FUTUREBUY: THE Future of Procurement

FUTUREBUY:The Future of P tProcurement25 in 25: Delivering procurement value in a complex worldvalue in a complex world

February 2014

Agenda

Introduction

Procurement in 2025

FUTUREBUY roles

Evolution of Procurement Capability Maturity Model

Future role of procurement industry trends Future role of procurement—industry trends

Conclusion

KPMG can help KPMG can help

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© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printedin the U.S.A. NDPPS 248113

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Introduction

Procurement history is rooted in the core concepts of centralization, volume leveraging, and cost reduction, with the earliest traces linked to materials management.

Although procurement has certainly evolved from its early roots, it still faces challenges in terms of executive recognition, talent management, and organizational challenges.and organizational challenges.

Modern enterprises face a massive new set of challenges, including the forces of globalization, increased risk, complex supply chains, the spread of government regulation on decision making and the tremendous strainof government regulation on decision making, and the tremendous strain of human presence on the earth’s natural resources.

Organizations that are better able to position procurement as a core business function will likely be able to drive a more competitive lever for change and adapt more readily to the rapid forces of change in the current global environment.


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Procurement in 2025

Based on the insights of 25 chief procurement officers (CPOs) on procurement activity in 2025 (“25 in 25”), it is observed that procurement can indeed provide a good deal more value to the business than it does today.


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Figure: Faces of procurement in 2025

Procurement in 2025

As the procurement professional dons multiple hats, his or her role and impact will become more strategic.

As shown in the figure, establishing a vision for

procurement transformation occurs in stages and

requires successive levelsrequires successive levels of outcome-based trust

development with stakeholders.

The representation of a “pyramid of capabilities”

suggests that these levels of trust are hierarchical in

nature and require time and effort to create.

Figure: Evolution of procurement capabilities in 2025


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Figure: Evolution of procurement capabilities in 2025

FUTUREBUY:Financial expert

Procurement must speak the language of finance to translate concepts, such as cost savings, purchase price variance, cost avoidance, and total cost, into terms with financial impact

Key Considerations Talent Imperative

• Demonstrate financial knowledge to thehi f fi i l ffi (CFO) fi

• Analytical rigor and structured thinking

impact.

chief financial officer (CFO), finance, and business

• Understand and drive profit and loss (P&L) and balance sheet impact

• Deep financial understanding and ability to communicate analysis with the CFO

(P&L) and balance sheet impact

• Build financial models that support and drive business decisions

• Identification, understanding, and the management of key metrics

• Ability to build a business case that

• Provide insight on, and decision support for, impact on working capital

• Structure deals from a cash flow

yresonates with finance, the business, and procurement


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Structure deals from a cash flow perspective

FUTUREBUY:Internal consultant

Procurement needs to understand the business well enough to apply sourcing tools that can drive the most effective business outcomes in each individual operating group and geography


• Focus on stakeholder value, not just • Recruit and develop talent that looks

geography.

“checking boxes”

• Predict customer needs based on historical spend patterns

and acts like the people in the organization they serve as stakeholders

C i ti li t i d

• Challenge conventional thinking on supply sources and models

P id l i d

• Communication, listening, and interpersonal skills become vital

• Align with stakeholders, deep understanding of the business • Provide external perspectives and

insights into emerging trends

• Speak the language of the stakeholders and understand the business

understanding of the business, categories, culture, and business imperatives


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and understand the business

FUTUREBUY:Intelligence agent

Procurement must consume large quantities of data, in multiple forms, and derive meaningful market insights for the business, emphasizing early directional detection, rather than specific predictions on exact movements in the market


• Perform predictive analysis, understand • The ability to mine and communicate

than specific predictions on exact movements in the market.

customer needs based on historical spend patterns and market intelligence

• Challenge conventional thinking on l d d l

data is vital

• Identify primary and secondary sources for data, utilize data to support b i d i i d k supply sources and models

• Provide external perspectives and insights into emerging trends

business decisions, and make recommendations to the business

• The establishment of Centres of Excellence (COEs) to support multiple

• Develop a structured approach to analysis

Excellence (COEs) to support multiple sources of data and teams requiring information will be important


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FUTUREBUY:Relationship broker

An emerging capability for procurement is the need to develop both outward and inward facing relationships. Individuals may play different roles at different organizations across the

l et k


• Supplier relationship management with • Understanding both suppliers and

supply network.

specific business outcomes defined

• Alignment of stakeholders internally

stakeholder perspectives, knowing the business well enough to align both

• Listening, conflict management, and f ilit ti k• Connecting suppliers with the business

• Interfacing with external agencies

facilitation are key

• Strong commercial and business acumen to support internal and external negotiations

• Alignment externally with business drivers rather than categories

external negotiations


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FUTUREBUY:Risk advisor

Procurement will be prepared with risk mitigation capabilities based on possible case scenarios, impact analysis, and vulnerability threat warnings, rather than predicting possible disruptions


• Develop accurate and in-depth insights • Establishing and using a strong

possible disruptions.

into supply market and supplier-specific risks

• Identify and measure sources of risk

technical network to develop and articulate a vision of sources of possible disruption

R i t t h i l t k

• Coordinate with suppliers to identify and reduce possible disruptions

C lid i P i

• Requires a strong technical network with the ability to identify and collate data from various sources

• Communication and constant • Consolidation across Procurement into COEs to drive collaboration

• Contracts and pricing will evolve based on information available

Communication and constant networking, supplier management, and trust building will be key


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on information available

FUTUREBUY:Environmental steward

Sustainable procurement will be a foundational component to every FUTUREBUY decision, supported by an evolving shared web of knowledge through supply chain networks across industries


• Corporate social responsibilities are • Starts with a commitment from top

industries.

viewed as shared community issues, driving procurement to develop shared solutions

M i hi d diti f th

leadership

• Establishment and monitoring of systems and metrics is required

• Managing, coaching, and auditing of the supplier code of compliance will be standard

• Building incentives to drive

• Must have the ability to understand and work in emerging countries with suppliers to drive home importance of compliance to the code Building incentives to drive

sustainability at suppliers level

• Managing Tier 2 suppliers is critical

compliance to the code


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FUTUREBUY:Legal expert

Contract compliance will no longer be the primary expectation of procurement. Businesses will increasingly rely on procurement to minimize exposure to contractual risks with third-party suppliers and joint venture partnerships


• Develop a better understanding of legal • Establish contracts/legal team within

party suppliers and joint venture partnerships.

language to support contract development

• Strike a balance between global and l l

Procurement, aligned with the needs of the categories or business

• Attract and recruit lawyers into P t b ild tt ti local

• Weigh business value versus risk; build contracts with appropriate incentives

Procurement, build attractive career path to entice, and retain talent

• Alignment with the business remains critical

• Empowerment and expectation for certain decisions within Procurement; understand when to engage Legal

critical


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FUTUREBUY:Supplier coach

Gone are the days of “supplier management” from a top-down perspective. Supplier coaching means both parties are engaged in a relationship to drive improvement for

t al be efit


• Move from adversarial to coaching • Supplier coaches must understand

mutual benefit.

• Coaches act ethically in the interest of their suppliers

the business to drive suppliers toward relevant continuous improvement

• Process thinking, cost management, d lit i t iti l • Coaches recruit and select the most

suitable suppliers from the population

• Coaches dedicate their time to the first-i / i li

and quality improvement are critical elements

• Drive leadership and nurturing without negatively impacting supplier string/most important suppliers

• Coaches help suppliers understand what they must do to be successful

negatively impacting supplier relationships


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Proactive procurement organizations are taking deliberate steps to upgrade talent Our interviews suggest that new

1 Ad Hoc 2 Defined 3 Managed 4 Leveraged 5 Optimized

Internal Small team handles ad Quarterly reports Global team Global team + site Global team + co located

Proactive procurement organizations are taking deliberate steps to upgrade talent. Our interviews suggest that new capabilities will need to be developed as procurement moves its agenda to the future.

Internal Consultant

Small team handles ad hoc requests for transaction work

Quarterly reports generated and reviewed with stakeholders andfollow-up

Global team coordinates with stakeholders via defined statement of work’s (SOW’s) templates

Global team + site representationprovides local and engagement

Global team + co-located teams participate in team meetings and anticipate requirements

Market Low level of common Cost models apply Dedicated cost model Dedicated cost Cost models MI andMarket Intelligence & Cost Modeling

Low level of common tools, processes, and methodologies

Cost models apply publicly traded financial information to create high-level product models

Dedicated cost model and supplierintelligence databases established with Market Intelligence (MI) portals, feeds, and updates

Dedicated cost modeling, MI analyst, and ground-level roles established; all major categories have updated MI feeds

Cost models, MI, and global event management are leveraged across the business for application in design, production, and marketing decisionsg

Financial Expertise

Secondary data dumps pulled into PowerPoint presentation and shipped to users

Secondary data complements internalsubject matter experts (SMEs) interviews onas-needed basis

Multiple insights pulled utilizing triangulated results, SME insights, ongoing database updates, and market reports

Co-located teams collect local supplierinsights and complement global team updates and reporting on real

Co-located teams plus network of SMEs identified within supply base and other outsourced providers updates marketreports reporting on real

indicatortime basis

updates market conditions and deep future state insights

Risk Mitigator Financial health measured annually using Dun & Bradstreet

Multiple indicators of financial health and operational risk

Risk profiles include multiple measures of primary/secondary

Risk profiles include primary andsecondary measures

Global risk event triggers are monitored in real time with impacts and


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(D&B) sources annually

established quarterly operational and financial health risk

of Tier 1 and 2supplier risk

mitigation plans in place


1 Ad Hoc 2 Defined 3 Managed 4 Leveraged 5 Optimized

Supplier Coach

Supplier scorecards adopted formeasurement

Scorecards complemented by regular reviews, improvement

Reactive approach to reducing issues across the supply base through supplier development

Suppliers are actively solicited for cost savings ideas, and opportunities to

Virtual integration: Suppliers and buying enterprise regularly work and collaborate on-siteimprovement

discussions, and ongoing project goals

supplier development engagements

opportunities tocollaborate on cost and innovation identified

and collaborate on site and as strategic partners

Relationship Broker

Supply MI reports and debriefs are presented to stakeholders

Quarterly market reports and inflation/deflation

Systematic process defined for engaging stakeholders aligning

Forecasting of stakeholder demands and technology road

Suppliers actively engaged with stakeholders throughto stakeholders inflation/deflation

trends with ad hoc MI category & cost model reports

stakeholders, aligning supplier scorecards to stakeholder post report metrics to assess satisfaction

and technology road maps linked to supplier strategies to drive alignment

stakeholders through face-to-face sessions, supplier integration on product design, and on-going virtual extended team meetings

L l E t All t t itt C t t t l t L l i lt d ll L l t C t t t tLegal Expert All contracts written on standard legal templates with no variation permitted

Contract templates approved by legal and some variations allowed

Legal is consulted on all major global category contracts, on an exception basis

Legal expert employed full-time in procurement as part of all category management contract discussions and negotiations

Contracts are transparent and visible to all parties, tied to supplier scorecards and procure-to-pay (P2P) process, and linked to incentives and mutual regard/risknegotiations and mutual regard/risk clauses

Sustainable Steward

Supplier code of conduct exists

Supplier code of conduct compliance is measured as part of supplier performance scorecard

Supplier compliance is measured, audited, and if required, actions taken

Supplier compliance to code of conduct is audited by independent third parties and Non-

Subtier supplier code of conduct performance is measured, monitored, and linked to tier 1 supplier performance


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scorecard parties and Non-governmental organizations (NGOs)

supplier performance reviews

Future role of procurement: industry trends

Analysis of the “future role of procurement” by industry provides another set of

Industrial manufacturing Industrial manufacturing Healthcare and pharmaceuticals

Analysis of the future role of procurement by industry provides another set of meaningful insights

• Industrial manufacturers typically already recognize the critical contribution of procurement to the bottom line, yet, they often struggle with finance to establish buy-in required to drive investments in procurement.

• In a few leading organizations, we find that CPOs who can effectively express their needs in the form of direct financial contributions find a ready and willing CFO to invest in procurement talent.

Healthcare and pharmaceuticals

• With the increasing pressure of healthcare reform, organizations in life sciences are looking at procurement to provide more leadership in managing theprovide more leadership in managing the complex set of relationships.

• The industry is at a tipping point. Large companies are often in the middle of massive mergers and mega patent-expiries Between now and the end of


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expiries. Between now and the end of 2015, most of the major top 10 drugs have a patent expiry.

Future role of procurement: industry trends

Energy, natural resources, and chemicals (ENRC)

• ENRC firms have a strong push toward further building their platform on a strong

ENRC Financial services

further building their platform on a strong financial acumen agenda; however, they are also pushing toward a stronger basis of market intelligence, sustainable procurement, and most importantly, know-how in contract management as a core capability of the organizationcore capability of the organization.

Financial services

• The financial services sector is feeling the full impact of regulatory forces after disastrous overleveraging during the d sast ous o e e e ag g du g t eglobal economic recession in 2008. These forces are occurring in every global region, with the exception of China.

• As shown in the graph on the right, risk and legal issues dominate all other forms gof value identified by other industries. Legal advisory knowledge and risk mitigation is a primary capability that procurement is being asked to support, according to the CPOs we interviewed.


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Conclusions

The evolution of procurement is one that involves managing change.

As we move through the transformation of supply management, the ability to drive recognition of the function is similar to the discovery of truth. All truth goes through an echelon of beingof the function is similar to the discovery of truth. All truth goes through an echelon of being criticized, then opposed, and finally becomes self-evident.

By 2025, the transformation of the entire supply management profession may move to a point where it will become a recognized business partner, alongside HR, IT, and Finance.

Universities will play a role in helping organizations to respond by developing technical management knowledge in the next generation of procurement professionals.

Increasingly, organizations will need to have talent ready to meet these challenges, and will g y g y gbe instrumental in helping us reach the point where transformation becomes self-evident.


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KPMG can help

KPMG h l li d i i bl i k f l d KPMG helps clients drive sustainable improvements to make procurement a source of value and innovation across the enterprise.

Our approach supports both full-scale procurement transformation as well as targeted improvements to address key client issues and deliver tangible benefits.address key client issues and deliver tangible benefits.

S i Kh h l iSamir Khushalani Principal, Practice LeaderAmericas Procurement Advisory Services713-319-3570kh h l i@[email protected]

Jie ZickDirectorU S P t Ad i S iU.S. Procurement Advisory [email protected]


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Research Download

Read the complete findings: FUTUREBUY: Delivering Procurement Value in a Complex Worldg p

www.kpmg.com/us/procurement

This project was conducted through a joint partnership between KPMG Procurement Advisory and Dr. Robert Handfield with the Supply Chain Resource Cooperative (SCRC)

t th P l C ll f M t t N th C li St t U i itat the Poole College of Management at North Carolina State University. Founded in 2000, the SCRC is an academic-university partnership to drive thought leadership, education, and practical application of research to tackle real-world supply chain problems. For more information on NC State’s Supply Chain Resource Cooperative, visit


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pp y p ,http://scm.ncsu.edu.

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 endeavor to provide accurate and timely i f ti th b t th t h i f ti iinformation, 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 upon such information without appropriate professional advice after a thorough examination of the particular situation.

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. NDPPS 248113

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

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