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Wie fit ist Ihr Einkauf?

In a series of ten regular posts published by the Procurement Leaders Global Intelligence Network I looked at the different facets to transform procurement to a partner of choice

Part 3 - performance management & reporting

2012-08-29 16:06

Thought Leaders is a series of regular posts from experts from across industries and regions, looking at the issues procurement faces today. This is the third in a sequence of posts by former Deutsche Post DHL CPO, Hugo Eckseler looking at new and innovative solutions to pave the way to the next performance level in procurement.

The discussion between CPOs and their internal customers about the contribution of procurement to the results of the business has been an “evergreen” ever since.
Typical statements of business partners: I can’t find the savings you claim in my bottom line. Where is the real influence of procurement on cost and prices?
The pressure on procurement to provide concise performance information is increasing. More and more companies “extract” procurement and other service functions from the business units and consolidate them in global Shared Service Centers [http://www.procurementleaders.com/blog/my-blog--sammy-rashed/beyond-procurement-10-global-business-services]. This can create new communication barriers between procurement and business partners.

What can CPOs do to improve performance management and reporting in order to become a trusted member at the table?


Key elements of procurement performance management


Systematic spend analysis
Spend transparency is the most important pre-requisite in procurement to identify cost reduction opportunities, to develop appropriate sourcing strategies and to monitor contractual compliance. Spend is used as the baseline for many performance indicators (e.g. savings in % of managed spend) to compare performance between spend categories/business units or to benchmark against other companies. Without solid spend figures it’s hardly possible to create reliable and consistent performance reports which are accepted by finance and other stakeholders. So it’s no surprise that in a survey of the Aberdeen Group in 2011 (“The Nexus of Spend Management”) 68% of the procurement managers indicated that spend analysis is a top or high priority for them. Interestingly enough, the statistics jumps to 88% when looking at C-level business executives, exclusively.

Professional category management
Business management rightfully expects that procurement is able to identify the relevant factors that influence the cost of purchased goods and services for the companies’ strategic categories and take the right sourcing decisions. This includes volume effects, market price developments, currency fluctuations, demand management, value analysis/specifications, etc.

Support of annual budgeting and forecasting process
Costs of purchased goods and services have a huge impact on the P&L for many companies. Professional spend analytics and category management help finance to understand the impact of major volume and price changes and account for them in the budgeting and forecasting process. This requires a close monitoring of the markets as well as tracking of the companies’ sourcing and savings programs to provide consistent data year on year.


Challenges in Spend Analysis

In the Aberdeen Group study mentioned above, 54% of the respondents say it’s the poor quality of spend data from procurement and ERP systems that results in an inability to identify and forecast savings opportunities (“garbage in, garbage out”).
To ensure the necessary accuracy and granularity requires systematic data extraction, cleansing, classification and enrichment. This is a very labor intensive process as long as it’s based on manual spreadsheets and traditional data warehouses and it needs support from several entities like IT, supply chain and finance, coordinated by procurement.
That’s why you can hear quite a few procurement managers express signs of resignation: yes, we see the need, but we don’t have the resources, and the implementation of new material classification codes and IT systems will take years …


How to get started?

The answer to these challenges lies in innovative solutions as demonstrated by best-in-class organizations. Such companies automate their spend analysis processes and collect data from multiple sources by use of modern tools.
To me it has become evident from projects over the last years that outsourcing of spend analysis to turn-key spend data management providers has become a valid option due to lack of internal skills and resources for data cleansing, classification and enrichment. Such tools provide userfriendly dash-boarding and reporting capabilities, first solid results can be delivered already some months after kick-off. Saas models prevent huge up-front IT investments and allow to share best practice from other industries and companies.
The range of spend management providers is wide-spread; advanced solutions do not just deliver basic data but use that information for the entire performance management cycle incl. category management, budgeting/forecasting as well as sourcing and savings programs tracking.


Conclusions

Reporting of procurement contributions to the key stakeholders has never been more important than today to earn a place at the table. Innovative turn-key solutions have emerged over the last years that allow an effective and efficient spend and performance management. CPOs should actively look at such options in order to overcome the hurdles described above.

Hugo Eckseler has been working more than thirty years as CPO and manager in manufacturing, logistics and quality management at Deutsche Post DHL, 3M, WELLA and other multi-national companies. Today he works as senior consultant looking for innovative solutions in procurement and supply chain management.

 

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