Chasing After Procurement Excellence: Findings from A.T. Kearney’s Latest Report

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World-class procurement organizations see a comparatively threefold higher return on their supply management assets, according to A.T. Kearney’s 2017 Assessment of Excellence in Procurement. The firm has been conducting these assessments every three years or so since 1992, and this is its ninth assessment.

A.T. Kearney divides companies into four groups based on their ability to manage external spend: Leaders (7%); Aspirants (11%); The Pack (55%); and Strugglers (27%). The “Leaders” are twice as likely to invest in supplier innovation, risk management and digital technologies like blockchain or automation.

A Formula for Success

On the surface, the following formula for procurement success is pretty simple. According to A.T. Kearney, the sum of three elements: category excellence, team excellence and supplier excellence.

Achieving all three is, of course, more complicated.

A.T. Kearney’s tips on pursuing category excellence revolve around its famous Purchasing Chessboard, the above grid of procurement strategies. Companies choose among appropriate strategies, depending on the degree of supplier and buyer power. The report finds that top performers (or “Leaders”) are three times as likely to use these strategies systematically.

For example, the upper-right quadrant (“seek joint advantage with supplier”) applies to situations where both supplier and buyer power are high. A.T. Kearney thus recommends collaborative approaches such as integrated operations planning and value chain management.

Naturally, crucial to the success of these strategies are talented employees, and the top performers are three times more likely to spend at least 70% of their staffing costs on strategic full-time employees. The report recommends companies look into automation for non-strategic activities, invest in employee skill development and create a high-performance culture.

The last part of the formula, supplier excellence, is about proactively managing the full supplier lifecycle. World-class procurement organizations set differentiated targets for strategic and mainstream suppliers, as well as goals for supplier innovation. Compared to average performers, they’re more likely to invest in risk management and structural advantage.

Recommendations

The report wraps up with recommendations for each of the four groups. If your procurement organization falls among the “Aspirants,” you probably know what you need to do in order to join the top 7% — you just need to do it.

“Aspirants have typically mastered basic strategic sourcing initiatives, segmented suppliers and relationships with key suppliers and put into place a procurement operating model with seat at the table, processes, systems and people,” explained report authors Mike Hales and Sonali Agarwal. “It is the next level which differentiates leaders.”

In terms of category excellence, this means having strategies for key spend areas as part of a three- to five-year management plan. For supplier excellence, Hales and Agarwal said, work on “monetizing the full supplier lifecycle by a defined SRM process and team accountabilities that yield 95% contractual compliance and value beyond” and “having a repeatable, robust collaborative process with top 1% of suppliers for mutual innovation, risk management and total cost of ownership.”

Average-performing procurement teams (“The Pack”) can work on establishing credibility as valuable contributors to the overall company. The lowest-performing quartile should focus on strategic sourcing in order to cut costs and start bringing in value. “The overall goal [for all companies] is to accelerate progress toward delivering higher earnings per share (EPS),” Hales and Agarwal said.

So, top performers can’t afford to grow complacent. All procurement teams should be actively working on attracting the best talent and exploring digital technologies. As the report authors put it, “If you are standing still, you are falling behind… every company needs to mobilize for success regardless of where they lie along the spectrum.”

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