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Peter Scharbert

Basel, September 2016

CIPS Seminar

Return on Supply Management AssetsSM

Procurement Performance Management

A.T. Kearney 2

This document is exclusively intended for selected client employees. Distribution, quotations and duplications – even in the form of extracts – for third parties is only permitted upon prior written consent of A.T. Kearney.

A.T. Kearney used the text and charts compiled in this report in a presentation; they do not represent a complete documentation of the presentation.

A.T. Kearney 3

What is usually keeping the CPO awake at night?

■ How do I achieve my savings as forecasted last year?

■ How can I see that I have the right resources and talents in my organization?

■ Are my category leads following our negotiated contracts and prices?

■ Is my spend fully managed by my organization?

■ How can I speak the same language as my CFO colleague?

How do I measure procurement performance in the “best way?”

Source: A.T. Kearney

… some haunting questions …

A.T. Kearney 4

Companies want the ability to measure and steer Procurement’s financial performance using a common standard

ROSMASM is a performance measure that evaluates the efficiency of supply management assets in delivering financial results

What is ROSMASM?

ROSMASM

Financial results delivered

Invested supply management assets

“A Classic Financial Ratio”

Source: A.T. Kearney

A.T. Kearney 5

A.T. Kearney’s Return on Supply Management Assets (ROSMASM

)

Addresses the total 3rd party spend that Procurement influences, along with consideration for the visibility and governance of that spend

Evaluates the speed of addressing the spend under Procurement influence

Encapsulates all the savings and other financial benefits gained from the spend addressed

Evaluates how well the negotiated agreements and policies are followed and enforced

Includes other financial benefits not captured already

Captures the cost of the Procurement infrastructure and capabilities development

Captures all the periodic costs, such as people costs, external support costs, etc.

The key is to link the financial ratio ROSMASM with the underlying 7 drivers of procurement performance

Source: A.T. Kearney

ROSMASM

Financial results deliveredInvested supply management assets

Structural investment

Period costsSpend coverage

VelocityCategory yields

ComplianceAdditional benefits

7 Main Drivers

Do we cover all spend?

Can we source more

frequently

Can we save more?

Do we capture all potential?

Can we impact the full value

agenda (e.g. innovation,

working capital)?

What running costs do we have?

Do we have the right

enablers?

A.T. Kearney 6

ROSMASM calculates procurement productivity from the values of the underlying performance drivers

Illustrative exampleROSMASM calculation

Source: A.T. Kearney

80% 50%(of influenced

spend sourced)

2.5%(on spend sourced)

70%(of spend sourced)

2.0 mn 2.5 mn 0.5 mn

Spend coverage

VelocityCategory yields

Compli-ance

Additional benefits

Period costsStructural investments

9.0 mn 3.0 mn

x x x + +

ROSMASM

Financial results delivered

Invested supply management assets

3.0(for every $ my company spends on procurement it gets $3 back)

Assumption: total annual external spend: $ 1 bn

A.T. Kearney 7

Scenario 2:

Improve Several ROSMASM Drivers

Addressing all levers through performance driven procurement process management can bring game changing value impact

Illustrative example

Company X

Today

After PPM Transformation

Total Spend $ 2.8 bn $ 2.70 bn

Spend Influenced 86% 90%

Spend Sourced 77% 80%

Yields 2.6% 6%

Compliance 68% 85%

Proc. Costs $ 10.7 mn $ 9 mn

ROSMASM 3.1 11.0

Financial Results Delivered

$ 33 mn $ 99 mn

Value of Improvement = $ 66 mn

So, for every $1 invested in Procurement, $ 11.00 is returned

Source: A.T. Kearney

Company X

Today

After Improvement

Total Spend $ 2.8 bn $ 2.74 bn

Spend Influenced 86% 86%

Spend Sourced 77% 77%

Yields 2.6% 4%

Compliance 68% 80%

Proc. Costs $ 10.7 mn $ 10.7 mn

ROSMASM 3.1 5.4

Financial Results Delivered

$ 33 mn $ 58 mn

Value of Improvement = $ 26 mn

Same

Same

Scenario 1:

Improve Just Yields & Compliance

Same

So, for every $1 invested in Procurement, $ 5.40 is returned

A.T. Kearney 8

A global technology group did a ROSMASM assessment with us to set baseline and new ambition level for their procurement

■ Procurement productivity measure tested and introduced

■ Productivity baseline established and benchmarked internally and with external peer groups

■ Procurement productivity improvement measures derived and prioritized

■ Recommendations condensed into a program with key improvement planks

High Level ROSMASM

Assessment

Top-down assessment of ROSMASM performance and enablers

ROSMASM Steering

ROSMASM planning and stage gate monitoring of benefits and resource deployment

Integrated ROSMASM

Performance Management

ROSMASM end-to-end integration with spend management and automated savings reporting

1 2 3

Level of ROSMASM implementation applied and project results

Source: A.T. Kearney

Case study

A.T. Kearney 9

We supported the ROSMASM benchmarking diligently with interviews and workshops to validate and socialize results

■ Two benchmark elements

• Quantitative ROSMASM scoring

• Qualitative practices assessment

■ Multiple forms of interaction

• Online surveys on Business Unit level

• Interviews with Procurement Managers

• Workshops on Division level

■ Different reference panels

• ROSMASM database with ~300 compa-nies from all industries and continents

• 5 custom segments with ~60 companies reflecting the client’s diverse business

Custom benchmarking segments(reflecting client’s different businesses)

Segment Characteristics

Small project business

One-off solutions business of limited size/ complexity

Infrastructure project business

One-off engineering and realization work of major complexity/ size

Manufacturing of small series

Engineering, design, manufactg. of systems and components, single piece to low volume production

Manufacturing of medium series

Engineering, design, manufactu-ring of machinery and components with low volume/ high variation

Manufacturing of large series

Mass production e.g. of devices, components

Benchmarking approach

Source: A.T. Kearney

Case study

A.T. Kearney 10

Workshops with Procurement Heads identified top improvement levers with cross-divisional relevance as basis for a program

1. Proxy for velocity 2. SM: Supply ManagementSource: A.T. Kearney

Spend coverage

Spend sourced1

Category yields

ComplianceAdditional

hard benefitsInvested

SM2 assets

Client confidential Client confidential Client confidential Client confidential Client confidential Client confidential

ROSMASM: Client confidential

Improvement lever Impact areas

Centralize and consolidate operational procurement, roll out operational procurement hubs

Enhance cross-functional governance and establish shared targets between procurement and stakeholders

Apply more systematic approach to category strategies, based on supply/ demand power, lifecycle phases

Help staff develop "multi-skills" for leading cross-functional teams

Further develop management system for commodity teams (pipeline management, progress reporting, etc.)

Top measures for improvement program

Spend coverage

Spend sourced1

Category yields

ComplianceAdditional

hard benefitsInvested

SM2 assets

ROSMASM

Spend coverage

Spend sourced1

Category yields

ComplianceAdditional

hard benefitsInvested

SM2 assets

ROSMASM

Spend coverage

Spend sourced1

Category yields

ComplianceAdditional

hard benefitsInvested

SM2 assets

ROSMASM

Spend coverage

Spend sourced1

Category yields

ComplianceAdditional

hard benefitsInvested

SM2 assets

ROSMASM

Spend coverage

Spend sourced1

Category yields

ComplianceAdditional

hard benefitsInvested

SM2 assets

ROSMASM

Impact of improvement lever

Case study

A.T. Kearney 11

The ROSMASM logic helps to unlock many benefits

Example benefits

Helps CPOs establish priorities around financial results improvement, talent capability building, and organizational development

Establishment of key priorities

Enables broader engagement and support by gaining the financial community’s understanding

Broader engagement

Gives supply management a way to benchmark performance and effectiveness across markets and industries

Universal benchmark

Explores gaps, sets priorities, and steers supply management towards a results-driven and leadership mindset or model

Results-driven mindset

Adds a powerful component to a balanced scorecard by measuring the hard, tangible results of procurement’s activities and investments

Powerful scorecard component

Note: See the white paper: “Building the Brand of Procurement and Supply” for more information. Source: A.T. Kearney

A.T. Kearney 12

Check out ROSMASM Performance Check on the CIPS website. Access is complimentary!

Once completed, participants instantly receive a customized feedback report

■ Access to ROSMA Performance Check:

– CIPS: http://www.cips.org/rosma

■ For ROSMA-related questions:

– CIPS: rosma@cips.org

– A.T. Kearney1: rosma@atkearney.com

1. Additional ROSMA information is available on A.T. Kearney’s website at: http://www.atkearney.com/procurement/rosmaSource: A.T. Kearney, CIPS

ROSMASM Performance Check online

A.T. Kearney 13

Thank you for your participation.

A.T. Kearney 14

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and Africa

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A.T. Kearney is a leading global management consulting firm with offices in more than 40 countries. Since

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A.T. Kearney 15

BACKUP

A.T. Kearney 16

Taking the first step with a ROSMASM Performance Check through the benchmarking platform is easy …

■ Embeds value management into the language and behaviors of procurement to enable improved alignment and support/respect in C-suite

■ Helps with the credibility gap between finance and procurement through a framework/metric that resonates with the financial community

■ Can be used to annually benchmarkagainst global market and industry peers

"The ROSMA Performance Check offers our professionals another component in their toolkit and provides a robust demonstration of their function's financial value.” -- David Noble, CIPS group CEO

Source: A.T. Kearney, CIPS

ROSMASM Performance Check online

A.T. Kearney 17

… and the amount of information required is quite manageable

The following information is needed:

■ Total annual external expenditures ($MM)

■ Percentage of total annual external expenditure influenced by procurement

■ Percentage of procurement influenced expenditures actively sourced by procurement

■ Cumulative "Hard Year-on-Year Benefits" as a % of expenditure actively sourced by procurement

■ Compliance rate of the expenditures sourced by procurement

■ Other hard financial benefits realized in current year

■ Total procurement operating cost (Note: this includes some period and structural costs) ($MM)

1. CIPS, ISM and A.T. Kearney offer a benchmarking service called ROSMA Performance Check to help Procurement organizations around the world calculate their ROSMA score. See CIPS, ISM and A.T. Kearney websites for details.

Source: A.T. Kearney

ROSMASM Performance Check online

A.T. Kearney 18

ROSMASM participants represent a broad mix of geographies and industries, resulting in an attractive benchmarking panel

Source: A.T. Kearney AEP and ROSMA survey data, 2011–2015

93

EMEA (47%)

Asia Pacific (18%)

Americas (35%)

522

183

246

240

15Unknown (3%)

153

$1-$10 billion (46%)

Less than $1 billion (29%)

Greater than $10 billion (22%)

522

114

43

Services (35%)

Process Industries (34%)

Manufacturing (23%)

522

181

178

120

Other (8%)

Region Revenue Industries

Cumulative ROSMA dataset profile (2011-2015)

A.T. Kearney 19

Financial productivity of procurement varies widely

Source: A.T. Kearney AEP and ROSMA survey data, 2011–2015

7,5

5,1

11,4

4,5

0,8

7,6

5,3

12,7

3,7

0,8

7,5

5,4

12,5

4,1

0,9

0

1

2

3

4

5

6

7

8

9

10

11

12

13

Top 25%Bottom 25% Middle 50% 75% pointOverall

Cumulative dataset form 2011-2015Dataset from 2014 ROSMA report Dataset from 2015 ROSMA report

Financial productivity of procurement trend

ROSMASM

A.T. Kearney 20

Value improvement potential exists in all industries

Source: A.T. Kearney ROSMASM Benchmarks Database 2011 - 2015

ROSMASM Average and StdDev by industryAvg. ROSMASM +/- 1 StdDev

4,5

7,2

4,2

6,1

7,2

3,9

8,3

4,1

6,0 5,7

4,6

3,2 3,4

5,5

4,2

-2

0

2

4

6

8

10

12

14

16