Designing a Demand-Driven Supply Management Organization
From AMR Research/Mickey North Rizza, Lora Cecere
This Report will focus on defining procurement organizational structures and sharing insights on how to transform the organization to become demand-driven in supply management. It concludes with five key lessons learned from IBM's organizational transformation in becoming a demand-driven supply management leader.

Historically, the pendulum swings between divisional and corporate procurement structures. Each has advantages:

1. Divisional control improves alignment and service to internal customers

2. A corporate procurement organization allows the aggregation of spend across units enabling tighter control of procurement processes. This one face to the customer streamlines many of the processes.

Not surprising, mature organizations want the best of both worlds: high internal customer service with greater control. This has given rise to a hybrid organizational structure—the shared services model.

Process flows in these three models are quite different.

Model A: divisional (decentralized)—In this model, the request-to-cash process is aligned by division, with sourcing control and procurement execution by the divisional personnel.

Model B: corporate (centralized)—Through the consolidation of processes across divisions, requests from multiple divisions are funneled to a corporate buying organization to execute aggregate buying strategies, Payables may be executed by corporate services or at the local divisional level.

Models C and D: shared services—In either model outlined in Figure 1, the shared-services organization performs both sourcing and procurement centrally, with the flow of costs back to the division based on centralized intra-company invoicing or intra-company invoicing by one division to others. In each of these models, the shared services group is operating as a cost not a profit center.

Today we see a migration to the shared services model in large organizations, and to corporate control in midmarket companies (revenue less than $1B). However, the secret to model success—and where we see a number of organizations losing their way—is in definition and delivery of customer service to the internal organization.

In November 2005, we asked 264 North American companies to provide insight into their supply management organizational structures. From this survey, we found the following:

1. 43% of respondents use the divisional model.

2. 46% use the corporate model.

3. 11% of companies operate in a shared services model.

This varies somewhat by the type of company—manufacturing versus services—and by type of spend.

From this survey, we note several trends. The most complex and most common organizational structure—found in mature DDSN supply management groups—is the shared-services model.

Divisional procurement remains the predominant model for the management of direct materials in manufacturing companies. With divisional procurement models, companies have the ability to more quickly react to changes in demand. The power of one face to the supplier, however, is lost. Frequently, divisions are played against each other by the suppliers.

In most of the companies interviewed for this study, AMR Research found companies operating with multiple organizational structures. The need to manage a mix of organizational models with differing requirements by spend type expands the requirements for supporting technologies.

An example of the use of multiple organizational structures for multiple commodity classifications is a $20B metals producer and fabricator. In 1980, it organized its procurement organization into a centralized corporate structure. Though the results met corporate expectations, business units wanted improved customer service and greater ability to sense and react to demand changes. In 1989, the company returned to a decentralized organization.

Nine years later, in order to regain spending controls and vendor leverage, it restructured once again into a corporate procurement environment. The results were impressive in the area of savings, spend control, and leverage. While it may have been a good decision to go divisional at the time, the business climate changed and it led the company back to a centralized model.

By 2001, the company had achieved great cost savings, but needed to achieve even more success in savings, productivity, and customer requirement management. It regrouped to focus on seven key areas:

1. Delivery of real bottom-line benefits affecting profitability

2. Offset commodity raw material increases

3. Leverage the business and scale

4. Improve spend portfolio information and reporting

5. Increase ”touchless” transactions

6. Re-engineer processes to ensure value sustainability

7. Create a higher value organization at a lower cost

These focus steps transformed the organization into a hybrid model consisting of global centralized procurement and a shared services environment. The global organization represents three centers of excellence:

Customer management—Shared services organization of regional procurement operations focused on operational service.

Market management—Corporate organization of commodity managers focused on supply market management and commercial leverage.

Global center of excellence—Focused on people, process, and information management for functional excellence. This restructure brought $474M in benefits and sustained value creation to this metals producer and fabricator.

Organizations may use multiple organizational structures that can change throughout the journey. But, in the most successful transformations, the right organizational structures are designed to fit the business strategy.

Service-oriented companies—e.g., banking, healthcare, hospitality, insurance, and logistics—have been early pioneers in defining workflows for shared services organizations as well as validating the value proposition for indirect and services spend. Manufacturing leaders should benchmark procurement and sourcing practices against some of these shared services leaders, such as Disney.

For Disney, a recognized leader in hospitality and entertainment, its 2004 annual report says it all: “…established our Strategic Sourcing and Procurement organization in 1999…and at the end of fiscal 2003, this organization was delivering annualized purchasing savings of more than $400M per year.” At a public event in 2005, a Disney spokesperson stated that these savings were equal to the funds required to build their new theme park in Asia.

In manufacturing companies, through the study, we confirmed the following trends:

Process-based manufacturers lag discrete manufacturing firms in the design of organizations and the refinement of supply management processes.

Midmarket companies are less mature in their supply management capabilities than large companies.

In manufacturing, while 66% of procurement organizations report to the VP of supply chain, we seldom see a clear understanding and appreciation of supply management technologies by supply chain management (SCM) leaders. Why? There are two primary reasons:

Supply management and SCM applications were developed in separate silos with little process overlap, technology integration, or cross-functional understanding. We're just beginning to see them merge.

The VP of SCM usually only appreciates the requirements of direct materials sourcing. As a result, they can undervalue the benefits of today's more mature supply management technologies for indirect, maintenance, repair, and overhaul (MRO), and services spend.

In contrast, manufacturing leaders have first focused on the implementation of demand-driven supply management practices in the areas of more mature technologies—indirect and services procurement—with later applicability to the management of direct materials. References are GlaxoSmithKline (GSK) and HJ Heinz. The Heinz annual report stated that “Heinz continued to pursue opportunities in e-sourcing, which was used to purchase more than $700M in ingredient and packaging materials during fiscal 2004.”

Supply management is becoming more important to the manufacturing agenda. In the 1990s, SCM processes were largely defined by manufacturing, with little input from supply management. Today, with the higher standards of contract compliance from Sarbanes-Oxley Act (SOX) regulations and the evolution of supply networks with multi-tier global sourcing, the business requirements have grown, with the role of supply management growing in importance as well.

Case study: IBM's supply management transformation
The largest organizational transformation with the greatest impact in both services and manufacturing is IBM. This case study remains one of the best examples of driving transformation through the creation of a shared services model for demand-driven supply management.

In the early 1990s, IBM knew it needed to change. It had hundreds of procurement organizations, $44.5B in total spend to manage, and its business was becoming global. Through a progressive development plan, the company forged a demand-driven supply management strategy. The results were dramatic: $6.5B in savings over fifteen years.

A unique feature of this case study is how IBM defined success. The team used one of the most comprehensive sets of customer service metrics (outlined in Table 2) that AMR Research has seen. Today, based on success of the transformation, IBM Global Procurement uses the same model to operate a shared services center in business transformation outsourcing (BTO) for companies like Colgate-Palmolive and Solectron.

IBM's lessons learned:
Build internal capabilities—IBM focused on building sourcing capabilities over many years. This was coupled with the definition of business controls and internal audits. Driving this transformation was a systematic program of training, process standardization, and internal audits.

One face to the supplier—As the result of the transformation, suppliers went from dealing with hundreds of organizations within the company (with an average of five contracts per supplier) to having one point of contract within IBM. Supplier interaction was simplified through the redesign of the organizational structure, contracting processes, implementation of paperless procurement, and use of portal technologies for supplier collaboration. The power of one face to the supplier is lost in a divisional structure, allowing suppliers to play divisions against each other.

Global is more than language and culture—To source globally and execute locally, IBM redesigned the organizational structure, metrics, and enabling technologies. Especially notable in this case study is the structure. It formed nearly two dozen global commodity councils to focus on the management of global strategies by spend type: marketing and advertising, information technologies, facilities, human resources, business specific (e.g., MRO, chemicals, office suppliers, etc.), and direct materials.

A transformational event—In the words of IBM, “business is not about automation, it is about driving a new way of doing business. You must start with strategy and end with technology.” It is for this reason that IBM remains a leader in demand-driven supply management.

Form follows function—To use the key learnings of the IBM case study, start with strategy, build the right organization, and end with technology. Unfortunately, companies too often start with technologies. With the evolution of shared services models and paperless procurement, the requirements for contract management, collaborative workflow, and supply management analytics have increased. It is imperative that companies start with a clear definition of the business process, define a supporting organizational structure, and then implement technologies.

As organizations become more global, with spend growing due to the outsourcing of services, manufacturing, and logistics, we can learn several lessons from leaders like Disney, IBM, GSK, and Heinz in driving organizational transformation:

Start with the vision. The goals of any transformation need to span procurement and sourcing for all types of spend. Leaders understand that supply management is hard to generalize, and that each spend type requires the focus of experts. Build global commodity councils to deliver the strategy.

Build credibility into the process. In many of the interviews for this research, we kept hearing the same theme from many companies: “If I had all of the money that the procurement organization has saved over the last years with their new technologies, I could fund a new company.” Because many projects have not established a way to measure, audit, and track savings, they lack internal credibility.

In driving demand-driven supply management organizational initiatives, companies can learn from GSK. Its leadership solved this problem early in the project by defining a process where cost savings could only be declared when approval and signoff by both finance and its internal customer was satisfied. Then and only then, could the savings count towards the goal or employee bonuses.

Stay the course. While the savings have some of the highest return on investment (ROI) of any project tracked by AMR Research, the payoff happens over time—for IBM it has been a decade—with a focus first on outward-facing benchmarking, followed by many years of building internal capabilities and supplier relationships. It cannot be achieved through an IT project orientation. Instead, multiple projects must be architected under a change transformation roadmap.
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