Honeycomb Management Excellence

Opinion Paper Honeycomb Management Excellence Sustainable performance excellence in procurement 2010 / 01 We make ICT strategies work Honeycomb Management Excellence Table of Contents 1 Sustainable Performance Excellence in Procurement ........................................ 3 2 Procurement Strategy.......................................................................................... 5 3 Procurement Organization................................................................................... 8 4 Procurement Processes .................................................................................... 12 5 Procurement Applications.................................................................................. 15 6 Procurement Intelligence................................................................................... 18 7 HR Management in Procurement ...................................................................... 22 8 The Authors ....................................................................................................... 26 9 The Company .................................................................................................... 27 Opinion Paper 2 Detecon International GmbH Honeycomb Management Excellence 1 Sustainable Performance Excellence in Procurement Being a CPO these days is not as comfortable as it used to be some 20 or 30 years ago. Almost everything has changed since then. Fierce challenges have come up from beyond the horizon. Here are the most common and important ones: Top management expects procurement to become a main contributor to cost reductions and to profit increases. In financial and enterprise risk management procurement starts to play a major role. Procurement is at the forefront of dealing with globalization issues. Best cost country sourcing has become a permanent challenge for procurement. Companies compete for procurement professionals in a world-wide battle for talent. There is permanent pressure to save costs: “Do more with less!”. These are the major challenges to be tackled. For the CPO it is therefore most important to know which fields of action he/she has to face and what measures to take. With its honeycomb model Detecon presents a holistic view for the CPO on all relevant fields of action, the honeycomb model. Procurement Strategy HR Management in Procurement Procurement Organization Sustainable Performance Excellence in Procurement Procurement Procurement Intelligence Processes Procurement Applications Figure 1: The Detecon Honeycomb Model of Procurement Opinion Paper 3 Detecon International GmbH Honeycomb Management Excellence The Detecon procurement honeycomb visualizes a management philosophy based on the cross-links and interdependencies of the individual cells and points out where to act and what to do. The six cells – strategy, organization, processes, intelligence, applications and human resources – need to be targeted in order to identify actions and measures. The challenge is to keep all these actions and measures well-balanced, because pushing one and disregarding the other(s) will produce unsatisfying results. CPOs who are among the leaders of the pack have mastered the challenge of identifying their needs and of balancing the honeycomb as a whole. Their departments deliver a sustainable performance excellence, which makes them valued enablers for the competitiveness of their company as a whole. In this opinion paper we describe every honeycomb cell, showing the challenges as well as the most common problems. In examples from our daily consulting work we demonstrate how to stay best-in-class. Feel invited to share our practical experience in facing and addressing CPO challenges in order to find new ways to turn problems into challenges and challenges into manageable solutions. Opinion Paper 4 Detecon International GmbH Honeycomb Management Excellence 2 Procurement Strategy a) CPO Challenges Year after year CPOs are facing new challenges. Just picking a few CPO issues from a comprehensive list you will find on almost all CPO agendas in 2009 a. pressure for spend savings and improvement of cash flow, b. supplier risk management, trouble shooting or even rescue management for financially staggering strategic suppliers, c. need for cost cutting within procurement organization, Those issues significantly vary from yesterdays challenges, when supplier sales forces were dictating prices in seller markets with climbing raw material price levels and supply shortages. Accordingly the focus of procurement strategy might have been on low-cost country sourcing, partnership management and supply chain integration. Resume: Procurement challenges are continuously changing and what CPOs obviously need is a strong strategic capability which is able to anticipate major changes in the business environment and their impact on supply markets as well as management expectations towards procurement (e.g. savings on top of budget, cash flow contributions versus EBIT effects), provide profound supply market and supplier intelligence (e.g. price dynamics, emerging suppliers, financial supplier performance and risks) and transfer those findings into strategic plans for implementation within the procurement organization (e.g. breakdown of saving targets to category leaders or divisional procurement heads, setup and tracking of saving programs, setup of supplier risk management). b) Reality Check Frankly spoken we only partly observe strategic procurement capabilities in the market place. Of course most CPOs will state that procurement strategies are in place but on the other hand significant challenges are not fully under management control. Just a few questions as a kind of self assessment for CPOs: How transparent are committed savings targets per sub-category versus achieved and approved savings year-to-date versus opportunity assessment for further savings per category, impact of budget changes on procurement targets and planning, planning and tracking of measures for target fulfilment? Opinion Paper 5 Detecon International GmbH Honeycomb Management Excellence How transparent is the financial constitution of your key suppliers and how fast would you be able to fully substitute financially staggering strategic suppliers? What about your insights into price dynamics of supply markets? Do you have access to broad-range price benchmarks and understand your gaps against best price as well as strategic levers for price optimization? While many procurement organizations might answer those questions with YES in terms of a high level understanding they are not able to provide facts and figures with the necessary level of quality and detail (e.g. per sub-category and planned sourcing event). But exactly those insights are necessary to get full management control on procurement performance and achieve sustainable excellence. Case study: In summer 2008 procurement analysts of a global automotive supplier told us about massive operational problems in their US plants due to the financial breakdown of local tier 2 and 3 suppliers. Accordingly we assumed that this issue was on the top management agenda. However they were not able to fix those problems on short notice and ran in even bigger troubles in Europe about 6-12 months later. Resume: In many organizations strategic procurement capabilities are not where they ought to be. c) Best-in-Class Based on our market insights we see the most advanced procurement organizations in globally leading manufacturing and automotive companies. In those companies procurement performance is not only on the top management agenda with a CPO on board level but the CPO will also have a strong focus on procurement strategy. Procurement strategy formulation is not only a one-time-a-year exercise, but a set of well defined strategic procurement processes is implemented and continuously proceeded by highly qualified resources, among others procurement planning and target setting (as part of the enterprise budgeting process) including quarterly updates (if necessary), performance management, which permanently tracks target fulfilment, permanent supply market analysis and price benchmarking, supply risk management, which permanently tracks suppliers’ financial performance based on (nearly) real-time and reliable information, enterprise-wide development and execution of category and supplier strategies.