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With cost savings across all spend types still a top priority for businesses, leaders are integrating sourcing and procurement into business, product, and customer joint value creation strategies to enable value chain responsiveness and innovation.
In discussions with more than 40 leading organizations, system integrators, and vendors, AMR Research found that the vision for sourcing and procurement is becoming embedded in value chain relationships, with a focus on delivering profitable perfect orders and innovation to customers. Our benchmarking studies across all industries validate the importance of best-in-class sourcing and procurement performance. Companies with better supplier on-time delivery performance hold half the raw material inventory (17 days versus 35 days) and have an eight percentage-point better perfect order performance.
Our research also highlights that the split between direct and indirect spend categories across different industries makes a material difference on the metrics and priorities of the sourcing and procurement strategy.
We have disbursed our findings into seven broad categories:
1. Organization and leadership--In leading companies, value chain executives already guide sourcing and procurement strategies to provide profitable relationships with customers, suppliers, and partners. More mature companies have sourcing and procurement reporting into a supply chain leader who also owns manufacturing and, in many cases, engineering/R&D and customer service as well. To achieve this vision, the sourcing and procurement strategy must be aligned with the business and programs such as the voice of the customer, demand response, open innovation, lean, and sales and operations planning (S&OP). The debate is no longer about centralized or decentralized structure, but rather on how to achieve outside-in, optimized spend management. Leading companies proactively involve the chief procurement officer (CPO) in business and strategy planning as part of the supply chain team.
2. Skills and talent--Across all industries, there is a shortage of skilled supply chain and sourcing and procurement professionals. In order to address this gap, 90% of companies interviewed have cross-functional education and rotation programs in place to develop and retain deeper strategic thinking and global supply chain skills and experience.
3. Performance measurement--As the ability to save costs goes down, employee and supplier performance measurement and development programs identify the lowest total cost of ownership and cost avoidance while improving efficiency, effectiveness, complexity reduction, responsiveness, and innovation. We see companies building out their internal and supplier scorecard metrics to encourage identification of opportunities to improve supply chain, process, and product performance by aligning closer with customer needs.
4. Cost/value tradeoffs--Risk management, complexity reduction, and sustainability must be factored into the process, through which companies use leverage and make tradeoffs in decision making, and embedded into the supply chain strategy. Hewlett-Packard's (HP) Procurement Risk Management (PRM) program is probably the best example of an embedded strategy. Although it focuses on risk mitigation, HP's PRM has led to huge savings. Across industry types, the importance of spend type, product margins, and portion of direct cost in products creates the priority--for example, the life science industry with high margins and low material costs focuses on indirect spend versus project and engineering-based A&D, where more than 80% of spend is on direct focus in this area.
5. Business processes--Multitier visibility, business process automation and outsourcing, workflow management, and lean are the cornerstones of sourcing and procurement transformation. Companies are reengineering sourcing and procurement strategies and measurement practices that were based on centralized shared service capabilities to deliver economies of scale to now deliver the outside-in demand responsiveness required in the value chain strategy.
6. Innovation--Leading companies use sourcing and procurement to link the value chain to external upstream and downstream sources of innovation, such as Procter & Gamble's (P&G) Connect + Develop open innovation program. Supplier innovation improves product and process differentiation, but requires sourcing to be involved early in the design process. A CPO of a leading global consumer goods company plans to include supply-chain-competent procurement leaders in customer account planning meetings. Leading companies also focus on innovative ways of streamlining and cost savings on indirect (auctions in healthcare, for example).
7. IT strategy--The portfolio of current supply chain and procurement applications provides a solid and necessary foundation, but is not sufficient to support the global value chain strategy. Leaders are adopting a new category of web-service-based business process applications to extend global visibility and processes outside of the traditional four walls of the buying organization.
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