Moving Beyond Cost Savings...over 75% of procurement leaders identified cost savings as their number...

Moving Beyond Cost Savings

Why Reducing Costs Shouldn’t Be Procurement’s Only Focus

Contents02Introduction & Glossary

Executive Summary

The Current State of Procurement

Why Supply Chain Transparency is Essential

Case Study: Creative Gourmet’s Berry Nightmare

The Case for Strategic Transformation

Life Beyond Cost Savings

Transitioning From Tactical to Strategic

3 Elements of Supply Chain Transparency

04

06

09

11

14

17

20

22

Introduction

Moving Beyond Cost Savings: Why Reducing Costs Shouldn’t Be Procurement’s Only Focus

takes a deep dive into the current landscape of procurement in Australia and aims

to uncover an underused and underappreciated strategy that can move procurement

beyond cost savings to delivering greater value to the business.

02

Moving Beyond Cost Savings: Why Reducing Costs Shouldn’t Be Procurements Only Focuswww.ibisworld.com.au

03Consolidating

Spend

StrategicTransformation

Supply chain analysis that intends to reduce the supply base

Organisational change management that places a greater emphasis on developing more strategic procurement processes, such as category management and supply chain analysis

Value

Procurement terms often encompass a broad range of ideas. Ask anyone in procurement to define ‘spend under management’ and you may get a range of responses. We’ll focus on

specific ideas within five broad terms for simplicity.

Increasing Competition

Competitive bidding that forces suppliers to engage in price-based competition

Includes, but is not limited to, generating new revenue, optimising cost savings, innovating, ensuring transparency across spend activities, reducing supply chain disruption and being a source in customer-facing situations

Supplier Relationships

Procurement’s ability to provide benefit beyond cost savings, which includes, but is not limited to, generating new revenue, optimising cost savings, innovating, ensuring transparency across spend activities, reducing supply chain disruption and being a source in customer-facing situations

Glossary


Executive Summary

Procurement leaders are focused on reducing costs. According to the Deloitte 2018 Global CPO survey,

over 75% of procurement leaders identified cost savings as their number one priority. To achieve this goal, procurement leaders are employing tactical measures, such as consolidating spend, reducing total cost of ownership and increasing competition. While helpful, these components focus on the immediate, short-term benefits. Nevertheless, procurement operates in a highly complex, volatile economy. Therefore, in addition to maintaining focus on their top priority of reducing costs, procurement leaders are also shifting toward strategic, proactive processes, which requires an overhaul of the procurement function.


While many procurement leaders are moving toward strategic transformation with a predominant focus on category management, according to Deloitte, an estimated 65% have limited to no visibility beyond their Tier 1 suppliers.

This suggests that procurement leaders in Australia are not looking at their supply chains and supplier relationships strategically, further demonstrated by less than a quarter of procurement leaders viewing ‘supplier collaboration’ as a viable strategy to drive value for the business. As a result, most procurement leaders miss out on the underappreciated opportunity of supply chain transparency and supplier relationships.

Essentially, procurement can only repeatedly squeeze out so much cost savings from their

suppliers, and the lack of focus on the supply chain exposes companies to increased market, supply, compliance, product and financial risks.

By focusing on the supply chain, procurement leaders have an opportunity to provide their department with a greater chance of strategic transformation success and a better chance at moving beyond just cost savings.

Improved supply chain visibility and better supplier relationships will promote greater innovation and flexibility, among other exceptional value deliverables.

Procurement leaders can achieve these objectives by providing their teams with access to an objective, actionable market intelligence tool.

Executive Summary

0578

Percentage of procurement leaders that cited ‘reducing

costs’ as a top priority

Percentage of procurement leaders that have limited to

no visbility beyond Tier 1 suppliers

65

23Percentage of procurement

leaders that consider ‘supplier collaboration’ as a viable strategy to deliver value

Source: Deloitte’s Global Chief Procurement Officer Survey 2018


Procurement leaders throughout Australia are primarily focused on one goal: reducing costs. According to the

Deloitte Global Chief Procurement Officer Survey of 2018, 78% of procurement leaders cited cost savings as their number one priority. The survey further noted that procurement leaders are using tactical components to achieve that goal.

07The Current State of Procurement


3 Primary Tactics Used to Reduce Costs

The three most widely used tactical components are consolidating spend, competitive bidding and reducing total cost of ownership. While these components are widely used, the risks associated with them can hinder a procurement department’s goal of becoming strategic.

1 2 3

Consolidating Spend Competitive Bidding Reducing Total Costof Ownership

Typically used by government

agencies, competitive bidding

issues a public bid. The intent is

to increasing competition among

suppliers so they are tasked

with putting their best proposal

together to compete for a specific

product or service need. Ultimately,

procurement tends to choose the

supplier with the lowest bid.

Focusing on total cost of ownership

(TCO). When focusing on TCO,

procurement takes all related

costs into consideration, such as

implementation, energy use, and

ongoing service and maintenance

costs. Typically, the supplier offering

the product or service with the

lowest TCO wins the tender.

Assessing the supply chain to

drastically reduce supplier numbers.

As demonstrated by facilities

management spend, the TFM (total

facilities management) concept has

spread. When procurement uses the

TFM concept, facilities management

is controlled by one supplier

overseeing a range of services such

as security, cleaning, catering, and

other related activities.

Risks

• Inflexibility and reduced innovation

• Increased maverick purchases by

ended user departments for low cost

items

Risks

• Lower quality

• Comprised safety standards

• Possibility of top suppliers not

tendering at all

Risks

• Compliance risks

• Potential supply disruptions

08The potential risks associated with the three tactics listed can ultimately increase costs for an organisation focused on reducing them. However, the priority of cost saving is primarily driven by a top-down initiative, which is partly influenced by the overall economy’s volatility.

The Deloitte Global CPO 2018 survey references trade negotiations, volatility in emerging markets and the slowdown in China as the top three global macroeconomic risks on every procurement leader’s mind. Procurement leaders are also looking to employ more strategic processes, such as category management, to better proactively manage risk and align the procurement function with the company’s overall objectives.

The endgame is to increase the procurement function’s value to the business by moving beyond cost savings.



econom

ic slowdow

n in China

volatility in emerging m

arkets

uncertainty of trade negotiations

Source: Deloitte Global Chief Procurement Officer Survey 2018

Top 3 macroeconomic risks for procurement leaders

33%29% 28%

1 2 3

Percentage of respondents reporting on top three risks


With less than one-quarter of procurement leaders viewing supplier collaboration as a viable strategy

to drive value, it is not surprising that Deloitte’s 2018 CPO Survey revealed 65% of procurement leaders have limited to no visibility beyond their tier 1 suppliers.

10As procurement leaders navigate the volatile global market while completing the complex task of strategic transformation, category management is the key area of focus for most procurement leaders. However, the lack of focus on the supply chain and supplier relationships exposes the company to increased and unnecessary risk.

Although labelled the ‘Lucky Country,’ Australia’s misfortune (for its procurement leaders, at least) lies in its geographic location. Australian procurement leaders manage some of the most inherently vulnerable supply chains, based solely on location, at the bottom of the world. Therefore, it is alarming that over 60% of Australian procurement leaders are not diligently focused on their supply chains, as the cost of turning a blind eye can be substantial.

The most obvious consequence is supply disruption. Referring to the tactic of consolidating spend, procurement leaders are missing the mark and unknowingly exposing themselves to great risk.

The goal shouldn’t be to streamline the supply chain as much as possible, but for procurement to focus on developing mutually-beneficial supplier relationships. If procurement whittles their once robust supply chain of 20+ suppliers down to just one or two, what happens if the two suppliers run into supply issues or disruptions themselves? What happens if they run into financial trouble or the relationship sours? While 20+ suppliers for one product is perhaps excessive in most cases, having only one or two when you’re at the edge of the world is equally reckless.



65 percentage of procurement leaders that have limited to no visibility beyond their Tier 1 suppliers. 23 percentage of procurement leaders

that consider supplier collaboration a viable strategy to drive value

Source: Deloitte Global Chief Procurement Officer Survery 2018


Tactical measures to reduce costs are primarily a result of operating in a highly complex and volatile

economic environment. However, to effectively navigate the erratic economy, procurement leaders are correct in moving towards strategic transformation. With strategic processes in place, procurement will have greater flexibility in navigating changing external forces.

12The International Monetary Fund (IMF) downgraded its 2019 forecast for emerging markets and developing economies, spurred by an expected decline in China’s economic growth.

This decision sent a wave of unease through Australia’s business world: China accounted for a significant 30% of total Australian export revenue in 2018. Decisions by the IMF also influence banks and their lending behaviour. With a downgrade, banks are more likely to reduce lending, which can constrain procurement’s loftier goals (i.e. implementing strategic processes) and ramp up the need to further cut costs. In turn, tightened lending can inhibit the credit needs of smaller suppliers, subsequently increasing procurement’s supplier-based risks.

Closer to home, economic volatility persists. Procurement leaders, especially those operating in the retail sector, are wary due to the introduction of the Modern Slavery Act 2018 (the Act).

Passed in November 2018 and effective from 1 January 2019, the new Act requires Australian businesses (with an annual consolidated revenue of more than $100 million) to report on the potential risk of modern slavery in their operations and supply chains. Businesses will also need to report how they plan to address those risks and a high-level executive in the business, typically the director, will need to sign off on the reports.

While no financial repercussions currently exist (aside from NSW’s penalty for non-compliance of up to $1.1 million), the Act highlights the importance of focusing on supply chain transparency and supplier relationships. While those outside of NSW will face no financial repercussions for non-compliance, the greater penalty for non-compliance will be reputational as consumers are increasingly demanding companies show greater corporate social responsibility.




13“ The implementation of the Modern Slavery Act 2018

further supports the need for supply chain transparency with an additional focus on supplier relationships.”

In the current economic climate, it is increasingly troubling to see Australian procurement leaders looking so closely at their suppliers and supply chains to extract cost savings. Instead, procurement should be looking to their supply chain and suppliers to find collaboration opportunities to move beyond cost savings and start realising greater value for the business. Unfortunately, Deloitte’s survey found that less than 25% of procurement leaders viewed supplier collaboration as a strategy to drive value.



13 CASE STUDYCreative Gourmet’sBerry Nightmare

The nightmare began in 2015 when the brand was owned by Bairnsdale-based Patties Foods. Both Creative Gourmet

and Nanna’s frozen mixed berries were the source of a Hepatitis A outbreak in Australia. The berries in question were sourced from China, where poor hygiene among workers and allegedly contaminated water supplies were considered the likely causes of the outbreak. Patties Food recalled thousands of 300 gram and 500 gram Creative Gourmet frozen berry packets. Eventually, Patties Food cuts ties with the Creative Gourmet brand and sold it to Entyce late 2015.



15 However, the brand (and now Entyce) was back in the news with another Hepatitis outbreak in 2017, with the berries in question sourced from the same plant and area in China responsible for the 2015 outbreak. Just as in 2015, Entyce was forced to recall 48,000 units of Creative Gourmet mixed berries 300 gram packs. To put that in perspective, the retail price for 1 kilogram of Creative Gourmets mixed berries is AUD$12.00. Assuming a 300 gram pack retails for AUD$3.60, the financial fallout from the recall would have been AUD$172,800. Unfortunately, most of the stock had already been consumed.

Entyce has indicated that it has reduced reliance on fruit from China from 95% to 5%. However, the damage has already been done, and the company’s tarnished reputation undoubtedly lead to reduced sales volume.

It can be assumed that Entyce knew of the Hepatitis A outbreak prior to purchasing the Creative Gourmet brand in 2015. While the company has worked to reduce its reliance on fruit from China, it should have also focused on finding a new supplier to produce its fruit. The trouble with not focusing on supply chain transparency and supplier relationships is that once a supply issue arises, it is often too late to address the issue without experiencing some sort of reputational, financial, or supply fallout.


16

“”

The financial implications of continuing down the current path of focusing exclusively on reducing costs will far exceed the money required to restructure the procurement function and implement strategic processes.


This case study is a testament to the Chartered Institute of Procurement & Supply’s 2015 study, which found that 1 in 5 Australian business have lost out financially due to poor supply chain management.

With only 25% of procurement leaders ‘contributing significant strategic value’ to the business (referenced from Deloitte’s 2018 Global CPO survey), supply chain transparency and supplier relationships are undoubtedly an underused component in

driving value for the business. Restructuring the procurement function and implementing more strategic processes will be the only way that procurement leaders can effectively manage and navigate the complexity of the volatile economy.

Therefore, procurement leaders must find the right tools and resources to help them along the way.

Transitioning from Tactical to Strategic

The transition from tactical to strategic is a challenging yet rewarding process,

but a few housekeeping rules should be kept in mind during the journey.

18Transitioning from Tactical to Strategic

The process is continuous. Once strategic processes are in place, procurement leaders must continuously monitor and revise (as needed) those process.

Strategic transformation may take 12-18 months to fully implement. For complex spend categories, the transformation process may take even longer. Understanding the time required to fully implement this process is essential in managing stakeholder expectations.

One step (process or spend category) at a time. A slow start is better than no start and much better than an overwhelming start. Once strategic transformation is underway, determine a handful of processes or spend categories to focus on. The key aspect here is setting the effort up for success: choose areas that you can make progress on and track small wins. This strategy allows you to leverage those small wins and success stories to strengthen your case for a full strategic transformation of the department.

On Making the Transition: From Tactical to Strategic


Transitioning from Tactical to Strategic

19Steps to Becoming a Strategic Procurement Department

Build a business case

Assemble a team

Develop a strategic sourcing plan

Implement the plan

Monitor and revise plans


3 Elements ofSupply ChainTransparency

When looking specifically at supply chain transparency and supplier

relationships, three key elements require consideration.


Category management is often seen as a tool to consolidate spending and to acquire as much cost savings out of suppliers as possible. Now, more than ever, is the time for procurement to use category management to drive value for the business. Category management should be used to gain a better understanding of the company’s needs in key areas of spend, and strategically manage that need.


1 Category Management

2 Embrace Technology

At its most base level, procurement is the team in an organisation that focuses on driving down costs. However, the procurement function is much more nuanced and can be more valuable to an organisation if it’s allowed to broaden its horizons and focus on providing greater value. Shifting the department’s focus to look beyond cost savings allows for greater flexibility and innovation, especially when dealing with suppliers and developing those relationships.

3Think Beyond Cost Savings

A procurement department without ERP or related software and technology will struggle to become strategic. More importantly, the new technology and service offerings in the ERP space make it easier to share information and can provide an overview of the supply chain, subsequently enabling supply chain transparency.


Life BeyondCost Savings

Improved supply chain visibility and better supplier relationships will promote greater innovation

and improve total cost of ownership, among other exceptional value deliverables. However, life beyond cost savings will require a few more resources to achieve these goals, with the crux being access to market intelligence.

23Life Beyond Cost Savings

Access to the latest data and analytics to properly vet, compare and monitor suppliers against each other and the overall industry

Information on the trends, risks and economic drivers, competitive landscape and operating conditions that are influencing a specific spend category

Insight on the sensitivity, growth and structural risks associated with the supply chain of a spend category

Align industry performance with company performance to provide a holistic risk analysis

Provide the latest, most up-to-date information on a broad range of industries to cover every market you and your suppliers operate in

How Market Intelligence Supports Supply Chain Transparency and Improve Supplier Relationships

Any market intelligence worth its weight will provide the information needed to achieve those goals and much more.


23Life Beyond Cost Savings

24Moreover, access to actionable market intelligence should integrate seamlessly into improved strategic processes and complement existing ERP systems and related technology, helping to increase efficiency and productivity. For example, an effective market intelligence tool should provide fact-based, objective analysis that can fill out a Porter’s Five Forces template. It should also provide enough information to build a supply chain three to four tiers back, which is essential in achieving supply chain transparency.


While there are many roads to take on the journey to strategic transformation, keep supply chain transparency and supplier relationships top of mind. Those two components of the transformation will help procurement leaders achieve their goals and deliver greater value to the business.

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