Home: Issue 2 2012 Lead Story › Learn from the masters

Learn from the masters

Learn from the masters

01/05/2012 | Channel: Technology, Business

The next level of procurement excellence. By Jeremy Robinson

All over the world, the capabilities of procurement organisations are being tested as never before. They are required to help their businesses deal with the impact of globalisation, supply market volatility, supply chain disruption, rising costs of raw materials, regulatory overload, talent shortages, and much more. If ever there was a need for procurement to lead the way, it is now.

The good news is that procurement is better equipped and more eager to meet these challenges than in the past. Today, procurement executives have a seat at the top management table. Their organisations’ activities and results are getting attention - and for all the right reasons. Not only do they successfully and consistently contribute to cost reduction, but in an increasing number of companies, they regularly seek to understand how they might drive revenue growth as well. For perhaps the first time, procurement is starting to acquire what marketers might describe as brand appeal - the perception that procurement is rapidly becoming a power player, well able to augment the fortunes of the business on a level playing field with finance, sales and marketing.

Indeed, our 2011 worldwide study of best practices reveals that there really are two kinds of procurement organisations: The ‘masters’ that strive constantly to create new ways to improve their organisations’ results, and the ‘contenders,’ the procurement groups that continue to make meaningful progress by responding to the changing needs of the enterprise. The study revealed these contenders lag far behind what constitutes today’s best practices, arguably further behind than just a few years ago compared to the benchmarks carved out by the masters. The masters stand apart because it is their nature to strive. They constantly look for ways to do better tomorrow at what they already do well today.

Based on our 2011 Procurement Mastery research and Accenture’s global client experiences, we can see a glimpse of where the masters are taking procurement next and how they will drive performance excellence over the next five years.

We anticipate that there is potential for masters to make substantial advances in the following four areas:

1. Excelling at risk management
In the near future, we expect many more of the procurement masters to strengthen their risk management capabilities. Our studies have determined that the most common and potentially dangerous procurement risk areas relate to supplier reliability and price volatility. They also show that risk issues have a greater cost impact - and take up far more time - than most buyers’ efforts to capture savings through negotiation. Knowing this, the cutting-edge practitioners can be expected to further manage risks on every front.

There are already clear signs that excelling at risk management contributes significantly to a company’s achievement of procurement mastery. The masters tend to be particularly proficient at using specially developed risk-focused tools and services; for example, they are more than twice as likely as lower performers to use risk-sharing contract clauses. Our studies show they typically address supplier and price volatility risks early on when developing their procurement strategies.1
Additionally, we see that procurement masters suffer from fewer ‘risk incidents’ than contenders. Specifically, companies that invest in supplier risk management capabilities often experience fewer incidents. Accenture’s experience is that one of the masters’ most important attributes is their use of a ‘risk management framework’ - a comprehensive, end-to-end approach to anticipating, monitoring and mitigating risk.

2. Applying advanced analytics
Many of the procurement masters already use descriptive analytics regularly in areas such as spend analysis, supplier performance analytics, and cost modelling. Their next big move is in predictive analytics. Some far-sighted procurement teams are already making significant investments to better understand how predictive tools can be used to evaluate commodity price volatility, to develop models for price forecasting, and to better manage risks as a result.

The masters recognise that forecasting prices requires expertise in commodities markets as well as mastery of complex analytical techniques for financial time-series modelling - techniques such as advanced time series modelling or stochastic differential equations and processes. Additionally, forecasting prices requires expertise and tools to translate mathematical approaches into effective solutions, such as scenario planning or mitigation strategies for anticipated risks. These sharpened forecasting capabilities should enable procurement professionals to reduce their reliance on historic trend-line data. At the same time, concepts such as value-at-risk are also integrated into daily operations. The organisations that employ these tools should be better equipped to foresee the effect of a particular risk on their cost structure and the relative profitability associated with a specific component, system or end product.

Moreover, predictive analytics turns out to be a competitive advantage for more effective supplier relationship management. Price forecasting capabilities along with the knowledge of product breakdowns into semi-finished products and into raw materials provides opportunities for improved supplier negotiations and rebates. Additionally, it allows for quantitative estimates of risk exposure and helps show how each supplier affects the overall risk profile. These advanced analytics allow a company to balance risk exposure with reducing costs, helping them answer questions about when to buy, how much to buy, and at what price to buy.
To improve the chances that their practices bring quick benefits, the analytics pioneers place a premium on implementation. So they make sure the data they analyse is as error-free, up-to-date, and non-duplicative as possible. They pay attention to the skills and competencies needed to make analytics work - not just the raw number-crunching skills, but the business savvy to discern meaningful insights from ‘noisy’ information. And they make sure they build the processes that enable senior executives to review the resulting insights - and act promptly on them.

3. Accelerating closed-loop spend management.

A few leading procurement organisations are providing a glimpse of the future of cost control. Their self-directed mandate has been to watch the money from start to finish - driving accountability not only for the savings but also for visibility into spend, clear ownership of category spend within the business, bottom-up category budgeting, clear direction for buyers and users on how to appropriately procure goods and services, and tight control and monitoring of spend.

In essence, these organisations are ensuring that key process elements are in place so they can circle back – ‘close the loop’ - on spend over time.

The starting point is real transparency and information exchange between the procurement and finance organisations, with category definitions and cost definitions aligned and linked to a revised set of general ledger accounts. Executive owners are appointed for each category, with mandates across a range of budgeted areas. The executives work closely with category managers in procurement to drive smart consumption policies, develop consumption guidelines, create budgeting guidelines, and disseminate the procurement sourcing strategy and the operational consequences that apply to employees’ day-to-day spending behaviours. And the budget holders are asked to develop bottom-up or priority-based budgets that serve as a baseline for internal and external benchmarking under the leadership of the executive category cost owners. These principles are applied every time the company makes an acquisition, enabling a drop in overhead expenses that is twice as fast as that of competitors - and quickly changing spending behaviours. The concerted application of closed-loop policies, procedures, routines, tools and skills has become a differentiating capability for the corporation.

4. Filling the gaps in workforce capabilities

Even though workforce management is not something that the masters en masse can point to with pride, a few organisations are showing what the activity can look like. At one global industrial conglomerate, the supply chain organisation runs a powerful training programme that not only improves the skills of its employees but helps make the function - with procurement at its core - an attractive area in which to work and a breeding ground for talent for the company as a whole.

The function’s ‘capability development’ initiative continually improves the on-the-jobs skills of its workforce on every level. It also imbues all supply chain employees with the skill of ‘learning how to learn’ and how to work competently with their counterparts in a wide range of other functions.

In particular, the organisation runs an activity that is designed to rapidly enhance the skills of the company’s middle and senior supply chain managers in financial skills, leadership coaching, and skills in everything from employee engagement to influence and negotiation. The activity uses ‘action learning’, where real business problems are solved in small groups. Participants say it is helping them quickly broaden their skills. Now the organisation aims to implement the approach in other areas of the company’s business and even with its partners and suppliers.

Another organisation has created high-potential programmes that span several functions. At this consumer-goods company, individuals targeted as high performers within procurement, finance, HR, operations, etc., are eligible for additional training, special projects, and networking opportunities. The special projects are focused on broader company endeavours; they enable the participants to grow their networks, expand their capabilities, and see where the company is going at higher levels than is possible during their day-to-day activities. The company engages the selected participants in roundtable networking events, pushing them to expand their knowledge while enlarging their networks. Not only do these programmes benefit the individuals targeted, but they give other employees reasons to succeed and stay with the company.

Examples like these illuminate the path to success in talent management. That path is being taken by only a few organisations, but now it’s time for others to ensure that procurement becomes not just a good place to work, but a firm foundation for an interesting and rewarding career.

There is no question that business pressures will continue to demand more of procurement. Yet the procurement ‘masters’ will continue to set the pace. They already have a long lead over ‘contenders’ in many practical dimensions. And ‘masters’ have the discipline, the metrics, the competencies, and the brand to be able to extend their lead in the future.

So where does this leave the contenders? They clearly have work to do to catch up to the levels demonstrated by the masters - let alone to aim for the goals and objectives that the masters have set for themselves.

However, as the global economy regains velocity, new competitors are waiting. Yes, procurement has made huge strides in adding value, but the masters show how much further and faster it is possible to go. The opportunity is there for so many more procurement groups to extend their capabilities - and to help put the function firmly centre-stage in every company.

The procurement ‘masters’ are by no means standing still, and this sends a clear signal to senior executives, to current and potential employees, and to investors that procurement can be a vital, innovative contributor to corporate growth far into the future.

Jeremy Robinson
Jeremy Robinson is Accenture’s UK&I Lead for Procurement. Jeremy has over 20 years of supply chain experience from both industry and consulting with a focus on procurement. Over this time Jeremy has led a number of business change projects across multiple industry sectors including financial services, utilities and consumer packaged goods. Jeremy leads the procurement practice for Accenture across the UK and Ireland.

Accenture is a global management consulting, technology services and outsourcing company with over 244,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments.

For further information, visit: www.accenture.com