Procurement:The Last Best
Place for Results Improvement
ROSMA© answers the procurement performance challenge
Authors
Joseph Raudabaugh, head of Procurement
and Analytic Solutions, Chicago
[email protected]
John Blascovich, partner, New York
[email protected]
Rosanna Yang, director, Chicago
[email protected]
Christian Schuh, partner, Vienna
[email protected]
Stephen Easton, partner, London
[email protected]
Enrico Rizzon, partner, Melbourne
[email protected]
We wish to thank the more than 80 senior executives who joined in discussions,
provided insights, and helped us test our hypotheses over the past 18 months. We
especially appreciate those in our ROSMA study group who were generous with
their time and resources, and the hundreds of AEP 2011 survey participants who
helped us build the ROSMA benchmarks that so clearly validated the opportunity
for PDP. Also, we thank the many members of our CPO Executive Roundtable who
reviewed the paper and offered their insights and encouragement. Lastly, we welcome
the participation of procurement professionals—committed to the advancement of
the profession—in growing the ROSMA database.
Please contact us for more information about how to use our online survey and
reporting tool to obtain an assessment benchmark.
M
ore than 130 years ago, in 1881, Joseph Wharton gave an
endowment to the University of Pennsylvania to establish the
School of Finance and Economy. His gift sparked management
science as we know it today and brought a steady stream of thought
leaders with innovative concepts, tools, and methods to improve business
performance. Icons in the field, including Towne, Davenport, Gantt, Ford,
Sloan, Drucker, Deming, Taguchi, and Ohno, created game-changing
approaches such as JIT, Six Sigma, BPR, Lean, EVA, Balanced Scorecard,
and Competing on Analytics. And advancements in management science
have accelerated with the increasing waves of disruptive technologies—
more, faster, cheaper computational power—that have fundamentally
changed how we monitor, operate, and drive our businesses.
Thanks to these innovations and innovators, executives today can quickly evaluate business health
and performance as never before. Quarterly analyst calls feed the “Street” with sound bites about
plant utilization, recurring revenues, client contract renewals, fill rates, economic value added
(EVA) targets, and business and geographic unit
specific cash-flow estimates. Yet when it’s time for
the “voice over” on procurement performance
on the analyst calls, there is a hushed moment
of silence. For, when asked about procurement
performance, most CFOs go on and on about
keeping even with or ahead of inflation—saying
little about gaining ground through procurement efforts. In fact, research shows that in their
public remarks, CFOs discuss safety, sales force,
and manufacturing performance roughly 400,
360, and 100 times, respectively, and far more
frequently than procurement performance.1
1
2
There are exceptions to every rule, of course,
as illustrated in the sidebar, “A Few Executives’
Voices Heard” on page 2.
Despite significant improvements in procurement, overall progress has been intermittent.
Perhaps the most striking characteristic of the past
few decades has been the increasingly visible stratification between procurement leaders and the
lumbering pack.
Any reader, student, or advocate of the
Purchasing Chessboard® knows that strategic
supply management is a complex multidisciplinary
team sport.2 The variables and complexities of
everything from market dynamics to specification requirements make procurement performance
management and accountability a challenge. Far
different from many other discrete operations,
procurement processes have governance interdependencies at every step across the source-to-pay
A.T. Kearney analysis of Google search results for North America analyst calls for 12 months ending 13 March 2011.
A.T. Kearney’s Purchasing Chessboard ® is a framework that provides best practice sourcing techniques by addressing 64 unique supplier versus buyer power
situations. For more information, visit The Purchasing Chessboard in the publications/books section at www.atkearney.com.
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1
continuum. No wonder measuring procurement
performance has been overlooked. Until now, it
has simply been too painful and complex.
We see procurement as the last best place to
gain professional stature, increase management
visibility, and improve bottom line results. With
purchased goods and services comprising the lion’s
share of the value chain across most industries,
why isn’t procurement laying the groundwork for
supply management optimization and driving
enterprise economic performance? How do we
replace those awkward moments of silence on
analyst calls with discussions of how procurement
is a critical indicator of corporate performance?
How do we build a performance-driven procurement organization?
The answers, in part, lie with a new framework called the Return on Supply Management
Assets or ROSMA©, which provides procurement
professionals with the ability to finally — and
fully — tap into opportunities that have largely
been hidden.
Something’s Brewing
In 2010, we had the opportunity to work with
Tony Milikin, CPO of AB InBev. ABI is renowned
for its commitment to reaching stretch targets and
the aggressive use of strategic sourcing to achieve
its financial goals. Bringing procurement performance improvement innovation to ABI was a
challenge that required breakthrough ideas. In
working with Tony and ABI, we developed the
supply management productivity index, which
sparked a healthy debate among a tough audience
of very successful and experienced ABI procurement leaders. Soon after, Tony shared our frame-
A Few Executives’ Voices Heard
In a review of thousands of analyst
calls from publicly available transcripts on the Seeking Alpha website,
we found 29 companies with executives (CEOs, COOs and CFOs)
speaking out about the realized or
anticipated results from their procurement efforts. These executives
did not shy away from the procurement performance question. In fact,
they trumpeted the results. Among
their more notable comments:
• “We’ve now pushed about 55 percent of our addressable spend
through e-sourcing” – CEO
• “Through more global procurement, SKU, and spec rationalization … we expect to claw back
about two points of this market
inflation” – CFO
• “… on a positive side … we see …
2
further benefits … through our
well established strategic sourcing
processes …” – CFO
• “… get the … procurement and
logistics savings … we realized
$185 million plus … and there is
another $60 million to $80 million
coming” – CEO
• “In procurement, we pursued
over 150 strategic sourcing programs to identify best cost suppliers and lower total cost of
ownership”– CEO
• “… we currently expect $75 million in [savings benefits] from procurement related to … sourcing
changes for core materials” – CFO
• “We will see baseline cost improvements due to our procurement
initiatives … in a very short time
these procurement efforts directly
Procurement: The Last Best Place for RESULTS Improvement
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created savings in excess of 20 percent from existing market
prices …” – CFO
No doubt, other analyst call transcripts will affirm similar successes
through procurement and, going forward, there will be more questions
asked and more successes shared.
The 29 companies represented
on the analyst calls: Adidas, Alcoa,
Anheuser-Busch InBev, Avon, BristolMyers Squibb, Danaher, Dean
Foods, Family Dollar Stores, GlaxoSmithKline, H.J. Heinz, Hershey,
Hospira, ING Group, IngersollRand, Kimberly-Clark, Kraft,
MeadWestvaco, Nestlé, Novartis,
Office Depot, PepsiCo, Revlon,
Roche Holdings, Sara Lee, Staples,
Starbucks, UAL, Verizon, and
W.W. Grainger.
A.T. Kearney
work with a few other CPOs and the feedback was
encouraging. The discussions helped us realize
that we were really on to something (see sidebar:
Seeking Alpha and Expanding Your Moat on page 5).
We then sought input from a broader group
of clients, most of whom were CPOs from organizations that use advanced performance management models, such as EVA incentive systems, or
CFO scorecards. Many of the CPOs also had
strong financial backgrounds, with some having
also served as CFOs. They were extremely enthusiastic and provided invaluable feedback, which
led to numerous iterations and several proof-ofconcept pilots.
The end result is ROSMA, which we believe
is not only a catalyst for optimal procurement performance but also an approach that will bring
clarity to the procurement performance management challenge. ROSMA offers:
• A framework to help CFOs understand and
articulate value from procurement
• Broad support from the CFO and executive team
to help CPOs deliver game changing results
• Insights into the drivers of supply management
value, enabling CPOs to set their agendas and
optimize performance
• Performance benchmarking on a peer-to-peer
basis or among industries
How ROSMA Works
At the highest level, ROSMA measures the economic performance of the procurement resources
applied; specifically, the “hard” financial results
delivered from the activities and investments in
the organization’s procurement team (see figure 1).
From our growing benchmark database, we have
found that the ROSMA performance range for
the “middle” 80 percent of companies is between
Figure 1
Return on Supply Management Assets©
ROSMA©
÷
Financial
results delivered
Primary
drivers
Spend
coverage
Velocity
Category
yields
Compliance
Additional
benefits
Invested supply
management assets
Period
costs
Structural
investment
Secondary
drivers
Source: A.T. Kearney analysis
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3
We believe procurement is the last best place to gain
professional stature, increase management visibility, and
improve bottom line results.
0.7 and 11.7, but there remain many outliers that
deliver weaker results and some that are indeed
“value rock stars” that have posted single-year
scores approaching 20.
Although the aggregate score is helpful, and
in time will become one of the metrics the Wall
Street analysts routinely ask about, the distinguishing factor about ROSMA is the value derived
from understanding one’s performance against the
underlying drivers (spend coverage, velocity, and
category yields, for example). It provides immediate insight into what, where, and how to improve
and optimize procurement performance and to
quantify the value of the enhancements. In short,
the breakthrough is an analytical framework with
EVA constructs and standardized definitions to
drive leadership performance.
A.T. Kearney has been helping companies
explore value from improved procurement practices for almost 30 years. While we’ve pretty much
seen it all, ROSMA is unlike anything in the
market. The following outlines the primary drivers that form the ROSMA framework. There are
also more than 30 secondary drivers.
Driver 1: Spend Coverage
One of the most common impediments to strong
performance is procurement’s limited access to
spend or spend coverage. Our Assessment of
Excellence in Procurement (AEP) research, which
has been conducted routinely since 1992, finds
that leading procurement organizations have up to
67 percent more reach and influence over their
organization’s spend than average performers.3
3
4
For example, in 2008, “followers” typically only
managed 42 percent of their organization’s
external spend, while “leaders” managed more
than 70 percent.
Put simply, if you can’t find or influence your
spend, then there is no hope of affecting the
value, quality, or outcome of your spending. And
if procurement isn’t involved, then is there a clear
commitment to applying best practices? Who is
accountable for that out-of-scope spend? Managers
must know the total outside spend on purchased
goods and services and have visibility at the
sourceable category level, by location and by
vendor, including current specifications and
requirements. And all of this must be easily refreshable and accurate. Truth be told, accurate and
timely visibility is poor for most companies, but
advances in technology and a greater appreciation
for the value of the information have been
enabling improvements in this area for the past
decade — and certainly more will come. But even
if you have superb visibility, we find that lack of
governance over and across spend management
processes is ultimately a major block to effective
coverage by procurement.
The issue is not whether the procurement
team is accountable for a given spend category,
but to ensure that those who are accountable have
a clear understanding of best procurement practices, including how due process is applied and
measured. As noted in our most recent AEP study,
best-practice companies have excellent visibility
and their procurement organizations have clearly
defined roles and mandates to influence more
A.T. Kearney’s latest Assessment of Excellence in Procurement study is available at www.atkearney.com.
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Seeking Alpha and Expanding Your Moat *
It’s not that chief financial officers
prefer uncomfortable silence on analyst calls. Many of our CFO friends
say they would happily give a plug
to procurement performance, and do
so at length, if only they had a genuine framework to justify the numbers. ROSMA©, we patiently explain,
not only provides the numbers but
also the framework.
To illustrate what extraordinary
improvements in value really look
like, let’s explore two scenarios. We
call the first one doing better. Organization A has typical quartile-three
driver performance (slightly below
average) as its status quo, and wants
its “to be” performance potential at
mid-point quartile-two performance
levels across all of the drivers, or just
above average. The exciting insight
here is that, while doing better is not
an extraordinary goal, such modest
levels of improvement can generate
substantial financial gains in performance. We took a sample of publicly
traded companies (total spend
$5 billion, the approximate size
used in this scenario) and applied
the improvement in financial results
to organization A’s 2010 results;
the doing better potential outcome
would have increased its average
EBIT by 8 percent.
The second scenario, the procurement journey, is more aggressive but
not an outlier. Organization B has
typical quartile-three driver performances as its status quo but instead
of aspiring to simply doing better, this
organization has elected to become
a procurement leader by achieving
threshold-driver performance of the
2011 AEP leaders, and capturing
additional benefits from advanced
sourcing practices that we find
among leaders. Unlike the doing better
scenario, which can be achieved relatively fast, achieving sustained leadership performance may take three to
five years, but the outcome is game
changing. Applying the same interpretative framework and improvement results to the same sample of
publicly traded companies, the potential outcome for the procurement
journey would have increased average
2010 EBIT by 30 percent. The figure
below illustrates the scenario.
From these readily achievable
scenarios, where is the alpha and
gains in competitive advantage that
can expand the size of your moat?
Delivering excess risk-adjusted
returns is terrific but temporary
because once you demonstrate sustained procurement performance,
thus increasing your earnings, the
market will bid up your share price,
thereby increasing the risk and eliminating the alpha value. However, the
pursuit of alpha—although difficult
to sustain—is obviously good and
we frequently see clients that surprised the market with outsized benefits from procurement that buoyed
their valuations; occasionally these
have been shared publicly. Expanding your moat can be aided by a sustained commitment to the pursuit of
performance-driven procurement.
Figure: Scenario I “doing better” and Scenario II “procurement journey”
Structural
investment
(US$ M)
Invested
supply
management
assets
(US$ M)
$27.3
$6.8
$34.1
$21.4
$20.6
$42.0
3.3
23%
201%
Velocity
Status quo
$3100
61%
3%
60%
$3.4
$37.4
Potential
$4200
70%
6%
75%
$6.5
$138.8
35%
15%
100%
25%
Status quo
$3100
61%
3%
60%
$3.4
$37.4
$27.3
$6.8
$34.1
1.1
Potential
$4750
75%
10%
88%
$106.9
$420.4
$15.2
$22.8
$38.0
11.1
53%
23%
233%
47%
11%
909%
Category
yields
Compliance
Additional
benefits
(US$ M)
Financial
results
delivered
(US$ M)
Spend
coverage
(US$ M)
Total spend
($5 billion)
Period
costs
(US$ M)
ROSMA©
Scenario I
%Δ
271%
1.1
Scenario II
%Δ
Scenario I
FRD** change: $101.36 million
1024%
Scenario II
FRD change: $382.99 million
Source: A.T. Kearney analysis
*Alpha is a measure of performance on a risk-adjusted basis; it is the return after compensating for the risk borne.
** FRD is financial results delivered.
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Although most organizations turned up their sourcing
velocity in 2009 and 2010 over previous years, the gap
between leaders and the pack was still substantial.
than 90 percent of their organizations’ spend.
Imagine the analysts’ discussion with a consumer
products company when they want to explore
what your procurement strategy is for media,
transportation, or packaging. If answered honestly, many would have to reply: outsourced, too
complicated to source, and we have to ask our
suppliers for our specifications.
Driver 2: Velocity
Deming introduced the value and criticality of
cycle time in the 1980s as it pertained to innovation, physical supply chain performance, and timeto-market. Sourcing velocity is akin to cycle time
and equally critical for procurement performance
on many levels (such as frequency, volume, and
team productivity). Procurement leaders demonstrated spectacular results in 2009 with a full court
press, sourcing unprecedented portions of their
spend to take advantage of market conditions and
to help their organizations close financial performance gaps during the downturn.
Although most organizations turned up
their sourcing velocity in 2009 and 2010 over
previous years, the gap between leaders and the
pack was still substantial. Our last two AEP studies (2008 and 2011) reveal that leaders manage or
have active coverage of nearly 50 percent more of
their spend and source roughly 33 percent more
of their “covered” spend annually than followers.
So, the results are compelling, indicating that
in terms of hard savings annually, leaders deliver
just under two times that of the average follower,
4
6
even if the yield percentages from sourcing are
identical. With a yield percentage difference
between leaders and followers, the savings difference would be even greater.
This is not to say that maximizing velocity is
the optimal strategy; it is not. Every category will
have its own natural productive sourcing frequency. For example, some of our clients auction
every commercial print job and even individual
limo rides to the airport, which is essentially a 100
percent velocity outcome for those categories.
Transportation, however, may be best sourced
using advanced practices such as collaborative
optimization (CO) every 24 to 36 months.4 Still,
a structural gap of about 20 percent between leaders and followers against a larger proportion of
spend is unacceptable in terms of lost or deferred
savings and sourcing team productivity. Active
sourcing resource planning and pipeline management are required for leadership performance.
Drivers 3 and 4: Category Yields and
Additional Benefits
The ROSMA model has two drivers related to
benefits derived from sourcing program outcomes — category yields and additional benefits.
Although many different techniques can be
applied to an array of unique supply market situations and can provide value beyond unit price
reduction, virtually all supplier negotiations derive
some portion of their value from pricing outcomes. We believe actively tracking, benchmarking, and mapping yields (that is, what technique
Collaborative optimization is a sourcing process in which suppliers expressively bid or signal their capabilities, offering preferences and associated economics,
thus expanding the known base of commercial options. Improvement (or optimization) techniques secure best-fit award options, typically resulting in larger
yields and more satisfied suppliers.
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was used by whom on which category when?)
gained from price reductions is so important that
we elected to isolate this value element in the category yield driver. All other sources of hard value
gained through sourcing initiatives are captured
in additional benefits.
Yields are important and we have found consistently over the past 25 years that performance
in achieving them varies widely across companies,
even on common categories, industries, time periods, and in similar geographies. Our large-scale
survey research consistently reveals that the spread
in category yields due to pricing benefits between
leaders and followers is about 2 percent across the
total spend sourced in any given year (8 percent
versus 6 percent in 2010, for example). Although
2 percent is seemingly a small spread, it implies
that the leaders deliver 33 percent to 50 percent
higher yields; when projected against the larger
spend managed and the higher sourcing velocity
noted earlier it more than doubles the absolute
cost savings of leaders versus followers.
To sustain the advantage, leaders actively track
events and negotiations to catalog the techniques
applied, results achieved, and to maintain a living
“playbook” of their best practice events and negotiation strategies. This enables them to benchmark, drive higher yields, shorten sourcing cycle
times, and identify their “sourcing masters” and
the skill development needs within their teams.
Other performance differentiators, classified as
additional benefits, typically accrue from advanced
sourcing strategies. These include strategies that
improve working capital, encourage supplier innovation, and deliver total-cost-of-ownership gains,
including improving processes, simplifying requirements, and reducing warranty costs.
The Purchasing Chessboard highlights techniques for unleashing additional beneficial value
opportunities and our experience shows that
a handful of strategic spend projects (large complex spend) typically provide outsized gains.
Unfortunately, most organizations are too understaffed or underskilled to support the more complex sourcing opportunities to deliver these
additional benefits on a meaningful scale. Our
most recent AEP research queried hundreds of
clients about their usage of all of the chessboard
techniques and found that leaders are applying 68
percent more of the nearly 50 advanced techniques that yield additional benefits versus the
typical procurement organization.
Many procurement leaders use advanced
techniques and capabilities to pursue additional
benefits. Three stand out: access innovation
advantage from suppliers (such as cycle time,
exclusivity, or duration); complexity reduction or
specifications management; and joint process
improvements. For example, the largest automotive maintenance services retailer in North
America was able to secure 24 months of exclusive
access to market-breaking battery technology
from a major Tier One automotive parts OEM for
its branded line of batteries; the OEM delayed
marketing the technology under its own label in
exchange for securing both position and volume
with the retailer.
In another example, by using expressive
bidding, Big Packaged Goods Company (BPG) was
able to concurrently reengineer flexible packaging
specifications and re-source the consolidated
volume requirements to deliver more than 40 percent in savings on a high nine-figure spend category. There are many examples of buyers and
sellers with strategic relationships applying lean
principles to simplify their order and inventory management interfaces, where both parties
have reduced working capital requirements and
improved operating flows.
Over the past 18 months, procurement innovators have teamed with Pollenware to auction
accelerated payment timing and other accounts
payable obligations to suppliers. The vendors
benefit from faster payments and the clients gain
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7
superior returns on their capital, compared to the
bank rates on cash managed by their treasury
departments.
Untold billions have been spent on technology deployment for improved requisition-to-pay
and spend visibility solutions over the past 15
years. And, no doubt, these investments have
improved the ability to understand spending
behaviors and policy enforcements, and dramatically reduced the operational procurement head
count required to support buy-side transactions.
But the improvements were hard fought and often
frustrating and, in some cases, the return on
investment (ROI) is still unclear.
No one platform is best for all spend categories and with the growing success of categoryspecific solutions, there will certainly be another
wave of technology investments to further enhance
our ability to monitor, guide, and report our
spend behaviors. These waves of improvements
have enhanced our potential to achieve much
higher compliance, enabling organizations to
actually realize more of the value gained from
sourcing activities.
Driver 5: Compliance
Systems alone do not ensure compliance. We have
found that value leakage (shortfalls from the
achievable savings secured and contracted in the
sourcing process) varies widely even among those
with robust technology platforms. The compliance driver, of course, benefits from improved
spend visibility due to technology enablement but
that alone is not sufficient. Leadership compliance
levels are achieved when procurement practices
policies broadly—and buying compliance policies
in particular—are institutionally sacrosanct, and
the enforcement of compliance and procurement
policies is rigorous and visible. We have seen F100
organizations with lagging technology investments
achieve world-class compliance outcomes on huge
fragmented spend. Every organization has its cul8
tural appetite for administrative procedures and
degrees of intervention and enforcement practices,
but let’s explore two extremes.
The first example is one of the most successful business stories of the past 20 years, concerning
a firm we refer to as the Ruthless Gladiator Company
or RGC. RGC is led by an experienced team
of investment banking and private equity executives who have emerged as the leaders in their
industry through ruthless cost cutting, rigorous
financial planning and controls, and aggressive
performance management incentive systems.
Procurement has been an integral element of their
success and the CPO sits at the leadership table.
Zero-based budgeting is a way of life and year-onyear improvements are expected, typically delivered and rewarded at virtually all management
levels in the organization. Category-specific wave
plans are scheduled, targets are set and incorporated into budgets in advance, and when individual sourcing programs are completed all of the
associated budgets are recast to the lower of the
original budget or the newly achieved sourcing
result — thus there is constant pressure to meet or
exceed their financial goals.
Enforcement is clear at RGC. All cost variances are explored, expense reports are not honored above strict policy limits, and employees
at any level that affect a variance or are off policy
are identified for career-defining moments. RGC
materially lags against leading-edge technology
deployment and relies on armies of Excel wizards
woven together in its financial controlling processes. Bottom line: RGC is likely the world standard at compliance attainment, with essentially
no value leakage allowed and no flight long
enough to justify business class.
By contrast, Comfy Pharma Company or CPC
is a widely recognized early procurement technology adopter and process innovator. CPC consistently improves its procurement practices and is a
benchmark leader in most areas. The firm has been
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a “go-to” source of talent for other companies
looking for skills and leadership. CPC’s challenge
has typically not been delivery of procurement
value but rather weak corporate commitment to
seizing benefits in some areas and lack of clarity on
spend governance in others. But CPC has worldclass visibility, some terrific category-specific solutions, and consistently high yields on the categories
where governance is less challenged.
Until recently, there was barely any management interest in stepping up corporate policies,
much less follow-through with RGC-like prowess
on enforcement of spend in “touchy” areas such as
travel, marketing, or legal services. For example,
the procurement team could deliver great travel
deals, enable them on the market-leading desktop
booking software, and monitor buying behavior
and compliance down to carrier, lane, class, booking time window, and even auction the limo to
the airport. But there was no support to align the
travel policy to commonly applied industry standards and virtually no adverse feedback for being
non-compliant to the standards they did have.
(Buying a coach ticket in advance is great, but
business class and a room at the Four Seasons
hotel is even better!) As a result, CPC was allowing
more than $50 million of value per year from
travel alone to bleed away, despite having worldclass tools and procurement talent.
Although RGC and CPC are two extreme
examples—technology laggards with extreme
compliance rigor versus technology-enabled leaders with lagging executive discipline—but both
have great procurement people delivering great
value. And yet both end up with varied outcomes on compliance. Compliance is not procurement’s job alone. At best, procurement can
suggest policy, provide visibility to spending
behavior, and report on the benefit stream realized
versus the benefit stream potential that could be
gained from its sourcing programs. In the end,
only through executive support, leadership, and
setting cultural expectations will the value potential earned through sourcing programs be fully
realized through world-class compliance. The
compliance gap just in using preferred supplier
contracts between leaders and followers can be
12 percent or more. If it were easy to assess compliance down to contract-specific terms and conditions (advance purchase opportunities, volume
tier incentives, and payment terms, for example)
we would find an even larger compliance gap
between leaders and followers.
Financial Results Delivered
Rolling up the drivers thus far (spend coverage,
velocity, category yields, additional benefits,
and compliance) is what defines and drives the
financial results delivered through procurement
activities. We have highlighted the wide performance variances observed on each of the drivers
across hundreds of organizations. Yet, even with
this insight, it’s no wonder that procurement was
left behind and remains in catch-up mode. The
leadership and management challenges to create
awareness, get support, and galvanize all the necessary stakeholders required to shape a winning team
for this multidisciplined sport of procurement
are daunting. But the aggregate value potential
is worthy of the effort.
When senior executives understand this aggregate value, they often make first-rate procurement
performance a strategic priority. But too often,
when confronted with a stream of “singles”—oneoff controversial category turf battles or fears of
disrupting supplier relationships—leaders elect to
postpone the needed transformation rather than
embrace it. And the gap between those that
invested in the procurement transformation journey and those that postponed it is not only evident
in the performance-revealing drivers reviewed thus
far but also in the profile of their investments in
supply management assets, which is the denominator in the ROSMA metric.
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9
… procurement transformation is not about getting to the
lowest cost of procurement; it is about delivering attractive
levels of ROSMA and maximizing financial results.
We recently had the opportunity to help
a company in the commodity processing sector.
This organization, which we will call the
Federalist Silo Company or FSC, has survived
nearly 100 years and with the current run up in
commodities has been able to show strong results
along with the rest of the industry. FSC has been
very competitive on commodity buying and
managing it regionally with great aplomb. Enter
a new senior executive with a great deal of strategic
sourcing experience. He suggested that there
could be $75 million to $100 million of performance improvement from strategic sourcing.
But the other FSC executives considered this
preposterous and delayed its pursuit.
After some prodding, we were given a chance
to prove procurement could deliver additional
value. As part of our diagnostic assessment, we
found an organization that had no center-led or
supported procurement organization, billions of
dollars in spend unaddressed by sourcing activities, and no material investment in modern procurement tools, talent, or processes. Yet HR
records identified more than 200 employees who
held procurement-related jobs (other than agricultural commodity buying roles) across their network of plants. In this example, we found high
procurement period costs and virtually no structural investment assets in procurement. Needless
to say, the other underlying drivers were disappointing (low or no coverage, velocity = zero,
yields as prescribed by incumbent vendors, compliance to the past, and no effort toward additional benefits) and their ROSMA if not near
zero, was potentially negative. After delivering
10
half the expected total benefits on just 23 percent
of the unaddressed spend, the transformation
accelerated and now is in full swing. New tools,
talent, training, and a global center-led organization are taking shape. Why the detour to the FSC
story? Although it’s an extreme example, the end
game outcome contrasted to the starting point situation is very telling.
Period Costs and Structural Investment
Period costs reflect the people costs and mix
(head count by roles and rates) as well as other
direct costs of procurement activities. Continuing
with the FSC example, they had more than 200
tactical buyers and transaction support staff but
almost no one who was capable of driving strategic sourcing programs or providing category
management direction. Benchmarks suggest that
FSC should only have 75 to 80 full-time employees, and the mix and roles should be totally different from their baseline. To make the end game
possible, FSC is actively addressing its structural
investment needs of procurement — recruiting,
training, establishment of core processes, knowledge management and technology. But given this
pristine greenfield situation, it was easy to document the ROI or ROSMA improvement on this
transformation and obtain management support.
When the back of the envelope NPV is easily
$500 million and the time to benefit is within
a year, investment decisions are easy.
Although the FSC example is an extreme one,
our ROSMA research and database reveal significant variances across companies regarding their
investment in supply management assets. We find
Procurement: The Last Best Place for RESULTS Improvement
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A.T. Kearney
many well recognized organizations have invested
heavily in technology and have substantially reduced
their operational procurement head count. In 2008,
the cost of the procurement function averaged
about 1.7 percent of spend for the roughly 500
organizations that participated in our AEP research.
By 2010, because of the downturn, that has dropped
substantially to about 1.1 percent. And procurement leaders improved further with 0.8 percent.
However, procurement transformation is not
about getting to the lowest cost of procurement; it
is about delivering attractive levels of ROSMA and
maximizing financial results. To optimize procurement one must ensure that the hygiene elements
(requisition-to-pay or buying processes, contracting and other transactional activities, for example)
meet service and quality levels at the lowest possible cost. At the same time, it must get the strategic
procurement capabilities positioned (roles, mix,
and skills) to deliver high impact results at an
acceptable and sustainable level of cost. Most organizations have made major structural investments
in procurement and have raised their game on
strategic activities, but our research shows that
collectively the larger business community is far
from establishing performance-driven procurement practices in their organizations.
For the vast majority of organizations in our
surveys to date, the variation across every ROSMA
driver is notable and the existence of strong, consistent performance across most or all drivers is
almost nowhere to be found. The potential to
drive process improvements (TQM and lean principles) across procurement, both to affect threshold performance on hygiene activities and deliver
large-scale value from strategic activities, is nothing less than extraordinary.
Do You Speak PDP?
Now that we have a clarifying value framework for
procurement in ROSMA, we should apply process improvements and lean principles to optimize
and stabilize consistent performance. Performancedriven procurement (PDP) is the next frontier,
albeit an old concept being applied once again.
The concept is simple, the benefits huge, and the
challenge great. But the procurement journey to
sustaining PDP performance will create competitive advantage.
At least three dimensions of competitive
advantage accrue to those that can achieve and sustain an enterprise commitment to performancedriven procurement:
1.Few have shown an ability to achieve and sustain current leadership procurement practices
and PDP is a level beyond, so early achievers
will gain significant advantages for some time.
2.PDP organizations deliver substantial gains,
and additional benefits from advanced practices
in supplier innovation, reduced complexity,
and enhanced balance sheets.
3.A strong procurement organization, one that
supports successful M&A and PDP, will reap
additional advantages by achieving faster scale
and value.
Every organization has a unique situation from
which it begins its journey to become a PDP organization. While not an exhaustive list, the following
offers a few suggestions to help with the first steps.
Secure executive awareness, alignment, and
support. It took the better part of 20 years for
most organizations to understand, embrace, and
embed EVA or similar value-oriented management systems. ROSMA is just the supply side
bookend to these value management models
applied to procurement. Enroll the CFO and then
work together to bring the executive team and
business unit leaders aboard. Apply the framework
operationally during business unit performance
reviews, budgeting, and planning processes.
Assess your position, define your goals and
milestones, and publish your CPO Agenda.
Establish your baseline at the detail driver level and
assess the current processes and practices that affect
Procurement: The Last Best Place for RESULTS Improvement
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A.T. Kearney
11
the drivers. With this rich baseline, you will be able
to design a procurement journey that focuses on
the immediate high-impact opportunities while
building the foundation for optimizing your organization to sustain PDP in the longer term. Making
the agenda transparent to peers and staff will elicit
their support and improve accountability.
Change your team’s game. Embed PDP principles and the ROSMA framework into your performance management practices. Redefine your
procurement leadership team operating model
through conversations, measurements, meeting
agendas, and reporting practices to reflect the language and intent of a PDP organization. Adopt
tools that can enable and support day-to-day driver
performance, accountability, and activity reporting. We developed a toolkit with our pilot clients
designed for low-cost and broad-based deployment. It is not easy to fundamentally change your
engagement model and embed this disciplined
approach, but it does drive performance.
Become “PDP conversant.” The procurement leadership team must be evangelists for
performance-driven procurement—able to engage,
confront, and enroll stakeholders across the organization. Rather than backing down or deferring
a sourcing opportunity, raise the conversation to
the management table. Use the ROSMA framework as a discussion guide to debate the governance, RASIC, sourcing or Chessboard strategy,
timing, velocity, and compliance issues at the
executive level.
Rebalance your talent and infrastructure
model for success. Your baseline assessment and
CPO agenda should highlight some needs to rebalance head count, adopt more (or new) technology,
12
and fulfill other requirements. Changing the game
will bring a new level of transparency to your
team’s performance and highlight opportunities
and deficiencies. With executive support for PDP
and broad understanding of the value proposition
of procurement, planning and managing resources
and investments will be easier.
Build influence to drive additional benefits.
The prerequisite for PDP is optimizing for coverage, velocity, category yields, and compliance. It is
paramount to close the gap and take the lead on
conventional sourcing and procurement practices.
But major gains and long-term value will be
derived from applying advanced techniques to
strategic categories — and that requires building
credibility, talent, and influence across key stakeholders. Accessing executive support can jump
start this process and transfer skills.
Just Ahead: Management Science Applied
to Procurement
No doubt the aspiration of PDP and the ideas
unleashed from the ROSMA framework will
spark debate and raise many questions. That,
alone, is a success. It is time for procurement to
move ahead and no longer be left behind. And
it won’t be long before Wall Street analysts do in
fact query our executives about procurement and
perhaps key ROSMA drivers.
It may very well have been 130 years in the
making, but we are on the cusp of another profound change in business strategy, as management
science is applied to procurement. The potential
benefits, if long overdue, are nonetheless extraordinary — and waiting for those willing to begin
the journey.
Procurement: The Last Best Place for RESULTS Improvement
|
A.T. Kearney
A.T. Kearney is a global management consulting firm that uses strategic
insight, tailored solutions, and a collaborative working style to help clients
achieve sustainable results. Since 1926, we have been trusted advisors on
CEO-agenda issues to the world’s leading corporations across all major
industries. A.T. Kearney’s offices are located in major business centers
in 38 countries.
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