Align Global eSourcing

By Todd Grunert, Director of Global Purchasing Research & eSourcing, GPSArnold Bynum, Project Manager, eSourcing GPS

Katrina Leidecker, eSourcing Analyst, GPSAdam Tillman, eSourcing Analyst, GPS

Input provided by Jon Hamer, Director Regional GPO Purchasing Karl Rogers, eSourcing Manager, GPO

Date: July 27, 2011

A Global Purchasing Services White Paper

Contents

Executive Summary 3

Introduction 5

Problem Statement/Analysis 6

Recommendations 11

Implementation 14

Closing 15

Literature Review Appendix 16

References 22

3

Executive Summary

The purpose of this “White Paper” is to provide insight into Abbott’s position within the eSourcing marketplace and to assess/compare our practices in specific areas with a maturity continuum whose highest level reflects “Best in Class” performance practices.

In the pages that follow, we will present the problem statement touching on the points listed below.

1) eSourcing Strategy (Center Led)2) Organizational alignment3) Senior Level Mgmt Support4) Adoption5) Staffing6) Metrics and Performance

The supporting analysis will show that eSourcing should be viewed as the first option in sourcing processes, answering the question why not use eSourcing tools versus why should we use eSourcing tools.

The requirement for an overriding Global eSourcing Strategy is to convey the practices and use of the eSourcing tool and the necessary considerations (people, process, and technology) to achieve success in that strategy.

In an excerpt from CombineNet’s 2010 Whitepaper, lost opportunities arise due to a variety of factors:

• Lack of central visibility into spend – suppliers, items, costs, supply chain impact reduces an organization’s ability to respond to savings opportunities

• Similar products are being sourced from common supply bases in ad-hoc, unleveraged sourcing activities, reducing efficiency and cost savings opportunities.

• Multiple people across the organization are performing similar, parallel tasks, further reducing efficiency and cost savings opportunities.

• The impact of decentralized sourcing activities and decisions on the global supply chain are not being adequately measured and acted upon.

All of this leads to higher costs, lost opportunities, and poor productivity.

From the research conducted, there are numerous eSourcing organizational structures that can be considered. The eSourcing structure that we envision and support though this document, is that of a Center led organization where a core group of eSourcing Subject Matter Experts provide, drive and support the eSourcing strategy, technology, communication, governance and metrics. The

4

divisions, sites, and plants are then responsible for the implementation of the strategy.

Clearly we are not there, but we believe the vision is achievable and necessary to advance our global purchasing functions. Integration of a global eSourcing strategy at every level of our global organization is the endpoint. Only then will we realize the significant and numerous advantages that are possible.

5

Introduction

The reverse auction was among the most profound eSourcing technologies. First introduced in the late 1990’s by FreeMarkets, it quickly captured the eye of procurement leaders who understood that reverse auctions provided transparency and credibility in the negotiations process. Further, they challenged the longstanding, incumbent supplier relationships and improved savings.

In A.T. Kearney’s “Assessment of Excellence in Procurement”, which benchmarks more than 600 global enterprises in more than 15 industries, they found that while more than 75 percent of companies report that their procurement organizations have used eSourcing tools at least once, only a small fraction report using them in any significant way (defined as more than 200 online RFXs or reverse auctions per year). Fewer than 5 percent of the companies report having reengineered their sourcing processes to fully embed and leverage these tools.

Abbott was an early adopter with the use of FreeMarkets and an investment in ChemConnect for early chemical auctions. Ultimately, Abbott selected Emptoris as the company’s eSourcing tool.

The content of this white paper includes the research and benchmarking analysis and comparative analysis that are based upon various sources that include both objective metric data and anecdotal data provided via research papers, as well as, benchmarking commentary with the eSourcing user community.

6

Problem Statement/Analysis

Sourcing strategy: The key to global eSourcing integration is to have a corporate level, common global strategy in place. In the absence of a global corporate wide strategy to address the use and benefits of eSourcing, there is a lack of direction and focus in nonconforming divisions.

GPS has relied on purchasing professionals to come to us with their initiatives and events in eSourcing. GPS has to provide the means of messaging and communicate our strategy by promoting eSourcing as the first option.

The lack of a global eSourcing strategy is the primary issue. The additional problem statements that follow are supporting members in the creation and implementation of the strategy.

“According to Accenture research, procurement masters excel at building results-focused procurement processes, as well as results-oriented procurement organizations.

Clearly, procurement masters are more committed than most to improving communication and visibility, and helping employees understand company goals and the contributions they make to those goals.

One hundred percent of procurement masters have implemented a structure of centrally led category management.”

(Accenture 2007)

A.T. Kearney suggests that the “Stages of eSourcing Excellence” be used as a framework for companies to plot their course and prioritize investments for improvement. Importantly, most companies neither aspire to nor achieve stage-four status across all elements of their sourcing programs. Rather, they focus on those elements that they believe will deliver the greatest results.

As displayed in the table on the following page, Abbott GPS and GPO rank on average at “Building Competency” (Stage 3). There are some areas where we can improve from the “Novice” stage with greater adoption leveraged across all spend globally. In addition, there are areas where we have already achieved the “Programmatic Approach” stage for Organizational Alignment.

7

  1 2 3 4

AreaLimited

Experience NoviceBuilding

CompetencyProgrammatic

Approach

eSourcing StrategyAbbottNon-GPO/GPS (1.0)  

Abbott GPS (2.75)Abbott GPO (3.0)  

Organizational Alignment

AbbottNon-GPO/GPS (1.0)    

Abbott GPS (3.5)Abbott GPO (3.5)

TrainingAbbottNon-GPO/GPS (1.0)  

Abbott GPS (3.0)Abbott GPO (3.0)  

eSourcing Process Effectiveness and Efficiency

AbbottNon-GPO/GPS (1.0)

 Abbott GPO (3.0)Abbott GPS (3.0)

 

Performance Management

AbbottNon-GPO/GPS (1.0)

Abbott GPS (2.75)

Abbott GPO (3.0) 

Abbott Comparative to A.T. Kearney’s eSourcing Stages of Excellence(Align Global eSourcing: eSourcing Benchmark and Comparative presentation – Todd Grunert & Arnold Bynum)

eSourcing Benchmark and Comparative Heat Map

The purpose of the “Heat Map” that follows is to illustrate the consultant/systems/client perspective in the use and implementation of eSourcing initiatives.

(Align Global eSourcing: eSourcing Benchmark and Comparative Heat Map – Todd Grunert & Arnold Bynum)

8

Organizational Alignment: Divisions outside of GPS and GPO are not as aware or aligned with the global eSourcing strategy. We don’t have a documented global eSourcing strategy, therefore the other divisions do not have the benefit of understanding eSourcing. They have not made the investment in their own individual rollout/knowledge/promotion of the tool. Awareness and divisional investment is needed in order to be successful, as well as the recognition of benefits on a divisional basis.

“ “Spend under management” is often defined as spend that is identified, sourced, and managed by a centralized or center-led team using a variety of e-sourcing technologies. By capturing more spend under management, companies gain the benefits of better organizational visibility into what is being spent, for what, and with whom. In addition to identifying cost savings opportunities, capturing more spend under management enables better efficiency, productivity, and predictability within an organization’s sourcing and procurement activities” (CombineNet 2010).

Senior Level Management Support: GPS and the eSourcing Business Excellence Team must devise a global eSourcing strategy that can be supported by Senior Level Management across all divisions. The level of support that is required is a mandate to utilize the eSourcing technology. The strategy must be a top down approach with a bottom up implementation in order to achieve and optimize Abbott’s leverage.

“In the strategy category, for example, we determined that procurement masters invariably have a clear mandate from—and a better overall relationship with—senior management…strategies enjoy boardroom awareness and, consequently, boardroom support” (Accenture 2007).

Adoption: eSourcing usage should be a mandate. The front line purchasing professional must be as knowledgeable as possible in eSourcing to drive adoption and usage of eSourcing. eSourcing should be used as the first option so that the question is not why use it but instead why NOT use it.

“Build a meaningful governance model – use governance to change the conversation from one of “prove to me why we should use these tools” to “prove to me why we should not” (AT Kearney 2010).

Regarding adoption, “Additional advantages … stem from an increase in: Number of sourcing events that can take place Frequency with which sourcing events can take place Reduced cycle time required for sourcing events Increased availability of templates and analytic tools, which improves

the consistency and quality of the events

9

Ability to include more suppliers in the process (due to increased communication and collaboration functionality these tools provide)

Simply put, procurement organizations find they can do more with existing professional headcount, accelerating incremental savings while reducing operational costs” (AT Kearney 2010).

e-Sourcing initiatives are aimed at improving or eliminating: Sourcing cycle time Paper based processes Lack of standardization No repeatable methodology Knowledge management

(David Bush, Iasta 2006)

“Additionally, because the central team, which is specialized in the analysis, sourcing, negotiating, contracting, and management of spend, is often not leading the process (in many cases they are engaged, but not fully leveraged), the organization is suffering from less than ideal execution and efficiency” (CombineNet 2010).

Based upon the global eSourcing strategy, adoption and implementation of the strategy should be driven from the Region/Site/Division level of the organization.

Staffing: To support an eSourcing effort, there is a need to have well trained and qualifiled SMEs/personnel in region/in country as part of the eSourcing organization. Appropriate staffing, communication, and governance are required to drive efficiency and prevent the impact of “Multiple people across the organization … performing similar, parallel tasks, further reducing efficiency and cost savings opportunities” (CombineNet 2010).

“Software alone is not sufficient. Organizations must have the knowledge and policies in place to support these tools. Recognizing that, the leaders today are establishing Centers of Excellence (CoE) to fully capture the value and savings from eSourcing technologies” (Hochman and Dorf).

In the event of adoption of the global eSourcing strategy and full alignment from a divisional perspective, existing resources would not be sufficient to achieve success. Consideration must then be given to additional headcount requirements to service the global eSourcing strategy.

Metrics and Performance: There is a need to focus on all the benefits of the eSourcing strategy – not only reverse auctions. For instance: expressive bidding, data repository, knowledge transfer, etc. The efficiency of “online” negotiation via eSourcing tools is a benefit for both the purchasing function

10

and the supplier. This efficiency results in time savings, improved leverage, and achieved history as well as the benefits named below.

“Increase the efficiency of sourcing processes. Automating the sourcing process (eSourcing) speeds up individual tasks, reduces error rates and rework, eliminates the need for data reentry, and improves process flows. For example, various eSourcing tools can automatically collect and disseminate data from and to appropriate internal and external parties, thereby facilitating information flows and the management of administrative tasks … reporting capabilities make it possible to track purchasing data and calculate supplier-performance metrics. And eSourcing workflow engines organize work streams within and across product categories into a coherent sourcing effort” (Supply Chain Perspectives).

“Design and deploy metrics – Defining targets for the program and tracking progress against those targets ensures that these targets are translated into individual annual performance programs for stakeholders and sourcing team members... Success depends on program metrics, tied to individual performance metrics that clearly communicate expectations” (AT Kearney 2010).

11

Recommendations

Near Term (Present to 1 Year) Develop the Global eSourcing strategy and governance model

Center Led Model Defined

At the center of the organizational model lies eSourcing Business Excellence (BEx). This group is responsible for the overriding global eSourcing strategy. At its core is a group of eSourcing subject matter experts (SME) fluent in the technology and application of the eSourcing tool, the eSourcing Center of Excellence (CoE). The model allows for contributing CoE groups (Divisions, Regions, and Sites) to have a say in the development and updates of the global eSourcing strategy. This strategy is disseminated from the BEx to the Regions/Sites/Divisions for adoption. The Divisions/Regions/Sites are responsible for implementing and executing against the strategy on a daily basis. Where a Region/Site/Division CoE does not exist, the GPS eSourcing BEx will be responsible for implementing and executing the strategy.

Each Division/Region/Site therefore, is responsible for the investment of resources and organizational alignment necessary to achieve successful implementation of the Center Led global eSourcing strategy.

Center Led Model

12

The adoption of the global eSourcing strategy should involve setting a standard that can be applied across all Divisions/Regions/Sites. The eSourcing BEx rollout of that strategy will require:

Writing, communicating and implementing the global eSourcing strategy Setting the standard on eSourcing knowledge, training, policies and

procedures Coordinating communications and financial reporting Conducting Senior Management toll gate reviews for Division Progress

and uptake Interface with Corporate IT for the Emptoris platform Conducting Cross Divisional eSourcing events (direct support GPS

projects) Assisting in the development of Divisional eSourcing Roll Out Plans and

the Processes Involved (i.e. Sourcing Roll Out Project Management) Assisting in establishing the ground work within Division on preparedness

for change and change management Development of governance policy with respect to the use of the

eSourcing system Coordination and analysis of metrics and KPIs

In the long term overall strategy, the success of the global eSourcing strategy will rely on accurately capturing metrics and performance results and benchmarking with other companies in the healthcare industry. Each Division/Region/Site is responsible for aligning their results with the global eSourcing strategy. As more regions/sites/divisions adapt to this strategy, they will have to allocate their resources in such a way to implement and execute effectively.

Near Term (continued)Organizational Alignment and Senior Management Support Gain divisional Executive Senior Level support from Global Operations

Council presentation Align divisional strategies in their management support and drive

implementation

Medium Term (1 Year to 3 Years)Global Adoption Approach Increase division integration via the development of the global

eSourcing strategy driving the Center Led approach while optimizing current staff and resources

Align eSourcing Divisional and Affiliate goals Develop global SME resource base and position based on region

needs Create a knowledge sharing communication planCompany-wide performance reporting & promotionUpgrading of current value proposition of eSourcing tactical executionKnowledge sharing (best practices)

13

Long Term (3 Years and Beyond)Metrics and Performance

Measure metrics against goals and feedback to executive Senior Level support

Report & publicize performance results for all regions/countries Centralize metrics analysis competency (eSourcing BEx) to drive

predictive analytics and KPIsGlobal SME resources Tailored Business Unit / Divisional implementation strategy

Develop an annual global eSourcing review (measures processes, metrics, resources, and technology)

14

Implementation

Near Term (Present to 1 Year)Global eSourcing StrategyOrganizational Alignment and Senior Management Support

Medium Term (1 Year to 3 Years)Global Adoption ApproachCompany-wide performance reporting & promotionUpgrading of current value proposition of eSourcing tactical executionKnowledge sharing (best practices)

Long Term (3 Years and Beyond)Metrics and PerformanceGlobal SME resources Tailored Business Unit / Divisional implementation strategy

15

Closing

While Abbott was an early adopter in the eSourcing space, the early implementation of our current eSourcing tool via the training of all purchasing employees, and the expectation that once trained eSourcing use would follow proved false with limited uptake.

The early implementation did expose the purchasing community to the eSourcing tool and its benefits and provided the acceptance and acknowledgement necessary for the successful implementation of Centers of Excellence in both GPO and GPS.

Performance on the Comparative Analysis provides insight into strengths and weaknesses of the existing eSourcing programs at Abbott against “Best in Class” organizations.

Abbott’s strength can be found in the eSourcing tool selection and the strategies employed from upper management support and organizational alignment to current eSourcing strategy and event management. In order to extend the reach of eSourcing and its adoption, we cannot continue with the status quo.

This report presents the opportunities that exist in our organization today to effect change and advance our eSourcing initiatives. It is believed that by doing so we can provide significant impact in efficiency, productivity and leverage that yield both improved total cost of ownership, as well as, favorable return on investment.

16

Literature Review Appendix

Maximizing eSourcing through a Center of ExcellenceBy Marc Hochman and Suzanne Dorf

Software alone is not sufficient. Organizations must have the knowledge and policies in place to support these tools. Recognizing that, the leaders today are establishing Centers of Excellence (CoE) to full capture the value and savings from eSourcing technologies.

A Center of Excellence is a small, center-led group of procurement experts within an organization who focus on standardizing processes, leveraging eSourcing technology, capturing best practices, sharing knowledge, and streamlining procurement activities.

JumpStarting Your eSourcing InitiativeAT Kearney 2010

Anecdotal evidence suggests that incorporating eSourcing technologies into an already well-managed sourcing program can increase savings incrementally by 5-8 percent on average.

Additional advantages for buyers stem from an increase in: Number of sourcing events that can take place Frequency with which sourcing events can take place Reduced cycle time required for sourcing events Increased availability of templates and analytic tools, which improves the

consistency and quality of the events Ability to include more suppliers in the process (due to increased

communication and collaboration functionality these tools provide)Simply put, procurement organizations find they can do more with existing professional headcount, accelerating incremental savings while reducing operational costs.

Build a meaningful governance model – use governance to change the conversation from one of “prove to me why we should use these tools” to “prove to me why we should not.”

Design and deploy metrics – Defining targets for the program and tracking progress against those targets ensures that these targets are translated into individual annual performance programs for stakeholders and sourcing team members... Success depends on program metrics, tied to individual performance metrics that clearly communicate expectations.

A.T. Kearney suggests that the “Stages of eSourcing Excellence” be used as a framework for companies to plot their course and prioritize investments for improvement. Importantly, most companies neither aspire to nor achieve stage-

17

four status across all elements of their sourcing programs. Rather, they focus on those elements that they believe will deliver the greatest results.

Abbott Comparative to A.T. Kearney’s eSourcing Stages of Excellence (see page 20)

Fundamental goals of e-SourcingJanuary 3rd, 2006 at 04:09pm David Bush - Iasta

A typical bid lifecycle, using an e-Sourcing application, may go as follows: Review spend data and determine bid opportunities Issue RFI and review responses Develop strategy and supply base Create supplier and buyer responsibilities with a project management tool Issue a final RFQ with definitive specs Execute a reverse auction or sealed bid Analyze results with optimization tools or lot bundling reports Develop and track a final contract Track supplier performance over the life of the contract

So, what was the goal of going through these steps and what did the e-Sourcing application deliver?e-Sourcing initiatives are aimed at improving or eliminating:

1. Sourcing cycle time – Electronic creation and distribution of bid documents slashes the amount of time needed for managing the bid process. Specialized analysis tools also help streamline the award procedures.

2. Paper based processes – It has been said that less than 50% of spend is strategically sourced. Maverick spending can lead to variable pricing and missed volume opportunities. Using an electronic RFx system increases the speed at which bids can be produced and issued with intuitive tools and templates.

3. Lack of standardization – Many times purchasing decisions are made at the micro level which is time intensive and inefficient. e-Sourcing applications standardize decisions that can be made across an entire enterprise and force best practices and corporate rules into place. This also ensures that the consistent messages are being communicated to all suppliers.

4. No repeatable methodology – Removal of ad hoc practices, and the implementation of process driven methods that can be repeated continuously, provides a solid infrastructure for purchasing efficiency.

5. Knowledge management – After a bid is complete, it is important for the information that was gained to be transferred seamlessly within the organization. Employee turnover or extended periods of time can lead to the loss of valuable data that will impact the amount of time needed to re-bid, the quality of the product/service procured, or money spent for the next contract.

18

Capture More Spend Under Management: Attack the Gaps in Your Sourcing Toolkit with an Advanced Sourcing SolutionCombineNet 2010 White Paper

“Spend under management” is often defined as spend that is identified, sourced, and managed by a centralized or center-led team using a variety of e-sourcing technologies. By capturing more spend under management, companies gain the benefits of better organizational visibility into what is being spent, for what, and with whom. In addition to identifying cost savings opportunities, capturing more spend under management enables better efficiency, productivity, and predictability within an organization’s sourcing and procurement activities.

Therefore, despite the amount of time those products have been in the market, most companies report that they have successfully captured only up to 30% of their corporate spend under centralized management, on average, with the largest proportion of that spend in indirect spend categories.

CombineNet’s own recent research* indicates that even the most innovative companies, those who were the early adopters of centralized sourcing strategies and e-sourcing technologies years ago, have been unable to get beyond a ceiling of 25-35% of spend under management.

The challenge of capturing the remaining 70% of spend not under central management is what we refer to as reaching “the spend plateau,”Additionally, because the central team, which is specialized in the analysis, sourcing, negotiating, contracting, and management of spend, is often not leading the process (in many cases they are engaged, but not fully leveraged), the organization is suffering from less than ideal execution and efficiency.

Here are some specific examples of lost opportunities when more spend categories are not managed centrally:

• Lack of central visibility into spend – suppliers, items, costs, supply chain impact – reduces an organization’s ability to respond to savings opportunities

• Similar products are being sourced from common supply bases in ad-hoc, unleveraged sourcing activities, reducing efficiency and cost savings opportunities.

• Multiple people across the organization are performing similar, parallel tasks, further reducing efficiency and cost savings opportunities.

• The impact of decentralized sourcing activities and decisions on the global supply chain are not being adequately measured and acted upon.

All of this leads to higher costs, lost opportunities, and poor productivity.

19

High performance through procurement:Accenture research and insights into procurement performance masteryAccenture 2007

In the strategy category, for example, we determined that procurement masters invariably have a clear mandate from—and a better overall relationship with—senior management. Basically, masters’ strategies enjoy boardroom awareness and, consequently, boardroom support. In requisition to pay, we found that procurement masters are 10 times more likely than low performers to provide clear and documented buying channels to the end user. It’s also far more common for masters to use a supply-base segmentation strategy and to log and manage contracts centrally. In fact, 100 percent of procurement masters have implemented a structure of centrally led category management.

According to Accenture research, procurement masters excel at building results-focused procurement processes, as well as results-oriented procurement organizations.

Clearly, procurement masters are more committed than most to improving communication and visibility, and helping employees understand company goals and the contributions they make to those goals.

One hundred percent of procurement masters have implemented a structure of centrally led category management.

A Case for eSourcing: The Strategic Side of Procurement – By Dr. Jeffrey Brooks and Donovan FavreSupply Chain Perspectives

“Increase the efficiency of sourcing processes. Automating the sourcing process speeds up individual tasks, reduces error rates and rework, eliminates the need for data reentry, and improves process flows. For example, various eSourcing tools can automatically collect and disseminate data from and to appropriate internal and external parties, thereby facilitating information flows and the management of administrative tasks. Supplier reporting capabilities make it possible to track purchasing data and calculate supplier-performance metrics. And eSourcing workflow engines organize work streams within and across product categories into a coherent sourcing effort.”

20

AT Kearney eSourcing Stages of Excellence

21

22

References

1. Maximizing eSourcing through a Center of Excellence - Marc Hochman and Suzanne Dorf

2. JumpStarting Your eSourcing Initiative - AT Kearney 20103. Fundamental goals of e-Sourcing - January 3rd, 2006 at 04:09pm David

Bush - Iasta 4. Capture More Spend Under Management: Attack the Gaps in Your

Sourcing Toolkit with an Advanced Sourcing Solution - CombineNet 2010 White Paper

5. High performance through procurement: Accenture research and insights into procurement performance mastery - Accenture 2007

6. Issues in eSourcing: Adoption and Penetration, eSourcing Forum – Iasta 5/1/2007

7. A Case for eSourcing: The Strategic Side of Procurement – Supply Chain Perspectives - Dr. Jeffrey Brooks and Donovan Favre

8. Six Best Practices to Ensure eSourcing Adoption – SAP White Paper 2006

9. Procurement Innovation Parts I, II, and III – Denali Group 201010.The Forrester Wave: eProcurement Solutions, Q1 2011 – March 7, 201111.The Forrester Wave: eSourcing, Q1 2009 – April 1, 200912.eSourcing Best Practice Research Paper – Karl Rogers13.Using organizational control mechanisms to enhance procurement

efficiency: how GlaxoSmithKline improved the effectiveness of e-procurement – Gale & Cengage 2006

14.Align Global eSourcing: eSourcing Benchmark and Comparative Heat Map – Todd Grunert & Arnold Bynum

15.Align Global eSourcing: an eSourcing Benchmark and Comparative Executive Summary – Todd Grunert

16.Align Global eSourcing: eSourcing Benchmark and Comparative presentation – Todd Grunert & Arnold Bynum

23