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More than 130 years ago, in 1881, Joseph Wharton gave an endowment to the University of
Pennsylvania to establish the School of Finance and Economy. His gift sparked management
science as we know it today and brought a steady stream of thought leaders with innovative
concepts, tools, and methods to improve business performance. Icons in the field, including
Towne, Davenport, Gantt, Ford, Sloan, Drucker, Deming, Taguchi, and Ohno, created gamechanging approaches such as JIT, Six Sigma, BPR, Lean, EVA, Balanced Scorecard, and
Competing on Analytics. And advancements in management science have accelerated with
the increasing waves of disruptive technologiesmore, faster, cheaper computational power
that have fundamentally changed how we monitor, operate, and drive our businesses.
Thanks to these innovations and innovators, executives today can quickly evaluate business
health and performance as never before. Quarterly analyst calls feed the Street with sound
bites about plant utilization, recurring revenues, client contract renewals, fill rates, economic
value added (EVA) targets, and business and geographic unit specific cash-flow estimates.
Yet when its time for the voice over on procurement performance on the analyst calls, there
is a hushed moment of silence. For, when asked about procurement performance, most CFOs
go on and on about keeping even with or ahead of inflationsaying little about gaining ground
through procurement efforts. In fact, research shows that in their public remarks, CFOs discuss
safety, sales force, and manufacturing performance roughly 400, 360, and 100 times, respectively, and far more frequently than procurement performance.1
There are exceptions to every rule, of course, as illustrated in the sidebar, A Few Executives
Voices Heard on page 2.
Despite significant improvements in procurement, overall progress has been intermittent.
Perhaps the most striking characteristic of the past few decades has been the increasingly
visible stratification between procurement leaders and the lumbering pack.
Any reader, student, or advocate of the Purchasing Chessboard knows that strategic supply
management is a complex multidisciplinary team sport.2 The variables and complexities of
everything from market dynamics to specification requirements make procurement performance management and accountability a challenge. Far different from many other discrete
operations, procurement processes have governance inter-dependencies at every step across
the source-to-pay continuum. No wonder measuring procurement performance has been
overlooked. Until now, it has simply been too painful and complex.
We see procurement as the last best place to gain professional stature, increase management
visibility, and improve bottom line resultsa place where companies can make an immediate
impact on results and create a long-lasting competitive advantage. With purchased goods and
services comprising the lions share of the value chain across most industries, why isnt procurement laying the groundwork for supply management optimization and driving enterprise
economic performance? How do we replace those awkward moments of silence on analyst calls
with discussions of how procurement is a critical indicator of corporate performance? How do
we build a performance-driven procurement organization?
The answers, in part, lie with a new framework called the Return on Supply Management Assets
or ROSMA, which provides procurement professionals with the ability to finallyand fullytap
into opportunities that have largely been hidden.
A.T. Kearney analysis of Google search results for North America analyst calls for 12 months ending 13 March 2011.
A.T. Kearneys Purchasing Chessboard is a framework that provides best practice sourcing techniques by addressing 64 unique
supplier versus buyer power situations. For more information, go to http://www.middle-east.atkearney.com/procurement/
the-purchasing-chessboard.
In procurement, we pursued
over 150 strategic sourcing
programs to identify best cost
suppliers and lower total cost
of ownership CEO
we currently expect $75
million in [savings benefits]
from procurement related to
sourcing changes for core
materials CFO
We will see baseline cost
improvements due to our
procurement initiatives
in a very short time these
Somethings Brewing
In 2010, we had the opportunity to work with Tony Milikin, CPO of AB InBev. ABI is renowned for
its commitment to reaching stretch targets and the aggressive use of strategic sourcing to
achieve its financial goals. Bringing procurement performance improvement innovation to ABI
was a challenge that required breakthrough ideas. In working with Tony and ABI, we developed
the supply management productivity index, which sparked a healthy debate among a tough
audience of very successful and experienced ABI procurement leaders. Soon after, Tony shared
our framework with a few other CPOs and the feedback was encouraging. The discussions
helped us realize that we were really on to something (see sidebar: Seeking Alpha and
Expanding Your Moat on page 5).
We then sought input from a broader group of clients, most of whom were CPOs from organizations that use advanced performance management models, such as EVA incentive systems, or
CFO scorecards. Many of the CPOs also had strong financial backgrounds, with some having
also served as CFOs. They were extremely enthusiastic and provided invaluable feedback,
which led to numerous iterations and several proof-of-concept pilots.
The end result is ROSMA, which we believe is not only a catalyst for optimal procurement
performance but also an approach that will bring clarity to the procurement performance
management challenge. ROSMA offers:
A framework to help CFOs understand and articulate value from procurement
Procurement: The Last Best Place for Results Improvement
Broad support from the CFO and executive team to help CPOs deliver game changing results
Insights into the drivers of supply management value, enabling CPOs to set their agendas and
optimize performance
Performance benchmarking on a peer-to-peer basis or among industries
Figure 1
Return on Supply Management Assets
ROSMA
Financial
results delivered
Primary
drivers
Spend
coverage
Velocity
Category
yields
Compliance
Additional
benefits
Invested supply
management assets
Period
costs
Structural
investment
Secondary
drivers
Although the aggregate score is helpful, and in time will become one of the metrics the Wall
Street analysts routinely ask about, the distinguishing factor about ROSMA is the value derived
from understanding ones performance against the underlying drivers (spend coverage, velocity,
and category yields, for example). It provides immediate insight into what, where, and how to
improve and optimize procurement performance and to quantify the value of the enhancements.
Procurement: The Last Best Place for Results Improvement
Figure
Scenario I doing better and Scenario II procurement journey
Total spend
($5 billion)
Structural
investment
(US$ M)
Invested
supply
management
assets
(US$ M)
ROSMA
$27.3
$6.8
$34.1
$21.4
$20.6
$42.0
3.3
23%
201%
$6.8
$34.1
1.1
$22.8
$38.0
11.1
11%
909%
Compliance
Additional
benefits
(US$ M)
Financial
results
delivered
(US$ M)
Period
costs
(US$ M)
3%
60%
$3.4
$37.4
6%
75%
$6.5
$138.8
15%
100%
25%
$3100
61%
3%
60%
$3.4
$37.4
$27.3
$4750
75%
10%
88%
$106.9
$420.4
$15.2
53%
23%
233%
47%
Spend
coverage
(US$ M)
Velocity
Category
yields
Status quo
$3100
61%
Potential
$4200
70%
35%
Status quo
Potential
%
Scenario I
271%
1.1
Scenario II
Scenario I
FRD** change: $101.36 million
1024%
Scenario II
FRD change: $382.99 million
*Alpha is a measure of performance on a risk-adjusted basis; it is the return after compensating for the risk borne.
** FRD is financial results delivered.
Source: A.T. Kearney analysis
In short, the breakthrough is an analytical framework with EVA constructs and standardized
definitions to drive leadership performance.
A.T. Kearney has been helping companies explore value from improved procurement practices
for almost 30 years. While weve pretty much seen it all, ROSMA is unlike anything in the market.
The following outlines the primary drivers that form the ROSMA framework. There are also more
than 30 secondary drivers.
Driver 2: Velocity
Deming introduced the value and criticality of cycle time in the 1980s as it pertained to innovation, physical supply chain performance, and time-to-market. Sourcing velocity is akin to
cycle time and equally critical for procurement performance on many levels (such as frequency,
volume, and team productivity). Procurement leaders demonstrated spectacular results in 2009
with a full court press, sourcing unprecedented portions of their spend to take advantage of
market conditions and to help their organizations close financial performance gaps during the
downturn.
Although most organizations turned up their sourcing velocity in 2009 and 2010 over previous
years, the gap between leaders and the pack was still substantial. Our last two AEP studies
(2008 and 2011) reveal that leaders manage or have active coverage of nearly 50 percent more
of their spend and source roughly 33 percent more of their covered spend annually than
followers. So, the results are compelling, indicating that in terms of hard savings annually,
leaders deliver just under two times that of the average follower, even if the yield percentages
from sourcing are identical. With a yield percentage difference between leaders and followers,
the savings difference would be even greater.
This is not to say that maximizing velocity is the optimal strategy; it is not. Every category will
have its own natural productive sourcing frequency. For example, some of our clients auction
every commercial print job and even individual limo rides to the airport, which is essentially
a 100 percent velocity outcome for those categories. Transportation, however, may be best
sourced using advanced practices such as collaborative optimization (CO) every 24 to 36
months.4 Still, a structural gap of about 20 percent between leaders and followers against a
larger proportion of spend is unacceptable in terms of lost or deferred savings and sourcing
team productivity. Active sourcing resource planning and pipeline management are required
for leadership performance.
33 percent to 50 percent higher yields; when projected against the larger spend managed and
the higher sourcing velocity noted earlier it more than doubles the absolute cost savings of
leaders versus followers.
To sustain the advantage, leaders actively track events and negotiations to catalog the techniques applied, results achieved, and to maintain a living playbook of their best practice
events and negotiation strategies. This enables them to benchmark, drive higher yields, shorten
sourcing cycle times, and identify their sourcing masters and the skill development needs
within their teams.
Other performance differentiators, classified as additional benefits, typically accrue from
advanced sourcing strategies. These include strategies that improve working capital, encourage
supplier innovation, and deliver total-cost-of-ownership gains, including improving processes,
simplifying requirements, and reducing warranty costs.
benefit from faster payments and the clients gain superior returns on their capital, compared to
the bank rates on cash managed by their treasury departments.
Untold billions have been spent on technology deployment for improved requisition-to-pay and
spend visibility solutions over the past 15 years. And, no doubt, these investments have improved
the ability to understand spending behaviors and policy enforcements, and dramatically reduced
the operational procurement head count required to support buy-side transactions. But the
improvements were hard fought and often frustrating and, in some cases, the return on investment (ROI) is still unclear.
No one platform is best for all spend categories and with the growing success of categoryspecific solutions, there will certainly be another wave of technology investments to further
enhance our ability to monitor, guide, and report our spend behaviors. These waves of improvements have enhanced our potential to achieve much higher compliance, enabling organizations to actually realize more of the value gained from sourcing activities.
Driver 5: Compliance
Systems alone do not ensure compliance. We have found that value leakage (shortfalls from
the achievable savings secured and contracted in the sourcing process) varies widely even
among those with robust technology platforms. The compliance driver, of course, benefits
from improved spend visibility due to technology enablement but that alone is not sufficient.
Leadership compliance levels are achieved when procurement practices policies broadly
and buying compliance policies in particularare institutionally sacrosanct, and the
enforcement of compliance and procurement policies is rigorous and visible. We have seen
F100 organizations with lagging technology investments achieve world-class compliance
outcomes on huge fragmented spend. Every organization has its cultural appetite for administrative procedures and degrees of intervention and enforcement practices, but lets explore
two extremes.
The first example is one of the most successful business stories of the past 20 years, concerning a firm we refer to as the Ruthless Gladiator Company or RGC. RGC is led by an experienced
team of investment banking and private equity executives who have emerged as the leaders
in their industry through ruthless cost cutting, rigorous financial planning and controls, and
aggressive performance management incentive systems. Procurement has been an integral
element of their success and the CPO sits at the leadership table. Zero-based budgeting is a
way of life and year-on-year improvements are expected, typically delivered and rewarded at
virtually all management levels in the organization. Category-specific wave plans are scheduled,
targets are set and incorporated into budgets in advance, and when individual sourcing
programs are completed all of the associated budgets are recast to the lower of the original
budget or the newly achieved sourcing resultthus there is constant pressure to meet or
exceed their financial goals.
Enforcement is clear at RGC. All cost variances are explored, expense reports are not honored
above strict policy limits, and employees at any level that affect a variance or are off policy are
identified for career-defining moments. RGC materially lags against leading-edge technology
deployment and relies on armies of Excel wizards woven together in its financial controlling
processes. Bottom line: RGC is likely the world standard at compliance attainment, with essentially no value leakage allowed and no flight long enough to justify business class.
Procurement: The Last Best Place for Results Improvement
gap between those that invested in the procurement transformation journey and those that
postponed it is not only evident in the performance-revealing drivers reviewed thus far but also
in the profile of their investments in supply management assets, which is the denominator in the
ROSMA metric.
We recently had the opportunity to help a company in the commodity processing sector. This
organization, which we will call the Federalist Silo Company or FSC, has survived nearly 100
years and with the current run up in commodities has been able to show strong results along
with the rest of the industry. FSC has been very competitive on commodity buying and
managing it regionally with great aplomb. Enter a new senior executive with a great deal of
strategic sourcing experience. He suggested that there could be $75 million to $100 million of
performance improvement from strategic sourcing. But the other FSC executives considered
this preposterous and delayed its pursuit.
it was easy to document the ROI or ROSMA improvement on this transformation and obtain
management support. When the back of the envelope NPV is easily $500 million and the time
to benefit is within a year, investment decisions are easy.
Although the FSC example is an extreme one, our ROSMA research and database reveal significant variances across companies regarding their investment in supply management assets. We
find many well recognized organizations have invested heavily in technology and have substantially reduced their operational procurement head count. In 2008, the cost of the procurement
function averaged about 1.7 percent of spend for the roughly 500 organizations that participated
in our AEP research. By 2010, because of the downturn, that has dropped substantially to about
1.1 percent. And procurement leaders improved further with 0.8 percent.
However, procurement transformation is not about getting to the lowest cost of procurement;
it is about delivering attractive levels of ROSMA and maximizing financial results. To optimize
procurement one must ensure that the hygiene elements (requisition-to-pay or buying processes,
contracting and other transactional activities, for example) meet service and quality levels at
the lowest possible cost. At the same time, it must get the strategic procurement capabilities
positioned (roles, mix, and skills) to deliver high impact results at an acceptable and sustainable
level of cost. Most organizations have made major structural investments in procurement and
have raised their game on strategic activities, but our research shows that collectively the larger
business community is far from establishing performance-driven procurement practices in their
organizations.
For the vast majority of organizations in our surveys to date, the variation across every ROSMA
driver is notable and the existence of strong, consistent performance across most or all drivers
is almost nowhere to be found. The potential to drive process improvements (TQM and lean
principles) across procurement, both to affect threshold performance on hygiene activities and
deliver large-scale value from strategic activities, is nothing less than extraordinary.
Secure executive awareness, alignment, and support. It took the better part of 20 years for
most organizations to understand, embrace, and embed EVA or similar value-oriented management systems. ROSMA is just the supply side bookend to these value management models
applied to procurement. Enroll the CFO and then work together to bring the executive team and
business unit leaders aboard. Apply the framework operationally during business unit performance reviews, budgeting, and planning processes.
Assess your position, define your goals and milestones, and publish your CPO Agenda.
Establish your baseline at the detail driver level and assess the current processes and practices
that affect the drivers. With this rich baseline, you will be able to design a procurement journey
that focuses on the immediate high-impact opportunities while building the foundation for
optimizing your organization to sustain PDP in the longer term. Making the agenda transparent
to peers and staff will elicit their support and improve accountability.
Authors
Joseph Raudabaugh, partner, Chicago
joseph.raudabaugh@atkearney.com
We wish to thank the more than 80 senior executives who joined in discussions, provided insights, and helped
us test our hypotheses over the past 18 months. We especially appreciate those in our ROSMA study group who
were generous with their time and resources, and the hundreds of AEP 2011 survey participants who helped us
build the ROSMA benchmarks that so clearly validated the opportunity for PDP. Also, we thank the many members
of our CPO Executive Roundtable who reviewed the paper and offered their insights and encouragement. Lastly,
we welcome the participation of procurement professionalscommitted to the advancement of the profession
in growing the ROSMA database.
Please contact us for more information about how to use our online survey and reporting tool to obtain an
assessment benchmark.
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