The sourcing and procurement function is increasingly mandated to contribute to the growth and agility necessary in these volatile and uncertain times. Its current operating models are, however, seldom able to deliver on these expectations—often lacking enough resources to tackle at scale emerging challenges, such as analyzing global and fragmented supply chain risks, as well as enabling frequent changes of company “perimeter” brought on by geographic expansion, M&A, and so on.
Global Business Services (GBS), an evolution of shared services with a larger global footprint serving multiple functions, can benefit the sourcing and procurement function because they have the ability to streamline processes under a unified—although not always centralized—operating entity. Decoupling business functions combines the advanced use of metrics, scientific process management, specialized data analysis, and effective IT enablement. It can industrialize business support processes and operations and—when combined with end-to-end process management—can result in the ability to scale, lower costs, and superior delivery. The resulting transformed business processes enable faster decision-making and the ability to adapt to market conditions. This paper presents a scientific, granular approach to procurement transformation, proven through industry-specific experiences.
Enterprise strategy and the demand on procurement
Procurement leaders, now more than ever before, are key players in the transformation of their company’s operating models; however, their function is routinely strained by such challenges as:
- Tactical, transactional activities are still the core of many procurement organizations’ DNA—such as creating POs, helping execute contracts, responding to supplier issues, and running routine negotiations with suppliers. Contributing to the growth agenda warrants closer alignment to business operations and closer involvement in decision-making processes
- Moving beyond cost savings. Procurement faces, and often struggles with, the consistent demands of contributing to “higher touch” roles, such as category management, demand forecasting/management and supplier risk, and relation management, over and above driving costs from supplier contracts
- Solving for globalization and centralization. Serving global markets and newer geographies can sometimes be at odds with the centralization of the procurement function. The central and regional procurement leaders are asked to deliver greater value from global activities while providing efficiency at reduced operating costs
- Factoring supply chain risks, such as supplier bankruptcy, financial crisis, natural disasters, and price/currency volatility, are a “byproduct” of business volatility. The supply chain is prone to controllership risks because of its multiple physical and transactional hand-offs
- Evolving technology and analytics beyond the comparatively limited current use. Limited automation has often resulted in a lower (and slower) than expected ROI on technology. Predictive analytics—employed for commodity price volatility, price forecasting, and so on— is still underutilized
Industrialized procurement operations: A key to agility and resilience
Industrialized operations can, when executed well, help access new growth opportunities, create resilience to hostile market or regulatory conditions, and facilitate enterprise-wide product and business model innovation. They also enable faster innovation in volatile marketplaces.
For instance, increasing the size of a large operation by 20% (or strengthening business infrastructure in a new country) typically takes a year or two, but industrialized operations can often achieve this in half the time. For some processes, when the scale of business process service is increased by a factor of ten due to consolidation, the shared model can deliver a 50% savings in cost per transaction. (A leaner, more predictable cost structure also enables resilience and the consistent global application of best practices.)
We have already1 stressed the industrialization potential across functions within various industries. Figure 1 below reveals that procurement is one of the least “industrialized” functions based on its limited inclusion within captive outsourced Global Business Services (GBS) when compared to business processes such as F&A, HR, and IT. Taking industrial manufacturing as an example, Genpact estimates that 30% of the existing procurement activities can be industrialized through sourcing and direct/indirect procurement support.
As Figure 2 shows, we estimate that this effect can translate into business benefits amounting to $30 million for every $1 billion revenue in manufacturing companies.
Some of the most common procurement areas that can be “industrialized” include:
- Spend analytics: spend extraction, cleansing and categorization; supplier market research; supplier risk assessment
- Sourcing strategy and vendor negotiations: supplier profiling, supplier market analysis, sourcing analytics, preferred vendor selection, and negotiation and e-contracting
- Source to pay compliance reporting: Source-to-contract business cycle by driving contract compliance, transaction compliance (e.g., only POs driven through preferred vendors) and discount capture
Procurement’s place in the operations maturity curve
The evolution of GBS typically follows three phases (Figure 3), with focus and achievements shifting over time from foundational (often direct-cost driven) activities to more strategic ones. A typical company’s full realization of benefits using the GBS model is achieved when it moves beyond the first two phases, which can take between five and ten years. However, forward-looking organizations have successfully shortened the path and benefited from the experience of best-in-class early movers.
Figure 4 shows that most of the industrialized (and globally delivered) procurement operations are found in 5-to 10-year-old GBS organizations.
While the creation of a shared entity is important for harnessing scale and labor cost arbitrage, advanced business processes must optimize processes end-to-end, including those that do not belong to the industrialized entity. Data-driven process improvement frameworks like Genpact’s Smart Enterprise Processes (SEPSM) have distilled the Lean Six Sigma experience of the last decade and can help organizations to measure and improve procurement processes—in turn, enabling their operations to reach world-class levels faster and leapfrog on the maturity curve.
For example, in one major pharmaceutical company (a Genpact client) that spends more than $9 billion on procurement annually, a supplier risk assessment provided valuable insights for contract and price negotiation and lowered their risk of being hit by supplier bankruptcy. By setting up a system to periodically analyze key factors such as the supplier’s financial performance, industry ratings, cost-out initiatives, best practices, business strategies, and strategic initiatives, the company established bankruptcy indicators and benchmarked vendors against their competitors. The system let them segment suppliers into high, medium, and low risk categories and lent significant advantage in negotiations. The procurement function has already shared and outsourced key components of high-end operations like spend analytics, supplier risk and relation management, and category management.
Other situations where we have witnessed successes include:
- A global beverage player: increase spend under management through initiatives such as increasing spend visibility, designing metric structure for monitoring, reporting and benchmarking, identifying relevant technology stack, identifying change management interventions, and purchasing channel standardization
- An aerospace supplier: 18% cost savings through sourcing from Lowest Cost Country (LCC) through an end-to-end advanced and globally-delivered program management including sourcing, procurement, and logistics, in addition to part development, contracts negotiation, and new work transfers, ensuring improved timeliness for deliveries
These examples illustrate how advanced operating models, including the industrialization of higher-touch support operations, have enabled the procurement function to leverage a robust platform in order to create capacity and acquire sufficient capabilities to assume a more strategic role.
Toward an advanced procurement operations model
Scientific understanding of the operating model of procurement organizations, such as SEPSM, are now mature and allow organizations to correctly estimate the end-to-end business impact of target operating model choices, hence facilitating effective design and more targeted change. Still, building out GBS capabilities is not banal. The variability across scope, location, and delivery models indicate that while broad strategies and comparisons have a place in this process, each business case is heavily dependent on company-specific factors.
A thorough analysis of the following four dimensions, described in Figure 5, is critical to selecting the right target operating or delivery model.
- Review as-is state and rationale.Understand the current state of performance, identify candidates for improvement, and review the process and sub-process practices
- Identify top improvement opportunities. Use best-practice metrics and frameworks to benchmark key areas, identify top areas for improvement, assess the feasibility and risk of options, and conduct a preliminary analysis of benefits such as cost, efficiency, or effectiveness
- Identify delivery alternatives. Assess options for consolidating processes into internal global shared operations, externally sourced operations, or a combination of both
- Determine change implications. Outline both financial and risk-related implications for each location and structuring option (e.g., various types of risk)
- Build a business case for each alternative. Compile a high-level business case that encompasses process improvement, organizational structuring options, location choices, and change implications
- Develop a detailed roll-out plan. Develop a roll-out plan to reach the targeted operating model by process and by location
- Build the final business case. Identify emerging options for each process and develop financial and implementation plans
In this paper, we shared Genpact’s analysis and examples of how leading procurement organizations are transforming their operating models. As discussed in a previous paper, “The Adaptive Roadmap”2, business agility in times of unprecedented volatility is an imperative that demands a new role for many functions. Embracing new operating models can make companies not only more resilient, but also able to out-perform competitors in times of volatility3. For organizations looking to redefine their procurement operating models, a significant amount of specialized knowledge is needed to navigate the continuum of design choices. While every company and every industry presents unique challenges, in such a specialized field, it is possible to leverage the experience of early and sophisticated adopters. Combining this experience with a clear understanding of the organization’s strategic needs, capabilities, and industry context can help craft the right strategy for a target, advanced, and possibly “industrialized” operating model. Contact Genpact’s specialists to learn from our experience in building an industrialized operating model in the last two decades as a leader in business processes and operations.
For more information, contact, firstname.lastname@example.org and visit, genpact.com/what-we-do/capabilities/transformation-consulting/global-business-services, genpact.com/what-we-do/business-services/indirect-source-to-pay
1 Helping industrial manufacturing companies outperform through right operating models for support functions
2 The adaptive road map in uncertain times
3 Innovation and industrialized business operations: An industry-specific view