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AberdeenGroup

Center-Led Procurement

Organizing Resources and Technology for Sustained Supply Value

November 2005

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The Center-Led Procurement Business Value Research Series

Executive Summary

Procurement Business Value Research Series Executive Summary Enterprises have long struggled with how to best organize

Enterprises have long struggled with how to best organize procurement and supply man- agement groups to optimize and continuously improve supply costs and performance. Traditionally, enterprises have faced two primary options for organizing procurement operations – each with its pros and cons:

1. Centralized organizations leverage corporate spending and drive standard sourc- ing, process, and technology decisions as well as execution from a central com- mand and control group. While offering greater spending leverage and opera- tional efficiencies, centralized structures result in higher incidences of unap- proved spending, process circumvention, and uneven performance.

2. Decentralized organizations empower business units and sites with autonomy and control over supply, process, and technology decisions, as well as sourcing and procurement execution. This structure improves satisfaction at the site- and business-unit level, but fails to leverage corporate spending; is costly to operate; and leads to inconsistent supply cost and performance across the enterprise.

With market pressures such as globalization, outsourcing, and compliance pushing pro- curement to the frontlines of corporate strategy, an increasing number of enterprises are transitioning to a new organizational structure to position for supply management suc- cess: the center-led procurement organization. This hybrid model blends spend leverage, process standardization, and knowledge- and resource-sharing attributes of centralization with the local empowerment and execution characteristics of the decentralized model.

To better understand center-led procurement, Aberdeen examined the organizational, process, and technology infrastructures of more than 100 procurement groups. We found that center-led procurement accelerates business support for procurement goals and poli- cies, enhances compliance, improves spend under management, and delivers supply cost and performance advantages. Transitioning to this center-led model requires:

Executive-level support and reporting structure for procurement transformation.

A multi-year plan that aligns supply and business goals.

Cross-functional and cross-organizational teams.

Coordinated cost and performance metrics across functions and businesses.

Aberdeen research clearly indicates that technology is a key enabler (and accelerant) for the center-led model. Organizations using a closed-loop, source-to-settle automation plat- form were able to speed process standardization, improve spend leverage and operational efficiencies, and enhance knowledge sharing and analysis.

This report examines the organization, process, and technology structures required for successful center-led procurement. It also quantifies the operational and supply cost and performance advantages of making this transition.

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The Center-Led Procurement Business Value Research Series

The Center-Led Procurement Business Value Research Series Table of Contents Executive Summary i Chapter One:

Table of Contents

Executive Summary

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Chapter One: New Pressures Require New Organizational Model Centralized Procurement Structures Decentralized Procurement Structures Center-Led Procurement: Model for Strategic Operations

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Chapter Two: Implications and Analysis

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Chapter Three: Recommendations for Action Executive Support and Reporting Structure Multi-Year Supply Plan Aligned with Business Goals Cross-Functional Teams Coordinated Supply Metrics and Incentives Integrated Source-to-Settle Infrastructure The Importance of Integration

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Chapter Four: Conclusions

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Author Profile

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Appendix A: Research Methodology

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Appendix B: Related Aberdeen Research & Tools

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About AberdeenGroup

19

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The Center-Led Procurement Business Value Research Series Figures Figure 1: Procurement Organization by Company Size

The Center-Led Procurement Business Value Research Series

Figures

Figure 1: Procurement Organization by Company Size Figure 2: Procurement Performance by Organizational Model Figure 3: Reporting Line by Organizational Model Figure 4: Procurement Automation Investment by Organizational Model Figure 5: Center-Led Procurement Operating Model Figure 6: Closed-Loop Procurement Automation Infrastructure

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Tables

Table 1: Attributes of Procurement Organizational Models

2

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The Center-Led Procurement Business Value Research Series

The Center-Led Procurement Business Value Research Series Chapter One: New Pressures Require New Organizational Model

Chapter One:

New Pressures Require New Organizational Model

AberdeenGroup research of supply management executives at more than 100 global en- terprises found that procurement’s role in strategic operations has increased dramatically over the past five years. Macro-economic factors, such as globalization, regulatory pres- sures, procurement automation, outsourcing, and supply market instability, are driving more companies to view procurement as a catalyst not only for supply cost reduction and assurance but also for market expansion, product innovation, and compliance. 1

In response to such elevated expectations, many enterprises are moving to up-skill their procurement teams and employ new supply management strategies and systems infra- structures. However, transforming procurement into a center for value creation will re- quire companies to overhaul both how they organize the procurement function and how they align supply management operations with overall business activities and goals.

Traditionally, high operation and transaction costs and limited information flows forced most enterprises to adopt one of two procurement operating models: centralized com- mand and control or highly decentralized operations. Each of these organizational models offered benefits and challenges.

Centralized Procurement Structures

Centralized organizations leverage corporate spend and drive standard sourcing, process, and technology decisions as well as execution from a central command and control group. Centralized organizational models provide economies of scale that improve spending power, enhance operational efficiencies and knowledge sharing, and enforce process and policy standardization (Table 1).

While good in theory, centralized procurement models have not always performed well in practice. This has particularly been the case in large, geographically dispersed organi- zations, especially those that have grown through merger and acquisition. In these envi- ronments, site and plant managers often resist centralization, feeling that centrally man- dated supply decisions and policies slow operations and do not satisfy local supply and quality needs.

As a result, centralized procurement groups often report high incidences of unapproved (“maverick”) spending, process and policy circumvention, and uneven supply measure- ment and performance.

1 The CPO’s Agenda, March 2005.

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The Center-Led Procurement Business Value Research Series Table 1: Attributes of Procurement Organizational Models

The Center-Led Procurement Business Value Research Series

Table 1: Attributes of Procurement Organizational Models

Decentralized

Centralized

Center-Led

Organization

Process

Knowledge

Technology

Performance

•Sourcing decisions and pro- curement activities executed at the business or local level •Spending rarely leveraged across sites or business units •Procurement reports to plant or business unit manager

Limited or no process stan- dardization

Process efficiency and ef- fectiveness varies greatly by business unit or site

Limited sharing of resources or best practices across sites

Skills and category expertise vary by business unit or site

Limited visibility into spend- ing, compliance, and per- formance

Technology decisions and usage vary by business unit or locale

Metrics used vary by busi- ness unit or locale

Cost and performance vary greatly across the enterprise

•Sourcing decisions and procurement activities executed at central com- mand and control center •Spending leveraged centrally •Procurement reports to senior supply chain exec

Standardized processes and policies executed centrally

Process compliance, effi- ciency, and effectiveness vary by business or site

Resources and best prac- tices controlled centrally

Skills and category exper- tise controlled centrally

Visibility into spending, compliance, and perform- ance at aggregate level

Limited understanding of these factors at local level

Technology decisions and deployment made at corporate level

Technology deployment and usage vary based on schedule and budget

Standard metrics used at corporate level

Metric compliance varies across the organization

Cost, compliance, and performance vary across the enterprise

•Sourcing coordinated across business units •Spending leveraged across businesses and regions where practical •Procurement reports to senior supply chain or C-level exec

Standardized processes and policies tailored and executed at local level

Process compliance, efficiency, and effective- ness consistent across the enterprise

Resources and best practices shared across sites

Skills, category exper- tise coordinated across businesses and sites

Visibility into spending, compliance, and per- formance at aggregate and local levels

Technology decisions and deployment coordi- nated across sites

Technology deployment and usage coordinated across sites

Standard metrics used enterprise-wide, but sup- port for local variances

Metrics and incentives shared by procurement, functions and businesses

Cost, compliance, and performance consistent across the enterprise

Source: AberdeenGroup, August 2005

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The Center-Led Procurement Business Value Research Series

The Center-Led Procurement Business Value Research Series Decentralized Procurement Structures Decentralized organizations

Decentralized Procurement Structures

Decentralized organizations empower business units and sites with autonomy and control over supply, process, and technology decisions. In a decentralized environment, sourcing decisions and procurement activities are executed by individual business units or plants. This structure improves satisfaction at the site- and business-unit level and speeds process and issue resolution by avoiding much of the bureaucracy and “red tape” that comes with centralized procurement models (Table 1).

However, the decentralized organizational model comes with many negative side effects. Decentralized models optimize to the individual site level, and neither fully leverage cor- porate spend nor support the supply or business objectives of the organization. In such environments, there is little coordination or information sharing between divisions and sites. Decentralized models do not share systems, expertise, and resources across sites, resulting in higher operating costs and uneven supply cost and performance across the enterprise.

Center-Led Procurement: Model for Strategic Operations

The above factors make fully centralized or decentralized organizational models ill-suited to support and sustain procurement’s new strategic role. Higher expectations and new (and global) market pressures require enterprises to consider alternative organizational structures that can provide the spend leverage, process standardization, and knowledge- and resource-sharing attributes of centralization with the local empowerment and execu- tion characteristics of the decentralized model.

To better understand procurement organizational design issues and approaches, Aberdeen interviewed more than 100 chief procurement officers (CPOs) and vice presi- dents and directors of procurement and supply management. Our research found that “center-led” procurement is the preferred organizational model among supply manage- ment executives. In fact, more than 75% of enterprises will have completed or be in the process of shifting to a center-led procurement organizational structure by 2008.

This emerging center-led structure relies on cross-functional and -divisional teams, flexi- ble process and policy standards that can be tailored at the local level, coordinated met- rics and incentives, and an integrated procurement information systems infrastructure that automates and aligns source-to-settle processes across the enterprise. Preferences, trends, and approaches to center-led procurement will be examined in greater detail in the next chapters.

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The Center-Led Procurement Business Value Research Series Chapter Two: Implications and Analysis Aberdeen research found

The Center-Led Procurement Business Value Research Series

Chapter Two:

Implications and Analysis

Aberdeen research found that “center-led” procurement is the preferred organizational model among supply management executives. Although less than a third of all companies currently utilize a center-led procurement operating model, more than 75% of enterprises will have completed or be in the process of shifting to a center-led procurement organiza- tional structure by 2008 (Figure 1).

Aberdeen research found that use of the center-led procurement model increased in pro- portion with company size. In fact, large enterprises (revenues greater than $1 billion in revenues) were more than twice as likely as mid-size firms (revenues between $50 mil- lion and $999 million) to use a center-led procurement model.

This dichotomy is partially due to the fact that large enterprises tend to have more mature sourcing, procurement, and supply management operations and often look for economies of scale across divisional and geographical boundaries.

Figure 1: Procurement Organization by Company Size

50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

47% 36% 31% 28% 27% 22% 20% 18% 18% Overall Mid-Market Large
47%
36%
31%
28%
27%
22%
20%
18%
18%
Overall
Mid-Market
Large

Decentralized28% 27% 22% 20% 18% 18% Overall Mid-Market Large Centralized Center-led Source: Aberdeen Group , August

Centralized22% 20% 18% 18% Overall Mid-Market Large Decentralized Center-led Source: Aberdeen Group , August 2005 Regardless

Center-led18% Overall Mid-Market Large Decentralized Centralized Source: Aberdeen Group , August 2005 Regardless of company

Source: AberdeenGroup, August 2005

Regardless of company size, the motivation for a center-led procurement structure is clear. Aberdeen research found that companies with center-led procurement structures outperformed companies with other organizational models both in total spend under management of the procurement group and supply cost reductions achieved (Figure 2).

Aberdeen defines spend under management as the portion of corporate expenditures sourced and controlled by the procurement organization or by procurement-derived poli- cies and procedures. Having spend under management ensures maximum spending lever- age and the application of consistent and best practice market diligence, costing, negotia- tion, and compliance methods to each spending category. Spend managed outside the

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The Center-Led Procurement Business Value Research Series

The Center-Led Procurement Business Value Research Series procurement group typically results in d ecreased negotiation

procurement group typically results in decreased negotiation leverage and suboptimal market vetting, as well as higher prices and management costs.

Companies with center-led procurement structures reported more than twice as much spend under management than companies with decentralized structures, and nearly 20% more spend under management than firms with centralized models. This delta is not in- significant. Enterprises report 5% to 20% cost savings for each new dollar of spend brought under management of the procurement organization.

Center-led procurement organizations were also more likely to have top procurement of- ficers reporting to senior and C-level executives (Figure 3).

Figure 2: Procurement Performance by Organizational Model

80%

70%

60%

50%

40%

30%

20%

10%

0%

71% 60% 34% 11% 8% 9% 8% 6% 6% % of Spend Under Mgmt. 2004
71%
60%
34%
11%
8%
9%
8%
6% 6%
% of Spend
Under Mgmt.
2004 Supply
2005 Supply
Cost Reductions Cost Reductions
(est.)

DecentralizedSupply 2005 Supply Cost Reductions Cost Reductions (est.) Centralized Center-led Source: Aberdeen Group , August 2005

Centralized

Reductions Cost Reductions (est.) Decentralized Centralized Center-led Source: Aberdeen Group , August 2005 All print

Center-ledReductions Cost Reductions (est.) Decentralized Centralized Source: Aberdeen Group , August 2005 All print and

Source: AberdeenGroup, August 2005

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The Center-Led Procurement Business Value Research Series Figure 3: Reporting Line by Organizational Model

The Center-Led Procurement Business Value Research Series

Figure 3: Reporting Line by Organizational Model

CE

CF

President

CO

VP, Supply Chain

VP, Operations

25 30 10 20 14 10 15 6 10 10 10 0 20 40 37
25
30
10
20
14
10
15
6
10
10
10
0
20
40
37
10
0
33

Center-led10 20 14 10 15 6 10 10 10 0 20 40 37 10 0 33

Centralized10 15 6 10 10 10 0 20 40 37 10 0 33 Center-led Decentralized Source:

Decentralized10 10 10 0 20 40 37 10 0 33 Center-led Centralized Source: Aberdeen Group ,

Source: AberdeenGroup, August 2005

Companies with center-led procurement models also reported broader and more strategic investments in sourcing and procurement automation and business analytics (Figure 4). Increased adoption of procurement applications – and the need for improved integration with enterprise resource planning (ERP) – was a recurring theme among procurement executives. Technology investments were cited as a key component of every major sup- ply management improvement strategy outlined by executives for the next three years.

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The Center-Led Procurement Business Value Research Series

The Center-Led Procurement Business Value Research Series These findings are not surprising. At the tactical level,

These findings are not surprising. At the tactical level, automation streamlines and re- moves many of the non-strategic and transactional activities that consume the majority of buyers’ time, such as order processing, review, and expediting. Automation also allows enterprises to extend procurement processes and intelligence across the enterprise while improving coordination and control of spending and execution. At the strategic level, integrated visibility and control of procurement operations empowers supply manage- ment and business executives with insight to make strategic business decisions.

Integration and interoperation with financial, ERP, and other business systems are both critical for the success of procurement automation infrastructure. Such integration fosters improve spend visibility, speeds invoice and financial reconciliation, and enables proac- tive compliance monitoring and control.

Figure 4: Procurement Automation Investment by Organizational Model

Contract

management

Full e-sourcing

platform

e-

Reverse

auctions

e-procurement

25% 15% 20% 50% 25% 20% 50% 20% 20% 43% 32% 40% 100% 100% 40%
25%
15%
20%
50%
25%
20%
50%
20%
20%
43%
32%
40%
100%
100%
40%

Center-Led50% 25% 20% 50% 20% 20% 43% 32% 40% 100% 100% 40% Centralized Decentralized Source: Aberdeen

50% 20% 20% 43% 32% 40% 100% 100% 40% Center-Led Centralized Decentralized Source: Aberdeen Group ,

Centralized

Decentralized20% 43% 32% 40% 100% 100% 40% Center-Led Centralized Source: Aberdeen Group , August 2005 All

Source: AberdeenGroup, August 2005

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The Center-Led Procurement Business Value Research Series Chapter Three: Recommendations for Action Despite the obvious

The Center-Led Procurement Business Value Research Series

Chapter Three:

Recommendations for Action

Despite the obvious benefits of the center-led procurement model, any change in organ- izational structure will be challenging for most enterprises. In fact, procurement execu- tives cite aligning and standardizing procurement processes and systems as the leading challenge to raising the strategic importance and performance of their organizations. 2 However, Aberdeen research uncovered the following attributes of successful center-led procurement organizations:

Executive-level support and reporting structure for procurement transformation.

A multi-year supply plan that aligns with business goals.

Cross-functional and cross-organizational teams.

Shared cost and performance metrics across functional groups and businesses.

Shared and integrated source-to-settle automation platform (Figure 5).

Figure 5: Center-Led Procurement Operating Model

(Figure 5). Figure 5: Center-Led Procurement Operating Model 2 The CPO’s Agenda , March 2005. Source:

2 The CPO’s Agenda, March 2005.

Source: AberdeenGroup, August 2005

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The Center-Led Procurement Business Value Research Series

The Center-Led Procurement Business Value Research Series Executive Support and Reporting Structure As noted above,

Executive Support and Reporting Structure

As noted above, Aberdeen research found that center-led procurement organizations are more likely to have top procurement officers reporting to senior executives. This report- ing line suggests that companies using center-led models view procurement as a more strategic role than enterprises using other organizational structures. It also suggests that procurement plans, initiatives, and goals are better aligned with those of the business.

For example, at financial services giant American Express, the CFO crafted a re- organization to make procurement a strategic asset. The head of global procurement now reports directly to the CFO, and procurement and finance work in tandem to drive com- pliance across the businesses.

At Steelcase, Inc., a leading global office furniture manufacturer, procurement reports to the senior vice president of manufacturing to ensure close alignment of manufacturing strategies, plans, and systems with strategic sourcing and supplier management activities.

Multi-Year Supply Plan Aligned with Business Goals

Center-led procurement organizations tend to have better alignment and integration into the strategic planning and operations of the business. Most set multi-year sourcing and commodity plans that are mapped closely to the financial and performance goals of the business. These plans include details on the organizational structures, services, commod- ity strategies, and supply cost and performance goals. These plans also incorporate pro- jections for their contribution to corporate financial and operational objectives.

For example, Cessna Aircraft Co. has multi-year supply plans with sourcing and com- modity strategies linked directly to corporate performance and financial goals. A cross- functional commodity team — including supply chain management, manufacturing, en- gineering, and finance — maps production schedules against price and supply market benchmarks to determine and adjust this plan annually. This supply roadmap is linked to financial and performance targets of Cessna and its parent company, Textron.

Cross-Functional Teams

Center-led procurement organizations tend to make supply management an enterprise initiative. Most of these firms establish a cross-functional sourcing or governance council that includes the leadership of all major stakeholders across the organization, including commodity managers, sourcing process leaders, business unit executives, financial ex- ecutives, and, depending upon the industry, manufacturing and logistics.

Such coordination enables expertise and best practices to be shared across the business and provides a structured environment to identify demand and better define requirements and specifications. It also informs company leaders of savings opportunities and encour- ages them to take an active role in ensuring compliance with negotiated contracts.

The use of such cross-functional teams increases in conjunction with procurement’s stra- tegic role within the organization. Teaming activities tend to occur in three areas:

1. Supply planning and strategic sourcing — which aligns commodity managers; sourcing process leaders; and functional, business unit, and regional leaders to ensure alignment of supply decisions with business objectives.

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The Center-Led Procurement Business Value Research Series 2. Compliance management — which typically aligns

The Center-Led Procurement Business Value Research Series

2. Compliance management — which typically aligns procurement, finance, and business unit leaders to maximize cost savings and ensure compliance with con- tractual commitments.

3. Projects — which includes aligning procurement and engineering for new prod- uct development; procurement and manufacturing for lean and supply base im- provement initiatives; or sales, marketing, and procurement for customer- oriented initiatives. In each case procurement functions as the liaison aimed at in- tegrating suppliers and internal stakeholders to capture innovation, improve per- formance, and reduce costs.

For example, Motorola accelerated its reengineering in 2003 when it appointed its first CPO and established a global, center-led procurement organization. The new organiza- tion assigned global commodity leaders at the corporate level, two vice presidents within indirect materials and services procurement, and a vice president over semiconductor procurement. Each business unit also has its own CPO for direct materials procurement that reports both to the corporate CPO and the head of operations or supply chain man- agement within their businesses. The matrixed organization reinforces common procure- ment strategies and procedures globally, improves spending leverage, and enhances alignment across business units.

Harley-Davidson has established new product development sourcing groups that co- locate sourcing and commodity managers (most of whom are degreed engineers) with their product engineering groups. These commodity experts collaborate with engineers from design concept through production build. Key goals include:

Determining the supply mix that provides access to leading innovations

Ensuring ample capacity to support intended production volumes

Beating target and should-cost goals.

Steelcase has established a “sourcing service center” to provide sourcing and supply management tools, information, and templates to the commodity managers across its global business units. Part of Steelcase’s central services organization, the sourcing ser- vice center group provides spend and supplier data management, request for pro- posal/request for quote services and templates, pricing intelligence, and other support services. This approach not only reinforces standard processes and systems across the company but also helps identify opportunities to aggregate spending and coordinate pur- chases across the company.

Faced with this new strategic role, many procurement organizations are learning that buyers often lack the domain expertise or skills to drive these strategic activities, such as supplier development. In response, executives are recruiting new talent, particularly those with graduate degrees in supply chain, logistics, procurement, and finance. For example, taking the lead from success stories like Harley-Davidson’s, half of manufacturers are recruiting buyers with engineering degrees to enable procurement to become a more critical player in new product development and supplier improvement initiatives. (Aber- deen will examine the skills required for the next-generation of procurement professional in a future study.)

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The Center-Led Procurement Business Value Research Series

The Center-Led Procurement Business Value Research Series Coordinated Supply Metrics and Incentives As noted above,

Coordinated Supply Metrics and Incentives

As noted above, center-led procurement organizations attempt to weave supply manage- ment into the fabric of the business, ensuring that stakeholders – from the CFO to the frontline requisitioner – are active participants in efforts to continuously improve supply costs and performance. Key to attaining such support is ensuring that procurement goals are aligned and, where possible, shared with the businesses. This entails clearly defining supply cost and performance goals by function and business unit – as well as providing shared incentives to achieving these goals. It also requires enlisting the commitment of business leaders (and, often, the muscle of the finance department).

When overhauling its procurement operations, Owens Corning established a matrixed procurement model that married commodity management and sourcing strategy and pro- gram management at the corporate level with business unit leaders and plant-level buyers and managers. The company’s commodity experts and sourcing managers now collabo- rate with plants to identify detailed requirements and examine suppliers. Sourcing teams also work with business unit leaders to drive and measure compliance with negotiated contracts. Owens Corning fosters such coordination by establishing cost savings targets for each business unit.

American Express took a similar approach, developing 10 global commodity teams that collaborate with business unit executives to identify savings opportunities to set budgets, sourcing strategies, and savings plans for each spend category. These goals are shared between procurement and businesses.

Integrated Source-to-Settle Infrastructure

Aberdeen research clearly indicates that the recent transition to the center-led procure- ment model is made possible by advances in web-based procurement automation and ad- vanced decision support tools. Web-based automation allows an enterprise to extend source-to-pay activities to the desktops of both functional and frontline employees, while enforcing corporate procurement procedures and contract compliance. Advanced work- flow capabilities embedded within these tools can also provide the flexibility to empower business units or sites to configure processes or controls to support regional or industry- specific variations or regulatory and reporting requirements.

Such flexibility was critical to Nestle in 2001 when it set out to maximize global spend- ing and standardize and improve its processes by transitioning to a center-led procure- ment structure. Like many multi-national corporations, previous efforts to leverage spending and employ standard procurement procedures were frustrated by reluctant par- ticipation across regions and a highly fragmented systems infrastructure. Such issues lim- ited visibility into spending and compliance and stymied efforts to coordinate purchasing power and decisions across regions and markets.

Nestle is attempting to solve the information management and systems challenge by standardizing on a common ERP system globally. As part of this initiative, the global food and beverage giant is rolling out a common e-procurement solution across its major regions and markets. Adoption of the solution, which is being licensed from Nestle’s core ERP provider, has been accelerated by a unique three-pronged strategy:

1. Speed e-procurement system deployment by initially implementing in a hosted model. This tactic ensures that Nestle’s e-procurement rollout does not conflict

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The Center-Led Procurement Business Value Research Series with its global ERP and data center consolidation

The Center-Led Procurement Business Value Research Series

with its global ERP and data center consolidation efforts. (Nestle will begin tran- sitioning e-procurement system management to its own data centers in 2007.) This approach also allows Nestle to handle implementation and change manage- ment issues during the initial rollout, enabling simplified system set-up and con- figuration when e-procurement system management moves in house.

2. Leverage a global service provider that can support system rollout and supplier enablement at the local level. Nestle partnered with a service provider that of- fered a standard implementation template for its e-procurement system, including pre-defined approval workflows, master and regional catalogs, and training. Most importantly, the service provider offered in-country resources to manage change management issues, training, and technical assistance at the local level.

3. Provide flexible configuration and supplier management at the local level. Nestle allowed variability in its e-procurement implementation template to ensure sup- port of the unique business requirements of individual markets and locales. Simi- lar flexibility was extended to supplier enablement services, which support the activation and management of global, regional, and local supplier catalogs.

This flexible approach and local support has enabled Nestle to overcome much of the push-back that accompanies procurement standardization and system deployment.

“Just because you define a strategy at headquarters doesn’t mean the local markets will follow,” said one Nestle procurement executive. “Adoption has been accelerated by hav- ing resources from [our service partner] in the local markets describing the benefits of e-procurement and building the business case. Once the markets are convinced of the value to them, they will start supporting the initiative.”

Proof: the company deployed e-procurement across 15 businesses and regions within two years. Nestle plans to have 35 key businesses in 60 countries using its common e- procurement system within the next two years. At that time, Nestle expects to be manag- ing more than 60% of its total indirect (“non-production”) spending through the system.

Such factors and proof-points lead Aberdeen to contend that transitioning to a center-led organization is difficult, if not impossible, without the use of a common procurement sys- tem infrastructure that integrates and interoperates with finance, ERP, and other critical business systems. Supporting evidence for this assertion comes from Aberdeen research findings that more than 80% of Fortune 1000 companies have adopted web-based sourc- ing and requisitioning tools. Users report double-digit cost savings, enhanced process standardization and knowledge sharing, and dramatic improvements in compliance and process efficiencies. Not surprisingly, nearly half of this market segment prioritized in- vestment in a standard, integrated source-to-settle platform for within the next two years.

Core components of this closed-loop procurement automation infrastructure include:

Spend data management for aggregation, cleansing, classification, enrichment, and analysis of spending data.

Full e-sourcing platform to automate and manage complete sourcing projects – from initial requirements development, simple and complex negotiations, bid analysis, award allocation, and knowledge and project management. Leading en- terprises are also leveraging optimization-based analytics to enable flexible nego-

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The Center-Led Procurement Business Value Research Series

The Center-Led Procurement Business Value Research Series tiations and analyze and determine optimal total-cost-based

tiations and analyze and determine optimal total-cost-based allocation decisions across myriad business scenarios and constraints.

Requisition-to-settle capabilities to automate request, approval, receipt, recon- ciliation, and payment of all categories of spending.

Contract management to automate contract collaboration and creation, compli- ance management, and performance analysis.

Supplier performance measurement for quantitative and qualitative monitoring, scoring, and analysis of supplier performance. Extended functionality includes corrective action and improvement planning and execution (Figure 6).

Closed-loop procurement infrastructure will not necessarily be sourced from a single vendor. However, technology buying trends indicate that enterprises prefer to utilize as few solution providers as possible. Regardless of selection approaches, effective closed- loop operations require application modules to be integrated across the source-to-settle lifecycle to support process efficiencies, controls, and information transfer.

Figure 6: Closed-Loop Procurement Automation Infrastructure

Figure 6: Closed-Loop Procurement Automation Infrastructure The Importance of Integration Source: Aberdeen Group ,

The Importance of Integration

Source: AberdeenGroup, August 2005

Equally critical is integration between sourcing and procurement applications and back- office ERP systems, such as purchasing, financials, supply chain, logistics, and inventory systems. Integration between procurement applications and ERP systems enables “lights out” source-to-pay operations and delivers improved reporting and intelligence to sourc- ing and business executives. For example, Nestle expects to gain productivity, cost, and performance improvements from its center-led procurement initiative once the e-

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The Center-Led Procurement Business Value Research Series procurement system is installed in its data centers

The Center-Led Procurement Business Value Research Series

procurement system is installed in its data centers and integrated with its core ERP sys- tem. This will avoid data re-keying and enable more proactive alignment and manage- ment of sourcing and procurement activities in support of overall business objectives.

Such integration can foster improved coordination and collaboration with suppliers by exposing critical business information, such as demand and purchase plans and pull sig- nals, to supplier portals or directly to supplier systems. Integration between procurement and related business systems – such as PLM – supports initiatives, such as compliance, parts standardization and reuse, and costing.

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The Center-Led Procurement Business Value Research Series

Chapter Four:

Conclusions

Business Value Research Series Chapter Four: Conclusions New market pressures are pushing procurement to the

New market pressures are pushing procurement to the frontlines of corporate strategy. But traditional procurement organizational models fail to provide the control and flexibil- ity required to meet these new demands. As a result, an increasing number of enterprises are adopting a hybrid or center-led procurement model that offers the spend leverage, process standardization, and knowledge- and resource-sharing attributes of centralization with the local empowerment and execution characteristics of the decentralized model. This emerging center-led structure relies on:

Cross-functional and -divisional teams.

Flexible process and policy standards that can be tailored at the local level.

Coordinated metrics and incentives.

An integrated procurement information systems infrastructure that automates and aligns source-to-settle processes across the enterprise.

Enterprises successfully making the shift to center-led procurement structures consis- tently outperform companies with other organizational models both in total spend under management of the procurement group and supply cost reductions achieved.

Center-led firms also report greater and more effective use of procurement automation, higher level reporting structures, and more efficient and effective operations. As a result, Aberdeen projects that the center-led organizational structure will emerge as a competi- tive differentiator within and across industry segments.

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The Center-Led Procurement Business Value Research Series Author Profile Tim Minahan Senior Vice President, Global

The Center-Led Procurement Business Value Research Series

Author Profile

Tim Minahan Senior Vice President, Global Supply Management Research AberdeenGroup

Tim Minahan is senior vice president of global supply management research for AberdeenGroup, Inc. Minahan specifically focuses on total cost management (TCM), an organizational and technological framework for managing the total cost of ownership of supply relationships. Within TCM, Minahan tracks spending analysis, sourcing, pro- curement execution, contract management, and supplier performance measurement tech- nologies.

Minahan also covers product lifecycle management (PLM) technologies and their con- vergence with TCM. Minahan continually consults with early implementers of these ap- plications to identify world-class supply management strategies and determine the strengths and weaknesses of technology solutions and services that are competing in this market.

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The Center-Led Procurement Business Value Research Series

Appendix A:

Research Methodology

Value Research Series Appendix A: Research Methodology This research effort draws on the following Aberdeen Group

This research effort draws on the following AberdeenGroup research activities:

In 2004, Aberdeen assessed CLM implementations of more than 40 enterprises. Selection approaches and criteria used by these enterprises are reflected in this report. We have since benchmarked the performance of another dozen CLM im- plementations.

In 2005, Aberdeen was also appointed co-chair of the International Association of Commercial Contract Managers (IACCM) Contract Management Automation Community of Interest, a group of contracting, procurement, and IT executives currently evaluating or implementing contract management solutions. The group’s first meeting focused on the proper criteria to effectively evaluate com- mercially available contract management solutions. Some insights from this group are reflected in this report.

Between January and June 2005, Aberdeen conducted demonstrations and as- sessments of more than 20 CLM solutions and providers. Some insights from this research effort are reflected in this report. Detailed findings from this research ef- fort will be published in the CLM Vendor Assessment Report in December.

Aberdeen supplemented these research efforts with more detailed telephone interviews and on-site consultations with additional enterprises. This research initiative aimed to identify best practices for CLM solution selection.

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The Center-Led Procurement Business Value Research Series Appendix B: Related Aberdeen Research & Tools Related

The Center-Led Procurement Business Value Research Series

Appendix B:

Related Aberdeen Research & Tools

Related Aberdeen research that forms a companion or reference to this report includes:

Best

in

and

(September 2005)

Information

on

these

and

other

Aberdeen

publications

can

be

found

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The Center-Led Procurement Business Value Research Series

About

AberdeenGroup

Business Value Research Series About Aberdeen Group Our Mission To be the trusted advisor and business

Our Mission

To be the trusted advisor and business value research destination of choice for the Global Business Executive.

Our Approach

Aberdeen delivers unbiased, primary research that helps enterprises derive tangible busi- ness value from technology-enabled solutions. Through continuous benchmarking and analysis of value chain practices, Aberdeen offers a unique mix of research, tools, and services to help Global Business Executives accomplish the following:

IMPROVE the financial and competitive position of their business now

PRIORITIZE operational improvement areas to drive immediate, tangible value to their business

LEVERAGE information technology for tangible business value.

Aberdeen also offers selected solution providers fact-based tools and services to em- power and equip them to accomplish the following:

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ACCELERATE SALES, by accessing executive decision-makers who need a so- lution and arming the sales team with fact-based differentiation around business impact

EXPAND CUSTOMERS, by fortifying their value proposition with independent fact-based research and demonstrating installed base proof points

Our History of Integrity

Aberdeen was founded in 1988 to conduct fact-based, unbiased research that delivers tangible value to executives trying to advance their businesses with technology-enabled solutions.

Aberdeen's integrity has always been and always will be beyond reproach. We provide independent research and analysis of the dynamics underlying specific technology- enabled business strategies, market trends, and technology solutions. While some reports or portions of reports may be underwritten by corporate sponsors, Aberdeen's research findings are never influenced by any of these sponsors.

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The Center-Led Procurement Business Value Research Series

The Center-Led Procurement Business Value Research Series Aberdeen Group , Inc. 260 Franklin Street Boston,
The Center-Led Procurement Business Value Research Series Aberdeen Group , Inc. 260 Franklin Street Boston,

Aberdeen Group , Inc. 260 Franklin Street Boston, Massachusetts

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Founded in 1988, Aberdeen

driven research destination of choice for the global

Group has ov er 100,000 re-

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