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Bargain Hunter to Business Partner: The Monumental Opportunity Facing Procurement

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For today’s procurement functions, a single-minded focus on reducing input costs is not enough. Procurement leaders need to focus less on driving down suppliers’ prices and more on driving up value from end-to-end across the business.

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Bargain Hunter to Business Partner: The Monumental Opportunity Facing Procurement

  1. 1. Bargain hunter to business partner: The monumental opportunity facing Procurement Highlights of Q1 2014 Procurement Advisory Pulse Survey Monday, July 14, 2014
  2. 2. © 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 1 The research First edition of semi-annual KPMG Procurement Advisory Pulse survey We polled 217 KPMG Procurement Advisory consultants globally The survey was facilitated by KPMG’s Global Procurement Advisory Center of Excellence This recurring research enables us to provide KPMG Procurement practitioners’ point of view to advance industry-leading thinking and insights on the market globally Other 9% Singapore 2% France 2% Australia 3% Thailand 3% China 3% Brazil 7% Germany 12% Canada 13% UK 16% USA 30% Source: KPMG International, Procurement Advisory Pulse Survey, 2014
  3. 3. © 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 2 We asked:  What are companies’ priorities for improvement of the procurement function?  How are companies measuring procurement’s contribution to value?  Are qualitative and quantitative performance metrics being used?  What are companies doing to manage risk and preserve value across their supply chains?  What steps are companies taking to improve their procurement operating models? The research
  4. 4. © 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 3 Key themes and trends Appetite for Procurement change is increasing:  66% say operational change is more of a priority in next 12-24 months than previously  59% say strategic change (transformation) is more of a priority in next 12-24 months than previously 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Not a priority Somewhat less of a priority No Change Somewhat of a priority Priority 3% 7% 32% 45% 13% 51% 15% 2% 5% 27% Operational Change Strategic Change Prioritization to Improve/Overhaul Procurement Source: KPMG International, Procurement Advisory Pulse Survey, 2014
  5. 5. © 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 4 Key themes and trends  Appetite for change is increasing – but procurement priorities are often misaligned with objectives for change/transformation 1. It’s no surprise that the top 5 priorities directly affect ability to deliver value: 1. Improve performance 2. Align closer to business functions 3. Improve governance & compliance capabilities 4. Drive costs out of organizational indirect spend 5. Improve supplier management with tier 1 suppliers  Delivering on the top 5 priorities can be effected by:  Targeted tactical initiatives to tackle each priority separately  Changing/transforming the procurement operating model to tackle multiple priorities  The appetite for procurement operating model change is relatively low.
  6. 6. © 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 5 Key themes and trends Although the top priorities directly affect ability to deliver value, it’s more surprising that value contribution is not being tracked  58% want to improve performance – but a full range of performance metrics are not being used  42% want closer alignment – but metrics to track alignment are not being used  40% aim to improve governance – but metrics continue to emphasize quantitative measures (cost) over qualitative measures Setting and monitoring metrics on procurement’s performance in priority areas is key to realizing performance Changing the current procurement operating model (POM) typically helps to achieve the top 3 value-related priorities – and more. Source: KPMG International, Procurement Advisory Pulse Survey, 2014
  7. 7. © 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 6  Improving procurement performance & value delivery continue to be consistent priorities, yet: Realizing procurement’s value  Few companies benchmark the role of procurement against other strategic business functions Most companies still focus primarily on the traditional, quantitative metrics  Because qualitative measures are not tracked, the full extent of procurement value delivery is often overlooked 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Measure Quantitative Value Measure qualitative value 9% 15% 18% 32% 40% 40% 19% 13% 11% 2% Never Rarely Sometimes Frequently Always Source: KPMG International, Procurement Advisory Pulse Survey, 2014
  8. 8. © 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 7 Qualitative vs. quantitative measures  Direct costs are much more likely to be measured quantitatively  Qualitative measures can do more to capture and demonstrate value delivery  For example, the value of supplier relationships is rarely tracked (2.3) yet the ability of suppliers to contribute innovation and continuous improvement is widely recognized as having enormous potential to enhance value Source: KPMG International, Procurement Advisory Pulse Survey, 2014 1=Rarely/Never, 3=Sometimes, 5=Frequently/Almost always
  9. 9. © 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 8 Keys to increasing procurement value realization 1. Implement qualitative measures and a Return on Procurement measurement & assessment model to evaluate the full scope and value of the procurement function 2. Focus on execution to drive up value across the full scope of variables procurement can impact Show s what you can do and we will invest Customer and market needs Traditional and impacts focus on unit cost from suppliers Process efficiency and organizational effectiveness Supplier innovation and continuous improvement Enhanced design collaboration and optimization Comprehensive supply risk management Driving down cost Driving up value A single-minded focus on driving down input costs is not enough. Leading organizations focus more on driving up value from end-to-end across the business.
  10. 10. © 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 9 Procurement’s impact on risk management 1.00 2.00 3.00 4.00 5.00 Sales market risks Fraud/loss of intellectual property Currency risks Raw material price risks Organizational/process risk Supplier/supply chain risks Regulatory compliance risks 2.57 2.66 2.70 2.77 3.16 Risk Management Program Comprehensiveness  Risk management is recognized as a key to preserving and building value  Typically a minimal focus on Tier 2+ suppliers  Generally lacking in systematic breakdown of risk exposure  Respondents indicate current risk management capabilities and comprehensiveness are moderate at best: 2.59 2.74 1=Limited/Weak, 3=Moderate, 5=Comprehensive/Strong Source: KPMG International, Procurement Advisory Pulse Survey, 2014
  11. 11. © 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 10 Realizing procurement’s value – managing risk  Few companies report a comprehensive Risk Management program which facilitates: Assessment of risk in terms of probability and potential damage Segmentation of supply base by potential risk types Evaluation beyond Tier 1 or strategic suppliers Source: KPMG International, Procurement Advisory Pulse Survey, 2014 1=Rarely/Never, 3=Sometimes, 5=Frequently/Almost always
  12. 12. © 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 11 “Leading companies are harnessing data analytics & predicative modeling to manage potential impacts of short & long term risk trends.” John Tros, Head of Procurement Advisory practice, KPMG in the Netherlands Keys to managing Procurement Risk 1. Expand capability by creating a comprehensive risk management program  Monitor and actively manage procurement and supply chain risks as diligently as other financial and operating risks  Prepare a systematic breakdown of risk exposures  Segment supply base by risk types  Leverage newer (cloud-based) technologies to enable real-time compliance monitoring  Focus on people – to acquire, develop and retain the best resources to manage risk & compliance 2. Extend mitigation across Indirect supply and Tier 2+ suppliers 3. Monitor and actively manage procurement and supply chain risks as diligently as other operating units
  13. 13. © 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 12 11% 15% 44% 22% 8% None Few Some Most All Procurement Operating Model Client Accounts Planning or Actively Undertaking Formal Efforts to Significantly Change Procurement Operating Models  A majority of companies are indicating an appetite for strategic change/transformation initiatives  Interest in transformation of the Procurement Operating Model (POM) exists, however, most Procurement functions focus on tactical adjustments, ignoring the multi-dimensional enhancements that can be achieved through a POM transformation.  Those companies that are actively considering change/transformation appear to be trending toward adoption of more centralized or hybrid models Source: KPMG International, Procurement Advisory Pulse Survey, 2014
  14. 14. © 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 13 Optimizing the Procurement Operating Model 1.00 2.00 3.00 4.00 5.00 Greater tax efficiencies for the organization overall Higher revenue for the organization overall Overhaul/re-invigorate/transform the overall procurement function Higher profits for the organization overall Reduce/better manage risk as it relates to the procurement function Greater alignment with procurement function stakeholder needs Increase the measurable value that procurement brings to the organization Higher levels of procurement function operational efficiency 1=Rarely/Never, 3=Sometimes, 5=Frequently/Almost always Sought Achieved Benefits sought and achieved from changing the model  Companies that do transform their operating model are realizing the benefits – across many of the value dimensions sought  In fact, increasing measurable value is the #2 benefit sought, and in most cases achieved  Enhanced Risk management also ranks highly as benefit sought (and achieved) via POM transformation Source: KPMG International, Procurement Advisory Pulse Survey, 2014
  15. 15. © 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 14 Current/future Procurement Operating Models • Most indicate a shift toward centralized or center-led models • Hybrid and outsourced models are also gaining traction We asked what type of procurement operating model do clients have in place – now and in 24 months? “A hybrid procurement operating model may offer the best results, by balancing business proximity with purchasing power leverage.” Samir Khushalani Americas Practice Leader for Procurement Advisory Source: KPMG International, Procurement Advisory Pulse Survey, 2014
  16. 16. © 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 15 Keys to Procurement Operating Model value delivery To achieve maximum value, align the POM to key factors including the company’s unique strategic goals, operating environment and purchasing power levers. Multi-dimensional procurement performance improvements can be achieved via Procurement Operating Model transformation.  POM transformation has been shown to drive value in the 3 top-ranked priority areas: performance, business alignment and governance  As organizations transform, the benefits of past models are retained as procurement evolves into its new structure. 1. 2. 3. Hybrid operating models are enabling leading-edge organizations to unlock even further value from the procurement function. No single model can deliver its particular benefits indefinitely. Continuously monitor and adjust the model to ensure procurement function delivers sustained value. Three key findings: Takeaway…
  17. 17. Now is the time to focus less on driving down supplier’ prices and more on driving up value. KPMG.com/ValueofProcurement
  18. 18. Christian RastKPMG in GermanyT: +49 69 95870 E: crast@kpmg.comSamir KhushalaniKPMG in the US T: +1 713 319 3570E: skhushalani@kpmg.comJon TrosKPMG in the NetherlandsT: +31206 564056E: tros.john@kpmg.nlwww.kpmg.com/pulse © 2014 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independentfirms are affiliated with KPMG International. KPMG International provides no client services. 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 endeavour to provide accurate and timely information, 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 on such information without appropriate professional advice after a thorough examination of the particular situation. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

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