Enabling the Journey to Value - Insights

and Best Practices from CPOs

Procurement Analytics:

North Carolina State University

Rob Handfield, PhDExecutive Director, Supply Chain Resource Cooperative

IBM Procurement Solutions

Alex ZhongSenior Market Segment Manager

sig.org/eval

April 20, 2016

Sourcing Industry Group Global Executive Summit

Procurement Analytics: Enabling the Journey to Value

Alex Zhong

Senior Market Segment Manager

IBM Procurement Solutions

Rob Handfield, PhD

Executive Director, Supply Chain Resource Cooperative

North Carolina State University

Insights and Best Practices from CPOs

Agenda

Analytics in a disruptive era - Alex Zhong

Procurement analytics: enabling journey to value - Dr. Robert Handfield

3

“ “The ‘Uber syndrome’ –

where a competitor with a

completely different business

model enters your industry

and flattens you.”

4

Uber has a market cap

that exceeds the market

cap of all the car rental

companies combined, and

it’s only an app.”

— CIO, Transportation, United States — CMO, Transportation, United States

CxOs expect industry convergence to have the biggest impact on their business

5

Industry convergence

The “anywhere” workplace

Rising cyber risk

The redistribution of

consumer purchasing power

The sustainability imperative

Alternative finance and

financing mechanisms

The sharing economyTotal CEO CFO CHRO CIO CMO COO

70%

60%

50%

40%

30%

20%

10%

0%

Top trends to impact business (in 3 to 5 years)

CEOs again selected technology as the most important external force that will affect their enterprise

6

External forces impacting the enterprise (in 3 to 5 years)

2006 2008 2010 2012 20152004

Technology factors

Market factors

Regulatory concerns

Macro-economic factors

Socio-economic factors

Globalization

People skills

Geopolitical factors

Environmental issues

2013

“There’s no one technology that

matters most. It’s connecting the dots

between them all that’s important.”

7

— Mike Mancuso, Executive Vice President & CEO, Philips Healthcare, United States

Powerful disruptions have fundamentally changed long-standing business practices and interactions

Disruption 1

A digitized

ecosystem is crucial for

business success

Disruption 2

The upsurge of big data

and analytics technology

has been rapid and

radical

Disruption 3

Organizations that

deploy the right skills

can leverage analytics to

know instead of merely

to speculate

Analytics & cognitive

Cloud Social The Internet of Things

Traditional transactional data Contextual data

Digital ubiquityNew business models

Digital ecosystem

Source: Analytics: The upside of disruption. IBM Institute for Business Value 2015 Analytics research study. © 2015 IBM Institute for Business Value.

8

Big data has become ubiquitous and continues to grow exponentially

9

Each day, the world creates 2.5 quintillion

bytes of data1

200mb of data per

cow per year4

200 billion

tweets per year3

4.75 billion pieces of

content shared daily2

There will be over 200 billion

connected devices8

There will be over 12 billion

machine-to-machine devices9

Machine generated data will

be 42% of all data10

4x more digital data than all

the grains of sand on earth11

By 2020There are numerous examples:

And it is only just the beginning

Source: [1][2][3][4][5][6][7][8][9][10][11] See speaker notes

13 billion ad

impressions per day5

24 petabytes

processed daily6

$118,000

transaction

every minute7

Organizations need data and analytics to stay on par with or to outpace competitors

10

95%of respondents report

that data and analytics keeps their

organization on par with or ahead of

their local or global competitors

Only 5%of respondents report

data and analytics has no impact on

their organizational competitiveness

Locally

33%

48%change

Locally23%

Globally

25%

5%No

advantage

Globally

14%47%

Out pace

Keeps us ahead

of competitors

None5%

Keeps us

on par with

competitors

No advantage

against

competitors

Competitive impact of data

and analyticsas reported by respondents:

Source: Analytics: The upside of disruption. IBM Institute for Business Value 2015 Analytics research study. © 2015 IBM Institute for Business Value.

11

We have enough data,

but not much insights.— VP Procurement, a fortune 500 company

Leveraging advanced analytics creates the ability to turn insight into decisive action

12

Percentage of organizations that use this type of

analysis in one or more business functionsas reported by respondents

Source: Analytics: The upside of disruption. IBM Institute for Business Value 2015 Analytics research study. © 2015 IBM Institute for Business Value.

Learning from the best CPOs

13

2013 IBM CPO Study: Improving competitive advantage through

procurement excellence Procurement performance is highly correlated with company margin performance

2015 IBM CPO Study: The Journey to Value Focus on improving enterprise success, not just procurement

Engage with stakeholders to understand and anticipate their needs

Embrace leading-edge procurement practices and tools

The follow-on CPO Study

Procurement analytics: Enabling journey to value Powerful analytics systems and dependable data provide

the best results

It’s more important to first understand stakeholders’ needs

in order to succeed

14

Rob Handfield is Executive Director of the Supply Chain Resource

Cooperative (SCRC), and the Bank of America University

Distinguished Professor of Supply Chain Management at North

Carolina State University. He has published in more than 100 peer

reviewed journal articles, and a few popular procurement books.

Dr. Handfield has worked with many Fortune 500 companies, and

is a thought leader in the field of supply chain management and

procurement. He has spoken on those subjects across the globe.

Procurement analytics: enabling journey to value

Introduction

Original Question: Transformation vs. Systems

A Common Theme… and a New Question!

“Innovative Data Leveraging”

– Step 1: Engaging for Business Insight

– Step 2: Constructing the research question

– Step 3: Building the analytic platform

Overall Themes and Trends

Recommendations

Q&A

15

The Supply Chain Resource Cooperative (SCRC) at NC State University

16

Dept. of Defense (DOD)General Services Administration (GSA)

National Security Agency (NSA)

Corporate PartnersVISION, MISSION, VALUES & PHILOSOPHY

Vision: Be recognized as a "thought-leader" in global

supply chain management

Mission: Deliver "bottom-line" value to our partners and

academic excellence to our students

Values: Integrity, Scholarship, Leadership, Excellence &

Collaboration

Philosophy:

Customer Focused, Execution Driven, Results Oriented

Execution Trumps Effort

Right People, Right Skills, Right Job Equals Improved

Business Results

Research Methodology

Interviewed 24 CPO’s / Senior Directors

on a series of calls

Conducted interviews with multiple subject

matter experts

Reviewed primary & secondary research

Analyzed written transcripts of documents

and compared maturity levels (Early,

Emerging, and Advanced) with level of

analytics activity and procurement

systems deployment to identify trends

17

Current State of Procurement

18

Time

Value

Traditional

Sourcing

Leveraging spend

Procurement analytics

TCO

SLM

Clean sheeting

Demand Management

Supply chain Innovation

Value Creation

Working Capital Reduction

Asset Velocity

Trade Financing

INFLECTION POINT

A new set of procurement tools enabled by analytical innovation is required!

Procurement is at an inflection

point where the old “bag of

tricks” no longer works.

Opportunity for savings through

leveraging of spend have been

depleted?

Analytics represents the next

wave of opportunity.

Supply chain innovation is on

the horizon.

Who we interviewed… and their stage of procurement transformation

19

Industry Early Emerging Mature

Oil and Gas / Utilities 2 2 2

Financial Services 3 3 1

Manufacturing/ Life Sciences/ Others 1 2 8

24

CPO Tenure and Spend Under Management

20

0.625

1.86

7.25

Early Emerging Mature

Average Tenure of CPO (Years)

32%

66%

89%

Early Stage Emerging Mature

Spend Under Management

Original Research Question: Is There A Relationship Between Transformation and Systems Capabilities?

21

Procurement Transformation

Engaging with stakeholders

to have the right conversations

Building credible data to the table

Making a solid business case

for the enterprise

Investment in Systems Capabilities

Cleansed Master Data

Spend Analysis

Contract management systems

Risk metrics

Supplier Life Cycle Systems

“Which came first…..?”

1. Establishing stakeholder

confidence will lead to a

business case for investment

in systems…

2. Improved systems drives more

reliable data that provides the

basis for additional insights and

engagement…

Recurring Theme: Predictive Analytics

Every executive we interviewed was seeking to create

customized analytical insights that leverages existing databases

and data, along with other databases and information not

contained in their internal corporate procurement or ERP

systems (“mash-ups”)

The key to building stakeholder value and insight:

22

Innovative Data Leveraging (IDL) is defined as a fact-based, data-driven approach to driving

change and influencing stakeholders to create procurement value for the business.

“Innovation data leveraging”

Innovative Data Leveraging builds on increasingly higher levels of data

It is important to have meaningful data – but what you do with it is the issue.

Can you form insights that are actionable? That is the real question!

23

Supplier Life Cycle

Risk Analytics

Spend Analysis

Contract Management Systems

Basic ERP Systems

(AP, MRP, GL, Boilerplate P2P)

Predictive

Analytics

Foundations

Historical

Current

Real time

Future

Innovative Data Leveraging: Customized

solutions that enables insights into business

strategy problems

Contract database & workflow capture

that drive continuous supplier improvement

Historical spend history

point solutions for capturing

cost savings and productivity

Data that provides

Insight into historical

spending practices

Innovative Data Leveraging: A Process to Create Predictive Insight

24 24

What is the question

you are trying

to answer?

What data can

be leveraged to

guide decisions?

I have a

business problem

I need help with…

Business Challenge

Deep understanding

of the context of the

business problem

Leads to identification

and context on the nature

of the problem

What are different ways

of thinking about the

scope of the problem?

Hypothesis

Development

What would the “ideal”

analytic insight look like?

What are proxy data?

Do we want:

‒ Historical insight?

‒ Real-time views?

‒ Long-term trends

or forecasts?

Building Analytic

Platform

Establish sources of data

Enrich and cleanse data

Understand key

data distributions

Create initial platform

Build platform for

on-going data updates

First Things First: Business Problem Statement -Having the Right Conversation Leads to the Right Question & Guides Data Collection

25

Spend Analytics Price and Cost Models Contract Management

Marketing

and Sales

Local content requirements

Minority & Diverse Supply spending

Addition of new features and

capabilities for specific market

segments

Economic impact of local spending

for regulatory agencies

Cost and technical support on major

RFP/RFQ bids

Support on pricing for new product

development

Value analysis with suppliers

Cost to serve (TCA)

Supplier suggestion programs

Supplier ideas for new products

Guidance on best partners and alliances

in new markets

Supplier capacity for new product

launches

Supplier-driven customer solutions

to penetrate markets

Legal Support Sarbanes Oxley compliance

Supplier risk metrics and visibility

Local economic impact studies

Contractual obligations

Avoid predatory pricing

Price/cost index and renewal

mechanisms

Code of conduct compliance

Regulatory Risk exposure

Liability exposure – no contracts

IP issues relating to NPD

CFO, Finance,

and

Accounting

Opportunity analysis for direct

and indirect cost savings

Budgeting objectives

AP - Spend under management

GL codes linked to spending codes

Working capital targets

Payment terms

Should-cost models to reduce commodity

volatility exposure

Currency risk

Spend under contract

Product costing and pricing

Contract exposure to global risks

Country level risk exposure

Operations,

Business,

Division

Leader

Supplier leverage / selection

Reducing supply leadtime

Part/component standardization

Vendor managed inventory

Supplier capacity issues

Delivery/quality improvements

Tariffs/Border delays

Packaging compliance

Transportation and Logistics planning

and modeling

Should-cost targets

Inventory and material handling

INCO terms

Supplier performance

Avoid “shutting us down”

Business continuity plans

Supply disruption mitigation planning

Engineering,

R&D, Major

Projects

Emerging substitutes and threats

on product and process technology

Value Analysis and Standardization

Reducing duplication and parts

proliferation

Major projects scheduling &

turnarounds

Should-cost & supplier cost savings ideas

Supplier catalogs

New product development technology

solutions

Technology / software solutions

Design for Manufacturability

Cost downs

Project risks

IP Ownership

Supplier innovation and integration

Collaboration on project roll-out and

workflow mgmt

Case 1: Supplier Capacity Simulation Analysis

26

Marketing Question:

Will we have enough API

supply if all of our products

in the pipeline are

eventually commercialized?

If not, what will be the

bottlenecks for market

supply under different

scenarios of demand

forecasts?

Re-stated Question

(Procurement):

What are the key sources

of API we are using today?

Which ones will have

capacity limitations under

different scenarios of

supply?

Which suppliers should

be approached today

to discuss?

Analytic Tools and

Systems:

Monte Carlo simulation

Demand forecasting

analysis to understand

potential demand

Supplier constraint using risk

management simulation

Will suppliers be

able to support

our production

levels if all

pipeline products

are successful?

We don’t have

data – but we

can simulate

the supply

chain…

Case 1:

Biopharmaceutical

Supplier Capacity

Simulation

Analysis

Case 2: Local Spend Analytics

27

Marketing Question:

How is supply management

contributing to the local

economy?

What is the support for

the diverse supplier

community?

How is supply management

contributing to corporate

sustainability?

Procurement Insights:

Local Economic Impact

$ (Direct & Indirect)

Diverse supplier spend %

Targeted projects and

categories for local spend

Carbon footprint and

sustainability ideas from

supply base

Analytic Tools and

Systems:

Category Spend by

NAICS code

Local Impact Tool

Local Impact Opportunity

Sourcing Tool to integrate

Local Sourcing Decisions

Diverse Supplier Evaluation

and Assessment Tools

Utility

commissions

want to know

what we are

doing for the

local community!

We can

model it

using

economic

impact

analysis…

Case 2:

Utility Industry

Conversation

With Marketing

Team

Non-LocalSpend$5.5B/Year

Company Spend

Direct Impact

LocalSpend$2.7B/Year

Goods&Services

Labor

Indirect Impact Induced Impact Total Impact

Inter-IndustrySpending

LaborIncomeSpending

= + +

Direct Indirect Induced Total

Multiplier Effect: Indirect and Induced dollars multiply in smaller amounts

through each iteration of spend.

Leakage: Within each iteration of local spend, some dollars are lost to non-local

sources or through savings.

$

The model depicts how company spend within local areas adds value over and

above the direct dollars.

$2.7B $1.8B

ValueAdded

$4.5B

Most advanced form of IDL is PREDICTIVE ANALYTICS

Predictive analytics is about extracting an analytical model from data, that anticipates future

behavior or estimates unknown outcomes.

By understanding likely future outcomes,

– Organizations are better able to choose different courses of actions

(prescriptive analytics)

– Allocate investment to maximize better returns (decision management)

28

Demand Forecasting Identifying the most important spend categories through the use of spend analytics

Analyzing specific raw materials that are critical for on-going operations and forecast

future demand to facilitate efficient demand management

Strategic Sourcing Identifying suppliers that provide cost advantages and innovative insights

Ascertaining the supplier’s ability to sustain the advantage in long-term engagements

Predicting capability / capacity of supply for future products in the pipeline

Evaluate Supply Risk

Predict Price Volatility

of Services/Materials

Anticipating potential price fluctuations of raw materials and procured services

based on historical data and events

Identifying suppliers that provide cost advantages and innovative insights

Ascertaining the supplier’s ability to sustain the advantage in long-term engagements

Predicting capability / capacity of supply for future products in the pipeline

Predictive forecasting will replace supplier risk monitoring on major projects

29

Boundary conditions

Key Stakeholder impacts

Problem scope and timeframe

How information will be used?

Identify the business

problem you are

seeking to build

insight into

Data integrity trumps

data size. It’s better to

have six ounces of

“truth-y” data than a

thousand pounds of

garbage!

“When you show them globally that

80% of spend is with 300 out of a

total 3000 suppliers – they say “MY

team can’t be doing that!” It has to

be pitched as educational, not

confrontational, and as an agnostic,

independent source of truth.”

Structure question in terms

of available data

Consider proxy variables

that can drive directional insights

Hypothesize the

parameters and

potential relationships

Data collection and sampling

Establish models that drive

scenario-based outcomes

Key decision parameters

to establish insight

Creative thinking

on how to model

relationships

among data

Examples of Predictive Analytics

Sentiment analysis in demand/supply planning to modify forecasts

Predictive cost modeling using supplier-provided RFQ’s to highlight development

opportunities

"Spend Planning"

Caterpillar crowdsourcing of costs https://www.kaggle.com/c/caterpillar-tube-pricing

Supply network planning (disruption analysis using stochastic modeling)

Supply Chain Risk analytics (Twitter chatter monitoring)

30

Real-Time Data Feeds Agile Decision-making

To truly become agile in an uncertain world,

there is a significant business benefit in

developing a real-time risk forecasting

analytics capability enabling insight and

effective decision-making, allowing the

enterprise to act as one.

VISIBILITY = VELOCITY

31

THE CAR ANALOGY….

32

Flex Pulse Allows Real-Time Data

Leading organizations already embrace analytics and actionable insights – data-driven innovation takes analytics to the next level

33

Analytics

Actionable Insights

Analytics - Driven Innovation

Financial return from innovation investments

Impact of innovation, including market impact

Extent of collaboration to support innovation

Speed at which innovation can be executed

Amount or quantity of innovation

Outperforming organizations have:

Outperforming organizations measure innovation:

Higher willingness to accept risk

Tolerance to failure

Strong leadership

Flexibility and adaptability

Data driven decision making

LeadingOrganizations

Successful organizations are using analytics to create new forms of innovation

Analytics maturity

Innovation m

atu

rity

Analytics maturity

Five Analytic Predictions

Spend Analytics Will Become Real-time and Predictive

(Not Backward Looking and Probabilistic)

Incident prediction and workflow management systems

will replace supplier risk monitoring on projects and

indirect spending (“What is your current “kill-shot” node?)

Organizations will require a new set of capabilities and will

target individuals who have a combination of analytics

and engineering/business capability

Corporate responsibility (diversity, environment, labor and

human rights) will become integral to the sourcing process

and will require exploiting digital genomes

Post-Award Contract Management (SRM) will become the

biggest single source of sustainable cost reduction –

and analytics will help managers drive the right level of

supplier development and engagement activity

34

Issues to Consider From Today..

Procurement Analytics are key! Executives are keyed in on building analytics to not only

solve business problems, but as a core business strategy.

Establish stakeholder engagement as a key element to driving innovation and value for

the business.

Lack of a robust Source to Pay integrated solution is the biggest barrier to creating a

data platform for procurement analytics. Investment requires a solid business case tied to a

real set of business issues and challenges.

Analytical insight requires talented procurement analysts to drive customized solutions

that build on existing enterprise systems and platforms

Supplier management can be used to align with the right partners – that drive the

right insights on continuous supplier performance improvements, cost reductions,

and innovation.

Suppliers are a core element of your integrated solution. Intelligent solutions to drive

collaboration in SRM, deep integration of SLM with all S2P components, and other

approaches are needed.

35

36

ibm.com/cpostudy

Contact

37

Rob Handfield

Email: robert_handfield@ncsu.edu

LinkedIn: https://www.linkedin.com/in/rob-handfield-939570

Twitter: @Robhandfield

Alex Zhong

Email: alex.zhong@us.ibm.com

LinkedIn: https://www.linkedin.com/in/alex-zhong-5535591

Twitter: @alex7zhong

Thank you!

38

Evaluation How-to:

Your feedback drives

SIG Event content

By signing and

submitting your

evaluation, you are

automatically entered

into a prize drawing

Why?

Option 1: App

1. Select Schedule2. Select Schedule by Day3. Select Day4. Select Session5. Scroll to Description

6. Click on the Evaluation link

Option 2: Browser

1. Go to www.sig.org/eval2. Select Session (#S08)

How?

COMPLETE &SUBMIT EVAL

Tweet: #SIGspring16

Session #8

Procurement Analytics:

Enabling the Journey to Value –

Insights and Best Practices from CPOs

www.sig.org/eval

Download the App: bit.ly/SIGOrlando

Rob Handfield

Email: robert_handfield@ncsu.edu

https://www.linkedin.com/in/rob-handfield-939570

@Robhandfield

Alex Zhong

Email: alex.zhong@us.ibm.com

LinkedIn: https://www.linkedin.com/in/alex-zhong-5535591

@alex7zhong