Procurement Executive Advisory - 2010 Key Performance Metrics

Data and charts presented represent data selected from hundreds of different performance metrics and best practices in use at client organizations worldwide, and demonstrate the most significant differentiators between world-class performers and their more typical peers.

Optimizing Purchase-to-Pay Workflows by Spend Category

While companies usually have some type of formal sourcing methodology, they may have tens if not hundreds of different ways to buy and pay for goods and services. This reduces efficiency and customer satisfaction and leads to higher noncompliance rates and greater risk. To improve overall source-to-settle performance, have a unified spend category taxonomy and strictly limit transactional purchasing and payment processes, mapping them to spend categories and/or associated suppliers.

Purchase-to-Pay Process Advisory Key Metrics

Purchase-to-Pay Process Advisory Key Metrics

Stress-Testing Procurement Transformation at Rio Tinto

Rio Tinto’s 2007 acquisition of Alcan was followed by a mandate from executive management to quickly transform the merged G&A functions. A functional benchmark in late 2007 provided global procurement head Scott Singer with the data he needed to identify areas requiring improvement and to build support among his new team, made up of legacy Rio Tinto and Alcan professionals. The transformation of procurement and supply chain have been critical to Rio Tinto’s ability to withstand not just the pressures inherent to integrating acquisitions, but also rapid swings in commodity markets and the global recession. Tools included the benchmark findings, Lean-inspired value stream mapping and collaboration built on a foundation of understanding of the diverse, global company’s cultural differences.

G&A Organizations Have Failed the Agility Test

Unprecedented declines in consumer demand, heightened business uncertainty and intense global competitive pressure are testing the agility of G&A organizations as never before.New Hackett research reveals that G&A organizations by and large have failed to demonstrate the appropriate agility to respond to the rapidly declining revenue trends and avoid being a drag on profits. Between Q1 2008 and Q1 2009, Global 1000 companies saw their revenues decline by 13.3%, while their SG&A costs declined by only 1.9%. Since one proven approach to increasing agility is optimization of their global G&A service delivery, executives should take action immediately to define and develop an appropriate Service Delivery Model for G&A.

Procurement Metric of the Month July 2009: Wage Rate for High-Value Procurement Processes

For higher-value, more strategic work such as compliance management and supplier management/development, world-class organizations have fewer, better-paid staff. Increasingly, these people are working as Centers of Excellence, setting strategy, measuring performance, and providing guidance and support for work actually performed within the business operations.

Procurement Metric of the Month Jan 2009: Spend as a Percent of Revenue

Spend as a percent of revenue is an excellent metric for augmenting the common metric of year-on-year cost savings as a percent of spend. If negotiated savings look good, but total spend is not decreasing year over year, something is wrong (assuming the same levels of outsourcing). This should then lead to discussions and examinations of spend compliance; spend visibility; demand management; whether supply markets can be more involved in helping reduce total expenditures; and even outsourcing.

Hackett Sourcing Location Guide: Romania

Among the central and eastern European countries, Romania is the top destination for the services industry, scoring high on labor costs, productivity and skills. It has a skilled labor pool, especially in IT and IT services, but rising infrastructure and labor costs may make Romania less attractive in the future. Negatives include poorer-than-average telecom infrastructure, transport and logistics infrastructure and social climate.

The Transformation of Merck’s Global Procurement

To attain more strategic responsibility and elevate its role in enterprise management, Merck’s procurement function underwent a major, multi-phased transformation program based on a unique approach it calls entity management. Since 2004, entity management has helped generate more than $2 billion in bottom-line savings. Senior-level sponsorship, engagement with the business and effective change management have been the key enablers of Merck’s success. Important steps in the transformation involved widespread training in sourcing management best practices; the launch of more than 50 dedicated category teams; a formal supplier management program; regional sourcing teams; and a global operating framework for procurement.

Hackett Sourcing Location Guide: Estonia

Estonia is proving popular with companies (including outsourcers) from the Nordic region, Russia, Poland and Germany in search of a nearby, stable source of low-cost labor for their service centers. It has a small but well-educated labor force, yet compared with other EU countries, labor costs are still low. The services industry constitutes nearly 67% of the country's GDP. A stable political and economic environment, good IT infrastructure and cultural affinity with the Western European markets have greatly contributed to the success of Estonia's services industry, including captive facilities and third-party vendors. In 2007, Estonia became more prominent as an attractive services destination after debuting at number 15 on A.T. Kearney's list of the top 50 global outsourcing locations. In that report, Estonia was compared to what Ireland used to be 10 to 15 years ago: a relatively low-cost European location with largely untapped talent and a pro-business policy environment.

Dow Chemical Company: Supply Risk Management Process Is Key to Improving Safety and Security

The Dow Chemical Company manages an annual spend of over $15 billion across a broad range of products and services. Driven by the need to minimize supply disruption within its $7 billion raw materials portfolio, the company developed its procurement risk assessment and mitigation (PRAM) methodology. Based on an easy-to-use spreadsheet and visual tool, PRAM allows supply managers to work closely with the business to create risk profiles of the company’s raw materials supply strategies. Using these risk profiles has enabled Dow to develop risk mitigation plans in order to minimize the potential risks caused by supply disruption. The PRAM process has provided an opportunity for procurement to continue evolving its value proposition and become a more strategic partner to the business. Adapted from a case study presented by Paula Tolliver, Global Director of Purchasing, Dow Chemical Company, at The Hackett Group’s 2007 Best Practices Conference.

Automated Contract Management Solutions Help Improve Both the Efficiency and Effectiveness of Procurement

Maximum benefits from strategic sourcing are often not fully realized due to cumbersome contract creation processes, poor internal contract utilization and/or poor visibility to supplier performance. Evidence from the field shows that one particularly important practice for tackling these issues is automated contract management, an enabler to strategic sourcing, supplier management and purchase-to-pay (P2P) processes. The benefits of automating contract management include more efficient workflow; better supplier compliance; better internal compliance; and greater sourcing leverage. It also frees up critical sourcing staff to address more spending categories to deliver more savings.

Supply Intelligence: Building an Effective Capability to Enhance Procurement’s Value

Of all procurement knowledge areas, supplier analysis (a foundational capability of supply intelligence) is most highly correlated to world-class procurement performance. Supply intelligence is based on analysis of a range of market, supply and external data, and is used to improve outcomes in supply-chain-related performance goals. But only with the appropriate tools can the full strategic value of the data be extracted. In one successful example, at Corning, corporate and business-unit response to a new supply intelligence service has been so strong that, in order to expand functional capability, the initiative’s managers have trained 120 operations staff members in basic data gathering and analysis techniques.

Optimizing Supplier Payment Strategies

There are a number of recent advancements and other factors that have dramatically changed the value opportunity of a formalized supplier payment strategy. This research discusses how a truly optimized supplier payment strategy balances the need for working capital with the value of reduced procurement spend.

Foundational Practices of World-Class Procurement Organizations - Key Themes in Best Practices That Make All the Difference

While there are many variations in the way organizations approach and adopt best practices, based on history, current situations and business goals, several best practices stand out as common factors in driving world-class procurement performance: These are areas which deliver improvements in efficiency concurrently with gains in effectiveness.

Prepared for Risk: Boston Scientific Uses Data to Establish a Framework to Secure Its Supply Chain

Risk is moving up on the agenda of corporate leadership because of its impact on the bottom line, market valuation and shareholder value. The historical predominance of reactive risk management is now unsustainable. Proactive supply risk management is emerging as a best practice, and we expect broad adoption by world-class procurement and supply chain organizations in the coming years. This Procurement Executive Insight examines issues and strategies in supply risk management. It then describes the approach Boston Scientific Company (BSC) adopted to define and deploy effective risk mitigation strategies based on a formal and quantitative process for procurement, supply chain and manufacturing operations. The case study was presented in a recent Hackett client webcast by Boston Scientific’s Manager of Strategic Procurement Engineering, Mike Kalfopoulos, and its VP of Global Sourcing, Karen Weinstein-Millson. For further details, Hackett clients are referred to the recording of the webcast accessible through the Hackett portal.

2005 Performance Metrics and Practices in Total Working Capital

The goal of Performance Metrics and Practices in Total Working Capital is to show the profound impact on company finances that can be achieved through proactive management of working capital, a topic that, at typical companies, is often an afterthought to other considerations of business strategy and financial management. However, good working capital management will assist companies in achieving their business goals by freeing up cash for strategic initiatives. Within the same industry, there is a wide variance in working capital performance between companies. In this report, we provide the working capital performance metrics of world-class organizations and explain the best practices they have adopted that help them achieve their performance. Previously, only a summary analysis of this data was available through CFO Magazine in the US and Europe. This report gives a deeper insight into performance drivers and challenges faced by CFOs seeking to improve working capital management in their companies, and examines of some of the key best practices they use to optimize their approach. In this way, you may begin to analyze the working capital situation at your own company and construct a powerful business case for improvement.

To Optimize the Effectiveness of Purchase-to-Pay Processes, Risks and Controls Must Be in Balance

Many procurement executives have been unpleasantly surprised by the cost of assuring their organization is in compliance with the requirements of the Sarbanes- Oxley Act. For them, the costs of compliance are proving a burden; what they need is an approach to controls that can be implemented easily, yet economically. Unfortunately, a low-risk purchase-to-pay (P2P) process is viewed by many executives as requiring a high degree of control, which increases cost, not to mention cycle time. Finding the proper balance between risk and control means understanding that not all processes need to be controlled to the same degree. This Book of Numbers Insight offers strategies for quantifying and then comparing amounts of risk versus the potential cost of control.

Compressing the Close Cycle at Agilent: Challenges and Key Factors for Success

Historically, "days to close" has been seen as a particularly useful gauge of the effectiveness of finance organizations and their staff. Today, with severe penalties for false disclosures, the accuracy of the books has taken on greater importance, and median days-to-close figures have risen since the passage of the Sarbanes-Oxley Act. Agilent Technologies, as a result of its November 1999 spin-off from Hewlett-Packard, faced the daunting task of improving financial and accounting performance. Its internal financial structure, which it inherited from HP, was built on a diverse and very complex set of over 2,000 legacy systems that increased the inefficiencies and delays in the accounting process. This Hackett Perspective explores the program that Agilent Technologies employed to not only shorten the monthly close cycle by three days, but also reduce costs, eliminate many inefficiencies in the old 12-day schedule, improve the quality of data, allow more time for analysis and forecasting, and ultimately, enabled the company to receive an unqualified audit opinion at the end of FY05. It is based on a 2005 Hackett Finance Shared Services webcast featuring Mr. Mark Hejtmanek, Finance Integrating Manager with Agilent Technologies.

2005 Performance Metrics and Practices of World-Class Procurement Organizations

Top-of-mind issues among senior procurement executives - such as improving supplier leverage, increasing the level of spend savings, realizing a ROI on Web technologies, and making appropriate business process sourcing decisions - are all examined in detail in this research. Its 50-plus charts represent data selected from hundreds of different performance metrics and best practices in use at client organizations worldwide, and demonstrate the most significant differentiators between specific world-class performers (as identified by our empirically based methodology) and their more typical peers.

A Management Primer for Balancing Risk and Control in P2P

Any business process raises issues of the balance between the perception and reality of risk and the perception and reality of control. But in P2P this tension is particularly evident for several reasons. Most companies have many requestors originating orders and multiple ordering and payment methods, creating significant complexity from the point of view of control. Because this process is about purchasing items using the company’s funds, it is perceived to offer many opportunities for waste, error and fraud. In addition, managers know that a well-controlled P2P process can create real economic benefits for the firm, causing them to incline toward high degrees of control. Sarbanes-Oxley, too, has generated significant angst about whether a firm has adequate levels of control. Users of the process, on the other hand, equally and naturally desire speed and ease of use. This Hackett Perspective offers proven practices and guidelines for: defining risk and control in P2P; measuring the costs of control and risk; balancing risk with control; defining what constitutes acceptable risk and acceptable control; and understanding how risk and control vary with different types of purchases.

Best Practices in E-catalog Design

Implementing an e-procurement system is an undertaking that many clients regard with a mix of careful consideration and a little hesitation. According to Hackett Group data 50% of companies have either implemented or are in the process of implementing electronic merchant catalogs. All of the world-class companies provide access to Web-based catalogs for requisitioning and placing purchase orders. Only 50% of the peer group provides such access. The "toe in the water" approach to e-procurement is no longer necessary or beneficial to companies embarking on this type of initiative. Vendors are ready to integrate with customers using e-procurement systems and are willing to work closely with them to make this happen. With this in mind, The Hackett Group advises companies embarking on an e-procurement program to clearly define and communicate their catalog and content management strategy to their vendor population. Defining an e-procurement commodity and catalog strategy early in the program is critical; this will serve as a pinnacle point in driving the successful ongoing use of the system. There are several components to consider when developing the strategy and each is addressed in this issue of Hackett Perspective.

How to Set Up a Best Practice KPI Reporting System for the Purchase-to-Pay Process

A key performance indicator (KPI) model for the purchase-to-pay process focuses on comparability, compliance with end-to-end process strategy and measuring of current projects and initiatives. The main goals that executives link to the purchase-to-pay (P2P) process today are:, High productivity, Low costs, & Sufficient controls.

September 2005 Performance Metrics and Practices of World-Class Companies: Executive Insights in Finance, IT, HR, and Procurement

September 2005 Performance Metrics and Practices of World-Class Companies: Executive Insights in Finance, IT, HR, and Procurement

July 2005: Optimizing a Return on Business Complexity: Performance Metrics, Practices and Strategies of World-Class Companies

July 2005: Optimizing a Return on Business Complexity: Performance Metrics, Practices and Strategies of World-Class Companies

Expanding E-invoicing by Working Closely with Suppliers, Internal Stakeholders and Governments

According to Hackett Group data, the average cost to process an electronic invoice line item is about 15% of the cost of a paper-based invoice. For the median company the cost is $0.58 per line item electronically compared to $3.84 per line item for a paper-based invoice. In addition to reducing transactional costs, e-invoicing can improve the overall effectiveness of the purchase-to-pay process. Companies implementing electronic invoicing for greater than 50% of their invoice line item volume spend 3.5 times less per invoice line item on discrepancy resolution activities as compared with companies with less than 50%. Companies implementing electronic invoicing also process invoices more efficiently. Companies with greater than 50% electronic invoice line item volume processed five times the number of invoice line items per full-time equivalent (FTE) than companies with less than 50%.

End-to-end Accountability Delivers Improved Costs and Better Performance in Purchase-to-Pay

Leading companies continuously reevaluate their internal operations for opportunities to unlock hidden value. Nowhere is this value proposition clearer than in the unification of the purchasing and accounts payable (AP) processes. World-class companies have realized how single accountability of the purchase-to-pay (P2P) process serves as a catalyst to performance improvements in today's business environment. Unlike the traditional practice of viewing purchasing and account payables as two independent functions, world-class companies are now viewing them through one single window with common objectives and strategies. By employing single accountability in P2P, it is evident that there is substantial progress in enabling world-class performance through improved cost factors, higher productivity, improved working cooperation, and increased quality.

Honeywell Drives Purchase-To-Pay Process Excellence Through a Five-Stage Transformation Program and Diligent Use of Six Sigma

Research by The Hackett Group finds that few processes offer as many options for improvement at each step as purchase-to-pay. Attempts to substantially enhance performance are often stymied due to large parts of the process being owned by discrete parts of the business. As a result, opportunities for standardization, centralization and the leveraging of technology and sourcing strategies are minimized. Purchase-to-pay process ownership is parceled out at the 110,000 employee-strong Honeywell Corporation which, with $25 billion in revenues, competes within the aerospace, transportation, automation & control solutions and specialty materials markets. Honeywell's structure is such that Global Business Services (its shared services organization) owns Accounts Payable (AP), and each individual business unit owns its own procurement activities.

Lucent Innovates Global Sourcing to Deliver Greater Value at Lower Cost

In 2000, the telecommunications industry was riding high. The technology-fueled boom boosted demand for products, and Lucent Technologies was in aggressive growth mode. But when the market collapsed at the end of the year, leading to the worst telecom industry downturn in history, Lucent had to restructure its company-wide operations to stabilize finances and cut costs. While that necessity did not originally focus on the supply chain, the procurement leadership at Lucent sought to be a factor in the company's transformation.

Royal Caribbean Cruises Looked Beyond Its Benchmark Numbers to Target Effectiveness Improvements

Royal Caribbean Cruises is the second largest cruise company in the world. It has grown tenfold in just over a decade, in both revenue and profits. However, the post-9/11 global economic downturn hit profits hard and required substantial cuts in staffing. A Hackett benchmark addressing the entire SG&A operation revealed that Royal Caribbean was generally well-positioned in terms of efficiency (cost and productivity) except for procurement and sales, where costs were higher than average when compared to the rest of Hackett's global database. A major lesson of the benchmarking exercise was that even where costs are within the world-class range, that is not a reason for complacency.

Offshoring Procure-to-Pay Transactions: A major Component in Agilent's Goal to Become World-Class in Finance

While outsourcing is now broadly understood to mean sending work to an outside provider or manufacturer as a strategy for reducing costs, the definition of offshoring is still fluid. Offshoring takes outsourcing to another level, referred to as international outsourcing - that is, sending activities, processes or functions to an international location where labor costs are lower.