It is no small order for the procurement organization and it cadre of professionals to promote growth, guard supply and contain costs given the volatile economic conditions today. Procurement must not only continually reshape and manage the supply base in this environment, but also retool itself technologically to operate globally. As expectations for service increase, business support organizations, including procurement, are responding by prioritizing the building and strengthening of core capabilities, such as agility and excellence in operations.
Executives are cautiously optimistic about growth for the enterprise overall in 2012. Management priorities for the coming year look both inward and outward for opportunities to grow top-line revenue and bottom-line profits. The percentages of companies emphasizing growth, operating margin and presence in emerging markets have all increased over prior years. This will involve making difficult trade-offs between actions that may benefit one objective but detract from the success of others.
Procurement executives will be tested as they are held increasingly accountable for balancing their organization's strategies for supporting revenue growth with activities that will maintain or improve profit margins. Luckily, those organizations that achieve high stakeholder alignment are well-positioned to support revenue growth, not just through traditional product/service development, but across numerous scenarios. These scenarios may possibly overlap; for example, entering an emerging market might exploit all of these initiatives.
Given that traditional, developed markets remain in a no-growth or slow-growth mode in most industries, globalization is critical for enabling revenue growth. This fact is not lost on procurement executives. The topic of increasing emerging-market presence expanded more than any other key issue compared to last year's study.
Previous Hackett research, such as "Globalizing Procurement's Service Delivery Model, Not Just the Supply Base" and "Procurement Is Primed for Leadership Role in Services Globalization," explored procurement globalization trends, but this year's Key Issues study really highlighted the level of planned transformation occurring over next two to three years. The data shows that procurement - as well as finance, HR and IT - have all lagged other aspects of the business, such as product development, customer strategies and supply chain, in becoming more global. In most cases, there is no reason that these functions cannot function equally well on a global scale, sharing resources and ideas while working toward shared objectives. It is clear that they are now moving in this direction. If they are successful, their ambitious plans will nearly triple today's level of globalization within two to three years.
The planned increase in the globalization of corporate culture will provide the support for achieving greater globalization in every function. Achieving a shared mindset and understanding of what globalization means for the business will make clearer what it signifies at every level of the company to be executing truly globally. Companies need to prepare for this shift, creating the platform for making decisions about which processes and services will be controlled globally and which will retain local control.
Not only will procurement need to align to functional partners like product development, supply chain, and sales and marketing that are going global, but 34 percent of business support organizations - and this includes procurement - expect their operations to be primarily globalized soon, as compared to 13 percent today. However, global operations are also highly exposed to another global phenomenon: volatility.
A hallmark of the current business environment is the permanent volatility faced by companies across a variety of inputs to and outputs of their operations.
Input prices, customer demand and talent availability are all expected to be high throughout 2012; these, along with nearly every other factor measured, are expected to have greater volatility than in the pre-crisis period of 2003-2007.
Input cost volatility is not the only thing to hedge in strategic sourcing. Supply volume depends on demand volume (and, therefore, on demand volatility); profitability depends on output price volatility, exchange-rate volatility, tax rates, capital costs and many other factors. Therefore, organizations must develop a competency in what we call "supply agility" - supply base agility, contract flexibility and even the agility of the procurement function itself.
Supply volatility is also driven by supply chain risk. Since supply volatility is also driven by supply chain risk, it goes without saying that supply chain risk is front of mind for supply executives. In fact, managing supply risk ranks fifth in our 2012 Procurement Key Issues Study, and third in our 2012 Supply Chain Key Issues Study.
As organizations place higher "option value" on a supply chain and supply base that are more localized, dual-sourced and generally more risk-resistant, procurement activity will necessarily increase in sourcing, supplier management, risk/compliance management, etc.
Over the last decade, procurement has made a huge turnaround in its service orientation and its ability to influence stakeholders to systematically improve supply base performance. Now, with activity in procurement governance, risk and compliance expected to increase, the corporate purse strings are being loosened slightly, and procurement organizations anticipate a small uptick both in budget and full-time employees. (The fact that FTE growth is outpacing budget growth is indicative of a lower average wage rate, likely driven by globalization of procurement FTEs.) This trend is evident not just in our procurement benchmark and in the procurement customer satisfaction surveys that we help Procurement Advisory Program members execute, but also in the Key Issues study.
Interestingly, stakeholders are happier with the performance of procurement than they are with the performance of the supply base. This indicates that procurement remains boxed into a narrower operating model for purchased cost reductions, rather than broader supply base performance. This is one of the reasons that supplier relationship management is such a hot topic right now.
Procurement will need to do a lot more in 2012 with basically the same resources it had in 2011. To continue self-funding its evolution toward a higher-impact global Service Delivery Model (SDM), therefore, it needs to find a way to further reduce its costs.
Procurement organizations in the study plan to increase their percentage of FTEs in low-cost regions from the present 16 percent to 25 percent by the end of 2013. Today, much of this is being accomplished by pushing routine, repeatable processes to offshore service centers, but over time, higher-value work, such as tactical sourcing and market intelligence, will be increasingly shifted to external service providers In the Process Design component, we wanted to gauge the increase in global process ownership based on process scope. For example, an organization may establish global process ownership of a lower-level process such as catalog management within a Global Business Services organization, but may also have global process owners for a process group, such as sourcing and supply base strategy. The broader the process scope, the more impact global process ownership will have. The study indicates that, while currently the lion's share of global process ownership is at the function and process-group levels, the biggest changes will be occurring at the cross-functional process level. Moreover, we expect that procurement will increasingly own the source-to-settle and purchase-to-pay processes, even though procurement itself may report to finance or to a Global Business Services organization. The shift in the SDM is not always driven by procurement itself, but sometimes by a broader organizational movement toward globalization and outsourcing of business support services. Regardless, the planned transformation activity is quite broad in scope, hitting on multiple value levers. These activities are not necessarily being implemented within functional silos, nor should they be; the perfect time to simplify and standardize processes, policies and data conventions (e.g., category coding taxonomy) is during an upgrade of procurement applications. In the same vein, outsourcing non-core processes usually provides a good opportunity to transform those processes.
The coming year will test the mettle of every procurement organization. Many objectives need to be balanced, such as:
• Supporting enterprise efforts aimed at finding new sources of revenue while experiencing low investment or even cuts in the function's budget.
• Standardizing and systematizing processes amid volatile operating conditions.
• Driving more value from existing talent and technology.
• Anticipating and mitigating the effects of supply volatility through a multi-pronged "supply agility" approach.
• Coordinating disparate transformation efforts within procurement and across the company.
• Providing more value-added analysis and services to the business while maintaining transactional efficiency and effectiveness.
• Operating more globally while addressing the unique needs of local markets.
Procurement can only be successful if it fully embraces a global operating model. Function leaders should identify the attributes which will be of greatest help in achieving this goal, such as agility and excellence in execution, and set out to establish or strengthen associated capabilities.
Pierre Mitchell is senior research director, Procurement Executive Advisory Program; Christopher S. Sawchuk is procurement practice leader; and Lynne Schneider is senior research director.
Sidebar: The top five supply chain issues in 2012
1. Improving supply chain flexibility/agility.
2. Improving cross-organization collaboration in planning, fore- casting and visibility.
3. Managing supply chain risk.
4. Mitigating rising/volatile costs of raw materials or components.
5. Optimizing manufacturing and/or distribution network capacity and capital efficiency.
Source: Supply Chain Key Issues Study, The Hackett Group, 2012
The Hackett Group
Keywords: Sourcing & Procurement Solutions, Supplier Relationship Management, SC Finance & Revenue Mgmt., Technology, Supply Chain Security & Risk Mgmt, Business Strategy Alignment, Supply Chain Analysis & Consulting, Global Supply Chain Management, agile supply base, sourcing and procurement strategy, financing procurement process
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