bargain hunter to business partner: the monumental opportunity facing procurement

Bargain hunter to business partner:

The monumental opportunity

facing Procurement

Highlights of Q1 2014 Procurement Advisory

Pulse Survey

Monday, July 14, 2014

© 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International.

KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does

KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

1

The research

First edition of semi-annual KPMG

Procurement Advisory Pulse survey

We polled 217 KPMG Procurement

Advisory consultants globally

The survey was facilitated by KPMG’s

Global Procurement Advisory Center

of Excellence

This recurring research enables us to

provide KPMG Procurement

practitioners’ point of view to advance

industry-leading thinking and insights

on the market globally

Other 9%

Singapore 2%

France 2%

Australia 3%

Thailand 3%

China 3%

Brazil 7%

Germany 12%

Canada 13%

UK 16%

USA 30%

Source: KPMG International, Procurement Advisory Pulse Survey, 2014




2

We asked:

What are companies’ priorities for improvement of the procurement function?

How are companies measuring procurement’s contribution to value?

Are qualitative and quantitative performance metrics being used?

What are companies doing to manage risk and preserve value across their

supply chains?

What steps are companies taking to improve their procurement operating

models?

The research




3

Key themes and trends

Appetite for Procurement change is increasing:

66% say operational change is more of a priority in next 12-24 months than previously

59% say strategic change (transformation) is more of a priority in next 12-24 months than

previously

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Not a priority Somewhat less of a priority No Change Somewhat of a priority Priority

3% 7% 32% 45% 13%

15%51%27%5%2%

Operational

Change

Strategic

Change

Prioritization to Improve/Overhaul Procurement





4


Appetite for change is increasing – but procurement priorities are often misaligned with

objectives for change/transformation

1. It’s no surprise that the top 5 priorities directly affect ability to deliver value:

1. Improve performance

2. Align closer to business functions

3. Improve governance & compliance capabilities

4. Drive costs out of organizational indirect spend

5. Improve supplier management with tier 1 suppliers

Delivering on the top 5 priorities can be effected by:

Targeted tactical initiatives to tackle each priority separately

Changing/transforming the procurement operating model to tackle multiple priorities

The appetite for procurement operating model change is relatively low.




5


Although the top priorities directly affect ability to

deliver value, it’s more surprising that value

contribution is not being tracked

58% want to improve performance – but a full

range of performance metrics are not being used

42% want closer alignment – but metrics to

track alignment are not being used

40% aim to improve governance – but metrics

continue to emphasize quantitative measures (cost)

over qualitative measures

Setting and monitoring metrics on procurement’s

performance in priority areas is key to realizing

performance

Changing the current procurement operating model

(POM) typically helps to achieve the top 3 value-related

priorities – and more.





6

Improving procurement performance

& value delivery continue to be

consistent priorities, yet:

Realizing procurement’s value

Few companies benchmark

the role of procurement

against other strategic

business functions

Most companies still focus

primarily on the traditional,

quantitative metrics

Because qualitative measures

are not tracked, the full extent

of procurement value delivery

is often overlooked0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Measure QuantitativeValue

Measure qualitative value

9%15%

18%

32%

40%

40%

19%

11%13%

2%

Never Rarely Sometimes Frequently Always





7

Qualitative vs. quantitative measures

Direct costs are much more likely

to be measured quantitatively

Qualitative measures can do more

to capture and demonstrate value

delivery

For example, the value of supplier

relationships is rarely tracked (2.3)

yet the ability of suppliers to

contribute innovation and

continuous improvement is widely

recognized as having enormous

potential to enhance value


1=Rarely/Never, 3=Sometimes, 5=Frequently/Almost always




8

Keys to increasing procurement value realization

1. Implement qualitative measures and a Return on Procurement measurement & assessment model to

evaluate the full scope and value of the procurement function

2. Focus on execution to drive up value across the full scope of variables procurement can impact

Show s

what you

can do

and we will

invest

Customer and

market needs

and impactsTraditional

focus on unit

cost from

suppliers

Process

efficiency and

organizational

effectiveness

Supplier

innovation and

continuous

improvement Enhanced

design

collaboration

and

optimization

Comprehensive

supply risk

management

Driving down cost Driving up value

A single-minded focus on driving down input costs is not enough. Leading organizations focus

more on driving up value from end-to-end across the business.




9

Procurement’s impact on risk management

1.002.00

3.004.00

5.00

Sales market risks

Fraud/loss of intellectual property

Currency risks

Raw material price risks

Organizational/process risk

Supplier/supply chain risks

Regulatory compliance risks

2.57

2.66

2.70

2.77

3.16

Risk Management Program Comprehensiveness

Risk management is

recognized as a key to

preserving and building value

Typically a minimal focus on

Tier 2+ suppliers

Generally lacking in

systematic breakdown of

risk exposure

Respondents indicate current

risk management capabilities

and comprehensiveness are

moderate at best:

2.59

2.74

1=Limited/Weak, 3=Moderate, 5=Comprehensive/Strong





10

Realizing procurement’s value – managing risk

Few companies report a

comprehensive Risk

Management program which

facilitates:

Assessment of risk in terms of

probability and potential

damage

Segmentation of supply base

by potential risk types

Evaluation beyond Tier 1 or

strategic suppliers






11

“Leading companies are harnessing data analytics & predicative

modeling to manage potential impacts of short & long term risk

trends.”John Tros,

Head of Procurement Advisory practice, KPMG in the Netherlands

Keys to managing Procurement Risk

1. Expand capability by creating a comprehensive risk management program

Monitor and actively manage procurement and supply chain risks as diligently as

other financial and operating risks

Prepare a systematic breakdown of risk exposures

Segment supply base by risk types

Leverage newer (cloud-based) technologies to enable real-time compliance

monitoring

Focus on people – to acquire, develop and retain the best resources to manage risk &

compliance

2. Extend mitigation across Indirect supply and Tier 2+ suppliers

3. Monitor and actively manage procurement and supply chain risks as diligently as other operating

units




12

11%

15%

44%

22%

8%

None Few Some Most All

Procurement Operating Model

Client Accounts Planning or Actively Undertaking

Formal Efforts to Significantly Change Procurement

Operating Models A majority of companies are indicating

an appetite for strategic

change/transformation initiatives

Interest in transformation of the

Procurement Operating Model (POM)

exists, however, most Procurement

functions focus on tactical

adjustments, ignoring the multi-

dimensional enhancements that can

be achieved through a POM

transformation.

Those companies that are actively

considering change/transformation

appear to be trending toward adoption

of more centralized or hybrid models





13

Optimizing the Procurement Operating Model

1.002.00

3.004.00

5.00

Greater tax efficiencies for the organizationoverall

Higher revenue for the organization overall

Overhaul/re-invigorate/transform the overallprocurement function

Higher profits for the organization overall

Reduce/better manage risk as it relates to theprocurement function

Greater alignment with procurement functionstakeholder needs

Increase the measurable value thatprocurement brings to the organization

Higher levels of procurement functionoperational efficiency


Sought

Achieved

Benefits sought and achieved from changing

the model

Companies that do transform

their operating model are

realizing the benefits – across

many of the value dimensions

sought

In fact, increasing

measurable value is the #2

benefit sought, and in most

cases achieved

Enhanced Risk management

also ranks highly as benefit

sought (and achieved) via

POM transformation





14

Current/future Procurement Operating Models

• Most indicate a shift toward

centralized or center-led models

• Hybrid and outsourced models are

also gaining traction

We asked what type of procurement operating model do clients have in place

– now and in 24 months?

“A hybrid procurement operating model

may offer the best results, by balancing

business proximity with purchasing

power leverage.”Samir Khushalani

Americas Practice Leader for

Procurement Advisory





15

Keys to Procurement Operating Model value delivery

To achieve maximum value, align the POM

to key factors including the company’s

unique strategic goals, operating

environment and purchasing power

levers. Multi-dimensional procurement

performance improvements can be

achieved via Procurement Operating Model

transformation.

POM transformation has been shown

to drive value in the 3 top-ranked

priority areas: performance, business

alignment and governance

As organizations transform, the

benefits of past models are retained

as procurement evolves into its new

structure.

1.

2.

3.

Hybrid operating models are enabling

leading-edge organizations to unlock even

further value from the procurement

function.

No single model can deliver its particular

benefits indefinitely. Continuously monitor

and adjust the model to ensure

procurement function delivers sustained

value.

Three key findings:

Takeaway…

Now is the time to focus

less on driving down

supplier’ prices and

more on driving up

value.

KPMG.com/ValueofProcurement

Christian RastKPMG in Germany

T: +49 69 95870

E: [email protected]

Samir KhushalaniKPMG in the US

T: +1 713 319 3570


Jon TrosKPMG in the Netherlands

T: +31206 564056


www.kpmg.com/pulse

© 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG

International. KPMG International provides no client services.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour

to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be

accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

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