RESEARCH BRIEF MAY 2015 How Best in Class Companies Embrace Operational Excellence to Drive Procurement and Supply Chain Performance

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How Best in Class Companies Embrace Operational Excellence to Drive Procurement and Supply Chain Performance

Introduction Enterprises today are under enormous pressures. They must keep supply chain costs low, innovate with new products and services, and respond to rapid changes in how products are marketed and sold, while executing their operations within an increasingly volatile, complex world. Responding to all these pressures and executing well in these volatile times makes operational excellence imperative. Many leading companies have adopted Operational Excellence programs that establish a framework for supply chain performance improvement. While there are many definitions of Operational Excellence and various approaches to excellence programs, at its core, Operational Excellence is about creating value for the enterprise on a continuous, measurable basis. Value can be derived from lower procurement costs, a more resilient, risk tolerant supply chain, and improvements in customer service. As the world becomes more e-commerce driven, value also is created by excelling at logistics and fulfillment, being first to market with new products, and by rapidly capturing new channel opportunities. Operational Excellence and Procurement Excellence programs vary by company, but they might span all these areas of value creation and more. While reducing the cost of purchased materials is a high priority for most companies, Procurement Excellence programs might also address priorities such as supply chain risk and resiliency, supplier management, and leveraging partnership agility to capitalize on new markets, or corporate sustainability objectives. In sum, Operational Excellence and Procurement Excellence initiatives are about value creation and measurable improvement across those goals critical to the success of a business. Examining how the most successful companies approach Operational and Procurement Excellence provides insight into how companies might better attain their operational and strategic supply chain goals. In a recent study sponsored by IHS, Inc. and conducted by Peerless Research Group (PRG) on behalf of Supply Chain Management Review, 236 leading supply chain executives provided insights on the efficacy of their procurement and sourcing operations. Specifically, the research examines how implementation and proper execution of programs such as Operational Excellence and Procurement Excellence provide supply chain executives with the direction needed for making key strategic decisions necessary for running highly proficient procurement and sourcing operations. In particular, this research brief examines companies whose procurement practices successfully contribute to their company’s business accomplishments, in combination with their adoption and approach to Operational and Procurement Excellence. The practices and characteristics of these companies are contrasted with organizations that deem themselves less successful in meeting procurement and sourcing goals for their companies, and report lower adoption of excellence initiatives. These business segments are referenced as Best in Class and Laggard, respectively.

1 How Best in Class Companies Embrace Operational Excellence to Drive Procurement and Supply Chain Performance

Best in Class companies and Laggard businesses Responding companies are grouped into one of these two categories based on how the supply chain executives we surveyed perceive their company’s overall performance relative to their competition. Managers in Evaluating company’s overall business performance “Best in Class” companies distinguish their corporation as either a top or leading performer when compared to competitors, while executives Top or leading performer (Best in Class) 65% in “Laggard” businesses consider their company to be either an average or lagging Average or lagging performer (Laggards) 35% performer in their market. Company’s Procurement Organizations Best in Class organizations are far more assured of hitting their performance Confidence that company will reach performance goals goals. One out of five Best in Class companies are extremely 21% EExtremely confidentt 9% confident they will meet 41% their performance objectives. Furthermore, more than four 60% 50% out of five believe that they Very confident are poised to hit specific goals. 81% By contrast, fewer than one out of 10 (9 percent) Laggards 41% feel certain they’ll reach their targets while one-half in this group are confident they’ll meet performance objectives. 15% SomewhatS confidentnt The number of global 9% suppliers with whom 4% Not very/ procurement organizations Best in Class Not at all confident Laggards work is comparable across both segments. On average, Structure of procurement organization Best in Class companies are 37% working with 213 (median A single enterprise-wide organization, responsible for all global procurement 30% = 75) global suppliers while Laggards partner with an A single enterprise-wide organization, managing most procure- 26% average of 193 (median = 78) ment with some managed by sites, regions, or business units 26% providers worldwide. Although Best in Class and Divisions, business units, or regional organization 25% Laggards are similar in some structures manage their procurement 27% regards, the organizational structure of companies’ Procurement is managed by the company’s 5% procurement operations does individual sites and facilities 12% differ in design. Best in Class Best in Class 5% companies are generally more Other Laggards apt to have a centralized, 1% organization-wide global 3% procurement operation Don’t know while Laggards have a greater 4%

2 How Best in Class Companies Embrace Operational Excellence to Drive Procurement and Supply Chain Performance

tendency to run their procurement function on a siloed, decentralized basis. Best in Class’ procurement divisions are larger. On average, 70 employees (median = 26 employees) work in Best in Class procurement departments as compared with Laggards who, on average, employ 53 individuals (median = 15) in their procurement group. One-fourth of the Best in Class operate with over 100 employees in procurement while only 14 percent of the Laggards have 100 or more workers in their procurement departments. Best in Class have a greater estimated procurement spend level than do Laggards. More than one out of four Best in Class companies (28 percent) report procurement spend to be in excess of $100 million a year while, in contrast, 20 percent of Laggard companies are spending $100 million or more on goods and services annually. This would suggest that Best in Class performers are afforded the necessary resources and that more staffing and funding is needed to attain performance excellence as well as reaching operational goals. It also suggests that Best-in-Class performers have more spend under their control, relative to the overall spend of the organization. By that, we mean that procurement groups in the “Laggard” category are not managing as large a percentage of spend for the company as a whole as “Best-in-Class” performers. For example, capital spend may fall outside the realm of procurement Key performance indicators in a Laggard Cost savings 89% organization, putting 84% it outside the scope of Meeting customer service metrics 64% a global procurement 61% strategy, and the standards and metrics Reductions in transportation costs 63% 56% to which that group is held. Documented process and 51% performance efficiencies 38% Top key performance indicators (KPIs) are Improved cycle times 50% 37% largely similar across the two segments. Improved workflow processes 45% Overall supply chain 42% cost savings, meeting Documented inventory reduction 44% customer service-driven 48% metrics, and lowering Reduced warehousing costs 42% transportation costs are 30% the top KPIs among both groups. However, Best Meeting sales forecasts 37% 35% in Class takes a more expansive approach Better supplier collaboration 34% to key performance 28% indicators (KPIs) and Reduced raw materials sourcing costs 34% Best in Class places greater emphasis 40% on KPIs tied to speed and Laggards Improved labor management 26% process performance 28% efficiencies, improved cycle times, reductions Implementation of environmentally 24% in warehouse costs, and sustainable/green initiatives 12% implementations of Automation implementations 22% green solutions. 10%

3 How Best in Class Companies Embrace Operational Excellence to Drive Procurement and Supply Chain Performance

Performance Evaluations As it pertains to companies meeting their annual financial performance expectations, the majority of Best in Class regularly hit their goals. More than one out of four (27 percent) always meet their financial expectations as compared with only 6 percent of the Laggards who are able to make this same claim. Meeting performance goals Always “ We have a fairly good 27% 6% handle on real time 51% performance, and this includes procurement 57% commitments versus budgets.” 89% 62% Frequently ­—Best in Class/Corporate Manager/Healthcare/ $1B - $2.5B in revenues

10% Sometimes 41% 1% Not very often 1% 1% Never Best in Class Laggards

Operational Excellence Best in Class are more likely to have an Operational Excellence strategy in place. In our survey, more than one-half (54 percent) of the Best in Class companies follow an Operational Excellence program while only half that many Laggards (27 percent) have a similar strategy in place. Because Operational Excellence programs often stress value creation and a framework for continuous improvement around established goals, the use of these programs correlates to greater effectiveness. In essence, Operational and Procurement Excellence programs apply methodology and measurement to the attainment of goals. Have a strategy for Operational Excellence

“ We’re looking for tools to allow 54% Have strategy 27% in place resources to spend greater time on value added initiatives” —Best in Class/Supply Chain Manager/Food Services/$50M

33% No strategy 57%

13% Not familiar with/ 16% Never heard of Operational Excellence (OE) Best in Class Laggards

4 How Best in Class Companies Embrace Operational Excellence to Drive Procurement and Supply Chain Performance

Further, more than four out of five (82 percent) Best in Class companies who are following Operational Excellence principles link their sourcing and procurement function to their Operational Excellence program. And, respondents at Best in Class businesses further assert that procurement is a highly critical discipline to their overall Operational Excellence methodology “ We are building a strong (Best in Class: 38 percent versus Laggards 25 percent). cohesive procurement Procurement Effectiveness strategy that is not just cost By substantial margins, Best in Class companies’ procurement functions are focused...includes capacity significantly more effective than those in Laggard organizations, most notably commitments and service in areas relating to cost savings, meeting procurement objectives, acquiring better and highly accurate data for business decision-making, labor, and risk related goals that are tied into planning. an overall corporate strategy.” —Best in Class/Purchasing While the major challenge facing procurement operations in both the Best in Management/Electronics/$2.5B+ Class and Laggard segments is the same, working with a lack of resources (53 percent and 50 percent, respectively), other obstacles differ among the two groups. Procurement operations in Best in Class businesses recognize a lack of visibility, using out-of-date technology and difficulties finding talent with the right skillsets. Laggards not only fight these same challenges, but also struggle working with insufficient benchmarking data, poor planning and insight, a lack of understanding of procurement methods, minimal support from management as well as inadequate funding. Maintaining consistency in procurement practices enables businesses to rely on better data. This greatly applies when working to get a handle on pricing, negotiating and spend issues. Best in Class organizations, to a far greater degree than Laggards, are more successfully leveraging reliable data to gain a better understanding of market conditions, to be better prepared for negotiating with suppliers, in fostering more insightful decision-making and for developing cost estimates and spend analysis. Procurement organization’s effectiveness in…

Meeting procurement targets 81% 50%

Achieving cost savings from suppliers 80% 57%

Conducting transparent /objective negotiations 77% 47% Accurate cost and price analysis 74% for spend categories 40% 73% Reducing costs/expanding margin 44% 72% Understanding markets 46% 69% Balancing cost and risk 47% 61% Knowledge sharing & retention 30% 60% Best in Class Optimizing talent 34% Laggards

Planning for risk in supplier decisions 60% 39%

Benchmarking performance 60% 27%

5 How Best in Class Companies Embrace Operational Excellence to Drive Procurement and Supply Chain Performance

Challenge(s) procurement organizations “ There’s a severe talent faces in working to meet business goals shortage. We just do not have the manpower to complete Lack of time/resources 53% 50% jobs in a timely manner.” —Laggard/Corporate Lack of visibility 39% 31% Management manufacturing/ Outdated technology 31% <$50M 25%

Talent shortage 30% 35% “ We have clear, accurate Inability to benchmark performance 19% visibility into our customer’s 28% sales cycles, forecasts, and Lack of management support 14% demand planning.” 16% Best in Class —Best in Class/Corporate Poor insight 13% Management/Pharmaceuticals/ 27% Laggards $50M - $99M Lack of funding 11% 16%

Other 11% “ In our forecasting, we 12% rely on historical data for productivity, transportation, and a use this to Consistency in global procurement practices… get firm estimate of projected cost Reviewing historical price data 78% 52% increases.” Best in Class/Warehouse Preparing for supplier negotiations 72% 44% Manager/Food & Beverage/$2.5B+ Performing spend analysis 66% 39%

Estimating project costs 63% 35%

Reviewing input costs for spend categories 62% 27%

Evaluating market drivers of costs 56% 33%

Evaluating supplier/material cost structures 56% 41%

Evaluating economic influences 45% 33%

Understanding geographic/country risk 44% 35% Best in Class Modeling future price assumptions 43% 27% Laggards

Forecasting future prices 33% 20%

6 How Best in Class Companies Embrace Operational Excellence to Drive Procurement and Supply Chain Performance

As expected, the inverse holds true as procurement performance among Laggards is inconsistent in all key areas. Because Laggards report a higher inability to benchmark performance, it’s likely that the lack of comprehensive scorecards and structured excellence methodologies contribute to greater inconsistencies and less confidence in measuring and modeling procurement programs. Without doubt, the maxim, “you can’t improve what you can’t measure” is at play here, as further seen by a greater tendency among Laggards to report inconsistency in being able to model, evaluate, and Areas in which procurement is inconsistent understand critical nuances involved in Procurement Modeling future price assumptions 14% 26% Effectiveness. Evaluating supplier/material cost structures 8% Procurement Excellence 23% Best in Class companies are four times more likely to have Forecasting future prices 15% 23% a Procurement Excellence program in place. More than Reviewing input costs for spend categories 4% one out of four Best in Class 23% companies have a formal Estimating project costs 6% Procurement Excellence or 21% Procurement Effectiveness Understanding geographic/country risk 12% strategy in place. By comparison 20% only 6 percent of Laggards have this type approach in operation. Evaluating market drivers of costs 5% 20% However, there’s still a need Best in Class for greater awareness of what 12% Evaluating economic influences Laggards these programs are and how 19% corporations can capitalize; Performing spend analysis 6% roughly one out of six Best in 18% Class and nearly one in five 2% Laggard respondents are not Preparing for supplier negotiations 14% familiar with the concept of Procurement Excellence or Reviewing historical price data 3% Procurement Effectiveness. 11% Companies having a formal “Procurement Excellence” or “Procurement Effectiveness” program Yes 6% 26% “ Understanding our volatile demand better is critical in reducing in-process scrap, and cutting manufacturing lead 61% No 75% times.” —Laggard/Supply Chain Manager/Tool Manufacturing/ $250M - $500M

Not familiar with/ 19% 13% Never heard of these concepts Best in Class Laggards

7 How Best in Class Companies Embrace Operational Excellence to Drive Procurement and Supply Chain Performance

Cost savings and on-time delivery are the main goals KPI’s or target objectives of Procurement Excellence strategy that Best in Class businesses are trying to achieve with Total cost savings 77% their Procurement Excellence program. As only a small On-time delivery 53% percentage (6 percent) of Laggards interviewed has a Quality 43% “Procurement Excellence” philosophy in place, their KPI Contract terms 43% objectives are not reported as data are unstable. Total cost of ownership 40% Managers in Best in Class Continuity of supply 37% companies are extremely confident they’ll hit their Inventory optimization 37% Operational Excellence goals. In fact, of the supply chain, Profit margin 30% procurement, and executive managers we surveyed, all are Purchase Price Variance (PPV) 23% confident with seven out of 10 (71 percent) being highly Value creation 23% certain they’ll fully achieve performance objectives. Innovation 17%

Confidence that company will reach performance goals

Extremely confident 25%

Very confident 46%

Somewhat confident 29%

Not very/Not at all confident 0% Best in Class

8 How Best in Class Companies Embrace Operational Excellence to Drive Procurement and Supply Chain Performance

Conclusions It’s evident why some businesses place value on archetypes that enable operations Demographics to run efficiently. We see in our survey Top job title/function Best in Class Laggards findings that companies who follow disciplines intended to make operations VP/General manager 23% 19% run efficiently are accomplishing their Supply chain manager 17% 15% business goals. These Best in Class Corporate/Divisional manager 16% 22% companies are more likely to centralize Logistics/Distribution manager 13% 11% their procurement operations as well as allocate the necessary funding and Purchasing management 12% 14% resources allowing for greater procurement efficiencies. Further, they place greater Top industries importance on key performance indicators Electronics and media 8% 2% such as cycle times, warehouse costs, and Healthcare 6% 5% environmental or green initiatives. Oil and gas 4% 0% Effectively leveraging a highly proficient Automotive 4% 3% procurement function within their operational excellence platform, companies Chemicals 4% 0% are realizing: Aerospace and defense 3% 5% • cost savings Agriculture 3% 3% • better decision-making and negotiating Consumer and retail 3% 11% through the use of current and more Metals and mining 3% 5% accurate data Wholesale/retail trade 12% 11% • upgraded workforce optimization; and Transportation/warehouse services 7% 12% • improved planning and execution of risk 3PL provider 6% 6% mitigation. Business/consulting services 12% 6% In practicing key operational and performance methodologies such as Location Procurement and Operational Excellence programs organizations are well-equipped United States 89% 80% to address and, subsequently, hit Canada 3% 5% performance goals. European Union/Europa 7% 5% Methodology Asia/Pacific Rim 1% 9% This research was conducted by Peerless Other 1% 2% Research Group (PRG) on behalf of Supply Chain Management Review for Revenues IHS, Inc., a leading provider of supply chain information and services. This Under $100 million 43% 46% study was executed in November and $100 million-$249,999 million 14% 19% December of 2014 and administered over $250 million-$499,999 million 5% 12% the Internet among subscribers to Supply $500 million-$999,999 million 6% 11% Chain Management Review magazine. All respondents were prequalified for being $1 billion-$2.49 billion 8% 6% involved in decisions related to sourcing $2.5 billion or more 23% 6% and procurement of goods and services for either their organization or for companies Average revenues $785.4M $411.9M with whom they consult. Median revenues $199.5M $125.0M A detailed profile of survey respondents describing Best in Class and Laggards is on the right.

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