Procurement in Action

The Efficio Grassroots Procurement Survey 2011

Procurement in Action
The Efficio Grassroots Procurement Survey 2011

Earthquakes in Japan and New Zealand, the threat of nuclear meltdown, political unrest in North Africa and the Middle East, the recent near-fatal global banking crisis and subsequent economic downturn: for businesses today, surviving in an unstable and unpredictable world has become a constant challenge. Increasingly, we are forced to examine our third-party spend to ensure that we remain competitive and protected as far as possible from supply chain risk.
Many surveys of the procurement community focus on high-level executives, chief procurement officers and senior managers: those who lead change and decide on strategy. In the Efficio Grassroots Procurement Survey, however, we wanted to find out what people at all levels in procurement roles think. Our questionnaire was therefore aimed at procurement practitioners from the most junior roles to the most senior. We asked about the kind of processes used to engage in procurement projects and how relationships with suppliers work. We asked about relationships with colleagues in other functions and about the savings procurement people are asked to achieve. The survey sought to find out about the training people in procurement receive and the supporting technology they use to accelerate the process. All these are areas of great importance in the continuing development of procurement as an essential business function. Some results were as we expected, others offered surprises. The survey results presented in this report provide food for thought and suggest a range of actions to help raise the status of procurement as a profession and expand the contribution it can make to business success.

James Jenkinson Vice President, Efficio

Efficio | Grassroots Procurement Survey 2011 | 3

Contents

Foreword About the Survey Executive Summary The Procurement Process Managing Supplier Relationships Internal Relationships Savings, Efficiencies and Compensation Training Technology Conclusions and Recommendations for Action

03 06 07 08 11 14 15 16 17 18

Efficio | Grassroots Procurement Survey 2011 | 5

About the Survey

The Efficio Grassroots Procurement Survey is based on a detailed questionnaire sent to procurement professionals in private and public sector organisations throughout the UK and Europe. The analysis is based on over 175 answers, which were submitted between September and December 2010. The survey aimed to gain a view of opinion among grassroots procurement personnel who are responsible for day-to-day operations as well as their more senior managerial colleagues. The objective was to analyse the views, positioning and challenges among personnel at all levels in the procurement community. Just over a quarter of those responding were at CXO level, typically ranking as Vice President or Director of Sourcing. These are the CPOs responsible for procurement departments who are likely to spend most or all of their time managing their teams, deciding strategy and setting objectives. The remaining respondents are comprised of category managers, specialist buyers, sourcing managers and others. The sample thus provides a good cross-section of opinion in the procurement community as a whole. The respondents come from a wide variety of sectors. 20 per cent from the public sector and 80 per cent from the private sector covering Manufacturing, Utilities, Financial Services, Pharmaceuticals, FMCG, Telecoms, Chemicals, Professional Services, Waste Services, Construction, Oil & Gas and Private Equity. Education 62 per cent of respondents hold a university degree, more than half of those at masters or higher level. This finding will be welcomed by those who have long argued that procurement should be recognised as a high-level strategic function in todays business world. It suggests that the academic status of those entering procurement as a career is rising as the profession becomes more established as an important business activity alongside, for example, finance. An equally encouraging finding suggests that procurement is enjoying an influx of younger entrants who will hopefully inject new thinking and approaches into the profession. While more than a third of respondents had been in procurement for 15 years or more, 40 per cent had been in their roles five years or less, showing plenty of new blood entering the profession.

Executive Summary
The Procurement Community Procurement is enjoying a high level of new entrants. The survey found that 40 per cent of respondents had been in procurement five years or less. Only a third had been in procurement for 15 years or more. The Procurement Process Training Most businesses follow a formal sourcing strategy, but many do not. In the survey, half of respondents followed a formal strategy and a quarter always calculate Total Cost of Ownership. However, more than a quarter of respondents rarely or never changed suppliers, 44 per cent rarely or never use request-for-proposal launch events and 67 per cent said tendering processes were usually completed in 10 weeks or less. Half of respondents always or often challenge specifications drawn up by non procurement people in their organisation. Managing Supplier Relationships Many procurement professionals are able to concentrate on a manageable number of categories, but some are tasked with too many suppliers. Two thirds of survey respondents managed five or fewer categories. However, two thirds managed 31 or more suppliers in total. 19 per cent always provide feedback to suppliers, while nearly two thirds measure performances of up to 10 per cent of their suppliers. 42 per cent received procurement data from within their own organisations only. 2. Education Internal Relationships Many procurement professionals face serious challenges in effectively carrying out their roles. 42 per cent of respondents identified a lack of time and difficulty in Not indicated arranging meetings as problems, while a fifth experienced 4% a lack of leadership or guidance from senior management.
31%

Savings, Efficiencies and Compensation Pressure on procurement personnel to achieve savings appears to be less intense than many fear. Nearly two thirds of respondents faced savings targets of 10 per cent or less of spend, while more than three quarters met or exceeded their savings targets.

Training for procurement professionals is generally delivered at acceptable levels, with a focus mainly on core skills. But the quality of much current training is in doubt. 25 per cent of respondents received training in negotiation and 20 per cent in category management. Procurement people are also focusing on wider business competence and being trained in presentation skills. But only 9 per cent of respondents thought their training was of a high standard. Technology There is a gap between the aspiration and reality when it comes to the use of online sourcing technology. 52 per cent of respondents rarely or never use eSourcing tools, while 44 per cent had not used eAuctions in the last 12 months.

73 per cent of respondents are comprised of category managers, specialist buyers, sourcing managers and others Participants by job titles
COO (1%) CEO (1%) Director of logistics (2%) Student (3%) Other 6% 4% VP/Director for Sourcing 24% CFO (1%) Not indicated (1%)

Contract Manager

Masters

4% Sourcing Manager 16%

4%

Other Phd

4% 5%

4%

22%

Category Manager 13% A levels

19% Purchasing/Procurement Specialist/Buyer

26%

Bachelors

Efficio | Grassroots Procurement Survey 2011 | 6

Efficio | Grassroots Procurement Survey 2011 | 7

24% Internal systems, from suppliers 34% Rarely

The Procurement Process

In todays difficult business environment it is critical that organisations follow a structured strategic sourcing process when procuring all third party services.

20. When you issue a new RFP, how often do you organise a launch event in order to introduce the RFP?
Always 6% Never Sometimes

26. Total co

Rar

However, only 51 per cent of survey respondents said they followed such a process. This causes concern for two reasons: first that the number is extremely low and much lower than expected. Second, experience suggests that even in companies with a formally agreed sourcing process, it is often not followed properly, with many key elements being omitted entirely or not given enough time. Managing a companys supply base is a key role within procurement. As part of that role, it may occasionally involve changing one or more of its suppliers as a key lever to maintain competition. However, more than a quarter of survey respondents said they rarely or never change suppliers. This may suggest the existence of monopolies or oligopolies among suppliers. A more likely explanation, however, is that there are often longstanding relationships between buyers and suppliers and that many procurement managers are relatively risk averse and would rather stay with incumbents than go through the burden of finding new sources of supply.

When respondents were asked to identify the tactics they Total cost of ownership used most often when entering 20. When you issue a new RFP, howTwo thirds ofyou organise a or always calculate Total procurement projects, often do respondents often launch however, an impressive 71 per cent said they always invited Cost of Ownership (TCO) as part of their analysis: this is event in order to introduce the RFP? new suppliers to their tender processes. These last two a sophisticated and complex approach which can be time results, considered in tandem, suggest that although new consuming especially if there has been little existing internal suppliers are frequently invited to take part in procurement data. In such cases, it would be very difficult to complete a Always projects, they are very often not selected. comprehensive TCO analysis within the 10 weeks that 67 6% per cent suggested as a typical tendering process timeframe 22% This appears to suggest an approach that can be considered so it may be that many procurement practitioners are only Often Never 26% Sometimes Rarely unwise: new suppliers will usually be keen to go the extra partially carrying out TCO activities. 28% 18% soon evaporate mile to win business, but this enthusiasm will if they repeatedly lose out to the incumbents. In time, this will lead to increases in both incumbent and new supplier pricing: incumbent prices will rise because they know they will always win the business, while new suppliers will also increase their pricing to account for the amount of time and money spent on the tender process.
Often 22% 26% Rarely

18%

28%

66 per cent often or always calculate Total Cost of Ownership cost of ownership 26. Total

Always

Number of respondents who carry out TCO activities

Never 4%

24%

Rarely 5%

Always

24%

42%

Often

Someti

25%

71 per cent invite new suppliers to the RFP process in order to create competition Tactics used by respondents during the tender process

Over 50 per cent challenge specifications

Procurements ability to challenge specifications

29b. Procurement allowed to challenge specifications?

Sometimes

31. Difficultie

Never

Volume / supplier bundling

66

22

7 33
Always

3% 18% 34% Often 14%

Inviting in new suppliers to create competition

71

18

9 2

29b. Procurement allowed to challenge specifications?

Working on relations with current suppliers % 55 24 15 4 2
Never

Simplification / harmonisation of specifications

42

33
Always

16

3%

20% Rarely Often 34% 24% Sometimes

31. Difficulties when Challenging specificationsworking with other functions (M The authority with which procurement managers are able to challenge specifications is key to their status within their organisations and is often a lever in unlocking significant cost reduction opportunities.
18% 4% It was therefore encouraging that more than half of respondents said they always or often challenged specifications. It is not clear from these results, however, 14% 30% how often such challenges lead to specifications being altered in a way that drives significant savings. 4%

Negotiating face to face / haggling

63

18

18%

13 3 3

Total Cost Management

52

27

9 3

La
20% 18%

Always

Often

Sometimes

Infrequently

Never

Rarely

Efficio | Grassroots Procurement Opinion Survey 2011 | 8

24% Sometimes

Efficio | Grassroots Procurement Survey 2011 | 9 29%

19. When a new contract is put in place, how likely is it that you would change supplier(s)? 13. Spend information sources
Never (2%) Often 21%

21. Invitation to RFP

61 Current + competitors 19. When a new contract is put in place, how likely is it that you would change supplier(s)?

Managing Supplier Relationships

to arrive at mutually acceptable deals is at the heart of an effective procurement strategy. Never (2%) Relating successfully 3with suppliers is a key skillset for procurement professionals.
Current

74
6% From suppliers, other (2%) Often Other (3%) 54% Sometimes

29b. Procurement allowed to challenge specifications effective two-way process in which the buyer exchanges information with the supplier An 55 Current + up to 2 competitors
41
Often 21%

Current + compe

Internal systems, other From suppliers 72 6%

Current + up to 2 compe

al systems, RFP uppliers, other 44

Launch Internal systems 42% 6% Procurement is involved in increasingly complex categories This may be because many procurement managers do not in which the request-for-proposal (RFP) launch event may have enough time to initiate and coordinate such activities. 24 Rarely 24% now be regarded as a key tool. These are town hall meetings In a separate question, 67 per cent of respondents said that Rarely attended by suppliers representatives to hear details of for them a typical tendering process is usually completed in the tender, ask questions and decide whether to compete. just 10 weeks or less. 22 Always This approach offers many benefits in developing an effective 24% procurement process. This gives cause for concern as it appears to indicate that Rarely Internal systems, 34% not enough preparatory work is being carried out in the from suppliers Our survey results found, however, that 44 per cent of category strategy phase to ensure that suppliers are 4 Never respondents rarely or never use launch events of this kind. bidding on accurate specifications and that procurement fully understands the baseline, specifications and future requirements with which they are dealing. It may also 55 Not indicated that insufficient time is devoted to conducting suggest fact-based negotiations to ensure that maximum value can be achieved.

Sometimes

28

55 Numbers of managed categories and suppliers Not indicated C To develop effective supplier relationships, the procurement Another area of opportunity is during the negotiation process. manager should not be tasked with an excessive number of Providing detailed feedback to suppliers during this process Sometimes 54% categories. Furthermore, within each category, there should is fundamental to effective procurement, especially for be a reasonable number of suppliers to be managed. complex products and services, to ensure the best possible Not ind pricing is achieved. Suppliers are typically grateful for The study found that for many respondents the number such feedback. It not only enables them to offer their most of categories they were expected to manage was within competitive pricing but also to benchmark themselves against sensible limits. Nearly two thirds were responsible for five or the competition. Most importantly it ensures that suppliers fewer categories. This finding may also suggest that there is ultimately make the decision on how competitively they want now a relatively advanced level of specialisation in corporate to bid, placing the final decision largely in their hands rather procurement. than the buyers.

However, the survey results also indicated that a full two thirds of respondents managed 31 or more suppliers in total, far in excess of a number that might be fully serviced for maximum mutual benefit.

Yet, only 19 per cent of respondents said they always provide feedback calling the quality of many buyer-seller relationships into question in this regard.

26. Total cost of ownership

Preparation is key when creating tenders

20. When respondents using launch events Never Percentage ofyou issue a new RFP, how often do you organise a launchtendering process Time taken to complete Rarely (number of respondents) event in order to introduce the RFP?
5% Always 6% Always 24% Never 18% 42% 28% Often Sometimes 4%

This less encouraging result appears to indicate that many procurement departments are insufficiently resourced to achieve full effectiveness or it may indicate that there are too many suppliers per category and further rationalisation is 26. Total cost of ownership required. It is a challenge many respondents commented on.

Communication with suppliers is key Number of respondents who provide feedback to suppliers

26. Frequency of calculation of TCO

Rarely 5% Never 4%

27. Negotiation process with qualita

23

Current weeks 23. Length of tender in+ competitors

Our clients often focus on reducing the tail of suppliers in a category, whereas most of the benefit lies with the top 5 suppliers who,61 managed well, could provide a better and if more cost effective solution which will, in time, eliminate the need for tail suppliers. Poor communication was highlighted as a major concern amongst procurement professionals both with external Often 42% suppliers and stakeholders. The survey found that almost two-thirds of respondents never met with 20 per cent of their suppliers.
55 With suppliers, the potential benefits of effective communication are essential. Suppliers often complain that procurement people fail to share forecasting information with them, for example. They are kept at an arms reach and not informed of upcoming production schedules, but still expected to deliver on time no matter what the level of demand. 55

Always

26. Frequency of calculation of TC

39 61

0 - 10 weeks

Current + up to 2 competitors
Always

80

Often Current + competitors

11 - 20 weeks

28

Current

324%

Current + up toSometimes 2 competitors

34

55

21 - 30 weeks
25% Often 22% Sometimes 26% Rarely

Not indicated

Rarely Current

17

31 - 50 weeks

2
25% Sometimes

Never Not indicated

55

31. Difficulties when working with other functions (MCQ)

Efficio | Grassroots Procurement Survey 2011 | 10

14. Percentage of contracts with regular review meetings

Efficio | Grassroots Procurement Survey 2011 | 11

0% - 10%

49

29b. Procurement allowed to challe

ry 8%

7% 30% Group sessions

0 - 10 weeks

11% - 20% 80

13

11 - 20 weeks

28

21% - 30%

18%

Information Effective procurement relies on an efficient two-way flow of 23% information between buyer and seller. Experience shows that Face to face the quality of such information its usefulness in developing 2. Education successful procurement strategies depends in large part on its source.

This is because ERP systems are often designed around the products produced by the organisation rather than those of the organisations suppliers making it extremely difficult to access the detailed information needed.

By far the best source of data needed to source categories strategically is the supplier base and procurement needs to Many respondents felt that difficult economic conditions concentrate on working towards obtaining this information. were driving suppliers towards providing less transparency Most likely though, suppliers will be reluctant to share this in the make-up of their costs. Typically, this is because such information with you so in order to cross this hurdle, its pressures are forcing suppliers to Not indicated margin in maximise the 4% important for procurement to last 12 months? every element of their cost structure.44. How many eAuctions have you run in thebe very clear about the Bundling all the cost Masters background 31% need for the data. and components together enables them to conceal the margins they have built in their pricing more effectively. More than 42 per cent of respondents said4% received they Other 4% 16-30 their data from systems within their own organisations 31-50 (1%) 5% rather than from6-15 suppliers. Such internal information can be 3% Phd 8% problematic internal systems typically yield only high level51-100 (1%) data such as accounts payable spend or at best usage numbers and do not produce the depth of information 13% required to work out actual costs.
A levels
44% 0

132

4%
27%

14%

26%

Bachelors

11% 9% 8%

43% 1-5

Poor savings results 2%

Supply Chain Instability Commodity Prices 15 Another serious cause for concern amongst procurement The survey results indicated that over 55 per cent of 31% - 50% 9 21 - 30 weeks professionals is the current instability in supply chains. respondents felt that commodity price instability was the single biggest challenge they 4. Years of experience faced in the current environment. Many companies cut their resources during the hardsourcing categ 7. Number of times and Rapid changes to prices, as well as a reluctance on the part 51%+ are now operating on thin margins, raising the risk of 40 2 31 - 50 weeks financial problems and, in the worst cases, being forced of the business to commit to foreseen/future volumes due out of business. to the high degree of uncertainty in the market have made the purchasing of commodities a very difficult business 31+ 0 2 years Such instability can cause massive disruption, including and these,-compounded by high currency exchanges and 21 - 30 interrupted deliveries, reductions in service levels, loss of4% uncertain supply stability, have placed large pressures on 9% 6% guarantees and fluctuating quality levels. In the worst cases, procurement to deliver in a very challenging environment. 15. Percentage of suppliers 20 and be forced to with measured performa a supplier may face insuperable challenges 11 6 - 9 years 15+ years 9% go out of business, leaving the purchasing organisation with Payment Terms 14% 34%number of a crisis caused by a sudden gap in the supply chain. In these Payment terms is a No eAuction platform hot topic right now for a 81 14. Percentage of contracts with regular review meetings likely this will remain a substantial uncertain times it seems respondents who noted that resolving issues around this 0% - 10% available for use challenge so it is up to the purchasing organisation to subject had been a particular challenge they have faced in mitigate these risks as best they can. recent times. Many companies are looking for new ways to 49 0% - 10% improve their working capital position, especially for private - 20% 8 11% 17% equity owned companies, and the tough economic times Performance measurement 6 - 10 Management has not yet 19% we are currently facing is putting suppliers under increased The survey produced mixed results regarding the decided to use them measurement of supplier performance. Nearly two thirds pressure and many respondents have suggested that 3 - 5 years - 20% 13 11% 3 21% measured performances of up to 10 per cent of their suppliers, increasing payment terms would tip suppliers over the edge. - 30% Sourcing method too aggressive whilst 18 per cent do this for more than 50 per cent of their 25% suppliers, and 48 per cent had contracts with key perforFor suppliers who are also Bad reputation of eAuctions customers it is imperative to 9 21% - 30% 10 - 14 years 11 mance indicators (KPIs) and regular reports from less than understand the balance of trade. If the client is a bigger 31% - 50% I dont know how to use itthen reducing accounts receivable half of their suppliers. supplier than customer / not user-friendly is more important than accounts payable.
31% - 50% Other 15 51%+ 23

42 per cent of respondents only use internal systems to provide vital data Sources of information buyers use to establish costs

30%

51%+

40

Measuring performance is a key aspect of managing suppliers Number of respondents measuring percentage of suppliers

13. Spend information sources

16. What it that you would change supplier(s)? 19. When a new contract is put in place, how likely ispro

Contracts with KPIs and regular reports from suppliers

15. 37. In 12 last 12 months, what savings did you achieve compared to the targets that were set? Percentage of suppliers with measured performance many eAuctions have you run in the lastthe months?
132
All

Internal systems, other 6% From suppliers

31-50 (1%) 51-100 (1%) No target 9% 27%

No eAuction platform From suppliers, other (2%) available for use

Other (3%)

0% - 10%
Often 21%

Never (2%) 81
Majority

8%

6% Internal systems, from suppliers, other 6% Under target

11% - 20%
Internal systems 42% Management has not yet

14%

14%

14% 11% 9%

decided to use them Sourcing method too aggressive

48%

21% - 30%

48%

Less than half

54%

Sometimes
None 14%

44%

Bad reputation of eAuctions I dont know how to use it / not user-friendly 31% - 50%
Rarely 24%

Above target

11

Internal systems, from suppliers

8%

34% Poor savings results 2%

29%

51%+ Other
30%

23
Half

16%

As expected

Efficio | Grassroots Procurement Survey 2011 | 12

16. What pro

Efficio | Grassroots Procurement Survey 2011 | 13

Internal Relationships
Procurement leaders attempting to instigate change within their organisations often face a range of challenges. These can be particularly acute when procurement has traditionally 42. In general, do you believe that the training provided is of good quality? been a transactional function which was not expected to drive change.
26. Frequency of calculation of TCO
Respondents to the Efficio survey were asked to identify the 4% problems they find when working with other functions within 9% their organisations. The most commonly cited was a lack of time and difficulty in arranging meetings:to 2 per cent Current + up 42 competitors identified this as a problem. In todays information-based world this should be easier than ever, but in practice people appear to be spending less and less time together. This Current makes it much more difficult when change is required which in todays environment is vital for success. 42%
Sometimes

Savings, Efficiencies and Compensation

The traditional objective of driving down costs is subject to continual scrutiny but remains the priority for many procurement leaders or, at least, for the organisations employing them. Some regard it as paramount, while others many eAuctions money merely as one 12 months 44. How think of saving have you run in the last 42. In general, do you believe that of the important objectives for procurement.the training provided is of good quality?
27. Negotiation process with qualitative and quantitative feedback
16-30

Current + competitors Always

Rarely

Often

influence the end-to-end procurement process, reducing it to a contract management function while other departments manage the procurement process themselves. It can become 55 a vicious circle when procurement suffers from a lack of respect which, in turn, limits interaction with other functions.
3 Procurements involvement late in the process is an ongoing
44% Often

61

23 Always The vast majority of respondents to the Efficio survey

6-15

3% reported that they had been given relatively modest savings Rarely 8% targets. Nearly two thirds faced targets of 10 per cent or Always less, while between 2.6Often5 per cent 4% the most 39 and was 9% common target. These figures tally with experience which suggests that this range is typical.

32 per cent confirmed that their savings target was linked 31-50 (1%) to their overall 51-100 (1%) compensation package and of these, 95 per cent indicated that this made up less than 20 per cent.

Almost as many identified the failure of others Not indicated to inform them of their plans as a problem, while a quarter of respondents said other functions were reluctant to work with procurement and a fifth said they experienced a lack of leadership or guidance from senior management.

issue that was also highlighted in the study. Procurement needs to be involved up front to define requirements, running the tender process and assisting with supplier selections. This is the only way to get real 55 benefit; it is no good being called up at the end of the process when the supplier has been selected to conduct some final round negotiations when the supplier already knows they are the favourite.

As well as savings targets, other ways explored and tried to reduce costs and add value include making technical modifications, changing the specifications to allow for 0 44% 34 Sometimes A further encouraging finding is that more than three quarters alternatives, improved supply delivery and extended 44% Often of respondents met or exceeded their savings targets. On payment terms. This is very good news but the proportion of respondents who engaged with this was only just a little the other hand this could, however, simply mean that saving Poor saving Rarely 43% 17 over 10 per cent. targets were rather conservative, and the fact remains that 42% results 2% 1-5 Sometimes 14 per cent of procurement professionals responding to this survey admitted that they failed to reach their targets.
Never 6

There are mutual benefits when procurement people are able 42 per cent of respondents find it difficult to arrange to communicate freely with their colleagues in other functions. meetings with colleagues in other functions It can produce mutual understanding ofthe past 12 months, what was your average annual 34. In respective skills and roles leading to better business savings target for the categories you manage? when working with other results. Poor communication, Key difficulties experienced on the other hand, can handcuff procurements ability to functions within the business (number of respondents)
Series

More than three quarters of respondents met or exceeded their savings targets Number of respondents with savings targets Proportion of respondents who met their savings targets

34. In the past 12 months, what was your average annual savings did you achieve comp 37. In the last 12 months, what savings target for the categories you manage?
Series
No target 29b. Procurement allowed to challenge specifications

functions (MCQ)

2.6% - 5%

37 74 2.6% - 5%

Lack of time / difficulty to arrange meetings 6% - 10% 33

37 Often 41 33 28 21 Rarely 24
Under target

9%

Lack of communication (procurement is not informed) 11% - 20% 21 44

72

6% - 10% Sometimes 11% - 20%

14%

Reluctance of other functions to work with procurement 11 0% - 2.5% Lack of leadership / guidance from senior management 10 20%+ No problem encountered 11 35

48%

Above target

0% - 2.5%

11 Always 22
29% As expected

20%+

10 Never 4

Other

10 Not indicated 55

Efficio | Grassroots Procurement Survey 2011 | 14

Efficio | Grassroots Procurement Survey 2011 | 15

Sometimes

Never

Training
Training is usually one of the first casualties in an economic downturn so it is positive 31. Difficulties when working with other functions (MCQ) to find that this appears not to have been the case for many procurement professionals.
Lack of time / difficulty to arrange meetings

Technology
eSourcing solutions have been an essential part of the procurement landscape for at least two decades and are generally regarded as crucial for delivering best results.
74 Often
132

29b. Procurement a

of procurement Of training received, was good quality? lieve that42. In general,negotiationis of the most common the training provided believe that the training provided is ofprofessionals. 46 per cent suggest that traindo you good quality? topic, identified by a quarter of followed by category management, cited by more than a fifth. These findings clearly reflect the continuing central place of these 14% essential skillsets in the procurement professionals toolkit.30% It was interesting to skills, not Always such a traditional area for the procurement professional, 4% also scored highly. This may provide some evidence of the 9% procurement professions gradual rise in status within the business world and the greater need for formal interaction 18% with other business functions.
44% Often

4% respondents, 4%

ing is only sometimes or rarely up to scratch so whilst there is 44. How many per cent of respondents never use eAuctions months? you run in the last 12 months? 44 eAuctions have you run in the last 12 72 Lack of communication a wide variety 44. How many eAuctions have a healthy mix of training being delivered and in(procurement is not informed) 132 Number of eAuctions used by respondents in the of formats (face to face, online, practical etc) there is much No eAuction platform Sometimes last 12 months work to be done to ensure real value is being delivered here. available for use

28

seeRarelypresentation that

42. In general, do you believe that the trainingprocurement is of good quality? Reluctance of other functions to work with provided 16-30

6-15 3% Only 9 per cent of respondents found the quality of 8% training was delivered to a high standard Lack of leadership / guidance from senior management How often training is delivered to a high standard Rarely Always 9% 4%

31-50 (1%) 6-15 3% 51-100 (1%) 8% 35

16-30

44
31-50 (1%) 51-100 (1%) 27%

44. How many eAuctions hav

Rarely 24
Management has not yet decided to use them 14% 22 16-30 14% Always Sourcing method 31-50 (1%) 6-15 3% too aggressive 11%
9% 8% 8% 27%

While these overall results are encouraging, however, there are causes for concern. 18 per cent of respondents said 29% they had no training at all, surely an unacceptable situation 42% inSometimes todays skills-based business world. Equally worrying is the finding that only 9 per cent thought their training was always delivered to a high standard. It is not clear from these results why this should be, but experience suggests that while many of the skills needed in procurement are very specific, many of the training courses available are too generic and as a result struggle to meet the real needs

44%

Often

No problem encountered

44%

11

44%

Other
1-5 42% 43% 44% Often

10
43% 1-5

Poor savings results 2%

Bad reputation of eAuctions 4 Never 9% I dont know how to use it / 8% not user-friendly Poor savings Not indicated 0 results 2% 44% Other

11% 51-100 (1%)

Sometimes

30% 43% 1-5

30%

ths, what was your average annual what was your average annual 34. In the past 12 months, categories you manage? for the categories you manage? savings target

25 per cent of respondents have received training in negotiation skills have failed to make an impact on many in procurement. Series 40./41. Training the last two years (number) Training received by respondents in received in the past tw ng delivered? 34. In the past 12 months, what was your average annual than half the respondents to the survey 52 per More One to one cent said they rarely or never use eSourcing tools while savings target for the categories you manage? 37 2.6% - 5% No cent just 25 pertarget use them often. Furthermore, whenNo target it 43 Negotiation Both internal & Theory 7% comes to eAuctions, often heralded as a vital tool in modern external 9% Series 8% Group Category procurement, the reality is also somewhat different from the9% 35 sessions 30% 33 6% - 10% Management accepted wisdom with 44 per cent of respondents saying Under target 37 2.6% - 5% Under target they 14% not used them at all in the last 12 months. had No training 32 Practical 14%
14%

37. In theprocurement processwhat savings did you achieve compared to whichdid youthat were set? last 12 months, eSourcing In the last 12 months, what tools the targets achieve comparedDespite targets online savings were highlighted time and again. to the 37. however appears to

Technology to automate the sourcing stages in the

However, there are a number of negative aspects of using

the transparency, there is often resistance from suppliers who find the process too aggressive with too much focus on the lowest price rather than service and value being taken into of tender 23. Length consideration. This can sour the relationship with the supplier 37. In the last 12 months, wha and make future negotiations more difficult. There is also some difficulty around using the systems which have caused 0 - 10 weeks eAuctions to fail when suppliers have not been able to use the systems correctly. What we can learn from this is that whilst online tools have 9% a strong place within any procurement department, knowing when to use them48%key.Above target fewtarget is When very Under suppliers are 9 21 - 30 weeks available, or a category very service oriented, or 14% a product heavily customised, it is likely to be less time consuming and more beneficial to use a more traditional approach involving face to face negotiations. However, a tender 2 31 - 50 weeks involving numerous suppliers can easily benefit from a well planned and prepared auction. The time taken to build trust with suppliers and ensure the buyers are trained can reap rewards with a highly competitive process.
29% As expected Efficio | Grassroots Procurement Survey 2011 | 17

11% - 20%

Presentation skills

21
16 15

29

Contract writing

6% - 10%
Online 72%

33
18% 23% Face to face

0% - 2.5%

11 Office (excel, word, etc) 10

11% - 20%
External

21

RFI / RFP writing

14 9 6 15% 13%

20%+

Supplier interviewing Other

0% - 2.5%

Internal

11

Positive factors around the use of eTools were regarded as the efficiency with which RFPs and RFIs can be issued. They Above target 48% allow greater document control and a standardised process leading to better communication both internally and externally throughout the RFP and RFI process. This, therefore, leads to quicker decision making. Online tools, by their nature, bring about a very high level of transparency to the process. 29% Its a very open and fair playing field and the onus is on the 29% As expected supplier, with control handed to them,As expected competitive as to how they want to be determined by much they want to win.

11 - 20 weeks

No target

28

20%+
Efficio | Grassroots Procurement Survey 2011 | 16

10

14. Percentage of co

Conclusions and Recommendations for Action

From the survey we have been able to gather an understanding of how procurement functions are operating on a day to day basis and the challenges that are being faced.

Some highlights include that a large number of respondents had been in procurement five years or less. This is very good news and strongly suggests it is time to usher in a new era by breaking the shackles which have traditionally limited procurement. Businesses must position their younger procurement professionals closer to operations personnel and equip them with sophisticated tools to carry out a more strategic role. It is imperative that senior management provides full support to their procurement executives, paying particular attention to ambitious young entrants. We also discovered that most procurement professionals are required to manage a sensible number of categories. But many are responsible for 30 or more suppliers far too many to make fully effective management possible. Business leaders must ensure that their procurement executives are able to focus on a small number of core categories. This will produce benefits including better procurement results, increased staff motivation and improved business relationships. Many procurement professionals reported of a lack leadership from senior management. Without top-level sponsorship, simple matters such as being able to arrange meetings with other functions are far more difficult. Too often, procurement has no mandate and is still seen as a transactional function. Procurement professionals must demonstrate their value to their organisations more often and more effectively. By taking the lead in projects they must consistently prove their credentials to key operational stakeholders. We also noted that the imperative for procurement people to make savings is not as intense as is often suggested with moderate savings targets of 10 per cent or less. We have seen significant progress with how procurement identifies savings opportunities but tracking savings can be a time-consuming process that is sometimes avoided. Therefore, savings that are identified may be lost in implementation or clawed back by suppliers but still counted as savings. However, as well as the points above, outlined here are solutions to 5 key challenges identified in the survey that need to be addressed in order to improve operational activity.

1. Managing Instability in Commodity Prices Commodity prices have risen dramatically in the recent past. Many commodities have substantially increased in price, but the movement has not been continuous and there have been sharp falls. Managing these fluctuations has become increasingly important and the good news is that in most cases, effective commodity management can be done in several ways. However, by far the most effective is through indexing, assuming your business is not completely risk averse. The first step is to unbundle the underlying cost structure (either through a tender with suppliers willing to provide the information or through a collaborative approach with your incumbent supplier) to obtain the necessary breakdown. Once you know how much of your product is based on commodities, an appropriate index to baseline against can be found. Unbundling prices can be time consuming and data intensive but can be very effective at minimising risk while developing a pricing mechanism that is sustainable and transparent for all parties to see. The final step is to develop an inflator or deflator against the index to accommodate additional cost elements, which are then fixed, so that when the cost of the commodity goes up, the price you pay your supplier rises, and when it falls, you pay less. The proportion of fixed as against variable elements must be negotiated with your suppliers. In summary, this is a difficult area to manage but the right approach can put you as the purchaser in the driving seat, no longer so vulnerable to unpredictable commodity price fluctuations.

2. Creating Transparency The cost of different materials and components often varies widely between suppliers even though the final price for a particular item may be similar. This means that if procurement can identify the suppliers costs and margins by unbundling cost components, they will be able to negotiate prices for the constituent parts of the item as well as the total cost. Much of the information you need to analyse the costs of the goods and services you are paying for, however, must by necessity come from the supplier. The question then is how to persuade the supplier to provide the information. Suppliers will often respond to a request for this kind of detailed information by claiming it does not exist or that their systems are unable to provide it. However, this is unlikely to be true and with some perseverance there are ways of persuading them to part with the data you need. If you cannot do this collaboratively, however, a well structured RFP which includes pricing templates allows you to request unbundled pricing from suppliers and enables a comparison across several potential suppliers. This kind of transparency also ensures that the suppliers profit margins more accurately reflect market conditions, creating the additional benefit that the relationship with the buyer will be more sustainable in the longer term: both sides are likely to be happier if the deal makes economic sense from their own point of view.

3. Ensuring Supply Chain Stability First it is essential to understand which categories in your business are the most sensitive to supply chain risk. Using Krajlics quadrant, it is a simple exercise to identify such categories: they are the ones most critical to your organisations viability and most difficult to substitute in the marketplace. Within these categories, consider which suppliers are the most potentially vulnerable. Identify those which present the highest risk they might account for perhaps 10 per cent of the total and focus on them. These are the companies most likely to face financial problems and therefore cause the biggest potential damage. Monitoring the financial and organisational health of these suppliers is a matter of collecting information. Incumbent suppliers may be willing to help with this, because they are likely to want to cooperate to keep your business. It is reasonable to ask for quarterly reports on turnover which will quickly reveal any problems caused by, for example, the loss of a major customer. Similarly, your supplier may agree to notify you of any changes in key personnel. Credit checks are very easily accessed from the established providers of these services. And, importantly, informal communication channels may prove extremely useful in gaining this kind of information: talk to your suppliers salespeople. Finally, it is essential to ensure that you have alternative suppliers in case of a looming crisis. Prequalifying and maintaining a small number of extra suppliers need not be a big investment. A small spend can be allocated to the alternative vendors to maintain their interest in your business. It may be effective to utilise a supplier already serving some other category or identify and activate alternative vendors during a strategic sourcing initiative: second place bidders are the natural candidates.

Efficio | Grassroots Procurement Survey 2011 | 18

Efficio | Grassroots Procurement Survey 2011 | 19

About Efficio
4. Improve Communications When it comes to suppliers, it makes sense to provide them with as much information as possible. That way, they can fulfil their obligations and you are more likely to receive the service you require. Simply increasing the amount of communication with stakeholders and suppliers may well produce tangible benefits. Good communications can be achieved through the following steps: Segment your stakeholders and your supplier base so you can prioritise your targets. For stakeholders, assess how supportive they are of your efforts as a professional procurement function, and how important they are in the organisation. For suppliers, determine how strategic they are gauge the potential impact if they were to cease supply. Instigate a new approach to communications with stakeholders and suppliers in a new sourcing project. This should ideally be the kind of project that involves significant stakeholder engagement but is one you can lead and make changes as necessary. Meet stakeholders bi-weekly or even weekly, together or separately, to get them onboard and ensure you understand their fears and concerns. You will have a better chance of success if they feel that you understand their position. Always err on the side of over-communicating, even if this means just a short weekly update with a few bullet points. When negotiations are complete, produce a list of options with the relevant business cases attached rather than presenting a single solution. That way, stakeholders feel they retain some status and influence over the proceedings. Procurement should be a facilitator not a decision maker. For suppliers, good communication means regular meetings to share information, deal with any issues and explore ideas about how the relationship can be improved. Once the selections have been made and contractual terms agreed, vendor management becomes the priority. Account meetings should begin within a month of contract signing, especially for new suppliers. Effective, agile communication with your two main target groups internal colleagues and suppliers will produce a win-win outcome in which all those involved are able to meet their business objectives. 5. Payment Terms Historically, for companies looking to increase their working capital, the most effective approach was to increase payment terms and the question is often asked what are the optimum payment terms?. The answer to this question varies depending on the geography; in the UK it is around 60 days, Northern Europe is 90 days and Southern Europe 120 days is common. Whilst many believe that extending payment terms will increase prices, if handled correctly, and for categories that are not finance based (e.g. leasing,) then it is possible to extend payment terms without incurring additional costs. It is also very important that suppliers are only approached once. It would be unethical to go to them proposing to change payment terms then in 3 months go back to them again asking to reduce rates. If done in this order then there are likely to be price rises in the RFP or at the very least limited cost savings opportunities. When starting a working capital exercise it is important to segment your supplier base to isolate those suppliers to be dealt with during the sourcing effort. It is during this process that payment terms are added to the list of conditions in the RFP document. This has a far greater chance of success. However, there is now an alternative to the traditional method and that is to offer suppliers an early payment discount if they are paid in a very short window. Early payment is a great incentive for a supplier to provide a discount and can add great value to a large contract.

Efficio is a results-focused procurement consultancy, with a track record of helping leading organisations achieve more value from their procurement. Whether the challenge is delivering significant savings to the bottom line or managing suppliers to create value for the longer term, Efficio provides a range of client-tailored services including: Procurement Opportunity Assessment Strategic Sourcing Execution People and Process Development Procurement Transformation

Comprised of experienced professionals with a blue-chip consultancy heritage, Efficio combines the credentials of a top tier firm, with the depth of expertise and execution of a flexible niche player. With offices in the UK, France, Germany and Switzerland, and a growing operation in the USA, we service clients from a broad range of sectors throughout Europe and the United States. To learn more, please visit www.efficioconsulting.com or call +44 20 7553 6900

About the author

James Jenkinson is a Vice President in Efficios London office

Efficio | Grassroots Procurement Survey 2011 | 20

Efficio | Grassroots Procurement Survey 2011 | 21

Efficio | Grassroots Procurement Survey 2011 | 22

Efficio Crusader House 145-157 St John Street London EC1V 4QJ United Kingdom T. +44 (0)20 7553 6900 F. +44 (0)20 7553 6901 E. info@efficioconsulting.com W. www.efficioconsulting.com