Title: Making Procurement Performance Count - A 3 Step Approach
1(No Transcript)
2Making Procurement Performance Count A 3 Step
Approach
- Measuring the performance of a procurement
department can be a very complex process but, in
2013, more CPOs will work aggressively and
proactively to define the performance criteria
(and the methodology - used to track it) that will be used to measure
procurement department performance. - -Ardent partners 2012
- Procurement has always been integral to the
- performance of an organization. However, it is
now - with increasing unpredictability in the market,
cut - throat competition and looming recession fears
that - procurement has become a highly topical area for
- the senior level management.
Procurement is now being considered as a
strategic business function. The increasing share
of material costs and purchased services in major
global organizations Profit Loss account
highlights its growing significance. The need to
align procurement objectives with that of the
organization is becoming a necessity
3Let's have a look at how procurement has evolved
over a period of time.
4The CPO s Top Metrics
- As seen in the chart, for a CPO the top metrics
- Is Identified Savings whereas at the
- enterprise level the top metrics is Implemented
- Savings. Thus there is a stark
- difference in the priorities which need to be
- aligned.
Source Ardent Partners 2012
5This whitepaper will focus on problems prevalent
in the process followed to measure procurement
performance and how technology can be leveraged
to improve procurement performance.
- Neil Deverill former CPO of Anglo American and
Royal Philips quoted in Procurement - Intelligence Unit (PIU), "what gets measured gets
done". It literally conveys that it in order - to improve efficiency of any process it is
mandatory to have the correct metrics to measure
it. - Procurement is largely judged by the savings it
generates. Measuring procurement should be a part
of - an improvement process. The key is not to measure
for measurement's sake, but to indentify gaps - which can be filled timely to prevent any kind of
savings leakages. Procurement is a complex
function - with tiers of suppliers and stakeholders spread
across geographies. The performance measurement - process should thus consider the key aspects,
agreed upon by all the stakeholders and give
results - that are widely in line with the organization
goals.
6Let us understand the procurement performance
measurement woes with the help of an
example. Mr. John has been newly appointed as
CPO of a manufacturing company with workforce of
10,000 employees. The company has its offices
spread across the globe. John has an upcoming
meeting with the CFO where he needs to present
the performance of his function. However with the
present process of measuring procurement
performance involving data spread across
excel sheets, John was unable to comprehend the
existing state of performance.
- Some of the key pain areas for John were
- Difficulty in tracking procurement savings due to
multiple stakeholders across commodities and
divisions - Lack of transparency in maintaining and comparing
forecasted and actual savings - Difficulty in collating all procurement savings
from different sources and generating savings
report for top management - No visibility into procurement savings obtained
from supplier negotiations - Overcoming disconnect with finance division over
savings definition - Difficult to demonstrate procurement's impact on
company's bottom-line - Difficult to shift focus from cost savings to
growth
7- Having seen the challenges the following section
will focus on the process that procurement needs
to - adopt for having a better performance tracking
system in place. Organizations need to - Develop a function-specific view into individual
projects and associated savings. This increases
the visibility into organization wide savings a
key to improving resource planning - Establish a common savings definition and
baseline agreed upon by finance and procurement
savings is an important factor for defining
success for both Procurement and Finance.
However, there has always been disconnect between
the functions as savings generated by procurement
is not reflected in the financial statements - Map the impact of procurement savings by
collaborating with the finance team. - Streamline savings approval process thus ensuring
the right information reaches the right authority - Track savings at a multi-dimensional level
- Map forecasted savings to budgets - Project have
multiple stages. It is important to be able to
track forecasted savings vs. actual savings
against the fixed budget at every stage
8Process
- In this section we will focus on how technology
can be leveraged to streamline the entire - process of mapping procurement performance. In
this whitepaper we propose a 3 step process to - mapping procurement performance.
9Step 1 Configuration
- This is the basic step which starts with defining
the structure and boundary of the project. - 1. Project type
- The procurement team along with the other
stakeholders needs to decide the project type.
For - instance, cost avoidance, cost reduction, CAPEX,
inflation management, revenue returns etc.
Benefit - types expected from the category i.e. various
categories of savings whether it impacts PL
directly or - indirectly, savings by cost avoidance etc.
- 2. Customization
- Performance measurement tools/systems cannot
adopt one for all strategy. It will vary
depending on - the organization structure, business and the
industry it is functioning in. Thus it is
necessary to have - an option of customizing the fields as necessary.
For instance track savings as per different
business - units, functions, plants etc.
10- 3. Defining user roles
- The data used to measure and manage the
procurement performance is highly confidential to
the - organization. Thus care should be taken that
right people have the right access. Technology
enables - defining user roles i.e. the access rights for
the users. For instance, some users can have the
right to - create and edit the project while some users can
only view the reports etc. - 4. Customized approval workflow
- In order to align the procurement function
objectives with that of the organization, high
level of - collaboration is needed amongst the stakeholders
of any given project. Building a workflow ensures - the information is passed through the correct
channel i.e. set of individuals and the end
result is - accurate and relevant. Multi level workflow is
required to ensure correct flow of most relevant - information. For instance,
11- 5. Project stages
- A project has multiple stages. Typically 5 viz.
- Supplier discovery
- Creating a sourcing event
- Negotiating a contract with the selected supplier
- Managing and building supplier performance
- Spend analysis
- The project will have a fixed overall budget.
Savings should be forecasted at every stage. This - forecasted savings should be compared with the
actual realized savings. This helps the
organization to - track the status and success of project at every
stage.
12- 6. Customized savings formula
- Just like flexibility is needed in defining the
required fields and approval workflow, savings
formula used - to calculate the performance of procurement
should also be customizable. Different projects
have - different requirements and so a rigid savings
formula will not do justice to the procurement
evaluation. - 7. Configure savings target
- In order to ensure clear communication of savings
target to the teams/individual, top management - should have the ability to configure targets on
any parameter for instance an individual, a
team, unit, - geography etc. so that they can plan the
resources accordingly.
Step 2 Execution
After the project basics have been defined and
configured, the next step is to execute
it. Execution involves 2 stages.
13- 1. Manage savings
- As the project goes through different stages,
savings also has multiple stages. At each stage
there is a - fight between forecasted saving vs. actual
savings.
The savings are calculated as per the agreed
savings formula and its impact is mapped on the
relevant financial statement. In case of any
changes at any stage, the user should have the
option, depending upon the access rights to add
comments or add an attachment or revise the data.
14- 2. Approve savings
- Savings approval follows the path defined by the
multi level workflow. The reviewer/approver
checks the - savings and its impact on the financial
statements and accordingly approves them or
otherwise.
Step 3 Report Savings
Once the savings have been approved, the last
step involves reporting them. Reports help in
analyzing the reasons for project success or
failure. An ideal reporting system should be
customizable and provide an in-depth analysis of
where and how savings were generated. Dashboards
with ability to track target v/s forecasted v/s
actual savings provides the necessary visibility
to the top management for actionable decision
making.
15Conclusion
Thus we see that for procurement to successfully
measure and manage performance, the key is to
effectively leverage technology which is less
time consuming and gives accurate savings while
maintaining a single version of truth, and at the
same time ensuring transparency. Auto conversion
of procurement savings to show its impact on PL
and balance sheet gives the company valuable
insights and opportunities to grow which is the
need of the hour today.
16About Zycus
- At Zycus we are 100 dedicated to positioning
procurement at the heart of business performance.
For - more than a decade we have been the world's most
trusted leader in Spend Analysis. With our spirit
of - innovation and a passion to help procurement
create even greater business advantages, we have - evolved our portfolio to a full suite of
Procurement Performance Solutions Spend
Analysis, eSourcing, Contract Management,
Supplier Management, Procure-to-Pay and Financial
Savings Management. - Behind every Zycus solution stands an
organization that possesses deep, detailed
procurement - expertise and a sharp focus on being responsive
to customers. We are a large 600 and growing - company with a physical presence in virtually
every major region of the globe. We see each - customer as a partner in innovation and no client
is too small to deserve our attention. - With more than 200 solution deployments among
Global 1000 clients, we search the world
continually - for procurement practices proven to drive
competitive business performance. We incorporate
these - practices into easy-to-use solutions that give
procurement teams the power to get moving quickly
- from any point of departure and to continue
innovating and pushing business and procurement - performance to new heights.