on procurement performance

and achieve sustainable excellence.

Case study:

In summer 2008 procurement analysts of a global automotive supplier told us

about massive operational problems in their US plants due to the financialbreakdown of local tier 2 and 3 suppliers. Accordingly we assumed that this

issue was on the top management agenda. However they were not able to fix

those problems on short notice and ran in even bigger troubles in Europe

about 6-12 months later.

Resume: In many organizations strategic procurement capabilities are not where they ought

to be.

c) Best-in-Class

Based on our market insights we see the most advanced procurement organizations in

globally leading manufacturing and automotive companies.

In those companies procurement performance is not only on the top

management agenda with a CPO on board level but the CPO will also have a

strong focus on procurement strategy.

Procurement strategy formulation is not only a one-time-a-year exercise, but a

set of well defined strategic procurement processes is implemented and

continuously proceeded by highly qualified resources, among others

procurement planning and target setting (as part of the enterprise budgeting

process) including quarterly updates (if necessary),

performance management, which permanently tracks target fulfilment,

permanent supply market analysis and price benchmarking,

supply risk management, which permanently tracks suppliers financial performance

based on (nearly) real-time and reliable information,

enterprise-wide development and execution of category and supplier strategies.


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Procurement strategy framework

Sourcing Fulfillment

CoreProcesses

Performance Mgmt.

Procurement Reporting

Procurement Controlling

HR Mgmt.

Development

Selection

Infrastructure Mgmt.

Systems and Class. Mgt.

Knowledge Management

SupportProcesses

Direction

Setting

Strategy Management

Vision, Strategy and Targets Systems MethodologiesPolicy, Organisation, Processes

Supplier Management

Supplier Information Supplier Selection Supplier DevelopmentSupplier Evaluation

Purchase Processing

Accounts Payable

Contract Negotiation

Contract Management

Demand Specification

Demand Planning

Risk Management

Sourcing Strategy

Supplier SelectionProduct Development Market Research Purchase Requisition

Strategic procurement processes

Figure 2: Detecons Procurement Strategy Framework

Leading procurement organizations typically install a dedicated unit for

procurement strategy. Critical success factor is to provide real-life procurement

experience in the strategy unit and a strong interaction with sourcers and

operational buyers.

But of course the whole procurement organization has to contribute in order to achieve a

strong strategic procurement capability:

Procurement business intelligence has to provide a common framework forplanning and reporting (category codes, spend planning logic in line withcategory based reporting structure), high data quality and of course acomprehensive reporting repository (KPIs/reports, views, different levels ofdetail),

Procurement HR Management has to provide the necessary skills for strategictasks,

Procurement Systems Management has to provide supporting applications forstrategic procurement processes.

Resume: Although most procurement organizations have a lack of strategic procurement

capabilities you will find advanced best practices in the market place to learn from.

d) Core Messages

Strategic procurement challenges are continuously changing and what CPOsobviously need is a strong strategic capability which helps them to get it undermanagement control.

Most procurement organizations have a lack of strategic procurementcapabilities today and under critical conditions this might become a real threatfor the companys ability to run the business (break-down of strategicsuppliers!).

Advanced best practices can be observed in the market place (procurementplanning and performance management, supply market analysis and pricebench-marking, supply risk management, enterprise-wide development and

execution of category and supplier strategies). Based on our market insightsyou will find them in globally leading manufacturing and automotive companies.


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3 Procurement Organization

a) CPO Challenges

During times of financial crisis performance-related challenges for CPOs have become even

greater and they also differ significantly from those in the past, growth-driven years:

Global consolidation and management of a global procurement function

Position the procurement function and its value contribution within the

enterprise

Increase collaboration with other enterprise functions

Contribute to the companys bottom line by cost-cutting in procurement

Manage mergers/de-merges from procurements point of view

In most enterprises, CPOs have changed the procurement organization over the last years

by implementing lead-buyer approaches across their enterprise and by establishing

preferred supplier strategies. Automation rates were improved by dedicated IT projects and

by implementing common commodity classifications within the procurement units of each

business unit.

b) Reality Check

Facing the challenges mentioned above, most CPOs have realized that the achieved

improvements in a national organization now will have to be lifted to a global scale in terms

of processes, governance models and IT. Furthermore, the successful establishment of a

global procurement organization requires a broader involvement of procurement in the

processes and networks of the enterprise at-large.

Experiences from huge procurement projects in blue-chip companies across several

industries have pinpointed a huge need for action concerning this point:

Organizational structures are often lacking the amount of flexibility and

responsiveness necessary for a successful implementation of global sourcing

strategies in more and more dynamic supplier markets. To benefit from

sourcing opportunities in global markets, agile sourcing officers are needed,

with a well-gauged and approved balance of power between regional and

central competencies in combination with expert knowledge about individual

markets.

The procurement organization seldom reflects the overall strategy and mission

of the procurement function and is still constrained by traditional structures and

hierarchies.

Although the position of the procurement function within the enterprise is

becoming more and more important due to the increasing share of material

cost and purchased services, existing collaboration models for the procurement

function are still very limited. With the exception of engineering and production

departments the traditional partners of procurement collaboration with other

departments is seldom taking place.


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CPOs still seem to underestimate the challenges of global sourcing. Taking advantage of

global sourcing requires more than identifying suppliers in low-cost countries and successful

contract negotiations. Experiences from global sourcing projects revealed the critical

success factors:

In-depth knowledge about individual markets and supplier structures, including

soft factors such as language and cultural behaviour

Extended time frames for screening and testing of suppliers from low-cost

countries

Strong focus on quality management to ensure compliance with quality

specifications as well as aspects of corporate responsibility

Regional sourcing officers provide the necessary skills and knowledge on-site. They need to

have the necessary amount of competencies and maneuvering room to establish successful

supplier relations with suppliers from low-cost countries. CPOs must focus on a well-gauged

balance of power between regional units and central sourcing units located at headquarters.

Efficient and effective processes for successful global sourcing and cost-efficient operational

procurement call for end-to-end integrated IT solutions as described in the honey comb cell

Applications and a lean and powerful organizational structure. Critical success factors are:

Clearly-defined leadership for category management on a global scale and

strategic sourcing for all categories relevant for global sourcing

A separation of sourcing and operational procurement activities due to the fact

that the guiding principles for these areas are different: deep category and

market expertise to maximize savings versus efficiency and customersatisfaction in the processing of operational procurement tasks

A capability to execute global sourcing strategies with an efficient management

of key suppliers in their markets

c) Best-in-Class

Best-in-class enterprises established global sourcing units by bundling the purchasing

volume from all subsidiaries worldwide. The highly skilled employees are freed from

operational procurement tasks in order to increase their air time for strategic sourcing

activities. Operational procurement tasks are allocated to shared services. For standard

commodities, the transactional services are either provided by outsourcing partners orshared services centers located in low-cost countries. CPOs have to assess the

performance of their procurement organization using the benchmarks set by enterprises who

have successfully adapted their procurement organization.

Finally, the scope and intensity of the procurement collaboration network within the

enterprise is an appropriate indicator for how the procurement organization sees itself within

the enterprise. Market leaders have understood the constantly increasing leverage on the

companies bottom line that could be achieved by a complete empowerment of the

procurement function. Early involvement of procurement in product development and

marketing processes opens up the possibility to leverage innovation potential from suppliers

for product development, thus improving market attractiveness.


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On the other hand, procurement experts can help to realize savings by influencing the

selection of equipment and material to be integrated in the final product during the

development phase in close cooperation with technical specialists from product

development, production and marketing professionals.

A closer collaboration with other departments in the enterprise leads to a break-up of

traditional organizational structures in favor of interdisciplinary teams working together in

projects where product development and sourcing activities are combined.

We have observed some case studies from leading enterprises in different industries:

A global mobile telecommunications service provider implemented a global

category management and concentrated all resources for sourcing activities for

selected categories such as IT and IT services, network equipment and general

procurement in one single location in Central Europe.

A world-leading automotive manufacturer has established interdisciplinary

teams with experts from marketing, product development, production and

procurement working together during the product development and pre-

production process. The early involvement of procurement ensures the

realization of savings potential by optimizing the choice of components within

the product design and development process.

A leading ICT service provider separated its strategic sourcing activities from

operational procurement. A harmonized procure-to-pay process was developed

including a special routing logic ensuring the involvement of strategic sourcing

experts when the amount of goods or services to be sourced is above defined

values. If the values are below the threshold, sourcing activities are executed

by employees from the operational procurement unit.

Focus

Savings

&

Value contribution

Efficiency

&

Quality

StrategicSourcing

Bundling of purchasing volume for each category

Establishing of enterprise wide category

management

Increasing category, supplier and market expertise

on global markets

Implementation of global key accounts for important

suppliers

Increasing process efficiency through streamlined

processes and automation

Bundling of administrational tasks to further improve

efficiency and gain more air time for a closer

collaboration with internal customers

Continuous improvement of procurement processes

and applications

Value driver

OperationalProcurement

Separation

Figure 3: Separation of strategic sourcing and operational procurement at an ICT service provider


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d) Core Messages

Enterprises operating in global markets have to streamline their procurement

organization and harmonize their operational and steering processes toachieve more flexibility and agility in the interplay between procurement

headquarters and regional sourcing units. Experiences and lessons learned

from successful global sourcing projects have to be anticipated and spread

rapidly across the whole organization. This is necessary to take advantage of

global sourcing opportunities.

Best-in-Class enterprises have realized the increasing importance of

procurement. Procurement is gaining more responsibility, steering internal and

external logistics and contributing with excellent know-how about supplier

markets and products in early stages of the product development process.

Teamwork in interdisciplinary project teams has replaced traditional

administrative procurement activities. CPOs are facing the challenge to strengthen the position of procurement within

the enterprises top management. In order to achieve this, they have to

emphasize procurements increasing share of the overall value creation

process.


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4 Procurement Processes

a) CPO Challenges

The megatrend of shifting value creation from internal sources into the supply network is still

prevailing, although the economic downturn has been superposing many agendas last year.

And with it supply management and especially procurement is gaining more and more

importance.

The CPO is challenged to build a global corporate procurement function. Very often this

means integrating the procurement divisions scattered all over business units, affiliates and

subsidiaries with their different processes and policies, into one seamless procurement

function. This is additionally complicated because many companies are not static, but

constantly changing because of mergers and divestments. To further hinder thingsprocurement is constantly challenged to do more business with fewer resources. For

operational procurement this means raising the efficiency in order processing, whereas in

strategic procurement more value has to be created with the same or even less staff.

b) Reality Check

All these challenges have one thing in common: To gain sustainable excellence any CPO

needs a strong procurement process management capability. This is true despite the

perception of most CPOs that they have been changing procurement processes for years

and that every change takes a very long time to be implemented and is not really

satisfactory. So most CPOs are not happy with their procurement processes.

Procurement processes are not harmonized on a corporate level. Processes

are varying in different business units, countries or categories. In many projects

we encounter even diverse operational procurement processes for the same

category in the same country, but in different strategic business divisions. As

only one process can be optimal, the average process performance will be

lower, with negative effects on procurement efficiency.

Typically processes are not optimized end-to-end, but only on the division or

department level. A particular example for this is the requisitioning process and

the quality of requisitions that reach procurement. Some requisitions come with

excellent quality. All necessary data are filled in and the requisitions could be

processed automatically. But more often than not procurement receivesrequisitions nobody can work with. The line item description is poor, financial

data are missing, delivery dates and the like are left out and so on. And for

some requisitions a call of the annoyed internal customer reaches procurement

first: Why are you not buying the things I need for my work? The requisition in

question is often still in the approval process with some internal stakeholders,

but the fault is attributed to procurement. In all these cases procurement

spends valuable time to complete the requisition before being able to process

an order.

Frequently no clear separation of operational procurement and sourcing

processes can be observed. The first purchaser who picks up the requisition

will process it to the very end. Even if a complex sourcing event is necessarywhich this particular agent is not familiar with.


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Things are even worse for category and supplier management, where often no

common processes are in place. Usually different processes and procedures

are in place across categories, business units or foreign affiliates. Even supply

organizations with a good reputation as frontrunners have no harmonizedprocesses in this area.

Even if companies have harmonized processes in theory, there are many

microscopic differences. Requisition approval and order signing processes are

identical on a steering level across the whole company. But on the operational

level there are differences when to involve controlling or which management

level is authorized to sign an order worth 125,000.000.

Even open non-compliance can be observed. Typically this increases along the

way from operational procurement through sourcing to category and supplier

management. The inevitable argument goes like this: We dont want to be

distracted from value creation by merely following formal processes.

Typically the efficiency of processes is not currently known. Targets are set on

an annual basis. Controlling picks up the data and reports target fulfilment two

or three months later.

c) Best-in-Class

Despite all these obstacles some procurement departments are consistently in the best

quartile of their respective peer group when it comes to the quality of the process cell. For all

of them this is due to one factor: they manage their processes. In our opinion no company

can stay at the top if it does not constantly work on its processes.

As-Is

)BD 1 )BD 1

BD 2BD 2

BD 3BD 3

BD 1BD 1

To-Be

BD 2BD 2

BD 3BD 3

Figure 4: Harmonization of different business division (BD) processes with one master process and slight

division specific variants.

To implement world class procurement a leading automotive manufacturer

started a procurement process optimization project. The target of this project

was to design one standard end-to-end, procure-to-pay process for all business

units and categories. The company reached its target by implementing astandard process backbone by allowing only slight local process variants.


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By cleaning up the process cell in this way, purchasing will at least be average. But the real

frontrunners leverage the process cell by also utilizing the other cells of our honeycomb

model.

In the above example the automotive manufacturer supported the newstandard process with a standard software solution and only allowed variants if

they are compliant with this solution. As a matter of fact process compliance

can easily be facilitated if processes and applications are aligned. Additionally

a target system was designed and the respective KPIs for the processes are

now consistently collected and reported from the procurement application.

Another example comes from a global telecommunications company which

wants to build the best procurement function in its industry. A main lever to

reach this target is the optimization and harmonization of the scattered

procurement processes which were different in its strategic business units,

categories and countries. The different processes were benchmarked and best

practices were identified. As a key feature the processes are harmonized overbusiness divisions and countries, but are kept slightly different to allow for

category-specific needs. Interestingly for every category at least one leading

edge process could be identified in the different business divisions or countries.

The handling of such a complex process landscape needs special process

know-how, combined with a high degree of knowledge of procurement itself.

Therefore this is done by a newly formed procurement process department

responsible for process management across the international procurement

function. Finally together with IT best practices in automation are evaluated and

rolled out across all categories and countries

A last example is again from a leading automotive manufacturer. In this case,

process management is already established as an organizational unit. To

further increase performance, this unit has a direct reporting line to the CPO

and is therefore closely aligned with procurement strategy. Clear objectives

and changes in procurement strategy are communicated directly to

procurement process management and will be implemented without delay. In

times of fast changing business environments this is a clear advantage.

d) Core Messages

Although many CPO challenges are interrelated with processes, most CPOs

are dissatisfied with their process performance.

Continuous management of the processes is the basis, but to reachsustainable performance processes should be harmonized according to the

identified best practice across the company and kept slightly category-specific.

(e.g. direct goods and capital goods). A benchmark against external best

processes is crucial to stay in the lead.

Real-world best-in-class can only be achieved by leveraging the process cell

with organization and applications.


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5 Procurement Applications

a) CPO Challenges

Procurement is in the spotlight. As an internal business service function procurement is

continuously asked to do more with less. The perpetual challenge of the CPO is to deliver

more value and additional savings with fewer procurement professionals. As far as strategic

sourcing is concerned there is a never-ending sequence of short-term cost saving initiatives

on top of the budget plan. A key challenge is to get all spending under the control and

management of procurement. On the operational level both process efficiency and internal

customer satisfaction have to be increased simultaneously. In addition cash management,

supply base management and risk management have never been more important and more

challenging than in the current economic situation.

b) Reality Check

Information technology is probably the most important enabler to solve a CPOs challenges.

Without leading-edge procurement applications there is no way for procurement to perform

as expected. But in reality most CPOs are not at all satisfied with their procurement

applications, and they consider IT more to be an obstacle than a key enabler. As illustrated

by the following examples the procurement applications often do not meet a CPOs

expectations:

Prior to supplier negotiations it is extremely burdensome to aggregate all

information (contracts, order and invoice volume, performance reports, etc.)

from numerous strategic and transactional procurement applications into acomplete and accurate picture. Global spend and contract visibility are missing.

Supplier performance and risk management information are outdated and

incomplete. Sales representatives using powerful CRM tools have a clear

advantage over sourcers working with cumbersome procurement applications

and Excel. It is an unfair battle with unequal weapons.

Concerning global spend analysis there is no single point of truth. Both on

entity and corporate level there are several reporting and spend analysis tools

producing contradictory results. Data quality is typically a mess; especially

spend figures are assigned to the wrong commodities or to the wrong

suppliers. The CPO does not even have a correct top supplier list, because

supplier affiliations are not depicted correctly. Furthermore spend data is not

current. It takes more than one month to consolidate and aggregate all spend

data from all legal entities worldwide.

Performance and excellence levels of the operational procurement processes

are disappointing or even unknown to the CPO. There are still lots of manual

steps in the processes, the automation and no-touch rate are low, and

productivity, measured in order line items per day and employee for instance, is

below best-in-class benchmarks. This is for the most part caused by outdated

operational procurement applications, which do not adequately support and

automate the operational procurement processes.

Usability and response times of procurement applications are dissatisfying.

This leads to a low acceptance of self-service procurement applications, which

in turn causes low process efficiency, low process compliance and maverick

spending.


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c) Best-in-Class

The messy state procurement applications are in cannot be explained by shortcomings of

the IT department alone. In fact suboptimal procurement applications are usually a symptomof shortcomings in the other cells of the procurement honeycomb. IT requires clear

guidelines and directions. If there is a professional process management and if the end-to-

end processes source-to-contract and procureto-pay are specified, then a well-

functioning procurement application can do its job. On the basis of a vaguely defined

organizational procurement model it is difficult to implement world-class procurement

applications, because undefined workflows are hard to design. So it is a prerequisite for

leading-edge procurement applications that all cells in the business honeycomb have done

their homework first. Best-in-class cases, which are presented below, typically excel in a

close cooperation between all the cells in the business honeycomb, including the

procurement applications cell.

Although a number of procurement technologies have entered mainstream adoption, there issignificant and continuous innovation. Leading procurement organizations leverage state-of-

the-art best practices of leading solutions providers and push market innovations into their

organizations. For example leading-edge sourcing suites supporting the complete source-

to-contract process are a powerful enabling technology and transformation vehicle capable

to take strategic sourcing to the next level of excellence. Actually these sourcing suites are

the CRM of procurement, empowering strategic sourcers and providing for corporate-wide

procurement transparency and visibility.

A global engineering company streamlined its spend analysis in order to have a

single point of truth concerning the total enterprise spend. In one central, global

procurement data warehouse all contracts, purchase orders and invoices were

collected from all entities. A fast and standardized data delivery process wasestablished. In order to ensure good data quality, key master data, such as

suppliers, are managed centrally. Furthermore an intelligent data enrichment

and quality enhancement tool has been implemented to automatically identify

and eliminate input errors, such as incorrect category assignments. A state-of-

the-art frontend makes the spend analysis more user-friendly.

A global telecommunications company created a shared service center for

procurement operations providing operational purchasing services to all

business units. The efficiency level of the SSC is monitored with performance

KPIs, which are compared with world-class benchmarks. By setting up an

efficiency program the efficiency level of the SSC was increased continuously.

Most efficiency measures have leveraged the power of IT. By fully utilizing theautomation potential in existing procurement applications and by establishing

category-specific best practice solutions, e.g. for services procurement, the no-

touch and automation rates have been increased significantly.

Employees are used to well-designed, user-friendly web frontends, such as

they find them in Amazon or Google. The internet experience has raised the

bar for self-service procurement applications, but many standard procurement

applications are still not very user-friendly. A leading telecommunications

company realized that this is not a soft issue, because both efficiency and

internal customer satisfaction depend on it. Therefore the usability of the key

procurement applications was significantly improved. The results and positive

effects are quite convincing.


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An automotive manufacturer defined an end-to-end process framework for its

procurement processes. The target processes were specified top-down with a

high level of detail. Functional requirements were assigned to the process

steps, which formed the basis for evaluating the software providers. The detaillevel of the process specification was increased further after selecting the best-

fitting vendor. Maximum standardization was ensured by strict policies and

governance. All deviations from the standard and all process variants required

a committee approval based on a business case justifying the effort. This strict

methodological approach ensured best-in-class applications with highly

standardized, end-to-end processes.

Leading procurement organizations have a clearly-defined procurement

systems strategy, which of course is aligned to the overall business and

corporate procurement strategy. Basically the procurement systems target

architecture, the building blocks and an implementation roadmap are defined

and updated on a regular basis. All short-term projects have to pass the testwhether they are moving into the right strategic direction and whether they fit

into the defined target architecture.

Supplier Management Solution

Contract Management Solution

eSourcing, Rfx & Auction Tool

Services Procurement Solution

Business Intelligence & Spend Analysis

Content & Master Data Solution

Buyer Portal

ERP Backend System

Integration Layer

SupplierPortal

Requisition

erPortal

Self-service eProcurement Solution

Supplier Management Solution

Contract Management Solution

eSourcing, Rfx & Auction Tool

Services Procurement Solution

Business Intelligence & Spend Analysis

Content & Master Data Solution

Buyer Portal

ERP Backend System

Integration Layer

SupplierPortal

Requisition

erPortal

Self-service eProcurement Solution

Figure 5: World Class Procurement Systems Target Architecture

d) Core Messages

Leading-edge procurement applications are probably the most important enabler to solve the

CPO challenge to do more with less. But in reality most CPOs are not at all satisfied with

their procurement applications and consider IT more to be an obstacle than a key enabler.

Best-in-class cases typically excel because of a close cooperation between all the cells in

the business honeycomb, including the procurement applications cell. Procurement leaders

leverage the full potential of procurement applications and have a clearly-defined

procurement systems strategy and roadmap.


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6 Procurement Intelligence

a) CPO Challenges

In economically difficult times characterized by declining sales and shrinking market shares

as a result of decreasing consumption, risk management and contributions to improve the

bottom line are vital to stabilize the enterprises economical basis and to ensure survival in

highly dynamic markets. Both these goals are the responsibility of the CPO, right at the top

of his/her agenda. A necessary prerequisite for both mentioned topics is a valid database

providing the information required for tracking the financial situation of key suppliers or

offering transparency about the utilization of the enterprises spend cube. These are just two

important topics falling into the responsibility of procurement intelligence and receiving a lot

of attention from CPOs these days.

In order to achieve major contributions from the purchasing department to the companys

overall bottom line and business stability, he/she has to overcome some well known

challenges. The big five of them are listed below:

1. Position procurement as a valued business partner within the enterprise, delivering

transparent benefits to the companys bottom line and creating value for internal

customers

2. Gain full transparency about the enterprise spend in order to get the best possible

leverage on the savings potential hidden in the spend cube.

3. Establish powerful performance measurements for strategic and operationalprocurement to identify and realize further improvements in effectiveness and efficiency

in procurement processes, organizational structure and supporting IT. Also improve

responsiveness to unexpected developments.

4. Achieve major improvements in risk reporting, especially for key suppliers. Safeguarding

a constant supply stream from key suppliers within the supply chain is vital for the

enterprises market success.

5. Ensure enduring high performance in procurement by establishing continuous

improvement and benchmarking processes.

b) Reality Check

Even today, procurement is still up against its image of a static bureaucratic business unit

mainly executing necessary operational tasks. Although the importance of procurement is

strongly increasing due to a constantly rising share of the purchasing volume in the overall

added value of a company, procurement is not yet established in an adequate position within

most enterprises. In our experience from numerous procurement projects in blue-chip

enterprises across different industries there is a wide scope of reasons for this unsatisfying

situation:

Benefits realized through effective spend management, streamlined

procurement processes and intelligent supply chain integration of key vendors

are often not transparent and in consequence not visible for importantstakeholders within the enterprise.


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The quality of available spend data is insufficient to fully leverage the savings

potential hidden within a companys overall spend cube.

The informational value of the key performance indicators commonly used for

steering the procurement unit is low. Needs for action are often identified toolate or in the worst case do not even show up in the regular procurement

performance reporting.

On a more general level, it is time-consuming and uncomfortable to generate

reports for ad-hoc information requests. The desired current information is not

available at managers fingertips, slowing down decision-making processes or

increasing the probability for bad decisions.

Naturally, the amount and quality of available information required for a proper

assessment of key suppliers solvency is low. Surely it is difficult to obtain this

highly sensitive information. All the more, proper processes have to be in place

ensuring that even minor indications in the economical behaviour of thesuppliers are identified and reported safely and with care. The necessary

awareness and sensitivity to identify and handle this kind of information is often

not transparent to lower level employees.

Many of these problems result from a poor quality of the underlying database. Required

information is usually not available on an ad-hoc basis, the basic data has to be gathered

and conditioned in time-consuming processes. Often, the prepared report is still not sufficient

to answer all questions, which increases the danger of making bad decisions. Moreover,

time-consuming data retrieval processes are not suited to increase confidence in the

reported figures. In the worst case, the reported figures bring up even more questions, and

the whole process has to be repeated.

But how could that be in times of sophisticated business warehouse technology connected to

large databases with terabytes of data from mighty ERP solutions? Actually, it is more a

question of processes and data quality, and a question of adherence to governance rules for

data collection and data maintenance:

Taxonomy procedures for the classification of master data are often not

consistent across all business units and subsidiaries of the enterprise. Uniform

data formats are essential for the aggregation and assessment of data.

If the description of a commodity or a service differs across the enterprise, a simple

question like how much do we spend for this specific commodity in a given year

cannot be answered. Inconsistent descriptions of suppliers are making it impossible to evaluate the overall

annual spend going to a specific supplier for a certain commodity.

These two examples illustrate how difficult it can be to answer even simple

questions. Excellence in procurement intelligence means that this information

is available to a sourcer whenever it is needed for preparing negotiations with a

supplier.


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Numerous different ERP applications and this include separately customized

ERP applications from the same vendor used as data sources for business

warehouse applications are still a big challenge in terms of data quality. A piece

of data extracted from the ERP backend can be turned into information, if thecontext of the process creating the data is understood properly. Comparing

information from several backend systems requires an in-depth knowledge

about the underlying business processes. There is a negative correlation

between the degree of process standardization across the enterprise and the

effort required for data transformation. If the business context of the

information retrieved from one application does not match with the one of the

other application(s), the information value of the generated report is

questionable.

Once the information required for the preparation of supplier negotiations is

gathered and the negotiations were concluded successfully, this success has

to be assessed and monitored. This is a stage in the process where enterprisesoften accumulate backlogs. Measuring and tracking sourcing performance has

to include both achieved savings and value added by the procurement

function. The challenge is to implement a clearly-defined set of governance

rules for the accounting of savings with or without a direct effect on EBIT. Of

course, the recorded savings have to be aggregated across commodities,

business units, timelines and other dimensions in order to enable a continuous

tracking of targets achieved as part of the overall procurement scorecard.

Procurement units struggle to put well-defined processes and clear governance

rules in place when it comes to managing the identification and handling of

information suited to assess the behaviour of a supplier and to enable

conclusions about his economic situation. It is not sufficient to have thisvaluable information in the heads of individual employees. It has to be

identified, validated and consolidated into a complete picture. Only then can it

serve the assessment of supplier-related risk.

c) Best-in-Class

Project experience has proven the hypothesis that procurement intelligence is both a hot

topic of great importance for the enterprise and at the same time a topic with significant open

questions requiring swift answers.. This observation has been made across different

industries. However, leading companies, especially in the manufacturing and automotive

industry, have started extensive projects to improve their capabilities in procurement

performance measurement for the most pressing topics:

Set up the prerequisites for informative reports and improve data quality by

harmonizing master data management processes and by introducing a single

classification logic across the whole enterprise combined with the introduction

of dedicated master data management applications

Establish state-of-the-art business warehouse applications across the entire

enterprise to gain transparency about spend and other procurement data.

Report and monitor procurements performance with a well-defined set of KPIs

grouped together in a KPI scorecard.


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Example for procurement performance KPI scorecard

Overview Evaluation Dimensions

score (school

grades)

actual period

no. KPI

actual

period

no. KPI

pre-

period

no. KPI

actual

period

no. KPI

pre-

period

no. KPI

actual

period

no. KPI

pre-

period Comments

1. Commercial and Contracts 3,4 0 0 3 0 1 0

2. Logistics 3,2 0 0 1 0 1 0 1 KPI currently n.a.

3. Quality 2,3 1 0 1 0 0 0 1 KPI currently n.a.

4. Innovation and Technology 2,1 3 0 0 0 0 0

5. Key Financials 0,0 0 0 0 0 0 0

6. Sustainablity Management 2,0 3 0 0 0 0 0

Total Result (without Sustainability) 2,7 7 0 5 0 2 0

Development in Comparison to Other Supplier

Distribution KPIs

Period: 2. HY 2008 (Pre-Period: 1. HY 2008)

Period:

2. HY 2008

Performance Results

2,5

2,5

2,5

2,5

2,5

2,0

2,1

2,3

3,2

3,4

2,0

2,0

2,0

2,0

2,0

0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 5,0

Sustainability Management

Key Financials

Innovation and Technology

Quality

Logistics

Commercial and Contracts

EvaluationDimensions

School Grades

Plan IBM

2. HY 2008 IBM

Average top supplier

Category-wide standardizedcorporate KPIs includingattributes enable comparableresults

System-supported suppliercockpit displays suppliersstrengths and weaknesses andenables corrective measuresupported by normativedevelopment strategies

Key Financials are integrated inthe KPI scorecard as importantindicator from risk reportingpoint of view

Key to the success is the closeintegration into the SupplierDevelopment Strategy

and the incorporation of theneeds and requirements of theproject's stakeholders

Figure 6: Example of a KPI Scorecard in Procurement

Implement clearly-defined guidelines how to evaluate and track savings and

added value created by the procurement function, supported with easy-to-use,

web-based IT applications for recording and monitoring.

Establish risk management processes in procurement in order to increase

employees awareness of useful indicators helping to continuously track and

assess the financial situation of suppliers. Hence, a well-designed guideline

defining how to collect and report indicators for a potential insolvency in thebehaviour of the supplier has to be in place in the procurement function in order

to focus the attention of every employee in procurement. At the same time, the

process has to make sure that suspicious facts are treated confidentially in a

professional manner, and that information is getting validated and kept within

the enterprise.

d) Core Messages

Data quality strongly depends on how far processes have been harmonized

and standardized and how well the enterprise as a whole adheres to valid

standards, e.g. in the classification of commodities or the management and

distribution of master data. Poor data quality leads to bad reports. PotentialSavings in spend are not even identified even though the company needs

them very urgently these days.

Most procurement organizations do not succeed very well in making their

performance and added value visible to stakeholders within the enterprise. A

clearly defined process to record achieved savings and added value by the

procurement function is an absolute must and the first step on the way to

improving the perception of procurement within the enterprise.

Globally leading enterprises have dedicated processes and tools for risk

management in place especially for evaluating the financial situation of key

suppliers. They combine internal and external knowledge bases to draw a clear

picture of the current situation and to enable an up-to-date, transparent

assessment of the actual risk situation at all times.


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7 HR Management in Procurement

a) CPO Challenges

The rapid metamorphosis of procurement from a mere operational function for executing

purchase orders to a strategic business function is unthinkable without globalization.

Globalization with its various facets shifted the importance of procurement functions from

operational purchasing to strategic sourcing, adding complexity to almost anything from

strategy to reporting, from processes to applications and from organization to HR relations.

The objective for procurement management with regard to these developments is to aim not

only for adaptive organizations, processes and systems, but also for the recruitment of

competent, flexible and adaptive people. This means they have to present the procurement

area as attractive as possible for current and future employees, and it shows the necessityfor reconsidering HR strategies and policies related to procurement. Skills and qualification

profiles for procurement staff have to be redefined with globalization and its challenges in

mind.

b) Reality Check

People have always been a valued success factor for any procurement department. What

weve all observed over the last years is that procurement staff were facing a multitude of

changes within their working environments. They had to learn new methodologies and adapt

to frequently changing processes and technologies. The speed of change was increased

every time, while cycle time was reduced continuously. In everyday life this adds a lot of

friction to many people-related issues. What are the pain points?

Recruitment also means attracting young high potentials. You may find out that

procurements reputation is comparably low in the perspective of those

candidates. In contrast other departmental functions, such as sales and

marketing, are generally a lot more attractive to young high-flyers. Procurement

is viewed as an unchallenging service function and it is supposed to offer few

opportunities to move into top management positions after a while.

Reorganization projects these days often focus on centralizing strategic

sourcing functions while carving out operational procurement staff into a shared

services center, or even outsourcing them completely. It is quite a good guess

that about half of the remaining staff will not meet the newly-definedrequirements of the organization. One approach of procurement management

is to get rid of those who dont fit in, let them participate in termination

settlement programs, and advertise for qualified external staff. But this may

cause extensive negotiations with the people affected or with the works council.

And solutions to deal with that situation are usually not at hand when needed.

Frequently procurement staff who is usually engaged with operational

procurement activities will be allocated to strategic duties, e.g. the preparation

of vendor reviews and negotiations or the continuous assessment, evaluation

and classification of procurement categories. The result is that people are

overwhelmed with their new challenges, and even though they keep on

struggling, they will eventually fail.


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Ever tried to convince local procurement staff to spend some years abroad to

establish a facility, e.g. in Asia? Ask around in the procurement department

who would volunteer to relocate for at least three years to build up a powerful

and effective local procurement function for a foreign subsidiary. The echousually will be frustrating. The most common reasons for this are not

procurement-specific: Rudimental expatriate programs with no real advantages

combined with a lack of job security and no career growth path on return home.

c) Best-in-Class

Procurement usually deals with buying goods and services. And usually the position of a

buyer is strong and dominant as most markets are demand-driven these days. Sourcing

qualified staff externally or persuading internal staff to move internally or to migrate to distant

locations even abroad is not that easy.

Companies are facing a fierce competition for talent between global enterprises particularly

in the telco market. In addition, procurement is not on top of the wish list of high potentials,

due to assumed unchallenging career perspectives. The procurement talent market is

supply-driven these days and sourcing and buying talent has become definitely a SALES

job. It must therefore be one of the foremost objectives of every CPO to position his/her

procurement department as attractively as possible in order to stand in the forefront of

suppliers of attractive positions for job applicants, be it internally or externally, if the

objective is performance excellence in procurement.

Now changing sides from a buyer to a seller in terms of staff recruitment and development

may not be everyones favourite, but it is necessary. We will give a few examples how the

leaders in sustainable performance excellence in procurement have remained successful.

A client in the telecommunications business planned to refresh the

procurement team by attracting young high potentials. But they had few

positive responses. During interviews they found out that procurement in

general had a lower reputation in the perspective of the candidates than other

departmental functions, due to higher salary expectations and to challenging

career opportunities in functions such as sales and marketing, production or

finance and controlling. Formulating a conjoint procurement recruitment

strategy with a procurement branding concept that was supported by published

articles in relevant publications, by attending job expositions, talent fairs and

alumni re-unions, they could present and market themselves directly to their

target groups. After that both contact and contract rates went up significantly.

During a reorganization project of several procurement units with the focus on

centralizing strategic sourcing functions as well as on carving out operational

procurement staff into a shared services center unit, one of our clients in the

telecommunications industry realized through a survey of staff skill sets that

most of the existing staff about 50 % - were not meeting the defined

requirements of the target organization.

The first approach of procurement management was to get rid of those who

didnt fit in and to advertise for qualified external staff, but this caused massive

problems with the works council. They also got few responses from outside

candidates, because parts of the lay-off program had been reported in themedia, and a company with a swift lay-off policy isnt really attractive.


24/27



Reconsidering this challenge qualification programs were set up to empower a

major part of the current procurement employees to take over new tasks. The

remaining staff who were not willing or able to qualify could participate in a

comfortable termination settlement program which was stipulated in closecooperation with the works council. All in all this solution turned out to be even

more cost-effective. The real advantage was that existing know-how could be

kept inside the company, and the costs of training and incorporating external

staff could be avoided.

One of our clients is in the automatic teller machines business, and its

procurement headquarters is located in Germany. They wanted to extend their

sourcing to the Asian market and to underpin this qualified procurement staff

that was asked to move to Asian locations. Upfront the interest of local people

to move abroad was not overwhelming as there werent real benefits and job

security on return home. Installing a complete expatriate program and

reworking the fringe benefits program in combination with individual returnguarantees and substantially higher benefits such as home and family support

and even salary rises made employee dispatching a continuous success.

Another best-in-class example: A client in the aerospace industry founded a

dedicated procurement academy for more than 3,000 procurement employees.

The objective was to continuously train the world wide procurement staff. The

benefit was a unified knowledge about processes, applications and terminology

on a company wide basis as well as standardized certificates and degrees.

HR Management for procurement consists of six integrated fields of action that have to be

addressed strategically and monitored and improved continuously. These fields of action are

illustrated in figure 7 below.

ProcurementBrandingConcept

HRM inProcurement

ProcurementRecruitment

StrategySkills and

Qualificationframework

Salary andOutplacement

HRM SWOTPositioning

Benefits andCompensations

External Demand and Requirements

Internal Demand and Requirements

ProcurementBrandingConcept

HRM inProcurement

ProcurementRecruitment

StrategySkills and

Qualificationframework

Salary andOutplacement

HRM SWOTPositioning

Benefits andCompensations

External Demand and Requirements

Internal Demand and Requirements

Figure 7: Fields of Action for HRM in Procurement


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HRM SWOT Positioning

Perform a SWOT Analysis of your procurement area with regard to requirements relevant to

HRM. Compare your organization against the competition in order to see where there isroom for improvement.

Skills and Qualification Framework

Get a clear picture about the current qualification levels of your staff, elaborate on future

demands and locate the gaps to generate a medium-term action plan.

Benefits and Compensation

Rework your offering of benefits and compensation with a clear dedication to exceed market

standards.

Salary and Outplacement

Design a comprehensive and transparent salary framework for your valued employees while

offering generous outplacement options for those who do not meet your standards anymore.

Procurement Branding Concept

Be a true marketeer and communicate your values to the internal and external audience to

generate positive impact.

Procurement Recruitment Strategy

Aggregate all your findings and conclusions into a long-term, procurement-specific

recruitment strategy and implement it.

d) Core Messages

In order to win the battle for talent it is necessary to change roles. CPOs need

to become sales people offering attractive job opportunities in their

procurement department.

It is essential for a procurement organization to know the capabilities of their

staff. Even though people are in their positions for years, in many procurement

organizations no structured and detailed information about skill levels exists

and no formalized process is in place to collect such information on an ongoingbasis.

A mature training and qualification concept is often missing in procurement

organizations. All aspects about staff qualification, job descriptions and future

requirements need to find their way into a qualification and training concept.

Many procurement organizations facing the challenge of globalization still have

no real expatriate policies in place which would motivate employees to move to

other locations domestic or abroad.


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8 The Authors

Michael Hanke is a managing partner at Detecon International GmbH in Bonn, Germany

with responsibilty for the area of supply management. He studied electrical engineering at

the Technical University of Vienna. Hereafter he held responsible management positions in

various consultancies and IT service companies. His consulting focus is primarily on clients

in the automotive, high-tech and telecommunications industry in the areas of procurement

and supply chain management.

He can be reached at: +49 228 7002514 or [email protected]

Dr. Thomas Krause is a managing consultant for supply efficiency and supply management

at Detecon International GmbH in Bonn and is holding a PhD in Physics from the university

of Wrzburg, Germany. He has more than 13 years of consulting experience in severalresponsible positions in IT-service and consulting companies and is currently leading the

supply efficiency team of Detecon Germany. He is an expert in raising the overall efficiency

of supply and logistics function and focuses on automotive, telecommunication and logistics

service providers.

He can be reached at: +49-151-14003076 [email protected]

Alexander Rinker is a management consultant for Supply Management and Supply

Efficiency at Detecon International in Eschborn, Germany. He studied business

administration at the University of applied sciences in Reutlingen. He has more than 18

years consulting expertise in supply chain management and sales logistics projects and

focuses on clients in production and telecommunication.


Felix Theisinger is a managing consultant for Supply Management and Processes &

Applications at Detecon International in Bonn, Germany. At first he studied Information

Technology at the University Erlangen/Nuremberg and on top he completed successfully a

MBA Program at Kellogg-WHU in Frankfurt/Chicago/Hongkong. Based on his profound

project leadership and interims management experience he leads the team Supply

Management Processes & Applications.


Michael Wettklo. His major topics include purchasing, procurement performance

management, business process reengineering, process-based implementation of

procurement applications and the development of IT strategies for the implementation

procurement applications. After earning a degree in economics, Michael Wettklo works as

Managing Consultant in the group Supply Management and is leading the team Procurement

Performance Management. He has gained a broad experience as a project leader in several

procurement transformation, reengineering and value chain optimization projects. On the

other side, he is also familiar with the challenges of implementing optimized to-be processes

from experiences as a project leader in several SRM/ERP implementation projects.

He can be reached at: +49-151-12101453 [email protected]


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9 The Company

We make ICT strategies work

Detecon is a consulting company which unites classic management consulting with a high

level of technology expertise.

Our company's history is proof of this: Detecon International is the product of the merger of

the management and IT consulting company Diebold, founded in 1954, and the

telecommunications consultancy Detecon, founded in 1977. Our services focus on

consulting and implementation solutions which are derived from the use of information and

communications technology (ICT). All around the globe, clients from virtually all industries

profit from our holistic know-how in questions of strategy and organizational design and in

the use of state-of-the-art technologies.

Detecons know-how bundles the knowledge from the successful conclusion of management

and ICT projects in more than 160 countries. We are represented globally by subsidiaries,

affiliates, and project offices. Detecon is a subsidiary of T-Systems International, the

business customer brand of Deutsche Telekom. In our capacity as consultants, we are able

to benefit from the infrastructure of a global player spanning our planet.

Know-how and Do-how

The rapid development of information and telecommunications technologies has an

increasingly decisive influence on the strategies of companies as well as on the processes

within an organization. The subsequent complex adaptations affect business models andcorporate structures, not only technological applications.

Our services for ICT management encompass classic strategy and organization consulting

as well as the planning and implementation of highly complex, technological ICT

architectures and applications. We are independent of manufacturers and obligated solely to

our client's success.

Detecon International GmbH

Oberkasselerstr. 2

53227 BonnTelefon: +49 228 700 0

E-Mail: [email protected]

Internet: www.detecon.com

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