A next-generation operating model for source-to-pay A next-generation procurement operating model that capitalizes on advances in digital, data, and analytics delivers new levels of performance across the value-creation lifecycle. Samir Khushalani and Edward Woodcock DECEMBER 2018 • OPERATIONS Effective procurement has long been recognized navigate new markets and new sources of supply. It as a source of a competitive advantage (Exhibit must balance the benefits of global sourcing and 1). But achieving excellence requires a concerted standardization against the risks associated with effort to align a variety of capabilities, insights, and complex logistics, and the need to tailor products activities in an integrated manner across the whole and supply chains to suit the requirements of local organization. markets. It must develop the agility to manage price volatility, shortages, and supply interruptions. Achieving the level of performance and cross- GES 2018 Increasingly, it must cope with political uncertainty functional integration required for procurement and global trade tensions. A next generation operating model for source to pay excellence has never been easy. And the big trends Exhibit 1 of 2 that are reshaping so many aspects of modern Then there is the proliferation of data and the rise business are only adding to the complexity of the of the Internet of Things, coupled with advances challenge. Today’s procurement function must in automation, analytics, and digital technologies. Exhibit 1 Procurement pays: Procurement health shows a strong correlation to corporate performance. Better procurement practices … … result in higher performance Average survey scores Annual procure- Annual reduction Average EBITDA2 across all drivers ment savings of COGS1 margin Scale 1-5 Percent Percent Percent Procurement 3.5 4.9 0.4 20.2 leaders Middle of 2.7 3.8 0.1 17.0 the pack Procurement 1.9 2.3 -0.1 10.9 followers Confidence level of correlation > 99% 1 Cost of goods sold 2 Earnings before interest, taxes, depreciation, and amortization A next-generation operating model for source-to-pay 2 These developments create many new opportunities This end-to-end remit is shown as in the honeycomb at for procurement, such as allowing companies to the center of Exhibit 2. At the heart of the honeycomb learn more about supplier capabilities and customer is the procurement strategy. Given the strategic requirements, and helping accelerate, streamline, nature of procurement—and its impact on the bottom and improve the effectiveness of internal processes. line—the design of the operating model must start with an understanding of the overall business strategy Together, these factors create a business imperative and how to align specific procurement practices with for the C-suite to reexamine, rethink, and desired outcomes. For example, if a company is in reimagine the procurement function. Capturing growth mode, its procurement strategy may emphasize the opportunities offered by this fast-changing supplier management, development, and innovation. If, technological and commercial landscape will call for however, the company is focused on profitability, more deeper and more interconnected capabilities. attention will be directed towards traditional sourcing activities aimed at reducing the cost of supply. Reimagining procurement To maximize the impact and potential of the The six elements surrounding the procurement procurement function, companies need to strategy represent a comprehensive set of activities develop and coordinate a comprehensive set of needed to capture and to sustain value. The capabilities that encapsulate recent advances in difference is important. To deliver value, the technology, analytics, and management practice. We procurement function must do more than develop describe these requirements in a next-generation appropriate sources of supply. It must ensure procurement operating model that restructures the transactional and compliance-driven activities are function’s relationship with its internal customers performed correctly, to sustain performance and avoid and supply base. Our model reframes the remit of potential value leakage—which can be substantial. the procurement function (the comprehensive set of interconnected activities it should either lead or The seamless execution of these components requires participate in) as well as the enabling elements (the close coordination and synchronization between critical elements needed for efficient and effective procurement and its stakeholders, both internal execution of these activities). (business operations as well as corporate functions such as finance, IT, internal audit, HR, and legal) and We define the remit of the procurement function external (the supplier community). expansively, recognizing the interconnections between different activities needed to drive value To enable the efficient and effective execution across the end-to-end source-to-pay lifecycle. of these six elements, companies must achieve For example, insights gained through business excellence in six enabling components of the operating partnering will influence specification definition, model—processes, digital, organization, capabilities demand management, and sourcing decisions; and culture, governance, and data and analytics— decisions made during the contracting will have represented by the outer ring of Exhibit 2. implications for payment-optimization strategies; the efficacy of the vendor-onboarding process Value capturing will influence the quality of data obtained for To generate new value for the business, next- subsequent vendor performance management and generation procurement functions must become spend analytics. adept at three primary activities: business partnering, category management, and sourcing and contracting. 3 Digital procurement: For lasting value, go broad and deep GES 2018 A next generation operating model for source to pay Exhibit 2 of 2 Exhibit 2 A successful procurement operating model coordinates multiple capabilities to enable, capture, and sustain value. ICS LYT PR NA O A C Value capture: & ES S Identification and TA E A S execution of commercial D 2. Category management and demand levers to capture value (traditional E offering) C 1. Business 3. Source D N partnering to contract I A G N I T R A E L V O STRATEGY G 6. Supplier 4. Procure C management to invoice A P N A 5. Invoice IO Value sustainment: B T IL to pay A Implementation IT IZ I N of a structured ES A supplier-management & RG CU O program, and buying LTURE Value enablement: channels to help Design and deployment prevent value leakage of a holistic best-in- class procurement operating model Excellence in business partnering starts with Best-practice category management goes procurement developing a clear understanding beyond squeezing suppliers for the lowest of the business’s strategies, goals, and plans, possible price. High-performing procurement and the business developing an appreciation of functions capture other sources of value procurement’s role in delivering its objectives. by proactively and continuously managing A major energy company achieves these twin categories of spend. These tactics can be objectives by closely coordinating interactions externally oriented (creating competition in between engineering and procurement, with the the supply base, negotiating more favorable two functions collaborating in the development commercial terms, or investing in joint and review of purchase specifications. Vendor innovation with suppliers, for example) bidding processes are designed to ensure they or internally oriented (such as by better meet design-to-value criteria while remaining managing demand, or optimizing product broad enough to ensure that multiple vendors specifications to minimize excess costs due to can compete. unnecessary functionality). A next-generation operating model for source-to-pay 4 Procure-to-invoice covers the span of Next-generation category management will activities from needs identification through make use of advanced-analytics techniques to approvals, purchase-order generation (and to identify emerging opportunities in supply expediting), advanced shipping notification, markets. For example, consumer-goods and finally to the receipt of goods or services. companies are starting to use tools that combine The procure-to-invoice process can often be machine-learning based agronomic models with highly manual, poorly documented (if, say, local crop, weather, and related data to improve an end user places an order by phone directly price forecasts and help food buyers make better from the suppler), inconsistent, and opaque. purchasing decisions. Furthermore, if the requisite controls are not in place, purchases may be subject to long Typical source-to-contract processes are cycle times, value leakage, and fraud potential. plagued by repetitive manual activities and Next-generation solutions embed governance inconsistency across the organization, resulting into how goods and services are ordered, such in long cycle times, lack of transparency, and as by enforcing well-defined buying channels suboptimal outcomes—thus exacerbating that prescribe how purchases are made—often friction between procurement and the business. digitizing the buying process. A chemicals By contrast, a well-managed source-to-contract company has adopted this approach, creating process doesn’t just create value by identifying highly automated channels in which robotics and selecting the best source of supply.