innovative procurement strategies for thriving in a networked economy

HR EAP Advisory Program Introduction | 1 © 2014 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.

Innovative Procurement Strategies for Thriving in a Networked Economy Ariba Commerce Summit – October 2014

Amy Fong

Senior Director, Procurement Executive Advisory

The Hackett Group

Ariba Commerce Summit

Statement of Confidentiality and Usage Restrictions

This document contains trade secrets and other information that is company sensitive, proprietary, and confidential, the

disclosure of which would provide a competitive advantage to others. As a result, the reproduction, copying, or

redistribution of this document or the contents contained herein, in whole or in part, for any purpose is strictly prohibited

without the prior written consent of The Hackett Group.

Copyright © 2014 The Hackett Group, Inc. All rights reserved. World-Class Defined and Enabled.

Challenges and Priorities: What Keeps Procurement

Executives up at Night?

Capabilities: How can we Leverage Supplier Network

Technology to Address Key Procurement Challenges?

Outlook: What Lessons and Trends are Emerging

from Supplier Networking?

Agenda

Innovative Procurement Strategies for Thriving in a Networked Economy

© 2014 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.

The Hackett Group A leader in organizational effectiveness and best practice insight

Mission

Hackett is an IP-based Global Advisory and Consulting firm helping clients implement and

sustain World-Class business performance across General and Administrative Services

Hackett’s Value:

We formulate strategies based on our proprietary repository of Certified Hackett best practices

and competitive insights

We design and implement sustainable performance improvement solutions

Results

Our efforts have delivered 20%-40% in sustainable cost savings and over $25 billion of

improved cash flow for clients across the globe

Hackett Group Solutions:

Finance

Enterprise Performance Management

Human Resources

IT

Procurement & Sourcing Supply Chain

Operations, Strategy, and Marketing Performance

Working Capital

Global Business Services/ Outsourcing

Workforce Solutions

Technology Implementation Oracle, SAP,

Hyperion,

Kronos, and Business Objects

97% of the Dow

Jones

Industrials

73% of the

Fortune 100

88% of the Dow

Jones Global

Titans

73% of the DAX 30

45% of the FTSE

100

35% of the CAC 40


Enabling World-Class: Hackett’s Solution Portfolio Benchmarking, Advisory, Business Transformation

Membership Advisory Insight into World-Class Performance

Benchmarking Assess World-Class Performance

Business Transformation Consulting Transforms Performance

Deliverables

Peer & world-class comparison

performance metrics

Detailed analysis

Stakeholder survey

Executive presentation

Benefits

Objective comparison to peer group

and world-class performers

Quantify performance gaps

Uncover hidden costs

Prioritization of improvement

initiatives

Deliverables

Strategic direction

Detailed business case

Initiative plans & detailed designs

Implementation of best practices

Benefits

Reduced cost

Working capital optimization

Enhanced service delivery

Business insight

Sustainable benefits

Speed of solution delivery

Merger integration

Risk mitigation

Deliverables

Best practice research

Advisor access

Best Practice Intelligence Center

Peer interaction

World-Class Progress Report

Benefits

Identify the strategies and practices

employed by Leaders

Validation of current initiatives

Determining what’s possible (World-

Class Performance Metrics)

Process implementation support

Continuous best practice adoption


Value

Evolve the Service Value

What do we aspire to be?

Where is time actually being

spent?

What does want

Procurement to do?

Performance

Capability

Business

Requirements

(and investments)

Procurement Value

Procurement Suppliers

Requirements & Spend

Spend / Supplier Value

Recalibrate the Service

Execution

What is the level of

efficiency and

effectiveness?

How well is Procurement

delivering?

How are my peers

doing?

Redevelop the Service Capability

What capabilities do we have

today or need to acquire to

change?

What capabilities are

strongest? weakest?

What barriers hinder

evolution?

Supply Assurance

Purchase Cost Reduction

TCO Reduction

Demand Mgt

Value Mgt

1. Lagging

2. Achieving

3. Exceeding

4. Leading

Building an agile procurement organization requires a focus on Value, Performance, and Capabilities


Value Proposition of

Procurement Services

Role of

Procurement

Right goods /services at the right time & place

Right goods and services AND

at the right price

Shift from lowest price to Total Cost

of Ownership

Reduce demand activity, complexity

and variability

Increase business value derived

from spend

Supply Assurance Buyer / Planner

Negotiator

Supply expert (SCM,

SPM), team leader,

project manager

Spend/ budget consultant &

relationship manager

Trusted business advisor and

change agent

Purchase Price Reduction

Total Cost of Ownership

Demand Management

Value Mgmt.

Procurement must evolve its own value proposition and that of the supply base to create more “Bang for the Buck”

VA

LU

E

+ Role of

Supply Base

Innovative / Flexible

Aligned / Loyal

Operationally Excellent

Priced Fairly

Reliable, Solvent

Every Major Service you Perform has a Value Evolution!


Top 5 Trends Cited by Hackett Clients

1. In 2014, procurement’s first priority was to expand its scope/influence.

2. This requires procurement to reinvent its value proposition and revisit how

success is monitored, measured and reported on.

3. Supplier networks, master data management (MDM), and analytics are key

enablers... but the strategy is to reconfigure (versus replace) existing tools.

4. Organizations continue to search for the right combination of outsourcing, in-

sourcing, offshore and onshore work. Procurement organizations are selectively

using outsourcing for supply market intelligence and supporting/maintaining

master data and legacy applications.

5. There’s a real shortage of great procurement talent out there. To adapt,

procurement leaders are taking a hard look at redefining the required

competencies (and measurement tools) to move from optimizers to innovators.

2014 Procurement Trends – Hackett Key Issues Study

Source: Enterprise Key Issues Study, The Hackett Group 2014


Priorities for Procurement Technology – Collaborative Tools and Self-Service are increasingly important to procurement executives

14%

17%

21%

21%

24%

31%

31%

38%

41%

41%

52%

55%

55%

Acquire other technology or servicesdirectly within the function without…

Acquire cloud-based businessapplication services directly within…

Invest in mobile technology

Invest in data storage and datamanagement infrastructure

Implement Procurement pointsolutions with functionality not…

Move more Procurement processesand/or business units to the…

Implement more Procurementfunctionality/modules to the…

Roll out web-based and self-servicetools for third parties (e.g.,…

Maintain existing technology platformand minimize new investment

Invest in collaboration technology(including social media,…

Implement BI/analytics applications

Roll out web-based and self-servicetools for internal employees

Establish data stewardship,standardize master data and…

Key takeaways

• Self-service and collaboration tools for

procurement executives are gaining

steam... but the strategy is to reconfigure

(versus replace) existing tools.

• Supplier networks are a good example of

where these reconfigure/recalibrate efforts

will be focused



29%

21%

22%

32%

25%

36%

11%

11%

30%

14%

29%

18%

11%

4%

11%

7%

11%

Collaborate on demand forecasts

Network with peers to share risk andperform. info on specific suppliers

View supplier credentials (insurance,compliance, tax forms)

Measure and track supplierperformance

Maintain supplier master data(items/catalogs, contracts, pricing)

Identify new suppliers and marketopportunities

Current

Limited Use Moderate Use Significant Use

23%

31%

8%

15%

23%

12%

38%

27%

50%

31%

35%

42%

15%

19%

31%

38%

31%

31%

In 2-3 years

77%

76%

89%

84%

89%

85% 65%

61%

57%

56%

43%

40%


Future Changes in Procurement Technology – Usage of supplier networks will continue to evolve over the next 2-3 years

Definition: Supplier networks refer to any system used to exchange data electronically between buyers and

suppliers using a common standard; also a web-based trading community that connects trading partners and

provides a platform for collaboration -- including but not limited to supplier discovery, e-procurement and e-invoicing





Source

Purchase

Pay

Manage



Agenda



Source-to-Manage in a Networked Community – What information is exchanged with suppliers and other trading partners?

Supplier

Community

Requisition

and PO

Processing

Supplier

Scheduling

Supply Data

Management

Receipt

Processing

Accounts

Payable

Supplier

Management &

Development

Pay Purchase Source Manage

Sourcing &

Supply Base

Analysis

Sourcing

Execution

Trading Partners /

Service Provider

Compliance

Management

Catalog

Requisition ASN

Delivery

Schedule

Self-service

Inquiry

Invoice

Market

Intelligence

Purchase

Order

Order Change /

Cancellation

Order

Confirmation

Risk

Assessment

Certifications Sourcing /

eRFX

SRM /

Performance

Supplier

Qualification

Contract

Supply Chain

Finance

Payment

File P-card

Requisition

Partnering /

Collaboration

Sarbanes Oxley

IRS, OFAC

Diversity

Workforce

Audit

Hazmat

Item/Catalog

Dynamic

Pricing

Payment

Terms

Data

Enrichment

Barcode /

Label Data

Level 2 / 3

Data

Card Issuer or Network SIM

Provider

Financial

Institution

Regulatory

Authority

E-payment

Dynamic

Discount Shipment

tracking


Strategic Sourcing

The Gap

Not transactional, but

still managed through

transactional buying

channel (if at all)

Spend Importance

(magnitude, risk, business outcomes)

Recurrence

of Spending

High

(Highly

Recurring)

Low

(One-off,

ad hoc)

High

(Strategic)

Low

(Tactical)

Tran

sact

ion

al

Bu

yin

g

Sourcing – There’s a gap in traditional procurement approaches, leaving “tactical” spend poorly supported

Purchase Pay Source Manage

Catalog or rate-based

lower-value goods and

services (e.g. print,

temp labor, promotional

items, etc.) – “three bid”

process

Large, predictable

purchases of goods and

services (e.g. telecom,

advertising, recruiting

services, etc.)

Critical, non-recurring

spend (e.g. custom

software, special

marketing campaign,

specialized training, facility

refurb, one-off M&A

services, etc.)

The problem: Critical project purchases being underserved (IT, HR, Finance / Corp. Service, Marketing &

Sales, Capital Equip & Services). This results in lost savings and longer cycle times.


Establishing a Tactical Buying Desk with supporting “Rules and Tools” is the most commonly employed practice

67%

67%

56%

39%

33%

22%

0% 10% 20% 30% 40% 50% 60% 70%

“Buying Desk” group to handle specific tactical purchase transactions routed to them

eSourcing tools (ex. eRfX, eAuctions)

Established business rules or “triage” process for request routing

Multiple language requirements to manage tacticalsourcing activities

Workflow tools

Guided buying

Tactical Sourcing Capabilities (% of respondents – multiple answers allowed)

Correlation to Purchased

Cost Reduction Savings

Medium

Medium

High

High

Source: Tactical Sourcing Survey, The Hackett Group 2011



The evolution of networked Supplier Discovery and E-Sourcing tools makes tactical buying easier

“Consumerized” experience for casual buyers

– Supplier Networks facilitate easier buyer-seller discovery and collaboration

– Self-service, fast and with minimal (if any) support required from software provider

– Improved matching algorithms to find more relevant suppliers

Light-touch with software-as-a-service (Saas)

– Quickly deployed to start conducting market research and seller identification

– Supplier-funded marketplaces lower the barriers to entry for buyers

Supplier networks have grown in breadth and depth

– More supplier information is available than ever

– Not just supplier self-reported information but also community references and ratings

– The size of the networks have grown substantially (e.g. more than 190 countries on a single network)

Improved sourcing decisions

– Manage complex bid optimization

– Run tender events and make better supplier selections

– Migrate from tactical procurement to strategic sourcing when necessary



Hosted &

Managed

Internally

Hosted

Internally

Managed by

Service

Hosted &

Managed by

Service

Hosted &

Managed

by Supplier

(Punch Out)

Hosted &

Managed

by Supplier

(Search Agent)

Internal

Catalogue

Support

Resources

Internal User

Acceptance

Supplier

Onboarding

Overall Cost of

Ownership

Compliance to

Agreed Pricing

Highest Lowest Level of Enablement


Purchase – The e-Catalog strategy must be aligned with the organization's objectives to be successful


$8.57

$10.82

$22.82 40%

14%

1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

High Medium Low

Indirect E-Catalog Spend vs. Order Processing Cost

Process Cost per Order

Percent of Indirect Spend on E-Catalog

Order Processing Cost: Requisitioning & PO Processing (Labor + Outsourcing)

Source: P2P Performance Study, The Hackett Group 2013

$2.84

$3.32

$3.75 90%

53%

15%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

$2.50

$2.70

$2.90

$3.10

$3.30

$3.50

$3.70

$3.90

High Medium Low

Order Automation vs. Invoice Processing Cost

AP Process Cost per Invoice

Order Automation

Automated Orders: Orders that require no (or minimal) intervention from a buyer

(e.g. system generated, e-catalog)


Order automation strategy drives greater activity through e-Catalog and achieves lower costs as a result


80%

70%

45%

82%

75% 70%

90%

53%

15%

20%

30%

40%

50%

60%

70%

80%

90%

High Medium Low

Order Automation vs. Spend Visibility and Invoice Match Rate

Spend Visibility at Line Item Level

First Pass Match Rate

Order Automation

3.79%

5.95%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

High Adoptors of E-Catalogs

Low Adoptors of E-Catalogs

Indirect E-Catalog Adoption vs. Average Negotiated Cost Reduction

Lost to Non-Compliance

57%

Automated Orders: Orders that require no (or minimal) intervention from a buyer

(e.g. system generated, e-catalog)

Source (left): P2P Performance Study, The Hackett Group 2013

Source (right): Procurement Benchmark, The Hackett Group 2014


Order automation also drives higher levels of spend visibility, first-pass yield, and contract compliance


Invoice-to-Pay technology should complement a Channel Strategy that simplifies P2P execution options

System

Receipt

Entry

Automated

Inventory/

MRP

Pcard or

Travel

Card

Requisition

Requisition to Transmit

No

System

Req

Invoice

Approval

(Workflow)

Order Transmit Order Receive

No PO

(Invoice

Only)

Receive

Invoice

Invoice to Pay

Charge

Card

eInvoice

Pay

1

2

3

4

5 Catalog (Internal and

External)

Non Catalog

(Text Based)

Charge Card

Non PO

Automated

Requisition

(Inventory)

Channel

Automated

(no touch) Automated

(no touch)

SC

(text

based)

Electronic

Payment No System

Receipt

Work

Order

System

SRM

Sourcing

Cockpit

7

Manual

ERS (no

invoice)

Maintenance &

Repair

Non-System

Ordering

Shopping

Cart

Auto

Ordering

SAP ME21N

Requisition

Process

Pull From

Stock On Hand

Goods Done

SC

(Catalog)

6

Recurring

Payments



AP automation strategy should balance transactional efficiency with the ability to enable a broad base of suppliers

1 Based on organizations with high percentage of transactions through dominate strategy


$2.22

$4.24

$6.85

E-invoicing Invoice Captureand Imaging &

Workflow

Paper

AP Process Cost per Invoice (labor & outsourcing)1

Difficulty of

Enablement

20,314

9,484

7,459

E-invoicing Invoice Captureand Imaging &

Workflow

Paper

AP Invoices Processed per FTE



An end-to-end automation strategy also drives savings from increased capture of early-payment discounts

Early Payment Discounts Taken as a

Percent Of Spend

0.015%

0.164%

Non Top performer Top Performer

Early Payment Discounts Taken as a

Percent Of Those Available

79%

69%

High Adoptors of E-Catalogs

Low Adoptore of E-Catalogs

Source (left): P2P Performance Study, The Hackett Group 2013

Source (right): P2P Performance Study, The Hackett Group 2011



Dynamic Discounting Strategies (Percent of all Participants)

42%

30%

19%

14%

None planned at this time

None currently in place but are implementing or currently evaluating

Allow suppliers that are setup on standard net payment terms with no discount toelect an early payment discount once the invoice is approved for payment

Take a pro-rated portion of a discount if paid before net term but after discountterm (e.g. payment term is 2% 10 Net30, if paid on day 20 take a 1% discount)


Buyer

Supplier

Dynamic Discounting Overview

Technology

Platform

1. Invoice

2. Approval3. Timing decision

4. Discount payment


With a supplier network, organizations can more easily pursue Dynamic Discounting to drive added savings


Internally gathered performance data

Financial results

•Merger, acquisition activity

•Credit ratings

Pricing/benchmarking

•Price variance % - external

benchmark

Global trade

•Restricted party alerts

•Customs compliance issues

Regulatory

•Criminal check alerts

•EPA violations

Receiving, quality control systems

•Delivery time variances

•Number of rescheduled deliveries

•Receipt variances

•Reasons for receipt rejection

Customer returns

•Return reason

•Quantity returned

Compliance and automation data

•Procurement cycle time

•Labeling accuracy

•EDI compliance

•ASN accuracy

Support feedback

•Feedback score

•Issue

Pricing accuracy and benchmarking

•Price variance % - internal benchmark

•Invoice accuracy %

Surveys results

•KPI calculations

Externally gathered performance and risk data

Supplier networks are increasingly being used as a platform for enabling supplier performance and risk management



The use of niche risk software and business intelligence platforms are on the rise

Q5.4 How extensively do you rely on each of these technology tools to support your risk management efforts today vs. expected within two to three years?

50%

84%

9% 19%

56% 50%

23% 19%

41%

25%

42%

22% 19% 9%

47%

25% 27%

13%

31%

16%

31%

34%

34% 38%

17%

6%

44%

34%

26%

25% 39%

16%

31%

19% 20%

6%

FutureCurrentFutureCurrentFutureCurrentFutureCurrentFutureCurrentFutureCurrentFutureCurrentFutureCurrentFutureCurrent

Microsoft OfficeHome-grown/custom-built

solutions

Financial riskcontent providers

Governance, riskand compliance(GRC) software

ERP solutionSpendmanagement

suites

News aggregatorsBusinessintelligence (BI)

solutions

Purpose-built/niche supply risk

software

Current High Current Medium Future High Future Medium

The tools being used today and in the future to support risk

management efforts

Fastest

growing

Most used

today

Source: Supply Risk Management Study, The Hackett Group 2014



The ability to segment suppliers by risk category, criticality, or other user-defined fields are key features

65%

58%

58%

58%

52%

48%

45%

29%

32%

26%

32%

23%

32%

35%

29%

45%

3%

16%

10%

16%

13%

13%

23%

19%

3%

3%

3%

3%

6%

Risk segmenting

Risk analytics

Risk prioritization

Alerting

Risk scoring automation

Supplier risk scoring surveys

Third-party inputs/data feeds

Risk dependency

High / "Must Have" Medium Low Not important

Q5.3 Please rank the importance of each feature below when selecting a supplier risk management software solution.

Risk management: Importance of specific features when selecting supply risk management software




Q2.2 What level of granularity do you segment and report on supply risk today? (multiple selections allowed)

The level of granularity of supply risk segmentation and reporting

68%

56%

50%

26%

26%

12%

Individual supplier level

Product/service category level

Supplier segmentation level (i.e.critical or strategic suppliers only)

Regional level

Item or component level

Other

“Other” write-in responses:

• Business-unit level

• By type of compliance risk

• Commodity level and by manufacturing site

35% of respondents

measure risk at both the

category and supplier

segmentation levels.

Only 14% selected

‘Individual supplier level’

alone. The remainder

selected multiple

segmentation criteria.

Risk is being measured at different levels of granularity across multiple segmentation criteria









Agenda



Fact Check – How are organizations implementing supplier networks and what are the primary challenges being faced?

Issues with leveraging supplier networks

Cost: overwhelming integration costs when it comes to using older EDI-VAN frameworks. High cost of

subscription for suppliers to certain networks.

Coverage: Inadequate supplier adoption. Limited interoperability between disparate global networks. Low levels

of participation make proprietary networks hard to justify

Variability: Too many competing networks to support. Inconsistent application and agreement of data interface

standards

Legacy: Continued use of email and fax. Pre-existing data quality issues were never resolved (ex. outdated

items/specifications, inaccurate prices, incorrect lead times)

18%

24%

24%

33%

0% 5% 10% 15% 20% 25% 30% 35%

We do not use a supplier network

PO/

AP RFx

All 3

AP RFx PO

None

Source: Supplier Networks Webcast – Real-time Poll Results, The Hackett Group 2014

Does your company use multiple supplier networks to support the source-to-pay process?

57% of

respondents

are not using a

single platform


Looking Ahead – Emerging Trends in Supplier Network Technology

1. Buyer organizations are pursuing broader connectivity strategies with suppliers, peers, and trading partners (banks, outsource

providers, etc.). A greater emphasis on peer-to-peer sharing will support improved supplier discovery and risk assessment.

2. Cycle times for supplier qualification and setup will decrease as more organizations use credentials (insurance, tax) and master data

(items, pricing) pulled directly from the network

3. Companies will need to invest heavily in data cleansing and process re-engineering to take full advantage of network capabilities,

while total synchronization between supplier network and the ERP will remain elusive.

4. Pricing structures are becoming more complex for buyers and sellers to navigate (e.g. volume-based pricing, value-based pricing,

fixed-fee models, “free” networks, etc.); suppliers are passing certain costs onto buyers and will also limit the number of networks they

can support.

5. The business case for supplier networks will continue to improve, but the sale to internal stakeholders may not be any easier in the

current climate (i.e. long list of competing priorities)

6. Leveraging existing connectivity, strategically-paired buyers and sellers will look to adopt common supply chain operations data

standards, tools, and governance structure to drive broader supply chain collaboration and shared demand forecasting.

Questions?


The Hackett Group

Suite N500

1117 Perimeter Center West

Atlanta, GA 30338

Phone: +1 770 225 3600

Martin House

5 Martin Lane

London EC4R 0DP

Phone: +44 207 398 9100

Torhaus Westhafen

Speicherstrasse 59

60327 Frankfurt am Main, Germany

Phone: +49 69 900217 0

8, rue de Port Mahon

75002 Paris, France

Phone: +33 1 53 43 0400

Strawinskylaan 3051G, 1077 ZX

Amsterdam, The Netherlands

Phone: +31 20 301 2210

Amy Fong Senior Procurement Advisor and P2P Program Leader

Phone: + 408-887-7335

[email protected]

1-888-8HACKETT

[email protected]

www.thehackettgroup.com

Contact Information

mailto:[email protected]




innovative procurement strategies for thriving in a networked economy

Business

prior written consent

peer group

procurement executives

key procurement challenges

globehackett group solutions

agile procurement organization

business objects97

global advisory