Supply management at a crossroads: Lessons for success in turbulent times

Expanding beyond its traditional role, the supply management organization in many companies has become a key contributor to overall corporate strategy, a source of competitive advantage, and a facilitator of profit growth. Supply and sourcing executives are also considering a growing array of risks, and building stronger alliances inside and outside the company. These issues, and others, were highlighted in a survey of sourcing leaders conducted by Strategy& in connection with the firm’s annual Strategic Sourcing Executive Forum.

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Supply management at a crossroads Lessons for success in turbulent times

Contacts

Berlin Nils Naujok Partner +49-30-88705-855 nils.naujok @strategyand.pwc.com Chicago Eric Dustman Partner +1-312-578-4740 eric.dustman @strategyand.pwc.com Düsseldorf Detlef Schwarting Partner +49-211-3890124 detlef.schwarting @strategyand.pwc.com Martin Kaltenbach Principal +49-211-3890177 martin.kaltenbach @strategyand.pwc.com Robert Weissbarth Principal +49-211-3890134 robert.weissbarth @strategyand.pwc.com

Houston Matt McKenna Senior Executive Advisor +1-713-650-4156 matt.mckenna @strategyand.pwc.com Mark Uffhausen Principal +1-713-650-4191 mark.uffhausen @strategyand.pwc.com London John Potter Partner +44-20-7393-3736 john.potter @strategyand.pwc.com New York Martha D. Turner Partner +1-212-551-6731 martha.turner @strategyand.pwc.com Jodi Miller Principal +1-212-551-6639 jodi.miller @strategyand.pwc.com

São Paulo Luiz Vieira Partner +55-11-5501-6212 luis.vieira @strategyand.pwc.com Shanghai Sarah Butler Partner +86-21-2327-9800 sarah.butler @strategyand.pwc.com Vienna Harald Dutzler Partner +43-1-518-22-904 harald.dutzler @strategyand.pwc.com

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About the authors

Pat Houston was formerly a partner with Booz & Company. Martha D. Turner is a partner with Strategy& based in New York. She specializes in driving operational and organizational transformation, with specific focus in sourcing for consumer, media, and retail companies, and she co-leads Strategy&’s North American sourcing business. Jodi Miller is a principal with Strategy& based in New York. She is a member of the operations practice, specializing in advanced sourcing offerings and procurement transformations, with an emphasis in organization and operating model design. She focuses in the consumer, media, retail, and financial services industries. Bruce Thelen was formerly an associate with Strategy&.

This report was originally published by Booz & Company in 2012.

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Executive summary

Economic turmoil, globalization, and bottom-line pressures are adding new dimensions to the work of chief procurement officers, sourcing organizations, and supply management teams. Expanding beyond its traditional role, the supply management organization in many companies has become a key contributor to overall corporate strategy, a source of competitive advantage, and a facilitator of profit growth. Supply and sourcing executives are also considering a growing array of risks — from currency fluctuations to commodity price volatility to political and regulatory uncertainty — as part of their supply strategies. In doing so, they’re improving the quality and diversity of their teams and building stronger alliances inside and outside the company. These issues, and others, were highlighted in a survey of sourcing leaders conducted by Strategy& in connection with the firm’s annual Strategic Sourcing Executive Forum.

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Introduction

Today’s supply management organizations are confronted with increasingly strong headwinds — from economic turmoil, globalization, variability in the cost of supply, and a host of other bottom-line pressures. This turbulence is unlikely to disappear; it is part of the “new normal” business environment. At the same time, supply management leaders are being asked to proactively manage against more variables than ever before — not only cost, service, and quality but also risk, complexity, and sustainability. We see in our survey data that the incremental value offered by supply management comes less from conventional cost and price levers and more from demand management and supplier collaboration. These latter levers require a shift from a traditional sourcing mind-set to more holistic category management in partnership with key stakeholders. In our research and work with clients, we observe leading-edge supply management organizations doing three primary things to create competitive advantage and improve margin. First, they are expanding beyond traditional boundaries to become key contributors to the overall corporate strategy and more integrated into the business agenda. Second, they are realigning their organization structures and operating models (governance, reporting, engagement, decision rights) to better meet their evolving business needs. Third, they are developing talentdriven organizations and enhancing the capabilities of their teams: their functional excellence along with a better ability to collaborate inside and outside the company. For most companies today, the supply management organization is the biggest business unit — given the size of the cost base it influences. Thus, your company’s ability to improve the bottom line is driven in large part by how well (and truly “strategically”) you can run sourcing as a value-added business unit. You don’t need to try to be best-in-class across all dimensions; the key is to find out where value resides in improved supply management for your company and the capability gaps that need to be filled to deliver that value in a sustainable way. We hope this article sparks your thinking about the challenges you face and what it will take to chart a path for success.
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Sample of companies contributing to the survey
• AB InBev • American Greetings • Applied Materials • Bob Evans • BP • Bunge • Caesars Entertainment • Cargill • Delphi • Diageo • Dover Electric • Dow Jones • DTE Energy • Encana Natural Gas • FedEx • General Electric • ITW • KeyBank • Kimberly-Clark • Las Vegas Sands Corporation • Modine • Newell Rubbermaid • PepsiCo • Pitney Bowes • Procter & Gamble • Reed Elsevier • Scotts Miracle-Gro • Simmons • J.M. Smucker • Sun Capital Partners • UBS • Walmart • WellPoint • Wolters Kluwer

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The trends that shape sourcing

Economic turbulence is everywhere. Volatile commodity markets, financially stressed suppliers, globalization, and increasingly complex customer demands challenge companies as they try to increase profits. Many chief executives look to their supply management teams to play a more strategic role in responding to these challenges, thus giving the function a broader impact on the business as a whole. These were some of the key trends highlighted in the Strategic Sourcing Executive Forum Survey, a survey of senior supply management executives developed by Strategy& in 2010 and 2011. This survey was conducted as a precursor to the exclusive Strategic Sourcing Executive Forums, hosted in 2010 and 2011 by Strategy& in Chicago. The firm will host another Strategic Sourcing Executive Forum in 2012. Supply management in this context includes everything related to the sourcing and procurement functions. This involves decisions about what to make versus what to buy, the selection criteria for sourcing, the design of the supply structure (including how many suppliers and what types of capabilities are needed), the selection of suppliers, the management of supplier relationships, and the operations that enable those relationships. The purpose of the survey was to invite supply management executives from a broad range of industries to share approaches and exchange ideas for addressing the challenges they face. Questions focused on the key capabilities that a sourcing organization needs in order to compete in an environment of rising cost pressures, increasing risk, globalization, and growing complexity. Survey respondents were executives with overall responsibility for the sourcing and supply management functions at Fortune 500 companies around the globe. In this report, we combine findings from 2010 and 2011 to provide an overview of the attitudes and observations of these individuals.

Many chief executives look to their supply management teams to play a more strategic role in responding to today’s challenges.

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The supply managers reported that of all the trends affecting their business, globalization is having the greatest impact (see Exhibit 1, next page). This is followed by such trends as demographic change and competition for resources. One key indicator of these trends is commodity market volatility, which has outpaced other forms of volatility such as currency fluctuations during the past five years (see Exhibit 2, page 10). For many procurement officers, this has highlighted the importance of proactively managing risk exposure, which can substantially impact a company’s financials. To meet these new demands, most sourcing and supply management executives are working to improve systems and standardize processes while they build more flexibility into their organizations (see Exhibit 3, page 10). The goal is to create stronger, more agile supply networks that can deliver value consistently even as markets, commodities, and currencies gyrate. Talent is the key. This means having the right people, processes, and tools in the right places to drive efficiency and effectiveness, and to ensure that the right skill sets are in place to meet the strategic needs of the business. Aware that traditional tactics are no longer enough, supply executives are enhancing existing approaches like category management while adding new capabilities like risk management. The trick is making changes that will yield future benefits while delivering the cost savings expected today.

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Exhibit 1 Which trends have the greatest impact on your business?
Average score 5 4.2 4 3 2 1 0 3.6 3.4 3.3 3.3 3.1

3.0

2.7

2.7

Globalization Demographic Redistribution Lifestyle change of wealth transformation

Race for resources

Environment

Educated individualism

Shift of powers (political)

Migration

Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

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Exhibit 2 Market volatility of commodities, January 2007-December 2011
Index 160 140 120 100 80 60 2007 2008 2009 Note: Volatility score is the standard deviation of ∑log(Pt/Pt-1). Source: Thomson Reuters/ Jefferies CRB Index; Strategy& analysis Commodities global index CAGR 1.1% Average volatility .055

Currency (dollars vs. euros) CAGR 0.4% Average volatility .028 2010 2011 2012

Exhibit 3 How is your sourcing organization preparing for longer-term trends?
% of respondents 100% 80% 60% 40% 20% 0% Focusing on better system & process standardization Building flexibility into org model Ramping up BRIC sourcing capabilities Better institutionalizing staff development Restructuring the supply base Source: Pre-event survey responses; Strategy& analysis 90% 70% 53% 50% 47%

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Taking sophisticated strategies to the “fringe”

Sophisticated sourcing strategies that focus on demand and value are proven profit producers. They are also the essence of a robust strategy for making make-versus-buy decisions. On the demand front, supply organizations can generate savings by working with business stakeholders to reduce consumption, harmonize specifications, and encourage the use of less expensive but functionally equivalent parts and materials. Value can be created in many ways, such as restructuring the supply base to create competitive advantages, and collaborating with suppliers to improve overall supply chain efficiency and drive innovation. But most supply management organizations still focus on negotiating tactically for the lowest price, leaving much of that potential untapped. More than half of the survey respondents said they use sophisticated strategies in only “some” or “a few” sourcing categories (see Exhibit 4, next page). Today, advanced methods are used mostly in direct materials-related categories. They’re relatively rare in the “fringe” categories of supply management: areas that have not traditionally been linked to sourcing or procurement, but where supplier relationships are critical. These include professional and legal services, plant materials, and MRO (maintenance, repair, and operations). Bringing more sophisticated techniques to these categories will yield substantial savings. Even in areas such as packaging and transportation, where companies are regularly using supply management strategies, more value can be captured by applying additional advanced methods. For example, a more sophisticated approach to the make-versus-buy decision can provide great value. Respondents underlined these opportunities by noting that traditional sourcing methods aimed at reducing prices still predominate across all categories, with a handful of exceptions (see Exhibit 5, page 13).

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Exhibit 4 In how many spending categories does your organization have robust sourcing strategies?
9 (36%)

8 (32%) 6 (24%)

2 (8%)

Almost all (90+%)

Most (~75%)

Some (~50%)

A few (~25%)

Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

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Exhibit 5 Identify the primary sourcing lever you employ for each category

Price Capital construction Capital equipment & assets Direct materials, engineered Direct materials, raw/commodity-based Finished goods/ components/assemblies Packaging Transportation & distribution 19% 23% 21% 24% 18% 29% 15%

Cost 38% 33% 36% 24% 32% 32% 33%

Demand 24% 23% 14% 35% 26% 21% 37%

Value 19% 20% 29% 16% IT & telecom 24% 18% 15% 100% Marketing & advertising Office supplies Professional services Plant materials (e.g., MRO) Plant services Corporate real estate management Human resources

Price 26% 25% 21% 19% 22% 29% 41% 39%

Cost 41% 42% 50% 33% 33% 21% 24% 26%

Demand 22% 25%

Value 11% 8%

7% 21% 24% 22% 29% 21% 13% 24% 22% 21% 14% 22% 100%

Note: Numbers may not add up due to rounding. Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

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End-to-end thinking

By focusing on the middle stages of the sourcing life cycle, and pushing suppliers to cut prices, supply management organizations have reaped significant savings and internal plaudits. Now it’s time to look beyond the middle of the sourcing process and focus on the ends. This means playing a more collaborative role up front in planning and defining the company’s requirements over the long term, and forging deeper relationships with a select group of strategic supplier partners. In other words, it is necessary to manage up-front demand and downstream supplier relationships more effectively. Although some companies have made progress in these areas, few have tapped much of the potential value available from this approach (see Exhibit 6, next page). That’s probably because capturing value at the ends of the supply management life cycle requires new thinking. Supply management must become trusted partners with the business stakeholders who determine requirements. Only then will they gain the credibility to influence requirements planning decisions. Similarly, the relationship with suppliers must go beyond lining up bidders for the next contract and playing them off against one another to get the lowest possible price. Forming partnerships with suppliers opens the door to cooperative efforts that wring more value out of the supply chain over the long term (see Exhibit 7, page 16). Supply management organizations seeking to improve performance tend to focus on internal processes and relationships (see Exhibits 8 and 9, pages 17 and 18). But the executives surveyed found that the greatest opportunities exist inside the company through demand management and outside the company with suppliers, through supplier collaboration and TCO (see Exhibit 10, page 19). Indeed, better collaboration with suppliers can pay big dividends, especially in this era of market volatility and economic uncertainty. It starts with understanding your suppliers’ capabilities — learning which is most advantaged to drive value in each segment. Each supplier’s unique, outside perspective can reveal opportunities that aren’t obvious to those on the inside of the supply management organization, helping to deliver more value throughout the supply chain, and creating benefits for both parties.
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Exhibit 6 How fully do your internal clients/stakeholders engage your sourcing/supply management organization in the following activities?
Percentage of respondents
4% 13% 29% 38% 38% 17% 17% Requirements planning 8% Demand management 29% 38% 25% 13% Suppiier selection & negotiations 4% Contract management 13% 13% Order process management 8% Performance measurement & tracking 13% Ongoing value management 33% 38% 17% 17% 25%

25% 8%

17% 25%

8% 25% 42% 21%

8% 25%

8% 17% 25%

50%

33%

13% 4% Sourcing strategy development

Sourcing life-cycle activities
NA Full, integrated engagement Good, consistent engagement Moderate engagement Ad hoc engagement No engagement

Note: Numbers may not add up due to rounding. Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

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Exhibit 7 Which factors outside your organization affect your ability to elevate performance and drive sustainable value?

Low 0 Engaging with internal clients to create shared annual performance targets Involvement in up-front requirements planning and ongoing demand management with stakeholders Engaging internal clients in creation and management of category strategies Ability to openly collaborate with suppliers to understand underlying costs Ability to collaborate with suppliers on innovative commercial solutions specific to yourcompany’s situation and challenges Managing strategic suppliers through well-developed performance measurement programs

High
1

2

3 3.05

4 3.90 3.76

5

2.90

3.05

3.90

2.90

4.05
Perceived importance Perceived maturity

3.06 3.11

4.11

4.26

Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

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Exhibit 8 How often does your sourcing or supply management organization use these tactics and strategies?
100% 20%

4% 28%

16%

12%

8% 16% 36% 36%

16%

4% 40%

4% 20%

4%

12% 28%

4%

36% 52% 40% 28% 12% 24% 4% Value engineering 20% Product teardowns 16% 8% 12% Detailed cost modeling 28% 12% 8% 16% 36% 44% 48% 24% 8% 20% Purchase through a consortium 48% 36% 12% 12% Restructuring the supply base  52%

36%

32% 28% 24% Direct investment in supply chain to gain access/ capacity 16% Tailored supply models based on unique demand characteristics

Internal Joint continuous continuous improvement improvement projects projects

Knowledge- Co-innovation based with sourcing/ suppliers should-be costing

Very frequently Often Sometimes Limited/rarely Not at all

Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

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Exhibit 9 Which skills will have the greatest impact in driving value at the category level?

Sourcing Activity Spend analytics

Level 1 (low)

Level 2

Level 3

Level 4

Level 5 (high)

3.0

Market intelligence

2.8

Cost modeling

2.6

Stakeholder collaboration

3.5

Negotiation capabilities

3.3

Supplier relationship management Ongoing category management

2.9

2.9

Average maturity

Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

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Exhibit 10 Which three levers will unlock the most untapped value for your organization?

Demand management

63%

Supplier collaboration

60%

TCO

53%

Supplier consolidation

37%

Operating model changes

37%

Process efficiency

23%

Compliance with supplier agreements 0

7% 10 20 30 40 50 60 70 Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

% of respondents

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The search for value goes beyond price
Listed are key themes from the survey and executive forum discussions. • Get strategic: Category managers must develop holistic end-to-end strategies, as opposed to just picking suppliers and negotiating prices. Own the category: Category managers should think of themselves as owners of their categories, treating each area as a separate P&L. Manage up-front demand and downstream supplier relationships: Supply managers create more value when they get out of the “middle” — supplier selection and negotiation — and manage the front and back ends of the sourcing life cycle. Taking a longer-term view of the company’s resource needs, they work with internal stakeholders to project demand and collaborate with suppliers to meet those needs over time. • Link to the business: Supply executives who know their company’s broader business strategy can plan better and contribute more to the bottom line. They say close cooperation with internal stakeholders is essential, and recommend joint accountability with other departments for hitting savings targets. Collaborate: Work closely with internal stakeholders and externally with select suppliers.







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Risk management moves to the fore

As risks multiply — from natural disasters to political upheaval and currency fluctuations — risk management is getting more attention in the C-suite. Supply management executives are at the center of the conversation, taking more responsibility for managing risk in the supply chain (see Exhibit 11, next page). Therefore, their role in risk management keeps expanding (see Exhibit 12, page 23). They can make a real difference in the company’s overall risk profile, because supplier relationships and performance directly affect several of the greatest potential business risks — commodity price volatility, product quality, and supplier capacity (see Exhibit 13, page 24). While product quality is identified as the risk with the greatest impact on the business, it is noteworthy — given how much of the cost of goods flows through the supply organization — that commodity price fluctuations are a close second.

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Exhibit 11 How is the sourcing organization involved in risk management?
Risk management is a cross-functional responsibility, shared by sourcing and other functions

22% 30%

Sourcing owns risk management (no separate function exists)

35% Sourcing partners with a separate risk management function

13% Sourcing is not involved (risk management is owned by a separate function) Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

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Exhibit 12 How has sourcing’s role in managing specific risks changed in the past three years?
100% 22% 26%

35%

22%

26%

22%

13%

52% 48%

52%

52%

57%

30% 39%

48% 17% Strategic risk 26% Supplier financial stability/health 22% Input cost volatility 26% Capacity constrained supply 30% Product/service delivery disruptions Product safety

35%

Product quality

Type of risk
Increased dramatically Increased slightly No change Decreased slightly Decreased dramatically

Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

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Exhibit 13 Rate the relative impact of each risk on your business

Risk element Product quality Commodity fluctuations Capacity constraints Currency Regulatory changes Suppler stability/solvency Social/environmental attributes 3.03 3.00 2.96 2.69 2.72 3.93 3.90

Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

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A strategic approach to risk

Risk management efforts are in their infancy at many supply management organizations. Most are working on some type of framework to assess the risks of their supply base, products, and services (see Exhibits 14 and 15, next page). Yet 45 percent of executives surveyed acknowledge they haven’t fully evaluated the risks their business faces (see Exhibit 16, page 27 ). Some also wonder if their contingency plans for critical suppliers, products, and services are adequate (see Exhibit 17, page 27 ). The most successful executives take a strategic, proactive approach to risk management. They start with a comprehensive assessment of all the risks that could affect the supply chain. Armed with this knowledge, they create a fully developed risk mitigation program with tailored strategies for each area of risk. This is where many companies fall short, using various tactics in an ad hoc way rather than creating an integrated program incorporating all relevant strategies (see Exhibit 18, page 28).

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Exhibit 14 My company has a framework for assessing risks to our supply base and/or products and services
Do not agree 5% Somewhat disagree Fully agree 32% 18%

18% Neutral 27% Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

Somewhat agree

Exhibit 15 My company has segmented the supply base across some element of risk

Do not agree Fully agree 18% 23% Somewhat disagree 5%

41%

14% Neutral

Note: Numbers may not add up due to rounding. Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

Somewhat agree

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Exhibit 16 My company has done a robust risk assessment across our supply base and/or portfolio

Fully agree 14%

Do not agree 18%

Somewhat agree

27%

27%

Somewhat disagree

14% Neutral

Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

Exhibit 17 My company has sufficient contingency plans in place for shortfalls affecting critical suppliers, products, and/or services

Fully agree 14% 14%

Do not agree

5%

Somewhat disagree

Somewhat agree

41%

27% Neutral

Note: Numbers may not add up due to rounding. Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

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Exhibit 18 How often does your company use the following tactics to manage risk?
100%

18% 23%

14%

9% 27%

9% 27%

14% 5%

5% 18% 45%

5%

14% 41%

5%

9% 18% 48% 59%

5% 5%

9% 18%

23%

55% 32% 18% 27% Do nothing 14% Shift risk to supplier 27% 27%

50%

36% 18%

45% 29% 14%

41%

27% 9% Shift risk to customer

5% 27% 9% Physical hedging 27% Financial hedging 41% 32%

23% 18% Tolling 9% Supplier redundancy

18% 18%
Modify specs

5%

14% Process redundancy

14% Geographic diversification

Backward Cointegration investment

Very frequently Often Sometimes Limited/rarely Not at all

Note: Numbers may not add up due to rounding. Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

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Views of risk management
Listed are key themes from the survey and executive forum discussions. • Risk is on the CEO agenda: Risk management is now a top priority for chief executives. Supply steps up: Supply executives are becoming risk managers, given the magnitude of the costs under their control. Dig deeper: Business continuity plans with Tier One suppliers aren’t • enough. Know your supply chain all the way back to raw materials. External scrutiny changes the game: Regulatory scrutiny is growing, and customers want transparency and accountability. Key elements of risk management: A risk management program must identify risks, calibrate exposures, establish a monitoring process, and plan for contingencies.







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Clear vision and critical skills

Transforming the supply organization requires a clear vision and the talent to carry it out. The top supply executive’s job is to articulate that vision in a way that wins support across the company by showing how it advances broader business goals. The plan should include specific dollar targets for savings and a timetable for reaching those targets (see Exhibits 19 and 20, next page). Communication is essential throughout the transformation. Supply executives should engage senior stakeholders early in the process, and develop a plan to keep them informed along the way with regular progress reports and updates as goals are achieved. Through this process, the sourcing organization can help the entire company cultivate awareness of the factors that lead to improvements in overall performance (see Exhibit 21, page 32). Talent is the other essential ingredient of successful transformation. Having talent with the right skills and capabilities beyond typical supply management knowledge is critical — especially strong communication, commercial, and analytic skills. Successful organizations employ team members with diverse backgrounds. In addition to traditional procurement experience, they look for expertise in areas such as engineering, finance, and R&D, as well as experience in other industries (see Exhibits 22 and 23, pages 32 and 33). An incentive package combining financial rewards with opportunities for career growth is key to attracting and retaining high-performing talent. Executives responding to the survey believe that tying compensation to results, particularly hitting the targets of the strategic plan, rewards talent while achieving results for the business (see Exhibit 24, page 33).

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Exhibit 19 How far ahead does your organization look in shaping its strategic vision?

5-10 years 13% 9%

1 year

17%

1-2 years 

61%

3-5 years

Source: Strategy&

Exhibit 20 Which elements does your strategic plan include?

Annual savings forecast Road map for pursuing annual savings targets Key categories and timing to pursue value Road map for organizational capability development Market forecast for key categories Implementation feasibility for value opportunities Communication plan Change management plan No strategic plan currently in place 0 6 7 7 10 13

20 19 18

Source: Strategy&

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Exhibit 21 Which factors in your organization help improve performance?
Low 0 Establishing and adhering to a clear strategic vision Creation of documented policies and procedures with related governance models Access to timely and accurate market data to inform commercial decisions Developing a robust supply management human capital plan Mandating minimum “commercial/business” training requirements for all supply management employees Capturing and sharing organizational knowledgethrough a structured knowledge management process High 5 4.50

1

2

3

4 3.41 3.77

3.23

3.09

4.00

2.77 3.45

4.23
Perceived importance Perceived maturity

2.68

2.59

3.50

Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

Exhibit 22 What skills do you consider most important for supply management employees?

28%

30%

9%
22% 30%

4%

13%
43% 39%

4%

35%

26%

100%

43%

35%

43%

48%

39% 35% 9% 43% 26% Relationship management

57%

26% 4% Strong analytics

30% 4% Complex problem solving

17% 9% Deep category expertise

9%

9%

Deep knowledge of the sourcing life cycle and processes

4% Knowledge of "commercial" terms/business acumen

9% Project management

17% Communication skills (oral and written)

Note: Numbers may not add up due to rounding.
Extremely important Very important Important Somewhat important Not important

Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

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Exhibit 23 What percentage of the supply management employees you hired in the last three years came from outside your company?

Nearly ALL external hires 51%-75% 4% 39% Less than 10% 9%

21%-50%

30%
Note: Numbers may not add up due to rounding.

17% 10%-20%

Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

Exhibit 24 Where are the greatest opportunities to better align employee incentives with strategic goals?

Competitive salaries

35%

57%

9%
NEED Little to no opportunity Good opportunity Significant opportunity

Consistent/competitive merit increases

22%

70%

9%

Monetary bonuses Non-monetary incentives for employees (e.g., broader organizational recognition, one-on-one with CPO/CEO) Non-monetary incentives for sourcing/ supply management organization (e.g., celebration event)

26%

52%

22%

9%

57%

35%

Note: Numbers may not add up due to rounding. Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

22%

57%

22%

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Profit pressures call for new skill sets

As economic turbulence squeezes profit margins, companies are turning to the supply management organization for help. Over 50 percent of executives surveyed said they are expected to deliver more than 3 percent annual savings to the bottom line (see Exhibit 25, next page). These new expectations mark a fundamental change for the supply management organization, elevating its role in corporate strategy and increasing its accountability for bottom-line results. A new type of leader is emerging from these expectations, as companies redefine the role of the chief procurement officer and increase its prominence in the corporate hierarchy. As a result, many CPOs are relatively new to their positions, with tenures of less than three years (see Exhibit 26, page 36). As a first step, many of these new leaders are realigning their organizations to facilitate the closer working relationships with stakeholders and suppliers needed to meet their expanding mandates (see Exhibit 27, page 37 ). At the same time, the new leaders are assessing their organizations’ capabilities to better understand the gaps that must be closed to drive more value across the supply chain. Executives surveyed said the widest gaps are in employee sourcing capabilities and skill sets, the engagement model with internal stakeholders, and the linkage between performance and financial budgeting (see Exhibit 28, page 38). To fill the gaps, executives are spending more time on talent development and human capital planning.

To fill the gaps in their organizations’ capabilities, CPOs are spending more time on talent development and human capital planning.

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Exhibit 25 How much additional profit is your sourcing organization expected to contribute to the company’s bottom line?

31%

24%

17%

10% 7%

10% Note: Numbers may not add up due to rounding. Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

0%-1%

1%-2%

2%-3%

3%-4%

4%-5%

5%+

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Exhibit 26 How long has the current head of procurement/sourcing at your company been in the job?
2010 responses
5-7 years 7-10 years
3% 3% 17%

2011 responses
NA Less than 1 year More than 10 years
8% 4%

Less than 1 year
12%

3-5 years

21%

5-10 years

12%

32%

1-3 years

32% 55%

3-5 years 1-3 years

Note: Numbers may not add up due to rounding. Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

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Exhibit 27 When was the most recent realignment of your sourcing organization?

More than 7 years 5-7 years 3-5 years
3% 3% 10% 31%

Within the last year

Note: Numbers may not add up due to rounding.
55%

1-3 years

Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

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Exhibit 28 Which elements of your operating model are most important to capturing value?

Operating model element Sourcing organizational structure Sourcing capabilities & skill sets Defined roles & responsibilities within the sourcing organization Well-delineated engagement model with stakeholders (e.g., decision rights) Systems & tools that support value measurement Linkage to financial budgets Clear source to pay processes & policies Executive-level mandate or support

Level 1 (low)

Level 2

Level 3
3.3 3.3

Level 4
3.8

Level 5 (high)

4.6

3.3 2.9 2.8

3.6

3.9 3.4
Average maturity

2.8 3.2 3.4

3.8

Average importance

3.8

4.4

Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

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An integrated road map to reach the next level

While they work to build organizations capable of delivering more value over the long haul, supply management executives must meet continuing demands for short-term savings. How can they do both? The key is identifying the potential value to the company from better sourcing opportunities, and developing the distinct capabilities within the sourcing function that can best deliver this value (see Exhibit 29, next page). The highest-priority areas for investment within the function are the most strategically relevant gaps in supply management proficiency, in alignment with the needs of the firm as a whole. Though there may be room to improve in many areas, organizations should focus on only two or three at a time, knowing that it may take several years to reach the goal. What’s needed is a strategic road map outlining these strategically relevant capabilities, the planned enhancements, and the expected financial benefits of the supply management strategy. The road map should show how actions to harvest short-term savings finance the longer-term upgrades that produce sustainable benefits. Effective road maps also reposition or rebrand the supply management strategy by showcasing the enhancements to the organization and its impact on the company (see Exhibit 30, page 41), ultimately creating an attraction model for collaboration.

The highestpriority areas for investment are the most strategically relevant gaps in supply management proficiency.

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Exhibit 29 Have you identified the few differentiating capabilities that will improve your organization’s performance?
Limited insight No formal/broad-based assessment completed recently; insight based more on intuition and anecdotal evidence Yes Clear line of sight to and actively working against a plan to develop those capabilities 33%

14%

Some insight Assessments have been completed for different areas of the organization inconsistently surfacing common themes around capability gaps; still trying to clarify focus areas and develop a plan to act

38% 14%

Yes Clear line of sight to priority capability enhancements; no concrete plan yet for how to develop those capabilities

Note: Numbers may not add up due to rounding. Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

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Exhibit 30 Has your organization repositioned or rebranded itself within the last 3 years? What was the purpose?
Number of responses To communicate a new organizational structure or role To raise awareness of organizational capabilities To engender stronger partnerships with key stakeholders
43% No 57% Yes

10 9 9 5 5 4 1

To communicate and pursue savings targets To attract top talent to the organization To communicate processes and ensure compliance Other

Source: Strategic Sourcing Executive Forum Survey; Strategy& analysis

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Taking your organization to the next level
Listed are key themes from the survey and executive forum discussions. • Talent is key: A high-impact supply management organization needs the right mix of commercial skills, category expertise, and general organizational knowledge. Deliver today, build for tomorrow: Supply management executives must reap short-term savings to fund long-term improvements. Focus on the bottom line: CPOs should “own their P&L” and show the bottom-line impact of sourcing improvements. • Working across boundaries: Communication and facilitation are needed to work effectively outside the domains traditionally associated with sourcing and supply management. Leadership: The new chief procurement officer plays a more strategic role with heightened expectations to deliver value for the company.







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Resources

Strategy& Sourcing Profiler (sourcingprofiler.strategyand.pwc.com/). Strategy& Sourcing Web page (www.strategyand.pwc.com/global/home/ what_%20we_do/services/operations/ops_service_areas/48218132). “Procurement’s New Operating Model,” by Patrick W. Houston and Robert Hutchens (Strategy&, 2009). www.strategyand.pwc.com/media/uploads/ Procurements_New_Operating_Model.pdf “Sourcing Transformation,” by Patrick W. Houston, Detlef Schwarting, and Martha D. Turner (Booz & Company, 2009). www.booz.com/media/uploads/ Sourcing_Transformation.pdf “Evolving Supply Management Leadership: A Blueprint for CPO Success,” by Martha D. Turner, Rohit Singh, Bruce D. Thelen, and Jim Davis (Strategy& and Russell Reynolds Associates, 2011). www.strategyand.pwc.com/media/ uploads/Strategyand-Evolving-Supply-Management-Leadership.pdf Join the Strategy& Sourcing & Supply Management Group.

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Strategy& is a global team of practical strategists committed to helping you seize essential advantage. We do that by working alongside you to solve your toughest problems and helping you capture your greatest opportunities.

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This report was originally published by Booz & Company in 2012.

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© 2012 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. Disclaimer: This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.