We explore the frontiers of

supply management to inspire

the profession to greatness.

ISM Indirect Procurement 2017

Room: Breakers EFKL

November 30, 2017

Deborah Stanton, Executive Director, CAPS Research

A CPO’s PLAYBOOK TO NAVIGATING INDIRECT

ABOUT CAPS RESEARCH

• A non-profit research center established in 1986 by our founding partners:

We explore the frontiers of supply management to inspire the profession to greatness.

Define your starting point through BENCHMARKING

Reveal your destination through RESEARCH

Network to create your transformation through EVENTS

• Expansive set of SCM topics

• Current and trending metrics

• Actionable KPIs

• Members and non-members are welcome to participate

• Unbiased, academic rigor

• Thought-provoking, yet practical and relevant

• Researchers from universities around the world

• Exclusive, member events

• Very interactive and engaging

• International events –USA, Europe, China

• Sales-free, consultant-free

A JOURNEY THROUGH INDIRECT

Tactical• Focused on PO processing

• Sourcing was 3-bids-and-a-buy

• Contract processes primarily manual

• Activity limited to only certainspend categories

• Indirect suppliers were not part of our Supplier Programs

• Reactive engagement with internal partners…did what they told us to do!

How

?

Strategic

Supply Management

• Drive efficiency and focus on strategic activity.

• Engaged in EVERY spend category

• Develop Category Strategies

• Put our indirect suppliers into formal Supplier Programs

• Proactive & high levels of engagement with internal partners

• Shared dashboards with depts.

• Move from cost focus to value creation

• Deliver business solutions

SUPPLY MANAGEMENT DESIGN

Centralized

• Central Reporting: All SM

professionals reported

through the CPO hierarchy.

• Not Centrally Located: SM

professionals were NOT

physically centralized, but

rather co-located throughout

various departments, i.e.

Marketing, HR, IT

43%

48%

9%

Centralized

Center-led

Decentralized

Most Common Supply Management Structures

Source: The Metrics of Supply Management - CAPS Research 2017

BUILDING AND DESIGNING THE INDIRECT TEAM

www.CAPSResearch.org

44%56%

INDIRECTStrategic vs. Tactical

Strategic Tactical

46%YES

INDIRECT employees co-located within other

departments(% of companies)

BUILDING AND DESIGNING THE INDIRECT TEAM

www.CAPSResearch.org

44%56%

INDIRECTStrategic vs. Tactical

Strategic Tactical

Do you have your transactional

purchasing activity consolidated

into a Purchasing Operations

Center?

70%

TRANSITION FROM TACTICAL TO STRATEGIC

A drive to more strategic levels:

• Consolidate PO activity to POC

• Outsource tactical activities to

make room for strategic

• Invest in new roles: relationship

managers, value chain, data

scientists, tech savvy resources-

predictive and robotics in

procurement

• Improve collaboration - bringing

solutions to the business

• Move into all spend categories

Transactional POs

3-BIDS & A BUY

CATEGORY MANAGEMENT

Advanced SUPPLIER PROGRAMS

Next Frontier? BUSINESS INTEGRATION, PREDICTIVE, BIG DATA, ROBOTICS

Total Spend

Sourceable Spend

Managed Spend

Touched Spend (Annually)

DEFINITION OF SPEND

• All external purchases

• Excludes employee salaries

• Purchases or spend categories that could be sourced by SCM – whether

they currently are/are not

• Typical exclusions: gov’t taxes, legal fees, charitable donations

• Purchases or spend categories that are sourced, managed or influenced by

SCM by having policies, procedures, commercial agreements or category

strategies in place that define the way the purchase is executed or managed.

• Purchases or spend categories that are addressed in the current annual

period by SCM, i.e. bid, negotiations, category strategy development

EXPANDING OUR INVOLVEMENT AND INFLUENCE

Marketing

Facilities MRO

Real Estate

H.R.

I.T.

Professional Services

Office & Admin

LogisticsCapital

Equipment

Legal

Energy

84%All Industry

Average

Managed Spend – Average by Industry

A DISCIPLINED APPROACH TO MANAGED SPEND

WHY should Supply Management MANAGE SPEND?

• Make informed, unbiased business decisions

• Skilled to get the most value for your company

• Minimize RISK to your company

30%

25%

6%

14%

5%

35%

18%

16%

20%

6%

19%

31%

34%

16%

27%

11%

18%

31%

41%

42%

5%

8%

13%

9%

20%

IP NOT PROTECTED

AGREE TO PRE-PAIDS

DELIVERABLES NOT INCLUDED IN SCOPE

SUPPLIER WRITES THEIR OWN SOW

POORLY DEFINED SCOPE

With Limited Involvement from Supply Management…bad things happens!

1 - Less Frequent 5 - Very Frequent

A DISCIPLINED APPROACH TO MANAGED SPEND

HOW?

Category Management

Business Partner

Engagement

Metrics & Dashboards

A DISCIPLINED APPROACH TO MANAGED SPEND

HOW?

Category Management

Business Partner

Engagement

Metrics & Dashboards

A DISCIPLINED APPROACH: CATEGORY MANAGEMENT

Category Strategy Playbook or Template

1. Internal Analysis

• Internal Spend Analysis

‒ Spend by business unit, geographical region, by product, etc

• Current Contracts – Compliance, Terms, % Share of Category

2. External Analysis

• Industry/Category Characteristics

• Supplier Landscape – Risk, Innovation, M&A, Emerging

3. Porters Five Forces; SWOT Analysis

4. Should-cost Models; Value Chain Mapping

5. Business Requirements and Strategy Development

6. Category Action Plan

INTERNAL SPEND ANALYSIS – MARKETING CATEGORY EXAMPLE

$725,150 22%

$538,142 17%

$443,162 14%

$418,728 13%

$364,424 11%

$765,922 23%

Company Spend by Supplier

$1,000,000 22%

$2,000,000 45%

$1,500,000 33%

Marketing Spend by Company Business Unit

Business Unit A Business Unit B Business Unit C

$0

$75,000

$150,000

$225,000

$300,000

$375,000

$450,000

YTD Spend by Top Supplier and BU

BU C

BU B

BU A

Company Marketing Metrics

• $1.98B annual total spend

• $1.72B through agency

• 14 Suppliers

• Current contracts with xxx, xxx, xxx

Internal Spend Profile

INTERNAL ANALYSIS - SUPPLIER PROFILE FOR CATEGORY

Supplier Sub-Category

Spend

Total Supplier

Spend

Contract

Status

Payment

Terms

Performance

Score

Supplier 1 $129M $129M Active to 08/17 60 Days 4.2 / 5

Supplier 2 $100M $100M Active to 12/17 90 Days 3.75/5

Supplier 3 $864M $334M Active to 8/18 60 Days 4.7 / 5

Supplier 4 $864M $098M Active to 8/18 60 Days 2.9/5

Supplier 5 $3.97MM $880M Active to 06/19 90 Days 3.5/5

Supplier 6 $3.97MM $676M Active to 06/19 90 Days 4.5/5

Incumbent Marketing Supplier Status

EXTERNAL ANALYSIS – INDUSTRY CHARACTERISTICS

Marketing Industry Background Industry Breakdown

Category Description:

The marketing industry is complex and has many sub-

categories of spend. Some of these sub-categories are:

creative agency, advertising, media production,

sponsorships, trade show, digital, etc. Suppliers can

offer a large variety of services as well as niche

suppliers that focus on a specialty of these sub-

categories. Many large global suppliers have many

subsidiaries that specialize in certain areas of

marketing services.

Key Suppliers:

The large global suppliers in this space are WPP,

Omnicom, Publicis, xxx

Long Term Forecast:

Xxx

New Market Dynamics:

Xxx

Other:

xxx

Supplier 1 Supplier 2 Supplier 3 Supplier 4 Supplier 5

Revenue $23.51B $10.48B $20.59B

$20.18B

$14.96B

Gross Profit Margin -7.1% 6.00% -14.50% -36.10% 84%

Return on Equity -147.14% 8.30% -273.60% -110.42% 9.47%

Debt to Equity Ratio 6.5 .305 N/A 2.455 3.381

EBITDA $1.25B $1.58B 913.00M $1.70B $696.00M

Supplier Financial Indicators

14%

13%

11%11%

8%

7%Market Share

Supplier 1 Supplier 2 Supplier 3 Supplier 4 Supplier 5 Other

Source: xxx

Market share based

on revenue

EXTERNAL ANALYSIS - KEY SUPPLIERS

17

Profile of WPP

31%

21%8%

6%4%

30%

Top Business Sectors/UnitsWPP at a Glance

Number of employeesover 205,000 (including associates and investments)

Number of offices 3,000+

Number of countries 112

Reported revenues£14.4bn (as at December 2016)

Reported billings£55.2bn (as at December 2016)

Market capitalization £21.4bn (as at April 2016)

EXTERNAL ANALYSIS - KEY SUPPLIERS

18

WPP Area of Business

Advertising Global, national and specialist advertising services from a range of top international and specialist agencies, amongst them Bates CHI&Partners, Grey, JWT, Ogilvy & Mather and Y&R.

Media Investment Management Above- and below-the-line media planning and buying and specialist sponsorship and branded entertainment services from GroupM companies MediaCom, MEC, Mindshare, Maxus, plus tenthavenue and others.

Data Investment Management (formerly known as Consumer Insight)WPP's Kantar companies, including TNS, Millward Brown, Kantar Futures and many other specialists in brand, consumer, media and marketplace insight, work with clients to generate and apply great insights.

Public Relations & Public Affairs Corporate, consumer, financial and brand-building services from PR and lobbying firms Burson-Marsteller, Cohn & Wolfe, H+K Strategies, Ogilvy Public Relations, Finsbury and others.

Branding & Identity Consumer, corporate and employee branding and design services, covering identity, packaging, literature, events, training and architecture from Addison Group, Brand Union, FITCH, Lambie-Nairn, Landor Associates, The Partners and others.

Direct, Digital, Promotion & Relationship Marketing The full range of general and specialist customer, channel, direct, field, retail, promotional and point-of-sale services from AKQA, Geometry Global, OgilvyOne Worldwide, RTC, VML, Wunderman and others.

EXTERNAL ANALYSIS - KEY SUPPLIERS

19

WPP Locations

Risk Assessment

PORTERS FIVE FORCES ANALYSIS

20

Definition

• Large number of

competing

firms

• Competing firms

are the same size

and have similar

influence

• Slow industry

growth

• Lack of product

differentiation

• Product capacity

added in large

increments

Definition

• Number of buyers is

small

• Products sold to

buyers are

undifferentiated and

standard

• Products sold to

buyers are a significant

portion of a buyer’s

final costs

• Buyers are not earning

significant economic

profits

• Buyers threaten

backward vertical

integration (buyer can

enter your market)

Definition

• Suppliers industry is

dominated by a small

number of firms

• Suppliers sell unique or

highly differentiated

products

• Suppliers are not

threatened by

substitutes

• Suppliers threaten

vertical integration

• Firms are not important

customers for suppliers

Definition

• Substitute products

meet the same

customer need but in

different ways

• Substitutes place a

ceiling on the prices

that firms can charge

Definition

• Economies of Scale

• Product Differentiation

• Cost Advantages

• Independent of Scale:

a. Proprietary

technology

b. Know-How

c. Favorable Access to

Resources

d. Favorable

Geographic

Locations

e. Learning Curve

Cost Advantages

• Contrived Deterrence

• Government Policy

Threat of Entry

Low HighNeutral

Threat of Rivalry

Low Neutral High

Threat of Buyers

NeutralLow High

Analysis

xxx

Analysis

xxxAnalysis

xxx

Analysis

xxxAnalysis

xxx

Threat of Suppliers

NeutralLow

Threat of Substitutes

NeutralLow HighHigh

CATEGORY STRATEGY

Strategy

Key Strategy Elements

• Renegotiate current agency for sponsorship

• Competitively bid xxxx

• Unbundle creative agency from other

services that historically have been done by

the large agencies.….

• Move to a global supplier for xxx

• Implement a structured performance

management system

• Implement standard Terms and Conditions

Category Goals & Plans

Strategy involves maintaining cost effective

providers and leveraging the company’s

buying power.

xxx

xxx

Plan Items 2017 2018 2019 Comments

Savings $744M $283M

YTD June

2017

$600M • Renegotiate

contract with

supplier 1

• Competitively bid

xxxx

Total

Suppliers

(under

negotiated

contracts)

Agency 8

Media 10

Spons 4

Agency 6

Media 5

Spons 3

Agency 4

Media 3

Spons 3

• Reduce number of

suppliers for agency,

media, and

sponsorship

Payment

Terms

30-45 days 60 days 90 days • Move all pay terms

to company

standard

Perf Mgmt

Adoption

25%

suppliers in

program

50% 100% • Implement

performance

management for top

tier suppliers

A DISCIPLINED APPROACH TO MANAGED SPEND

Category Management

Business Partner

Engagement

Metrics & Dashboards

LEVEL OF BUSINESS PARTNER ENGAGEMENT

Tactical Transitional Strategic

15% 62% 23%

• Mostly transactional support to business.

• Reactive to business partner needs.

• Business partners make decisions and tell Supply Management what to do.

• Growing engagement and more proactive with business partners.

• Strategic conversations begin with business partners.

• Business partners reviewcategory strategies.

• High level of collaboration with business partners.

• Supply Management proactively bring solutions to solve business challenges.

• Align Supply Management objectives to business strategies – shared dashboards.

What is your level of business partner engagement?

STEPS TO BUSINESS PARTNER ENGAGEMENT

73%Yes

27%

CONDUCT CATEGORY REVIEWS WITH BUSINESS PARTNERS?

Yes No2017 CAPS Research Business Engagement

49%Yes

51%

CATEGORY STRATEGY SIGN-OFF BY BUSINESS PARTNER?

Yes No

Business Partner

Engagement

STEPS TO BUSINESS PARTNER ENGAGEMENT

43%Yes

57%

INVOLVED IN THE BUSINESS PARTNER BUDGET PROCESS?

Yes

No 52%Yes48%

SHARED SCORECARD WITH BUSINESS PARTNER?

Yes

No

• Educate, educate, educate!

• Bring your unique perspective.

• Be a storyteller, but keep it simple.

A DISCIPLINED APPROACH TO MANAGED SPEND

Category Management

Business Partner

Engagement

Metrics & Dashboards

DELIVERING VALUE…COST SAVINGS

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

All Companies Manuf Process Services

4.03.1 3.5

5.8

2.5

2.02.1

3.9

Reduction Avoidance

6.5% 5.1% 5.6% 9.7%

TOTAL COST SAVINGS - AS A % OF MANAGED SPEND

Source: The Metrics of Supply Management – 2017 CAPS Research

COST SAVINGS

Definitions

Cost Reduction: Year-

over-year savings based

on previous price.

Range: <1-30%

Cost Avoidance:

Negotiated reduction

(when no previous price

exists) from initial quote,

qualified bids, or other

valid price baseline

Range: <1-8%.

DELIVERING VALUE …NEW MEASURES TO DEFINE VALUE

INNOVATION

CONTRIBUTION TO REVENUE

TOTAL COST OF OWNERSHIP

RISK MITIGATION

CONTRIBUTION TO INCREASED MARGIN

26%

36%

50%

55%

60%

19%

40%

46%

47%

25%

New Metrics to Show Value(% of Companies with the Defined Metric)

INDIRECT ALL SPEND

82% Measure COST AVOIDANCE

97% Measure COST REDUCTION

(for Indirect Spend)

DELIVERING VALUE – IMPACT TO BUDGET

“Show me the money”

Cost ReductionYear-over-Year

Previous Price $150,000

Current Price $120,000

Cost Reduction $30,000

Budget ImpactScenario 1

Budget $120,000

Current Price $120,000

Budget Impact $ 0

$160,000

$120,000

$40,000

Enable re-investment or savings to the bottom line

2

DELIVERING VALUE…SUPPLY MANAGEMENT ROI

ROI = Cost Savings (Reduction + Avoidance) ÷ SM Operating Expense

SM Operating Expense

$1.00 $1.00 $1.00 $1.00

$3.04

$8.92$7.23

Return $8.38

Source: The Metrics of Supply Management - 2017 CAPS Research

All Discrete Process ServicesCompanies Mfg

ROI by INDUSTRY

2.3X 2.9X

7.2X8.9X

11.0X

Aero & Def Industrial Mfg Petroleum Financial Serv Utilities

Source: The Metrics of Supply Management - 2017 CAPS Research

DELIVERING VALUE…SUPPLY MANAGEMENT ROI BY INDUSTRY

THANK YOU

Q&A

www.CAPSResearch.org