Procurement in Action

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Procurement in ActionThe Ecio Grassroots Procurement Survey 2011


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Ecio | Grassroots Procurement Survey 2011 | 3

Procurement in ActionThe Ecio Grassroots Procurement Survey 2011

Many surveys o the procurement community ocuson high-level executives, chie procurement ocersand senior managers: those who lead changeand decide on strategy. In the Ecio GrassrootsProcurement Survey, however, we wanted to ndout what people at all levels in procurement rolesthink. Our questionnaire was thereore aimed atprocurement practitioners rom the most juniorroles to the most senior.

We asked about the kind o processes usedto engage in procurement projects and howrelationships with suppliers work. We asked aboutrelationships with colleagues in other unctions andabout the savings procurement people are askedto achieve.

The survey sought to nd out about the trainingpeople in procurement receive and the supportingtechnology they use to accelerate the process.All these are areas o great importance in thecontinuing development o procurement as anessential business unction. Some results wereas we expected, others oered surprises.

The survey results presented in this report provideood or thought and suggest a range o actionsto help raise the status o procurement as aproession and expand the contribution it canmake to business success.

James Jenkinson

Vice President, Efcio

Earthquakes in Japan and New Zealand, the threat o nuclear meltdown, political

unrest in North Arica and the Middle East, the recent near-atal global banking crisis

and subsequent economic downturn: or businesses today, surviving in an unstable and

unpredictable world has become a constant challenge. Increasingly, we are orced to

examine our third-party spend to ensure that we remain competitive and protected as

ar as possible rom supply chain risk.


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Foreword

About the Survey

Executive Summary

The Procurement Process

Managing Supplier Relationships

Internal Relationships

Savings, Efciencies and Compensation

Training

Technology

Conclusions and Recommendations or Action

03

06

07

08

11

14

15

16

17

18

Contents


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The Procurement Community

Procurement is enjoying a high level o new entrants.The survey ound that 40 per cent o respondents had beenin procurement ve years or less. Only a third had been inprocurement or 15 years or more.

The Procurement Process

Most businesses ollow a ormal sourcing strategy, butmany do not. In the survey, hal o respondents ollowed aormal strategy and a quarter always calculate Total Cost o

Ownership. However, more than a quarter o respondentsrarely or never changed suppliers, 44 per cent rarely ornever use request-or-proposal launch events and 67 percent said tendering processes were usually completedin 10 weeks or less. Hal o respondents always or otenchallenge specications drawn up by non procurementpeople in their organisation.

Managing Supplier Relationships

Many procurement proessionals are able to concentrateon a manageable number o categories, but some aretasked with too many suppliers. Two thirds o surveyrespondents managed ve or ewer categories. However,two thirds managed 31 or more suppliers in total. 19 percent always provide eedback to suppliers, while nearly twothirds measure perormances o up to 10 per cent o theirsuppliers. 42 per cent received procurement data romwithin their own organisations only.

Internal Relationships

Many procurement proessionals ace serious challengesin eectively carrying out their roles. 42 per cent orespondents identied a lack o time and diculty in

arranging meetings as problems, while a th experienceda lack o leadership or guidance rom senior management.

Executive Summary

Savings, Efciencies and Compensation

Pressure on procurement personnel to achieve savingsappears to be less intense than many ear. Nearly twothirds o respondents aced savings targets o 10 per centor less o spend, while more than three quarters met orexceeded their savings targets.

Training

Training or procurement proessionals is generallydelivered at acceptable levels, with a ocus mainly on core

skills. But the quality o much current training is in doubt.25 per cent o respondents received training in negotiationand 20 per cent in category management. Procurementpeople are also ocusing on wider business competenceand being trained in presentation skills. But only 9 per cento respondents thought their training was o a high standard.

Technology

There is a gap between the aspiration and reality whenit comes to the use o online sourcing technology. 52 per cent o respondents rarely or never use eSourcingtools, while 44 per cent had not used eAuctions in the last12 months.

Category Manager

Purchasing/ProcurementSpecialist/Buyer

Sourcing Manager

Contract Manager

Student (3%) VP/Director for Sourcing24%

4%

22%

19%

16%

6%

4%

CFO (1%)

COO (1%)

Director of logistics (2%)

Other

Not indicated (1%)

CEO (1%)

The Ecio Grassroots Procurement Survey is based on adetailed questionnaire sent to procurement proessionals inprivate and public sector organisations throughout the UK andEurope. The analysis is based on over 175 answers, whichwere submitted between September and December 2010.

The survey aimed to gain a view o opinion amonggrassroots procurement personnel who are responsibleor day-to-day operations as well as their more seniormanagerial colleagues. The objective was to analyse theviews, positioning and challenges among personnel at allevels in the procurement community.

Just over a quarter o those responding were at CXOevel, typically ranking as Vice President or Director oSourcing. These are the CPOs responsible or procurementdepartments who are likely to spend most or all o theirtime managing their teams, deciding strategy and settingobjectives.

The remaining respondents are comprised o categorymanagers, specialist buyers, sourcing managers and others.The sample thus provides a good cross-section o opinion inthe procurement community as a whole.

About the Survey

The respondents come rom a wide variety o sectors. 20 percent rom the public sector and 80 per cent rom the privatesector covering Manuacturing, Utilities, Financial Services,Pharmaceuticals, FMCG, Telecoms, Chemicals, ProessionalServices, Waste Services, Construction, Oil & Gas andPrivate Equity.

Education

62 per cent o respondents hold a university degree, morethan hal o those at masters or higher level. This ndingwill be welcomed by those who have long argued thatprocurement should be recognised as a high-level strategic

unction in todays business world. It suggests that theacademic status o those entering procurement as a careeris rising as the proession becomes more established as animportant business activity alongside, or example, nance.

An equally encouraging nding suggests that procurement isenjoying an infux o younger entrants who will hopeully injectnew thinking and approaches into the proession. While morethan a third o respondents had been in procurement or 15years or more, 40 per cent had been in their roles ve yearsor less, showing plenty o new blood entering the proession.


73 per cent o respondents are comprised o category managers, specialist buyers, sourcing managers and others

Participants by job titles


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However, only 51 per cent o survey respondents said theyollowed such a process. This causes concern or tworeasons: rst that the number is extremely low and muchower than expected. Second, experience suggests that evenn companies with a ormally agreed sourcing process, it isoten not ollowed properly, with many key elements beingomitted entirely or not given enough time.

Managing a companys supply base is a key role withinprocurement. As part o that role, it may occasionally involvechanging one or more o its suppliers as a key lever tomaintain competition. However, more than a quarter o surveyrespondents said they rarely or never change suppliers.This may suggest the existence o monopolies or oligopoliesamong suppliers. A more likely explanation, however, is thatthere are oten longstanding relationships between buyersand suppliers and that many procurement managers arerelatively risk averse and would rather stay with incumbentsthan go through the burden o nding new sources o supply.

The Procurement ProcessIn todays dicult business environment it is critical that organisations ollow a structured

strategic sourcing process when procuring all third party services.

When respondents were asked to identiy the tactics theyused most oten when entering procurement projects,however, an impressive 71 per cent said they always invitednew suppliers to their tender processes. These last tworesults, considered in tandem, suggest that although newsuppliers are requently invited to take part in procurementprojects, they are very oten not selected.

This appears to suggest an approach that can be consideredunwise: new suppliers will usually be keen to go the extramile to win business, but this enthusiasm will soon evaporatei they repeatedly lose out to the incumbents. In time, thiswill lead to increases in both incumbent and new supplierpricing: incumbent prices will rise because they know theywill always win the business, while new suppliers will alsoincrease their pricing to account or the amount o time andmoney spent on the tender process.

Volume / supplier bundling

Inviting in new suppliers to create competition

Working on relations with current suppliers

Simplification / harmonisation of specifications

Negotiating face to face / haggling

Total Cost Management

66 22

42 33 16 8

63 18 13 3 3

52

%

%

%

%

%

%

27 8 9 3

55 24 15 4 2

71 18 9 2 1

7 3 3

1

Always

Never

Rarely

Sometimes

Often

24%

18%

3%

34%

20%

Total cost o ownership

Two thirds o respondents oten or always calculate TotalCost o Ownership (TCO) as part o their analysis: this isa sophisticated and complex approach which can be timeconsuming especially i there has been little existing internaldata. In such cases, it would be very dicult to complete acomprehensive TCO analysis within the 10 weeks that 67per cent suggested as a typical tendering process timerameso it may be that many procurement practitioners are onlypartially carrying out TCO activities.

Challenging specifcationsThe authority with which procurement managers are ableto challenge specications is key to their status within theirorganisations and is oten a lever in unlocking signicantcost reduction opportunities.

It was thereore encouraging that more than hal orespondents said they always or oten challengedspecications. It is not clear rom these results, however,how oten such challenges lead to specications beingaltered in a way that drives signicant savings.

Never

Always

Sometimes

Rarely

Often

5%

24%

4%

42%

25%

Always Oten Sometimes Inrequently Never

71 per cent invite new suppliers to the RFP process in order to create competition

Tactics used by respondents during the tender process

66 per cent oten or always calculate Total Cost

o Ownership

Number o respondents who carry out TCO activities

Over 50 per cent challenge specifcations

Procurements ability to challenge specications


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Some highlights include that a large number o respondentshad been in procurement ve years or less. This is verygood news and strongly suggests it is time to usher in anew era by breaking the shackles which have traditionallyimited procurement. Businesses must position their youngerprocurement proessionals closer to operations personneland equip them with sophisticated tools to carry out amore strategic role. It is imperative that senior managementprovides ull support to their procurement executives, payingparticular attention to ambitious young entrants. We alsodiscovered that most procurement proessionals are requiredto manage a sensible number o categories. But many areresponsible or 30 or more suppliers ar too many to makeully eective management possible. Business leaders mustensure that their procurement executives are able to ocuson a small number o core categories. This will producebenets including better procurement results, increasedsta motivation and improved business relationships.

Many procurement proessionals reported o a lackeadership rom senior management. Without top-levelsponsorship, simple matters such as being able to arrangemeetings with other unctions are ar more dicult. Toooten, procurement has no mandate and is still seen as atransactional unction. Procurement proessionals mustdemonstrate their value to their organisations more otenand more eectively. By taking the lead in projects theymust consistently prove their credentials to key operationalstakeholders. We also noted that the imperative orprocurement people to make savings is not as intense ass oten suggested with moderate savings targets o 10 percent or less. We have seen signicant progress with howprocurement identies savings opportunities but tracking

savings can be a time-consuming process that is sometimesavoided. Thereore, savings that are identied may be lost inmplementation or clawed back by suppliers but still countedas savings.

However, as well as the points above, outlined here aresolutions to 5 key challenges identied in the survey thatneed to be addressed in order to improve operational activity.

Conclusions and Recommendations or ActionFrom the survey we have been able to gather an understanding o how procurement

unctions are operating on a day to day basis and the challenges that are being aced.

1. Managing Instability in Commodity Prices

Commodity prices have risen dramatically in the recent past.Many commodities have substantially increased in price,but the movement has not been continuous and there havebeen sharp alls. Managing these fuctuations has becomeincreasingly important and the good news is that in mostcases, eective commodity management can be done inseveral ways.

However, by ar the most eective is through indexing,assuming your business is not completely risk averse.The rst step is to unbundle the underlying cost structure(either through a tender with suppliers willing to provide theinormation or through a collaborative approach with yourincumbent supplier) to obtain the necessary breakdown.Once you know how much o your product is based oncommodities, an appropriate index to baseline against canbe ound. Unbundling prices can be time consuming anddata intensive but can be very eective at minimising riskwhile developing a pricing mechanism that is sustainableand transparent or all parties to see.

The nal step is to develop an infator or defator againstthe index to accommodate additional cost elements, whichare then xed, so that when the cost o the commodity goesup, the price you pay your supplier rises, and when it alls,you pay less. The proportion o xed as against variableelements must be negotiated with your suppliers.

In summary, this is a dicult area to manage but the rightapproach can put you as the purchaser in the driving seat,no longer so vulnerable to unpredictable commodity pricefuctuations.

2. Creating Transparency

The cost o dierent materials and components oten varieswidely between suppliers even though the nal price or aparticular item may be similar. This means that i procurementcan identiy the suppliers costs and margins by unbundlingcost components, they will be able to negotiate prices orthe constituent parts o the item as well as the total cost.Much o the inormation you need to analyse the costs othe goods and services you are paying or, however, mustby necessity come rom the supplier. The question then ishow to persuade the supplier to provide the inormation.

Suppliers will oten respond to a request or this kind odetailed inormation by claiming it does not exist or that theirsystems are unable to provide it. However, this is unlikelyto be true and with some perseverance there are ways opersuading them to part with the data you need. I you cannotdo this collaboratively, however, a well structured RFP whichincludes pricing templates allows you to request unbundledpricing rom suppliers and enables a comparison acrossseveral potential suppliers.

This kind o transparency also ensures that the suppliersprot margins more accurately refect market conditions,creating the additional benet that the relationship with thebuyer will be more sustainable in the longer term: both sidesare likely to be happier i the deal makes economic senserom their own point o view.

3. Ensuring Supply Chain Stability

First it is essential to understand which categories inyour business are the most sensitive to supply chain risk.Using Krajlics quadrant, it is a simple exercise to identiysuch categories: they are the ones most critical to yourorganisations viability and most dicult to substitute inthe marketplace.

Within these categories, consider which suppliers are themost potentially vulnerable. Identiy those which present thehighest risk they might account or perhaps 10 per cento the total and ocus on them. These are the companiesmost likely to ace nancial problems and thereore causethe biggest potential damage.

Monitoring the nancial and organisational health o thesesuppliers is a matter o collecting inormation. Incumbentsuppliers may be willing to help with this, because theyare likely to want to cooperate to keep your business. It isreasonable to ask or quarterly reports on turnover which willquickly reveal any problems caused by, or example, the losso a major customer. Similarly, your supplier may agree tonotiy you o any changes in key personnel.

Credit checks are very easily accessed rom theestablished providers o these services. And, importantly,inormal communication channels may prove extremelyuseul in gaining this kind o inormation: talk to yoursuppliers salespeople.

Finally, it is essential to ensure that you have alternativesuppliers in case o a looming crisis. Prequaliying andmaintaining a small number o extra suppliers need not be

a big investment. A small spend can be allocated to thealternative vendors to maintain their interest in your business.

It may be eective to utilise a supplier already serving someother category or identiy and activate alternative vendorsduring a strategic sourcing initiative: second place biddersare the natural candidates.


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4. Improve Communications

When it comes to suppliers, it makes sense to providethem with as much inormation as possible. That way, theycan ull their obligations and you are more likely to receivethe service you require. Simply increasing the amount ocommunication with stakeholders and suppliers may wellproduce tangible benets.

Good communications can be achieved through theollowing steps:

Segment your stakeholders and your supplier base so

you can prioritise your targets. For stakeholders, assesshow supportive they are o your eorts as a proessionalprocurement unction, and how important they are inthe organisation. For suppliers, determine how strategicthey are gauge the potential impact i they were tocease supply.

Instigate a new approach to communications withstakeholders and suppliers in a new sourcing project.This should ideally be the kind o project that involvessignicant stakeholder engagement but is one you canlead and make changes as necessary.

Meet stakeholders bi-weekly or even weekly, together orseparately, to get them onboard and ensure you understandtheir ears and concerns. You will have a better chanceo success i they eel that you understand their position.Always err on the side o over-communicating, even i thismeans just a short weekly update with a ew bullet points.

When negotiations are complete, produce a list o optionswith the relevant business cases attached rather thanpresenting a single solution. That way, stakeholders eelthey retain some status and infuence over the proceedings.Procurement should be a acilitator not a decision maker.

For suppliers, good communication means regularmeetings to share inormation, deal with any issues andexplore ideas about how the relationship can be improved.Once the selections have been made and contractualterms agreed, vendor management becomes the priority.

Account meetings should begin within a month o contractsigning, especially or new suppliers.

Eective, agile communication with your two main targetgroups internal colleagues and suppliers will producea win-win outcome in which all those involved are able tomeet their business objectives.

Ecio is a results-ocused procurementconsultancy, with a track record o helpingleading organisations achieve more value romtheir procurement. Whether the challenge isdelivering signicant savings to the bottom line ormanaging suppliers to create value or the longerterm, Ecio provides a range o client-tailoredservices including: Procurement Opportunity Assessment

Strategic Sourcing Execution People and Process Development

Procurement Transormation

Comprised o experienced proessionals with ablue-chip consultancy heritage, Ecio combinesthe credentials o a top tier rm, with the depth oexpertise and execution o a fexible niche player.With oces in the UK, France, Germany andSwitzerland, and a growing operation in the USA,we service clients rom a broad range o sectorsthroughout Europe and the United States.

To learn more, please visit www.ecioconsulting.com

or call +44 20 7553 6900

About Efcio

James Jenkinson is a Vice President in Ecios London oce

About the author

5. Payment Terms

Historically, or companies looking to increase their workingcapital, the most eective approach was to increase paymentterms and the question is oten asked what are the optimumpayment terms?. The answer to this question variesdepending on the geography; in the UK it is around 60 days,Northern Europe is 90 days and Southern Europe 120 daysis common.

Whilst many believe that extending payment terms willincrease prices, i handled correctly, and or categories thatare not nance based (e.g. leasing,) then it is possible to

extend payment terms without incurring additional costs. It isalso very important that suppliers are only approached once.It would be unethical to go to them proposing to changepayment terms then in 3 months go back to them againasking to reduce rates. I done in this order then there arelikely to be price rises in the RFP or at the very least limitedcost savings opportunities.

When starting a working capital exercise it is important tosegment your supplier base to isolate those suppliers to bedealt with during the sourcing eort. It is during this processthat payment terms are added to the list o conditions in theRFP document. This has a ar greater chance o success.

However, there is now an alternative to the traditional methodand that is to oer suppliers an early payment discount i theyare paid in a very short window. Early payment is a greatincentive or a supplier to provide a discount and can addgreat value to a large contract.


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