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Category: Procurement and Sourcing

Supply Chain News: Trends in Measuring Procurement’s Value

 

Beyond Efficiency and Cost Savings, Procurement Leaders Push New Ways of Capturing Value Creation

 

June 28, 2017
SCDigest Editorial Staff

Perhaps the only thing tougher than the procurement job itself the challenge of quantifying the value of the effort and investment in the function.

Several years back, SCDigest wrote an article summarizing the views of P. Fraser Johnson and Michiel R. Leenders, of the University of West Ontario and the Richard Ivey School of Business, respectively, on this topic.

Supply Chain Digest Says...

In addition to delivering hard- and soft-cost savings, strategic sourcing and procurement teams also drive value by decreasing a company's need for working capital.

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They cited the following challenges in quantifying procurement value:

• System Challenges
• Who Gets the Credit?
• Things Change
• Refusal to Account for Cumulative Savings
• Incomplete Definition of Savings
• Inability to Convert Savings into Profit
• 
Reluctance to Revisit Past Decisions


That's a pretty good list. To see the details, and what the authors recommend to do about it, go here: The Challenge in Quantifying Savings from Supply Management

We recently found some other interesting thoughts on quantifying procurement value in a recent piece from Harvard Business Review's Analytic Services group, part of a much broader report titled High-Performance Sourcing and Procurement.

Highlights of that section of the report are published below.

On one level, the report notes, quantifying the value of high-performance, strategic sourcing and procurement seems fairly straightforward: in addition to improving operational efficiency - measured through metrics such as decreased cycle times, percentage of on-time payments, and many more - high-performance sourcing and procurement delivers clear cost savings.

In practice, however, the report says, measuring and understanding the value of high-performance sourcing and procurement extends far beyond simply monitoring operational efficiency metrics and identifying cost savings.

HBR says that "When measuring and reporting business impact, sourcing and procurement organizations tend to be conservative - careful not to claim credit for the efforts of their colleagues in the business, and equally careful to validate savings and efficiency gains, often with assistance from the office of finance."

As an example, a sourcing leader at one fast-growing software firm told HBR that "We are conservative in the way we assess savings. We only report the number that sourcing has successfully been able to influence. If our business partners have already been able to negotiate 10% or 20% off, we assess our contribution from there - we don't count what the businesses were able to achieve on their own."

Levi Strauss provides another view on this topic.

"As we've evolved, our definition of savings has evolved with us," said a company procurement executive. "We've gone from simply "a saving is a saving" to "How do we categorize this saving?" What should be categorized as cost avoidance? What qualifies as negotiated savings? What qualifies as hard money that we can free from the budget and redirect to other projects?"

This approach is achieved in part by working closely with the finance team, the executive said.

In addition to delivering hard- and soft-cost savings, strategic sourcing and procurement teams also drive value by decreasing a company's need for working capital.

"Sourcing teams regularly negotiate more favorable payment terms to improve their company's working capital position, but they also contribute to operational improvements that boost working-capital efficiency, for example, by arranging with a supplier to deliver goods on a just-in-time basis, while holding inventory in the supplier's facilities," the report notes.


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In an interesting example from the report, at building products makers Owens Corning every organization in the global sourcing function measures a "value creation index," which encompasses cash and working-capital metrics such as discounted cash flow, in addition to hard-savings metrics.

The approach has paid off. In 2016, Owens Corning's sourcing team contributed millions of dollars of hard savings to the company, which helped it achieve record levels of adjusted EBIT and free cash flow.

However, some areas impacted by procurement performance are much more difficult to quantify.

The report observes that quantifying the value of risk avoidance is one area that is notoriously challenging to quantify, noting that many sourcing and procurement groups measure their risk-related performance using operational metrics tied to the execution of risk-management processes.

Also difficult to quantify, the report says, are procurement's contribution to innovation, creative problem solving, and other business outcomes beyond hard dollar savings - contributions that may well be manifested in additional revenues, but not in outright cost reductions.

The report says "narratives" are sometimes used to capture this creation of value.

The report also cites the example of Australia manufacturer Bradken, which only recently started to focus on procurement excellence.

Bradken is now generating impressive returns through its sourcing-improvement efforts, with the company realizing a return of 5 to 10 times every dollar it invests in procurement.

"The potential to drive 400% ROI - or more - through a self-paced, self-driven effort is a big reason why many companies are taking a closer look at sourcing and procurement," HBR says.

Although some dimensions are more straightforward to quantify than others, the concrete financial returns of focused sourcing and procurement efforts are quick to accrue and very easy to identify, according to the report.

"As Bradken's and Owens Corning's results demonstrate, companies that focus on strategic sourcing enjoy not just enhanced profitability, but a range of positive results including improved cash and working-capital performance - results that, in turn, are rewarded by investors," the report concludes.


What are your thoughts on quantifying procurement value? Let us know your thoughts at the Feedback section below.

 

Your Comments/Feedback

Srihari

Senior Consultant, Infosys
Posted on: May, 22 2016
Great article. I am a little suprised not to see BNSF in the mix while I understand their financial mode/operation is a little different. 

That would only give a complete perspective with all the players in the pool.

Mike O'Brien

Senior editor, Access Intelligence
Posted on: May, 26 2016
Surprised to see Home Depot fall off the list; thought they were winning with Sync?

Julie Leonard

Marketing Director, Inovity
Posted on: Jun, 27 2016
Using the right tool for the right job has always been a best practice and one of the reasons, we feel, that RFID has never taken off in the DC as exponentially as pundits have been forecasting since 2006. While these results may seem surprising to those solely focused on barcode scanning, the adoption of multi-modal technologies in the DC makes perfect sense for greater worker efficiency and productivity.

Carsten Baumann

Strategic Alliance Manager, Schneider Electric
Posted on: Aug, 19 2016

The IoT Platform in this year's (2016) Hype Cycle is on the ascending side, entering the "Peak of Inflated Expectation" area. How does this compare to the IoT positions of the previous years, which have already peaked in 2015? Isn't this contradicting in itself?

Editor's Note: 

You are right, Internet of Things (IoT) was at the top of the Garter new technology hype curve not long ago. As you noted, however, this time the placement was for “IoT Platforms,” a category of software tools from a good number of vendors to manage connectivity, data communications and more with IoT-enabled devices in the field.

So, this is different fro IoT generally, though a company deploying connected things obviously needs some kind of platform – hoe grown or acquired – to manage those functions.

Why IoT generically is not on the curve this year I wondered myself.

 

 

Jo Ann Tudtud-Navalta

Materials Management Manager, Chong Hua Hospital, Cebu City, Philippines
Posted on: Aug, 21 2016

I agree totally with Mr. Schneider.

I have always lived by "put it in writing" all my work life.  I am a firm believer of the many benefits of putting everything in writing and I try to teach it to as many people as I can.

This "putting in writing" can also be used for almost anything else.  Here are some general benefits (only some) of "putting in writing":

1. Everything is better understood between parties involved.  There are lots of people types who need something visual to improve their understanding.
2. Everyone can read to review and correct anything misunderstood.  This will ensure that all parties concerned confirm the details of the agreements as correct.  This is further enhanced by having all parties involved sign off on a hard copy or confirm via reply email.
3. Everything has a proof.  Not to belittle the element of trust among parties involved, it is always safest to have tangible proof of what was agreed on.
4. There will be a document to refer to at any time by any one who needs clarification.
5. The documentation can be useful historical data for any future endeavor.  It provides inputs for better decisions on related situations in the future.
6. This can also be compiled and used to teach future new team members.  "Learn from the past" it is said.

There are many more benefits.  Mr. Schneider is very correct about his call to "put it in writing".





Sandy Montalbano

Consultant, Reshoring Initiative
Posted on: Aug, 24 2016
U.S. companies are reshoring and foreign companies are investing in U.S. locations to be in close proximity to the U.S. market for customer responsiveness, flexibility, quality control, and for the positive branding of "Made in USA".

Reshoring including FDI balanced offshoring in 2015 as it did in 2014. In comparison, in 2000-2007 the U.S. lost net about 200,000 manufacturing jobs per year to offshoring. That is huge progress to celebrate!

The Reshoring Initiative Can Help. In order to help companies decide objectively to reshore manufacturing back to the U.S. or offshore, the nonprofit Reshoring Initiative's free Total Cost of Ownership Estimator can help corporations calculate the real P&L impact of reshoring or offshoring. http://www.reshorenow.org/TCO_Estimator.cfm

Robert

Transportation Manager, N/A
Posted on: Aug, 30 2016
 Good article!  I am sending this to my colleagues who work with me.  We have to keep this in mind.  Thanks!

Ian Jansen

Mr, NHLS
Posted on: Sep, 14 2016
SCM is all about getting the order delivered to the Customer on date/ time requested because happy Customers = Revenue. Using the right tools to do the right job is important and SCM is heavily dependent on sophisticated ERP systems to get right real data info ASP.

I've worked in a DC with more than 400,000 line items and measured the Productivity of Pickers by how many "picks" per day.

I've learned that one doesn't have to remind Germany about your EDI orders.

Don Benson

Partner, Warehouse Coach
Posted on: Sep, 15 2016
Challenge - to build and sustain effective relationships at the level of the organizations that are responsible for effectively coordinating and colaborating in an otherwise highly competitive environment 

Jade

Admin, Fulfillment Logistics UK Ltd
Posted on: Oct, 02 2016
Of course we all need to up our game. We need to move with the times, and always be one step ahead of what the future will bring.

Mike Dargis

President of asset-based carrier based in the Midwest, Zip Xpress Inc. (at ZipXpress.net)
Posted on: Oct, 03 2016
Thanks for the article, but I know there's a lot more to this issue than just the pay rates. Please check out my blogs on the subject at www.zipxpress.net.

Blaine

Inventory Specialist, Syncron
Posted on: Nov, 16 2016
Lora, great article! I agree that companies choose the 'safe' solution more often than not. My solution is a bolt-on for legacy ERP's and we even face challeneges of customer adoption. Most like to play it safe and choose an ERP upgrade, which is more costly, time consuming, and has lower ROI across the board. Would love to learn more about your company, we are always looking for partnerships.

Blaine
blaine.schultz@syncron.com

Bob McIntyre

National Account Executive, DBK Concepts LLC
Posted on: Nov, 21 2016
This is a game changer in GE's production and prototyping.  It also has huge implications across the GE global supply chain with regard to the management of their support and spare parts network. 

Kai Furmans

Professor, KIT
Posted on: May, 22 2017
I am referencing to the comment that leasing of warehousing equipment (beyond forklift trucks) is a vision for 2030.
Just recently in Europe, such a business model has started, see here: https://next-intralogistics.de/

I am following with a lot of interest, how the business develops.

Stuart Rosenberg

Supply Chain Consultant, First Choice Supply Chain
Posted on: Jun, 05 2017
If we limit the standard on judging or determining the best supply chain to just three calculations it does not tell the entire picture.  Financial performance metrics are valuable as they capture the economic consequences of business decisions.  But supply chain managers make decsions and use organizational resources that impact a company's financial well being.  Where is a firm's earnings over a period of time determined by sales less product costs and general/adminsitrative costs?  Where is the metric for determining the sources and uses of cash from three perspectives - operational, investment and financial?  Where are these supply chain metrics: on-time delivery, lead time, response time to customers, product returns, procurement costs, network distance, inventory carrying costs, forecasting accuracy, sourcing time, etc,.  Without knowing the results of all these supply chain calculations the there must be a question as to the accuracy of the 25 top supply chains.

Dustin Calitz

Project Commercialization Manager, Mondelez
Posted on: Jun, 06 2017
I feel this ranking misses the mark in SC. It does not seem to consider a key indicator in days inventory on hand, which is key to determining a SC company's ability to forecast, manage inventory costs and reduce aged stock. In additiion I realize it's difficult to understand what goes into the customer survey, but would I assume specific metrics are being asked. For examples customer's opinion on service level differentiation and the ability to deliver the right product on time, which should then be allocated a bigger weighting than 10%. It would also be interesting to take a view of the above list's SKU portfolio complexity, seasonality and launches/promotions. I would again assume some companies on the list above have a far more complex SC to manage and lead, ultimately requiring a lot more innovation within a SC to stay ahead of competitors, and ultimately satisfy their customers demands.  I understand above metrics are difficult to measure, as mentioned in the article, but they somehow need to be considered to give a true reflection. 

Michael Hurd

Lean Consultant, Unemployed
Posted on: Jun, 10 2017

A Very Good Article...

While some feel that lean is a scam that pushes for more out of the personnel and out of the companies through reduction of waste and adding value for the customer, there are several things to remember:

1) Lean methodologies are designed and implemented to reduce time wasting, so this may seem that you are working harder as an employee.

2) Lean methdoligies only work when everyone from the janitor to the owner of the company get involved and back the program.

3) Lean methods are there to make you work smarter not harder, although it may feel you are working harder.

4) YES... Sometimes lean methodologies fail! This is due to project overun or taking on too large a problem and trying to fix it all in one go and not taking the smaller problems that are associated with the large problem and fixing them first. Sometimes fixing the small problems leads to resolution of the larger problem.

 
 

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