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AberdeenGroup

Five Strategies for Procurement Transformation

The CPO's Agenda

March 2005

The CPO’s Agenda Report

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Executive Summary

Globalization, regulatory pressures, procurement automation, outsourcing, and supply market instability have simultaneously elevated the procurement discipline and increased supply management challenges. In response, procurement executives are moving to up skill their teams, adopt new organizational structures, and employ new supply manage-ment strategies and systems infrastructures.

To better understand these trends, Aberdeen Group surveyed and interviewed procure-ment executives at 100 global enterprises. Our research found that procurement’s role in strategic operations has increased dramatically over the past five years, with procurement not only reducing costs and ensuring supply availability but also contributing to market expansion, product innovation, and regulatory compliance.

We uncovered five primary strategies underlying procurement’s transformation to a ma-jor contributor to enterprise value:

1. Improve supplier development and collaboration -- nearly 70% of procurement organizations will have supplier development and improvement programs in place by 2008. And 60% of manufacturers have initiatives to involve procure-ment and suppliers earlier in the product design and development cycle.

2. Enhance and integrate procurement automation infrastructure – enterprises are transitioning from such tactical and fragmented automation investments toward a more cohesive and integrated source-to-pay platform.

3. Adopt low cost country supply initiatives – enterprises will double spending with offshore suppliers by 2008.

4. Transition to a center-led procurement organization – 75% of enterprises will have completed or be in the process of shifting to a center-led structure by 2008.

5. Increase spend under management and improve spend compliance -- enterprises are transitioning more spend and categories under procurement’s oversight. Each new dollar put under procurement’s control yields a 5% to 20% savings.

Enterprises employing these approaches in a consistent and integrated method outper-formed peers in cost savings, spend under management, compliance, supplier integration, and operating costs. These firms also reported greater contribution to enterprise value in the form of product and process innovation, faster time-to-market cycles, expansion into new markets, and improved profitability.

This report examines these trends and strategies in more detail and provides practical and proven approaches to procurement transformation. The report also includes more than 20 studies of enterprises applying these techniques to transform their own organizations.


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Table of Contents

Executive Summary .............................................................................................. i

Chapter One: Issue at Hand.................................................................................1 Procurement: It’s not Just About Cost Anymore............................................. 2 Transformation Won’t Come Easy ................................................................. 2

Chapter Two: Key Business Value Findings .........................................................4

Chapter Three: Supplier Development & Improvement.......................................6 Leading Supplier Improvement Strategies .............................................. 7

Chapter Four: Enhance Procurement Automation Infrastructure........................10

Chapter Five: Low Cost Country Sourcing .........................................................15

Chapter Six: Center-Led Procurement Organization..........................................18

Chapter Eight: Increase Spend Under Management..........................................21

Chapter Nine: Conclusions and Recommendations ...........................................24

Author Profile .....................................................................................................26

Appendix A: Research Methodology ..................................................................27

Appendix B: Related Aberdeen Research & Tools .............................................28

About AberdeenGroup ......................................................................................29


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Figures

Figure 1: Role of procurement in strategic business initiatives.............................2

Figure 2:Top Challenges to Procurement Transformation ....................................3

Figure 3: Procurement KPIs: Average versus Best-in-Class ................................5

Figure 4: Supplier Development’s Contribution to Enterprise Value .....................6

Figure 5: Supplier Rationalization and Spend Consolidation................................7

Figure 6: Procurement Automation Usage and Plans......................................... 11

Figure 7: LCCS’ Contribution to Enterprise Value...............................................15

Figure 8: LCCS Drivers and Approaches ...........................................................17

Figure 9: Procurement Organization and Reporting Structures..........................18

Figure 10: Staff Changes: Commodity, Technology Experts in Demand ............20

Figure 11: Top Tactics Planned To Increase Spend Under Management ...........21

Tables

Table 1: Top Spend Categories Managed by Procurement: Now and Planned ..22


All print and electronic rights are the property of AberdeenGroup © 2005. AberdeenGroup • 1

Chapter One: Issue at Hand

Key T

akea

ways

• Globalization, outsourcing, regulatory compliance, and shifting market dynamics have advanced procurement as a discipline and a contributor to enterprise value.

• In addition to cost and supply control, procurement is increasingly playing key roles in market expansion, product innovation, and compliance.

• Standardizing procurement procedures and systems, managing supply risk, maintaining top talent, and driving compliance are chief challenges to procurement transformation.

o better understand how changing market dynamics and advances in supply man-agement techniques and supporting automation is transforming procurement, Ab-erdeen surveyed chief procurement officers (CPOs), vice presidents and directors

of procurement and supply management at nearly 100 global enterprises. We also inter-viewed dozens of procurement executives in more detail to better understand the practical approaches their organizations are using to create strategic value for the enterprise.

T Ninety-percent of executives report that procurement’s role in strategic operations has increased dramatically over the past five years. This shift has been accelerated by:

• Globalization. Looking to drive more cost-effective, competitive, and global supply chains, enterprises are leverag-ing procurement to identify low cost and reliable sources of supply over-seas and to gain a foothold in emerg-ing markets.

• Outsourcing: With businesses transi-tioning underperforming assets and processes to external partners, the need to devise effective strategies and systems to assess, contract, and govern supply re-lationships has increased exponentially.

Procurement’s role in strategic opera-tions has increased dramatically over the past five years, with procurement contributing to market expansion, product innovation, and compliance.

• Regulatory compliance. New regulatory mandates for improved financial re-porting and controls (e.g., Sarbanes-Oxley Act) have increased requirements for procurement to adopt strategies and systems to improve visibility and control of spending and contractual commitments. Requirements for environmentally re-sponsible products (e.g., RoHS, WEEE) spawned similar demands for procure-ment to control product content and identify alternative materials and sources.

• Procurement automation. Early sourcing and requisition-to-pay technologies enabled enterprises to create competitive negotiation environments and process efficiencies. Automation also extended sourcing and procurement processes to the enterprise and increased visibility and expectations for procurement results.

• Changing supply market dynamics: Rising energy and transportation prices and curtailing of supplier inventories and production capacity have elevated the importance of establishing and maintaining stable and efficient supply lines.


All print and electronic rights are the property of AberdeenGroup © 2005. 2 • AberdeenGroup

Procurement: It’s not Just About Cost Anymore Enterprises continue to rely on procurement to reduce costs and ensure supply quality and availability. However, procurement organizations are playing an increasingly impor-tant role in creating value for the enterprise in the form of new revenue opportunities, improved profitability, and competitive differentiation.

Specifically, procurement executives report that their organizations are employing strate-gies to aid their companies in product innovation and development, regulatory compli-ance, and expansion into new markets (Figure 1). Procurement is also aligning with sup-ply chain and sales groups to better predict and manage customer demand.

Figure 1: Role of procurement in strategic business initiatives

Source: AberdeenGroup, March 2005

Transformation Won’t Come Easy Executives tasked with turning procurement into a strategic weapon are learning that such transformation is easier said than done; requiring changes in organizational struc-tures, processes, and systems. Top challenges to procurement transformation include:

• Aligning and standardizing procurement procedures and systems: Transfor-mation will require procurement to coordinate and automate sourcing, compli-ance, and supply management procedures and controls across the company. Fo-cusing on more strategic operations will require transitioning of tactical opera-tions – e.g., order management, requirements acquisition – to systems. It will also require that procurement activities be coordinated and, where possible, dis-tributed to stakeholders across the enterprise (Figure 2)



• Managing supply risk: New supply strategies such as low-cost country sourc-ing, lean and vendor managed inventory (VMI), integrated service and supply re-lationships, supplier rationalization, and outsourcing have driven increased effi-ciencies, improved responsiveness, and lower supply cost structures. However, these strategies bring new risks. Changing tariffs, increasing energy and material costs, terrorist strikes, outsourcing, transportation price and security increases, and unforeseen delays have elevated the importance of assessing and managing supply risk. Supply managers also must mitigate supply constraints, longer lead times, and increase in supplier bankruptcy and financial instability.

• Recruiting and maintaining skilled talent: An early value proposition of pro-curement automation was that it would free up buyers to focus on more strategic tasks. However, many enterprises are learning that existing staff often lack the category, process, and financial expertise necessary to drive strategic operations.

• Driving compliance: Aberdeen research found that most companies still suffer from savings “leakage” due to a lack of clear roles and controls for ensuring spend and performance compliance; limited involvement of functional stake-holders in sourcing and compliance, insufficient systems; and lack of executive mandates or policy support for compliance1. Result: 18% of purchases are non-compliant and 20% to 25% of negotiated savings never get implemented.

Figure 2:Top Challenges to Procurement Transformation


1 Spend Compliance Management: Implementing and Sustaining Supply Savings (December 2004)



Chapter Two: Key Business Value Findings

Key T

akea

ways

• Procurement executives have identified five prioritized strategies for transforming pro-curement operations over the next three years:

a. Improve supplier development and collaboration b. Enhance and integrate procurement automation infrastructure c. Increase low-cost country sourcing d. Transition to center-led procurement organizations e. Increase spend under management

• Enterprises employing these approaches in a consistent and integrated method have outperformed peers in cost savings, spend under management, compliance, and supplier management and integration.

berdeen’s study uncovered the following as the prioritized strategies executives are employing to accelerate procurement transformation and improve procure-ment’s contribution to enterprise value.

• Improve supplier development and collaboration – faced with higher energy prices, price inflation, and supply market constraints, procurement executives are partnering with suppliers to remove non-value added tasks and drive continuous improvements in cost and performance. Chief strategies include standardizing performance metrics and controls, developing and improving supplier capabili-ties, employing value engineering techniques, and increasing early supplier inte-gration in product development.

A

• Enhance and integrate procurement automation infrastructure – having tested e-procurement and online negotiations, executives are looking to adopt a closed-loop systems infrastructure for standardizing and streamlining processes, improv-ing supply information and analysis, and driving continuous improvement. Solu-tion areas planned for investment include full e-sourcing platforms, supplier or transaction networks, optimization-based sourcing and analytics tools, and sup-plier performance measurement and contract management applications.

• Adopt low cost country supply initiatives – pressed to further reduce supply and delivery costs and to help their companies penetrate new markets, procurement executives are developing strategies and procedures to identify, assess, and man-age low cost country suppliers. Chief strategies include accessing supply market and trade intelligence, automating sourcing and procurement execution activities, and establishing international purchasing offices (IPOs) in-country.

• Transition to a center-led procurement organization – looking to maximize spending, standardize procedures, and drive efficiencies, procurement executives are aggressively transitioning to a central-led organization that can achieve these goals while supporting the unique requirements of individual business units and



regions. Key strategies: secure executive support, adopt closed-loop procurement systems infrastructure, use cross-functional teams, recruit new hires with busi-ness, engineering, and finance degrees, and improve training.

• Increase spend under management and improve spend compliance – understand-ing that they can’t improve what they don’t manage, procurement executives have moved to get more spend under their groups’ control. Procurement applies consistent and proven costing and sourcing procedures and compliance disci-plines to spend control that business units and functional stakeholders often lack. Key strategies being employed include improving access to accurate and timely spend data, marketing the value of procurement to business units and stake-holders, imposing policy changes, and improve procedures and systems for con-tract compliance. Related Aberdeen research revealed that each dollar brought under management of the procurement group can yield 5% to 20% cost savings.

Procurement leaders such as ExxonMobil, Hewlett Packard, and Procter & Gamble have organized procedures, resources, and systems to consistently employ and align all above strategies. Overall, enterprises employing these approaches in a consistent and integrated method outperformed peers in cost savings, spend under management, compliance, sup-plier integration, and operating costs (Figure 3). These firms also reported greater contri-bution to enterprise value in the form of innovation, faster time-to-market cycles, expan-sion into new markets, and improved profitability.

Each of these strategies is examined in more detail in the following chapters of this re-port. Aberdeen’s 2005 research agenda will examine these trends in more detail.

Figure 3: Procurement KPIs: Average versus Best-in-Class

60.0%

7.2%

17.5%22.0%

39.0%

82.5%

15.4%8.3%

15.0%

52.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

Spend undermanagement

2004 costreductions

% of spendingthat is non-compliant

% of supplybase

accounting for80% of spend

% of supplierselectronically

enabled

AverageBest-in-Class




Chapter Three: Supplier Development & Improvement

Key T

akea

ways

• Maturing sourcing strategies and tightening supply market dynamics are driving supplier development, collaboration, and improvement initiatives.

• Earlier moves to rationalize supply base and adopt automation better position enter-prises to drive supplier development and improvement gains.

• Chief strategies include improving planning and forecasting; adopting automation; im-proving performance measurement, dedicating supplier improvement teams; and in-creasing procurement involvement with new product development.

berdeen has long documented the significant cost savings and performance im-provements enterprises have achieved through advances in strategic sourcing methods and adoption of procurement automation. Since the mid-1990s, supply

management initiatives and supporting business application solutions focused on creating market transparencies and process efficiencies. Today, many early adopters of these solu-tions have transitioned to employing strategies, policies, and solutions to implement iden-tified and negotiated savings and ensure contract compliance.

A Aberdeen’s CPO’s Agenda study clearly indicates that the next phase of supply man-agement will focus on improving the management of key supplier relationships through better coordination and collaboration, improved innovation capture, and joint waste-removal and continuous improvement initiatives.

Figure 4: Supplier Development’s Contribution to Enterprise Value




Top factors driving procurement organizations to improve supplier development and col-laboration include pressures to generate year-over-year improvements in supplier quality and performance; identify opportunities to remove non-value-added costs from the sup-ply chain; and develop and improve capacity, throughput, and other capabilities of key suppliers. However, supplier improvement initiatives have been accelerated recently in response to rising energy prices, inflation, and commodity and shipping shortages.

The good news: previous supply rationalization and procurement automation initiatives have positioned many supply management organizations to drive more collaborative rela-tionships with key suppliers. True, fewer than 5% of procurement executives feel that their companies have fully rationalized their supply bases. However, more than half of executives report that their company is “close” to having the right number and mix of suppliers. (Truth be told, constantly shifting demand and market dynamics and changes in supplier viability make it unlikely that an enterprise will ever be able to completely rationalize its supply base.) For example: since acquiring Compaq Computer Corp., Hew-lett-Packard has more than halved its number of direct materials suppliers and has trimmed its logistics and transportation carrier base by 70%.

There is also evidence that enterprises are continuing to consolidate a larger portion of their spending with their most strategic suppliers (Figure 5). Such consolidation improves an enterprise’s negotiation leverage with strategic suppliers. It also frees up (and moti-vates) buying organizations to collaborate with these suppliers to remove non-value-added activities and costs and jointly identify opportunities for improvement.

Leading Supplier Improvement Strategies Procurement executives prioritized the following strategies for improving supplier devel-opment and collaboration:

• Improve planning and forecasts with suppliers: Nearly 60% of procurement executives say their companies have initiatives in place to improve accuracy

Figure 5: Supplier Rationalization and Spend Consolidation

Status of Supply Base Rationalization

Fully rationalized,

4.5%

Close to rationalized,

55.2%

Way too many suppliers,

40.3%

% of supply base accounting for 80% of spend

22.0%

15.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Average Best-in-Class




and frequency of order plans and forecasts with suppliers. Improvement initia-tives include better coordination between business units internally and more fre-quent communication of planning and forecast changes with suppliers. Such im-provement efforts will rely on increased investments in advanced analytics and collaboration tools, including use of supplier-facing portals and networks.

• Improve supplier scorecarding and performance measurement capabilities: Performance measurement has been the elusive brass ring in supply management circles for decades. Chief performance measurement strategies mirror long-time challenges, including standardizing metrics and procedures across sites and divi-sions, tracking a broader portion of the supply base, and sharing performance scores with suppliers. However, recent advances in procurement automation, data cleansing and classification, analytics, and portal technologies have helped ad-vance supplier scorecarding and performance management initiatives (see exam-ple). Some firms, such as Daimler-Chrysler and Medrad, have extended their per-formance measurement programs to include formal channels to receive, evaluate, implement, and measure results of cost-reduction or improvement suggestions from suppliers. Daimler-Chrysler has recorded more than $1 billion dollars of savings from supplier-suggested improvements. Similarly, Medrad reported nearly $500,000 in improvements during the first year of its program.

• Improve use of sourcing, procurement, and planning automation: Increasing adoption and integration of source-to-pay automation was a recurring theme among procurement executives. Automation can extend procurement processes

Case Study One Fortune 500 distributor interviewed by Aberdeen has dedicated cross-functional “vendor relations” teams consisting of procurement, sales, marketing, contracts, pay-ables, distribution, and IT. These teams meet with the company’s strategic suppliers on a quarterly basis to scrutinize processes and performance, and to identify opportunities for improvement. The group has also established a formal vendor scorecard consisting of metrics that are of common interest to the company and its suppliers, including order and shipment accuracy, payment terms compliance, error tracking, and response timeliness. Scorecards are shared with suppliers via a Web-based portal and are used to identify and prioritize waste-reduction and improvement initiatives.

Examples of supplier improvements achieved through these collaborations include:

• Improved forecasting, order accuracy, and inventory visibility through the Web portal and system-to-system integration has resulted in reduced inventory levels, better fill rates, and more timely deliveries.

• Damage and returns feedback to suppliers prompted changes to product packag-ing and shipping and handling procedures that have yielded reduced shipment er-rors, damage instances and costs, and expediting.

• Automated payables transactions through electronic advanced shipping notices (ASN) receiving reduced operating costs and sped payment for the company and its suppliers.



and intelligence across the enterprise while simultaneously improving coordina-tion and control of spending and execution. The use of automation will be exam-ined in more detail in the next chapter.

• Dedicate supplier improvement teams: Procurement leaders, such as Cessna Aircraft Company, Delphi and The Toro Company have dedicated cross-functional teams to apply Six Sigma, lean, and other statistical process control and improvement techniques to supplier relationships. Resulting strategies in-clude increased standardization and automation of transactions and processes, elimination of redundant testing and processes, and vendor managed inventory programs. Other leaders, such as Ford and Nortel Networks, have used their buy-ing clout to negotiate favored trading terms with material and part suppliers. They then “share” their preferred pricing and availability with contract manufac-turers and other supply partners to lower costs across the supply chain.

• Increase procurement and supplier roles in new product development: More than 60% of manufacturers report initiatives to involve procurement, suppliers, and other relevant stakeholders earlier in product development (see example). Early involvement allows procurement and suppliers to suggest new technolo-gies, manufacturing methods, and processes that add joint value and competitive advantage – before product design is locked down. Involving procurement in de-sign also advances initiatives to meet and beat target cost models and to ensure sufficient supply capacity and quality to support proposed designs at volume production levels. Related Aberdeen research found that companies involving suppliers and procurement groups at design inception and development were able to reduce costs by nearly 18% compared to companies delaying such collabora-tion until the product prototype phase2. Early involvement also yielded 10% to 20% improvements in time-to-market cycles, allowing companies to capture greater market share and profit margins for being an early mover.

Case Study Harley-Davidson and The Toro Company are two companies that have made procure-ment a key participant in product development. Both have established new product de-velopment sourcing groups that co-locate sourcing and commodity managers (most of whom are degreed engineers) with their product engineering groups. These commodity experts collaborate with engineers from design concept through production build to de-termine the supply mix that provides access to leading innovations, ample capacity to support intended production volumes, and that can beat target and should-cost goals.

Toro has integrated its new product development program with its e-sourcing initiative, with each costing and sourcing program managed through the project management, sourcing, and analytics capabilities within its e-sourcing platform. Use of the e-sourcing tool allows Toro to involve multiple functions in the sourcing process, quickly cost vari-ous design and bill of material scenarios, and to incorporate supplier performance and total cost scores into design and sourcing decisions.

2 Aberdeen Group E-sourcing Index (ESI); (May 2003).



Chapter Four: Enhance Procurement Automation Infrastructure

Key T

akea

ways

• Automation will be key to enterprises’ procurement transformation plans. • Procurement automation investments have been tactical to date. • Future investments will look to drive more intelligent operations and to leverage and in-

tegrate disparate applications investments.

ncreased adoption of procurement automation – and increased integration of existing automation investments – was a recurring theme among procurement executives. Automation investments were cited as a key component of every major supply man-

agement improvement strategy outlined by executives for the next three years. I These findings are not surprising. At the tactical level, automation streamlines and re-moves many of the non-strategic and transactional activities that consume the majority of buyers’ time, such as order processing, review, and expediting. Automation also allows enterprises to extend procurement processes and intelligence across the enterprise while improving coordination and control of spending and execution (see example).

Yet, to date, most procurement automation investments have been tactical in nature, fo-cusing on making existing processes more efficient, such as putting manual requisition-to-pay processes online or using information transparency to create more competitive negotiation environments. These tactical investments were also often disconnected result-ing in sub-optimized processes and “savings leakage” between one application/process area and the next. For example, most e-sourcing users report that their firms have been unable to fully implement savings negotiated online due to insufficient processes and controls to communicate terms and monitor compliance.

Case Study Enterprises including the Fireman’s Fund Insurance Company (FFIC), GlaxoSmithKline, and MetLife are increasingly using automation to extend procurement processes to front-line employees. Each of these companies provides non-procurement personnel a Web-based interface to initiate sourcing requests. Category-specific templates guide users through the process of specifying detailed requirements, which are converted into an e-RFx that is either automatically distributed to preferred suppliers or routed to procure-ment for further review or action. This requirements gathering process once took weeks; a delay which often led to higher incidences of off-contract (“maverick”) buying. These organizations also involve functional and business unit leaders in bid evaluation and sup-plier selection. Such stakeholder involvement results in greater contract compliance rates, improved spend and demand visibility, and increased spend under management of the procurement group.

However, study findings strongly suggest that enterprises are transitioning from such tac-tical and fragmented automation investments toward a more cohesive and integrated



source-to-pay platform strategy (Figure 6). The study also suggests that future procure-ment automation investments will be those that provide greater value by introducing new process and analytical scenarios that were previously impossible using traditional manual methods. Solution areas planned for future investment include:

Supplier or transaction networks Looking to extend the value of existing application investments and supply relationships, nearly 40% of enterprises plan to utilize supplier or transaction networks within the next two years. If returns from peers already using such networks are any indication, these will be wise investments. Respondents using supplier or transaction networks outper-formed their peers in the percent of total suppliers enabled to communicate and transact electronically. On average, firms using transaction networks reported 46% of their total supply base was electronically enabled versus 39% for the overall sample. Automating supplier communications and transactions streamlines process cycles, reduces data errors, and lowers operating costs for the entire supply chain. Such automation also fosters buyer-supplier collaborations and the introduction of new processes and trading relation-ships, such as VMI. Internet-based networks offer cost-efficiencies and economies of scale that make electronic transactions and collaboration accessible to more partners.

Figure 6: Procurement Automation Usage and Plans




Full e-sourcing platform

Aberdeen’s ongoing benchmarking of e-sourcing usage found that more than 80% of Fortune 1000 companies (and nearly half of mid-market companies) have tested online negotiation capabilities, such as reverse auctions and e-RFx. Most large en-terprises are in the process of transitioning to broader e-sourcing platforms that automate and manage complete sourcing projects – from initial spend analysis and requirements development through bid analysis, award allocation, and compliance management (see example).

Case Study ExxonMobil was an early believer in the importance of a cohesive and integrated plat-form to automate and manage the full e-sourcing process. The oil giant passed on the first round of reverse auction and online negotiation tools and elected to collaborate with a solution provider to develop a full e-sourcing suite. “We made the decision early on that we would only invest in a technology that supported the end-to-end process we had de-fined,” said one procurement executive. “We wanted a solution that would allow us to “systematize” our process across the entire global organization.” The strategy paid off. Not only was ExxonMobil able to negotiate and implement 5% to 10% cost reductions across its 380 spend categories, but, more importantly, the company was able to ensure standardized process and share best practice processes company-wide, and apply strate-gic sourcing to a greater portion of spending.

Distinguishing components of “full” e-sourcing solutions include:

• Online negotiations -- e-RFx, reverse auction capabilities, and advanced negotia-tion functionality, including BOM-driven negotiations, multi-line-item negotia-tions, bundling/unbundling of bids, complex price negotiations, expressive bid-ding, and internationalization support.

• Collaboration and project management tools that support cross-functional sourc-ing and interaction with suppliers and the administration and monitoring of sourcing projects.

• Document management and knowledge management functionality that supports sharing and management of sourcing-related documents and schematics and pro-vides a central repository for supplier, material, component, part, and market in-telligence and supports the management and reuse of sourcing strategies, RFx templates, and process flows.

• Analytical tools that support spending, bid, and cost modeling and analyses. Ad-vanced capabilities include optimization-based analytics.

E-sourcing solution providers are further differentiated by their ability to deliver intelli-gence on commodities, suppliers, and markets, as well as sourcing expertise, methodolo-gies, and services. Increasingly, providers are augmenting their platforms with spend data classification and analysis, contract compliance, and supplier performance measurement capabilities.



Optimization-based sourcing and analytics tools Enterprises also identified the use of optimization-based bid analytics as critical to their ability to examine total cost/total value based supply solutions and to test multiple sourc-ing and award scenarios. Optimization is the use of advanced analytical tools to simulta-neously negotiate and evaluate complex bid structures against a wide range of interde-pendent sourcing objectives, variables, constraints, and scenarios. Optimization also sup-ports expressive bidding, enabling suppliers to offer alternative bundles or offers that differentiate their offerings on price and non-price attributes.

Related Aberdeen research found that enterprises optimization-based sourcing tools ne-gotiating an additional 12% cost savings, on average, above and beyond what they had previously accomplished using traditional sourcing methods or reverse auctions. Recent advances in usability are making optimization more accessible and practical for frequent use by a broader range of enterprises.

Supplier performance measurement Performance measurement is a vital underpinning of efforts to control total cost of own-ership of supply relationships and to drive continuous improvements in value and opera-tions. More than half of procurement executives report that their companies currently use automation to track supplier performance. However, most of these are simplistic, home-grown “systems” that are built on a basic database alone or in combination with a basic spreadsheet application. Many enterprises also report that their companies use different performance measures and systems within different business units.

Such rudimentary and fragmented approaches only provide sub-optimal and sporadic insight into supplier performance and force procurement to take a reactive approach to risk mitigation and improvements. Aberdeen research found that fewer than half of com-panies have standardized supplier performance metrics or systems companywide; and those that do typically measure only a third of their supply base.

Optimal systems offer a Web-based interface that enable internal functional groups to collaborate on performance scoring and review, a self-service portal that allows suppliers to register, score, and resolve performance issues, and role-based reporting and analysis tools. These systems must integrate and interact with other transactional applications. The most advanced solutions will also support the submission, evaluation, and execution of waste-removal and performance improvement initiatives. Some solutions also couple external information on suppliers with advanced mathematical algorithms to help predict future supplier performance and viability.

Contract management This study’s findings also reinforced previous Aberdeen research indicating that sustain-ing cost savings and driving continuous improvements in supplier performance and rela-tionships would require the adoption of processes and systems to manage the contract management lifecycle – from contract negotiation through contract compliance and per-formance analysis. Nearly a third of procurement executives have prioritized investments in contract management solutions for within the next 24 months. Planned investments are being driven by continued pressures to improve financial performance and regulatory and spend compliance and increases in the number and complexity of contracts.



Aberdeen research into early adopters of such systems has quantified significant im-provements in contract compliance, process efficiency, and supplier relationships (see example).

Base capabilities for contract management solutions include a central and searchable con-tract repository; online contract collaboration including redlining and version control; contract templates; integration with Microsoft Word; and basic reporting. Differentiating capabilities include deep integration with Microsoft Office; legacy contract and third-party paper conversion; integration into transactional platforms; advanced analytics; inte-gration to sourcing, invoicing, and performance measurement systems; and unique func-tionality to support specific contract-types and industry requirements.

Case Study Enterprises such as Burlington Northern Santa Fe (BNSF) and Toyota Motor Sales (TMS) U.S.A. adopted contract management automation solutions to standardize and speed contracting cycles, improve compliance, and mitigate supply risk. The results:

BNSF has mitigated millions of dollars in potential fines by ensuring suppliers are prop-erly insured; cut contracting cycles by 60%; improved worker productivity; and elimi-nated 10 FTEs. The railroad reported full system ROI in 62 days.

TMS saved $14 million over five years in improved prices, terms and conditions through enhanced visibility into contracts and compliance, resulting in 571% ROI.



Chapter Five: Low Cost Country Sourcing

Key T

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ways

• LCCS becomes standard operating procedure for most enterprises. • Cost savings is major motivator, but C-level attention and market expansion make

LCCS a clear contributor to enterprise value. • LCCS strategies will rely heavily on external sources for supplier, market, and tariff intel-

ligence. Automation and IPOs are also core to LCCS strategies.

ured by low material, manufacturing, and labor costs and advanced by desires to penetrate emerging markets, enterprises are aggressively adopting Low Cost Country Sourcing (LCCS) strategies. Recent macroeconomic trends such as glob-

alization, outsourcing, and pressures to reduce costs have accelerated this trend. In fact, today, it’s not a matter of if your company will source globally, but how best to do so.

L The attraction to LCCS is obvious: Materials and products from countries such as China, Singapore, and Malaysia, can be manufactured at prices 30% to 50% less than in the U.S. Related Aberdeen research finds that, even after logistics and tariff costs are factored in, companies are still reporting 10% to 35% total cost advantages from low-cost-country suppliers. Considering these factors, it is not surprising that use of foreign suppliers will double in the next few years, with offshore sources accounting for 27% of the typical company’s supply base by 2008. Not surprisingly, more than 86% of manufacturers list-ing LCCS as a top initiative for the next three years. Having applied strategic sourcing within domestic regions, most manufacturers are now looking to offshore sources for their next wave of savings.

Figure 7: LCCS’ Contribution to Enterprise Value




Cost savings may be the primary driver for LCCS initiatives, but procurement executives also view LCCS as a key lever to delivering value to the enterprise (Figure 7):

• Many LCCS initiatives driven from the top: Several procurement executives indi-cated that LCCS efforts were initiated by company executives who were influ-enced by peers, rivals, and board members touting LCCS benefits (see example).

Case Study Alcoa is one example of a company where LCCS is being driven from the top. “Our CEO wants us to be an industry leader in LCCS,” says one procurement executive. “There is also a growing awareness in our organization, that we have already achieved some of the easy, early savings from leveraging, and we need to be looking into new ways to save money. LCCS is an appealing opportunity.”

Alcoa sources raw materials and packaging from multiple low-cost countries, especially China. The company set up IPOs in Shanghai, Mexico, Brazil, and Hungary to assess and manage local suppliers and to support its global sourcing organization and business units. Sourcing managers within Alcoa business units function as resident LCCS experts.

• Many view LCCS as method to cut inventory costs and reach new markets: Inter-est in LCCS has been accelerated by rising energy and transportation costs. A growing number of enterprises view LCCS as a way to reduce logistics and in-ventory costs and to help their companies penetrate new markets (see example).

Case Study Schneider Electric North America (SENA) re-sourced over 60% of its spend in an effort to capitalize on low cost country sources and eliminate supply chain-related costs (e.g., logistics, inventory, etc.) by adopting sources closer to manufacturing sites and end mar-kets. SENA established international sourcing teams comprised of procurement, engi-neering, manufacturing, sales, marketing, and human resources. Each team is focused on costing and sourcing specific commodities within low cost markets. The division set up international purchasing offices (IPOs) in countries, such as China, to assess, develop, and manage local supply and to advise the international sourcing teams.

The strategy lowered supply costs and helped increase sales to emerging markets, such as China. SENA’s global sourcing team is now chartered to lead its corporate parent’s ini-tiative to transition $1 billion of spending to supply in China, Southeast Asia, and India. The company expects the move to yield $250 million cost savings annually.

• Procurement executives are aware of risk management: Procurement executives were acutely aware of the challenges and risks associated with LCCS, ranging from basic language, culture, and time-zone differences to intellectual property protection, currency fluctuations, geopolitical unrest, and supplier on-boarding. Enterprises were organizing cross-functional teams and leveraging technology and external information and service support to address these issues.

Chief strategies procurement executives are employing for LCCS include:

• Accessing supplier intelligence services. Nearly 70% of procurement executives plan to rely on external information sources and service providers to provide in-telligence required to identify and assess supplier capabilities, constraints, and financial viability capabilities of LCCS suppliers.



• Automating sourcing and procurement processes. All respondents viewed adoption of sourcing and procurement automation as a major enabling compo-nent of their LCCS strategies. This finding echoes Aberdeen’s e-sourcing index (ESI) research which finds e-sourcing users reporting that these tools have in-creased and improved negotiations with offshore suppliers. Considering this fact, it is not surprising that more than 80% of respondents from small and mid-size firms view automation as key to their LCCS plans. Limited resources of smaller firms will mandate increased reliance on automation and outside services.

• Accessing third-party intelligence on tariffs, trade rules, and landed costs. Ma-terial and manufacturing savings can quickly be undone if a company does not fully understand the transportation, handling, and tariff costs associated with moving the acquired product to its manufacturing site or end market. Ingersoll-Rand estimates that transportation, duties, taxes, and other cross-border logistics costs range from 13% to 24% of the basic price of imported materials and parts. Calculating such “total landed costs” requires understanding constantly shifting harmonized system (HS) code; tariffs; transportation, drayage, and handling costs; and cross-border regulations. Enterprises will look to third-party informa-tion services for assistance in ensuring accurate landed cost calculations. This in-telligence is also key to supply chain network and postponement strategies.

• Establishing an international purchasing office (IPO) in-country or in-region where LCCS suppliers are located. Larger enterprises and manufacturers were more inclined to set up their own IPOs. These firms have the spend volumes to justify such an investment. Larger firms were also more likely to hire regional supply market experts on staff. By comparison, more than half of mid-size firms either use or plan to use external service providers for in-country support for LCCS supplier assessment and management. Aberdeen will be conducting a benchmark of enterprise LCCS strategies in Q2 2005.

Figure 8: LCCS Drivers and Approaches

Factors driving LCCS strategy

20.0%

30.0%

42.5%

47.5%

67.5%

75.0%

Satisify local content requirements

Access innovation

Set sources of supply closer tocustomer markets

Mitigate logistics, tariff, and trade costs

Access lower manufacturing costs

Access lower product/service costs

Approaches to LCCS

37.5%

40.0%

45.0%

65.0%

67.5%

Hire regional supply market experts onstaff

Establish IPO in country

Access third-party information ontariffs, landed costs

Automate sourcing and procurementprocesses

Access third-party information onLCCS supplier capabilities




Chapter Six: Center-Led Procurement Organization

Key T

akea

ways

• Meeting new demands will require procurement to adopt new organizational structures and to upskill workforces.

• Three-quarters of procurement groups will have adopted or be transitioning to a center-led organizational structure by 2008.

• Procurement transformation will rely heavily on automation, recruitment, training and metric and incentive alignments.

rocurement executives were clear: automation and strategies are important, but transformation and execution will rely on having the right people and organiza-tional alignment. To leverage spending, optimize process controls and efficiencies,

and contribute value, procurement must have sufficient skills and resources and be aligned to affect change in the business. To have the greatest impact and align supply strategies with the goals of the business, procurement must report to top executives.

P Deciding on the proper organizational structure depends on a company’s size, geographic distribution, and spend attributes. As a result, approaches to procurement organization vary widely, as evidenced by the varied structures of organizations participating in this study (Figure 9). However, there is a movement afoot toward center-led procurement organization structures. In fact, 75% of procurement executives report that their compa-nies will be center-led or transitioning to a center-led organization by 2008.

In the simplest terms, center-led is organized to leverage enterprise spend, provide cen-tralized sourcing and policies; but allow for decentralized execution at the business unit or region level. When effectively managed this collaborative structure accelerates busi-ness unit support, ensures compliance, and drives greater spend under management.

Figure 9: Procurement Organization and Reporting Structures

What best describes your procurement structure?

28%

6%

12%19%

32%

3%

Highly decentralizedRegionalBusiness UnitCentralizedCenter-ledOutsourced

To whom does your top procurement officer report?

31.3%

3.1%

9.4%21.9%

12.5%

18.8%3.1% CEO

COO

President

CFO

VP Supply Chain

VP Operations

Regional/business unitexec




Unfortunately, transitioning to a center-led procurement organization is a challenging proposition. In fact, procurement executives cited company-wide alignment and stan-dardization of procurement procedures and systems as their top challenge. Unless effec-tively managed, centralizing source-to-pay processes can actually break the process, lead-ing to longer cycle times, increased opportunities for errors, and even higher costs. Cen-tralization efforts often meet resistance from business units and sites that are unwilling to relinquish local supply relationships and process controls.

The goal is to establish a balanced organizational alignment that enables the enterprise to realize the benefits of leverage and efficiencies of central and shared processes, re-sources, and infrastructure while still supporting the unique requirements of each busi-ness unit and geographic location (see example). Many procurement leaders have ap-proached this center-led structure by establishing cross-functional sourcing and commod-ity groups with representation from all geographies, business units, and functions.

Case Study In an attempt to improve its spending leverage and operational efficiencies in the face of rising energy prices, Sun Chemical, a leading producer of graphics arts printing inks, be-gan a phased approach to centralizing its procurement organization. With support from its CEO, Sun piloted a centralized procurement organization in Europe, targeting a dis-crete group of raw materials and spend that were common to multiple divisions. The trial organized commodity leaders from Sun’s European divisions into a central team that consolidated spending volumes, adopted lower priced commodity variants, employed advanced total cost models, and transitioned business to low cost country sources. The cost and performance savings were so dramatic that Sun moved to establish a central global procurement organization within a year. This new matrixed group includes:

• Global category teams responsible for setting strategy and sourcing each of Sun’s 21 spending categories.

• Regional purchasing leaders responsible for implementing and driving compli-ance with global category contracts within their regions within the context of lo-cal requirements and regulatory conditions.

• Supply chain managers responsible for linking supply to sales and operations planning and global warehousing and distribution.

• A center of expertise provides a central knowledge base for skills training, sup-ply market research, supplier intelligence, and sourcing methodologies.

Procurement executives identified the following strategies for improving the strategic role and effectiveness of procurement:

• Leverage technology to accelerate center-led procurement. Web-based auto-mation empowers an enterprise to extend source-to-pay activities to the desktops both functional and frontline employees while enforcing compliance with stan-dard procedures and contract compliance. Advanced workflow capabilities em-bedded within these tools can also provide the flexibility to configure unique processes or controls at the divisional or local level. In fact, many enterprises, such as Corning, Inc. and ExxonMobil view automation as a key enabler for transitioning to a center-led (or in Corning’s case, shared services) organization and enterprise-wide process standardization and controls.



• Establish common goals and incentives: To foster procurement transformation and support across business units, procurement leaders have set multi-year sourc-ing and commodity plans that are mapped closely to the financial and perform-ance goals of the business. These plans include details on the organizational structures, services, and commodity strategies; and provide projections for their financial and operational impact. Unfortunately, fewer than half of all procure-ment organizations use formal, multi-year plans. Instead, most rely on one-year plans. And 16% of companies lack any formal procurement plan at all.

Case Study Cessna Aircraft Co. has multi-year supply plans with sourcing and commodity strategies linked directly to corporate performance and financial goals. A cross-functional com-modity teams – including supply chain management, manufacturing, engineering, and finance -- map production schedules against price and supply market benchmarks to de-termine and adjust this plan annually. This supply roadmap is linked to year-over-year financial and performance targets of Cessna and its parent company, Textron.

• Recruit new talent: Automation freed up procurement to focus on more strate-gic tasks; but many enterprises are learning that buyers often lack the domain ex-pertise or skills to drive these strategic activities, such as supplier development. In response, executives are recruiting new talent, particularly those with graduate degrees in supply chain, logistics, procurement, and finance (Figure 10). Half of manufacturers are recruiting buyers with engineering degrees.

• Hone new skills: Leaders, such as Motorola and John Deere, have aligned with graduate programs to provide continuing education to existing team members.

Figure 10: Staff Changes: Commodity, Technology Experts in Demand

% increase/decrease in staff roles(over next 3 years)

48.4%

29%

58.1%

35.5%

48.0%

12.9%

3.2% 3.2%0.0%

29%

Overall Operationalpurchasing

Commodityand supplier

mgmt.

Managers Technologymanagers

IncreaseDecrease

Educational Requirements for New Staff

50.0%

84.4%

21.9%

31.3%

MBA Graduate: SCM/Procurement

Graduate:Finance

Engineering




Chapter Eight: Increase Spend Under Management

Key T

akea

ways

• Increasing spend under management is a top initiative for procurement executives. • Future efforts will focus on gaining control of complex services spending. • Key strategies for getting more spend under management include improving access and

accuracy of spend data, marketing procurement’s value, securing policy support, im-proving contract visibility, and leveraging industry benchmarks.

key measure of any procurement organization’s success is the amount of total enterprise spend it has under management. Aberdeen defines spend under man-agement as the portion of corporate expenditures that are sourced and controlled

by the procurement organization. The advantages of having spend under management is to ensure maximum spending leverage and the application of consistent and best practice market diligence, costing, negotiation, and compliance methods to each spending cate-gory. Spend managed outside the procurement group typically results in decreased nego-tiation leverage and suboptimal market vetting, and higher prices and management costs.

A

Findings from the CPO’s Agenda corroborated previous Aberdeen benchmarks which found that the average procurement group has about 60% of its company’s spend under its direct management. By comparison, best-in-class procurement organizations manage more than 80% of their company’s spending, on average. This delta is not insignificant, considering that enterprises have been able to achieve a 5% to 20% cost savings for each new dollar of spend brought under management of the procurement organization.

Figure 11: Top Tactics Planned To Increase Spend Under Management




Considering these factors, it is not surprising that procurement executives have made in-creasing spend under management one of their top three initiatives. These executives will focus on expanding the volume and breadth of spend under management of the procure-ment group. Services are viewed as top categories for improvements (Table 1). These plans echo Aberdeen’s ongoing benchmarking of services procurement practices.

Table 1: Top Spend Categories Managed by Procurement: Now and Planned

Currently Planned for Management Within 12 mos. 1. Transportation/logistics 2. Capital equipment/machinery 3. MRO supplies 4. Office equipment & furniture 5. (Tie) Fleet management & operations

(Tie)IT equipment and software

1. Temporary labor 2. Consulting services 3. Maintenance services 4. Advertising, marketing, and print services 5. Travel services


Procurement executives have prioritized the following strategies for increasing spend under management:

• Improve access to timely and accurate spend data: The success of any supply management program is largely dependent upon the ability to access, organize, and analyze spend data. Access to timely, accurate, complete, and detailed spend data offers invaluable intelligence on spending patterns, compliance and per-formance ratings, inventory status, and part attributes. Such insight helps identify savings opportunities, drive compliance, and develop sourcing strategies. Accu-rate spend data can also arm procurement executives with the facts needed to se-cure budget and policy changes needed to drive its supply management initia-tives. Aberdeen has benchmarked spend analysis approaches of nearly 200 enter-prises, including the use of emerging tools and services for data cleansing, classi-fication, and analysis. Companies using these solutions have been able to make spending analysis an efficient and repeatable process for developing, driving, and monitoring procurement strategies (see example).

• Market value of procurement to the enterprise: A common attribute among procurement leaders is that they have mechanisms for communicating cost, per-formance, and process improvements to stakeholders across the enterprise. Lead-ers such as MetLife and ExxonMobil have regular meetings with functional and business unit leaders to review plans and results. Other companies use newslet-ters and workshops to market improvements for a spend category or functional group as a way to secure buy-in from other areas of the organization.

• Secure policy changes and mandates to foster adoption and compliance: Without backing from senior executives, the procurement group often lacks the clout to increase spend under management and drive compliance among other functions and business groups. Unfortunately, less than a quarter of enterprises currently hold business unit leaders accountable for spend compliance targets,



and less than 20% of procurement executives reported that their CFOs provide sufficient backing and policy support to drive compliance. Procurement leaders have secured support of senior leadership as well as business unit and functional leaders to make necessary policy and incentive changes to get more spend under procurement’s control and to drive compliance (see example).

• Improve visibility and control of contract compliance: As noted in Chapter Four – and corroborated in other recent Aberdeen benchmarks – procurement ex-ecutives have prioritized investments in contract management systems to com-municate approved contracts to stakeholders, track and control compliance against contract terms, and analyze and report on contract performance. Such visibility and controls are critical for procurement plans to source and manage service contracts, which have complex pricing, payment, and service level terms.

• Leverage pricing and performance benchmarks to garner support and monitor improvements: Procurement executives view access to pricing and per-formance benchmarks as critical for measuring their performance against peers, defining optimal negotiation strategies with suppliers and securing executive and stakeholder support for procurement initiatives. In the words of a procurement executive at one manufacturer: “Nothing motivates executives more than learn-ing that their underperforming the competition.”

Case Study Leading enterprises such as MasterBrand Cabinets, Owens-Corning, and PPG licensed auto-classification software solutions to support their spend data management initiatives. Others, such as Vought Aircraft, adopted a turnkey spend data cleansing services.

• MasterBrand extracts spend data from five different legacy systems on a monthly basis. Spend data is classified at a detailed, line-item level and is accessible to all its divisions.

• Owens Corning now has visibility into all of its spend data, which is classified at the detailed, line-item level.

• PPG now receives a consolidated report of its spend from 23 data sources, in-cluding five different ERP systems, and feeds from its P-card provider.

These companies have reported faster sourcing cycles, improved data accuracy, and ma-terial cost savings reduction opportunities of 5% to 20% due to improved specification management, better compliance rates, and more informed sourcing strategies.



Chapter Nine: Conclusions and Recommendations

Key T

akea

ways

• Overhauling procurement will require enterprises to employ the five transformation strategies in consistent and integrated manner.

• Accelerating procurement transformation will require the following actions: o Establish a multi-year plan o Strategically rationalize and segment supply base o Advance total cost models o Establish supplier development and improvement capabilities o Adopt closed-loop systems infrastructure

ransforming procurement from its traditional cost-savings focus to a major con-tributor to enterprise value will require enterprises to adopt new organizational structures, new supply management approaches, and new supporting automation

and analytical tools. The five primary strategies outlined in this report deliver cost, per-formance, and value benefits in their own right. However, competitive advantage will go to companies that employ these strategies in a consistent and integrated manner.

T Aberdeen recommends the following actions to accelerate this transformation:

Establish a multi-year plan Identify the optimal organizational structure for your company and provide a detailed roadmap for making this transition, including staff recruitment and training requirements. Develop multi-year global commodity strategies, including planned adjustments due to supply price and availability fluctuations and product shifts. Identify operational im-provement plans and define the organizational and system investments required to sup-port these. Procurement’s multi-year plan must be mapped to the strategic goals of the business – e.g., innovation, market expansion, mergers and acquisitions – and include estimates on the impact these strategies will have on operational efficiencies and costs, customer service, and the financial health of the company.

“Wise-size” the supply base Armed with long-term commodity strategies –coupled with improved spending analysis – procurement must next strategically rationalize and segment the supply base to maximize spending leverage and improve supply relations and performance. Align varied sourcing and supply management strategies to each supply base segment.

For example, for strategic suppliers that comprise the bulk of spending and deliver prod-ucts or services with high strategic value and complexity, sourcing projects will be less frequent and more collaborative in nature. Ongoing management techniques for this seg-ment might include aligning product and cost roadmaps, identifying joint waste-removal initiatives, and dedicating development and improvement teams.



In contrast, for suppliers providing products and services of low strategic value and where there are ample alternatives, engage in more frequent and competitive negotiations – including reverse auctions – to exploit market dynamics. Leverage automation and other low-touch methods to maintain communication and management of these suppliers. And constantly evaluate alternative and lower-cost sources of supply.

Advance and adapt total cost models Aberdeen has long recommended the adoption of fact-based, total cost models and nego-tiation methods that breakdown and assesses the various cost components of a supplier’s bid. Leverage e-sourcing tools – especially expressive bidding and optimization -- to em-bed total cost models into each sourcing project. With supply lines and business models shifting, enterprises must constantly reassess and adjust these models.

Establish cost standards and should cost targets based on actual market pricing and costs. This will require benchmarking of commodity, product, and service prices and insight into future innovation and supply market trends. When possible access this intelligence – as well as costing templates -- from external service providers.

Establish supplier development and improvement competencies Define standard metrics and procedures for measuring supplier performance. Establish mechanisms – preferably a self-service Web-based supplier portal – for frequent per-formance score communication and dispute resolution. Extend this channel to accept submission, evaluation, and implementation of supplier-suggested waste-removal and improvement initiatives. Dedicate cross-functional teams to aid in development and im-provement of strategic suppliers. Include team members that are trained in statistical process control and improvement techniques such as Lean and Six Sigma. Where possi-ble incorporate incentives for suppliers exceeding performance goals and adopt cost- and savings-sharing terms for joint waste-removal and improvement initiatives.

Adopt closed-loop automation infrastructure Assess current procurement automation systems infrastructure and identifying gaps in process support, supply information and analytics, and integration. Define requirements for a more cohesive and integrated source-to-pay platform and determine a practical in-vestment and rollout plan. Where possible leverage and extend existing systems infra-structures – particularly transaction systems -- with new functionality, especially unifying portal and analytical layers that leverage and organize spend and supply information from transactional and legacy systems. Budget-challenged enterprises should consider OnDemand solutions, services, and content to fill initial gaps and accelerate procurement transformation. Collaborate with independent software vendors (ISVs) to introduce new processes and analytical scenarios, such as the in-context integration of supply content into a process or support for supplier development and improvement processes.

These “intelligent supply management” approaches can accelerate transformation and solidify procurement as a strategic contributor to value creation. In 2005, Aberdeen will be benchmarking and reporting on detailed implementation each of the transformational and intelligent supply management strategies outlined in this report.



Author Profile

Tim A. Minahan, Vice President and Managing Director Supply Research & Strategy AberdeenGroup, Inc.

Tim Minahan is vice president of supply research for AberdeenGroup, Inc., a Boston-based market research and positioning services firm. In this role, Minahan provides analysis and assessment of software and services that automate and streamline procure-ment, sourcing, design, and supply chain management operations.

Minahan specifically focuses on total cost management (TCM), which is an organiza-tional and technological framework for managing the total cost of ownership of supply relationships. Within TCM, Minahan tracks spending analysis, sourcing, procurement execution, contract management, and supplier performance measurement technologies. Minahan also covers product life cycle management (PLM) technologies and their con-vergence with TCM. Minahan continually consults with early implementers of these ap-plications to identify world-class supply management strategies and to determine the strengths and weaknesses of technology solutions and services that are competing in this market.

His current research efforts include Aberdeen’s quarterly E-sourcing Index (ESI), as well as benchmark studies Low Cost Country Sourcing (LCCS).



Appendix A: Research Methodology

etween January and March 2005, AberdeenGroup surveyed and interviewed chief officers, vice presidents, and directors of procurement at 100 global enterprises. These inquiries were designed to determine the following:

• The degree to which procurement’s role in their company’s strategic operations has changed over the past five years

B • How procurement is supporting company financial and performance goals

• Leading strategies procurement organizations are employing to transition to a value creation function

• Current and planned use of automation to aid these activities

• The benefits, if any, that have been derived from these strategies to date

Aberdeen supplemented this online survey effort with related Aberdeen benchmark and studies into supply management initiatives. The CPO study aimed to identify emerging best practices for procurement and supply management and provide a framework readers could use to assess their procurement competencies and foster transformation of their organization.

Responding enterprises included the following:

• Job title/function: The research sample included respondents with the following job titles: procurement, supply chain, or finance chief executive or vice president (23%); procurement or supply chain director (72%); other 5%.

• Industry: The research sample included respondents were from both manufactur-ing and non-manufacturing industries. CPG, high-tech, and industrial equipment were the leading manufacturers represented. Other manufacturing sectors partici-pating include pharmaceutical, chemicals, automotive, aerospace and defense, and apparel. Distribution companies were the largest service sector group, repre-senting 16% of respondents. Other service sectors responding included retail, fi-nancial services, healthcare, transportation, public sector and education.

• Geography: 57% of respondents were from North America; 20% were from EMEA; 18% from; Asia-Pacific; and 5% from South and Central America.

• Company size: About 40% of respondents were from large enterprises (annual revenues above US$1 billion); 43% were from midsize enterprises (annual reve-nues between $50 million and $1 billion); and 17% of respondents were from small businesses (annual revenues of $50 million or less).

Solution providers recognized as sponsors of this report were solicited after the fact and had no substantive influence on the direction of the The CPO’s Agenda Report. Their sponsorship has made it possible for AberdeenGroup to make these findings available to readers at no charge.



Appendix B: Related Aberdeen Research & Tools

Related Aberdeen research that forms a companion or reference to this report include:

• e-Procurement Benchmark Report (December 2004)

• Spend Compliance Management: Implementing and Sustaining Savings (Decem-ber 2004)

• Intelligent Sourcing: Advanced Sourcing Methods for Value-Based Supply Rela-tionships (September 204)

• Best Practices in Spending Analysis Report (September 2004)

• Best Practices in e-Sourcing Report (September 2004)

• Best Practices in Contract Management Report (September 2004)

• Global Sourcing Benchmark Study (June 2003) Information on these and any other Aberdeen publications can be found at www.aberdeen.com.

http://www.aberdeen.com/



About AberdeenGroup

Our Mission To be the trusted advisor and business value research destination of choice for the Global Business Executive.

Our Approach Aberdeen delivers unbiased, primary research that helps enterprises derive tangible busi-ness value from technology-enabled solutions. Through continuous benchmarking and analysis of value chain practices, Aberdeen offers a unique mix of research, tools, and services to help Global Business Executives accomplish the following:

• IMPROVE the financial and competitive position of their business now

• PRIORITIZE operational improvement areas to drive immediate, tangible value to their business

• LEVERAGE information technology for tangible business value. Aberdeen also offers selected solution providers fact-based tools and services to em-power and equip them to accomplish the following:

• CREATE DEMAND, by reaching the right level of executives in companies where their solutions can deliver differentiated results

• ACCELERATE SALES, by accessing executive decision-makers who need a so-lution and arming the sales team with fact-based differentiation around business impact

• EXPAND CUSTOMERS, by fortifying their value proposition with independent fact-based research and demonstrating installed base proof points

Our History of Integrity Aberdeen was founded in 1988 to conduct fact-based, unbiased research that delivers tangible value to executives trying to advance their businesses with technology-enabled solutions.

Aberdeen's integrity has always been and always will be beyond reproach. We provide independent research and analysis of the dynamics underlying specific technology-enabled business strategies, market trends, and technology solutions. While some reports or portions of reports may be underwritten by corporate sponsors, Aberdeen's research findings are never influenced by any of these sponsors.


AberdeenGroup, Inc. 260 Franklin Street, Suite 1700 Boston, Massachusetts 02110-3112 USA

Telephone: 617 723 7890 Fax: 617 723 7897 www.aberdeen.com

© 2005 AberdeenGroup, Inc. All rights reserved March 2005

Founded in 1988, AberdeenGroup is the technology- driven research destination of choice for the global business executive. AberdeenGroup has over 100,000 research members in over 36 countries around the world that both participate in and direct the most comprehen-sive technology-driven value chain research in the market. Through its continued fact-based research, benchmarking, and actionable analysis, AberdeenGroup offers global business and technology executives a unique mix of actionable research, KPIs, tools, and services.

The information contained in this publication has been obtained from sources Aberdeen believes to be reliable, but is not guaranteed by Aberdeen. Aberdeen publications reflect the analyst’s judgment at the time and are subject to change without notice.

The trademarks and registered trademarks of the corporations mentioned in this publication are the property of their respective holders.

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