Source-to-Pay: Advancing from Pure Cost Optimization to Value Generation
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This document summarizes the key challenges facing sourcing and procurement functions and strategies to help overcome these challenges and deliver more value. The main challenges include inadequate strategies, lack of market intelligence, shortcomings in processes and policies, lack of accountability, issues with organizational structure, and inability to balance process efficiency and technology. The document recommends focusing on supply risk management, category sourcing strategy, buying channel strategy, supply chain financing, and operating with a global shared service model. It argues that procurement must adopt practices like real-time market intelligence, evolving supplier partnerships, advanced risk management, and increased outsourcing maturity to transform from a cost optimization role to a strategic value generation function.
![cognizant 20-20 insights 2
• Technology: The inability to strike the right
balance between process efficiency and
advanced technology (catalogue manage-
ment, supplier relationship management
[SRM], e-procurement, reverse auction, P2P
buying channel, spend analytics) invariably
leads to poor or no ROI on S2P technology
investments — the result of bad choices and
favoring “automation” over “value creation.”
Organizations with semi-mature S2P practic-
es have managed to plug the savings leaks and
improve S2P efficiency-related benefits by imple-
menting the fundamentals of S2P processes (see
Figure 2). This includes ensuring compliance,
institutionalizing approval-based P2P workflows,
deploying foundational content management and
embracing spend analytics practices. However, to
move the needle beyond savings to value creation,
S2P functions must up the ante on other critical
aspects that can unearth larger opportunities
and enable them to systematically capitalize on
each. Avenues that have the potential to demon-
strate greater value to the business include:
• Supply risk management: This remains
an evolving practice (e.g., supplier audits)
within many organizations, which makes
Challenges Facing Sourcing and Procurement
Inefficient supplier
management practices
Sub-optimal price
discovery of goods &
services procured
Single-sourcing,
preferential
supplier treatment
Cost overruns
Broken procurement
planning processes
Lack of control &
accountability
Inconsistent & incomplete
catalogue & specifications
Poor service levels
Maverick, spot purchases,
contract non-compliance
40-60%
S2P SAVINGS POTENTIAL
Strategic
sourcing
15-25% 100%
External
compliance
15-25%
Internal
compliance
10-15%
Operating
efficiency
SOURCING
TOTAL POTENTIAL
SAVINGS
PROCURE-TO-PAY
Realizing Savings Through Basic
S2P Processes
Source: Everest
Figure 2
Figure 1](https://image.slidesharecdn.com/source-to-pay-advancing-from-pure-cost-optimization-to-value-generation-codex1656-151223173001/85/Source-to-Pay-Advancing-from-Pure-Cost-Optimization-to-Value-Generation-2-320.jpg)
Source-to-Pay: Advancing from Pure Cost Optimization to Value Generation
- 1. Source-to-Pay: Advancing from Pure Cost Optimization to Value Generation To turbo-charge business value from sourcing and procurement functions, organizations must transcend foundational approaches — focusing instead on refining strategies, heightening efficiencies and delivering more value across S2P operations, to internal customers, and throughout the extended supply chain. Executive Summary If the pundits are to be believed, 80% of busi- nesses treat their sourcing, procurement and payment (S2P) processes as non-core functions, with the possible exception being the sourcing of direct materials. As a result, S2P does not receive the attention, much less the capital and strategic focus, it deserves. There are also external forces at play — ongoing global economic uncertainty and a dearth of S2P talent at mid- to senior-management levels, for example — that exacerbate the problem. These issues, plus the lack of enterprise-level S2P opti- mization, directly impact gross margins and trigger a variety of other operational challenges. (See Figure 1, next page.) This white paper explores in detail the challenges facing sourcing and procurement heads, as well as specific levers/strategies that can be incor- porated to help overcome these roadblocks and enable purchasing teams to achieve excellence in sourcing, procurement and payment. By adopt- ing the new S2P operating model described here, leaders will be equipped to deliver the highest level of efficiency in S2P operations, along with more value to internal customers and the extend- ed supply chain. The State of S2P Our assessment of sourcing and procurement activities at organizations with global S2P opera- tions reveals a host of challenges in six primary categories: • Strategy: Inadequate S2P strategies (category management, sourcing strategy, supply risk planning) at an enterprise level. • Intelligence: A lack of market savvy concerning products, technology advancements, new suppliers (inadequate supplier outreach capability) and global commodity indices. • Policy and process: Shortcomings in the areas of spend management, cost modeling, working capital management, material procurement planning (including demand aggregation) and contract compliance. • Accountability: Failure to establish SLAs and controls through S2P KPIs. • Structure: S2P organizations struggle to find the best structure and model — decentral- ized, centralized or center-led. While structure alignment can still be attained, tribal category knowledge remains with a few experts and overall, inadequate sourcing skills is a recurrent problem. • Cognizant 20-20 Insights cognizant 20-20 insights | december 2015
- 2. cognizant 20-20 insights 2 • Technology: The inability to strike the right balance between process efficiency and advanced technology (catalogue manage- ment, supplier relationship management [SRM], e-procurement, reverse auction, P2P buying channel, spend analytics) invariably leads to poor or no ROI on S2P technology investments — the result of bad choices and favoring “automation” over “value creation.” Organizations with semi-mature S2P practic- es have managed to plug the savings leaks and improve S2P efficiency-related benefits by imple- menting the fundamentals of S2P processes (see Figure 2). This includes ensuring compliance, institutionalizing approval-based P2P workflows, deploying foundational content management and embracing spend analytics practices. However, to move the needle beyond savings to value creation, S2P functions must up the ante on other critical aspects that can unearth larger opportunities and enable them to systematically capitalize on each. Avenues that have the potential to demon- strate greater value to the business include: • Supply risk management: This remains an evolving practice (e.g., supplier audits) within many organizations, which makes Challenges Facing Sourcing and Procurement Inefficient supplier management practices Sub-optimal price discovery of goods & services procured Single-sourcing, preferential supplier treatment Cost overruns Broken procurement planning processes Lack of control & accountability Inconsistent & incomplete catalogue & specifications Poor service levels Maverick, spot purchases, contract non-compliance 40-60% S2P SAVINGS POTENTIAL Strategic sourcing 15-25% 100% External compliance 15-25% Internal compliance 10-15% Operating efficiency SOURCING TOTAL POTENTIAL SAVINGS PROCURE-TO-PAY Realizing Savings Through Basic S2P Processes Source: Everest Figure 2 Figure 1
- 3. cognizant 20-20 insights 3 sense given that other forms of risks — natural disasters, political and economic events, contracting, legal, operational and financial — are not collective- ly assessed. Moving from a quali- tative approach to a continuous, fact-/data-based quantitative risk evaluation is among the key capabilities that can differentiate an organization’s S2P function in terms of strategic value creation. Risk management should not be conducted in isolation; instead, it needs to be embedded within the core source-to-contract (S2C) and procure-to-pay (P2P) processes to minimize supply-exposure risks. • Category sourcing strategy: This involves defining sourcing groups and specifying strategies (balancing business goals, require- ments, buyer dynamics and supply market complexity) for direct and indirect services and projects — potentially resulting in a range of savings opportunities. (See Figure 3.) # 2 Risk management should not be conducted in isolation; instead, it needs to be embedded within the core source- to-contract and procure-to-pay processes to minimize supply- exposure risks. Source: Ariba Figure 3 Figure 4 Category Sourcing Can Result in Significant Savings Utilities Travel related Third-party logistics Professional services Office supplies MRO supplies Marketing/sales services Marketing/sales products IT/telecom HR related Facilities 4-8% 6-20% 6-25% 3-23% 6-20% 8-20% 7-20% 7-20% 6-22% 8-23% 5-15% AVERAGE SAVINGS Finding the Right Buying Channel Consulting Financial Professional Services MRO Capital Equipment Logistics Consumables Tools & Spare Parts Production equipment Air, Rail, Road & Sea Transport, Express Parcels Heating Cooling Ventilation Water & sewer Road maintenance Security Furniture IT consulting Management advisory Financial consulting Auditing Chemicals Semi-finished steel Components Electrical engines Import/export duty, costs for brokerage Warehousing services Etc. Assembly, automation, grinding, etc. Measurement, testing, packing, etc. LEVEL 1 REQUISITION LEVEL 2 LEVEL 3 Building Contractors Electrical Installations Indoor Infrastructure Office Equipment • Catalogue • Online contract • E-mail/phone/FAX/verbal • Special request • OCR • Non-OCR INVOICE • T&E card • E-Invoice (EDI) • Self-billing • Scanned invoice • Paper invoice PURCHASE • Non-PO • Hands-on PO • Automatically generated PO • Scheduled PO Facility Management CATALOGUE X BUYING CHANNELS
- 4. • Buying channel strategy: Finding the optimal procurement channel is critical — taking into account different dynamics in terms of user efficiency (lowest transaction costs, reduced complexity of IT solution, etc.), control and visibility (spend information, compliance to contracts and specifications) and ease of use (easy ordering, quick delivery and easy invoicing). (See Figure 4, previous page.) • Supply chain financing: This can be accom- plished through multiple techniques, such as vendor-managed inventory (VMI) and buyer-led credit programs for suppliers. Using a combination of payment terms (early vs. late) and associated rebates, invoice consolidation and P2P automation can deliver additional cost savings. • Global shared service: This operating model is responsible for defining and executing on sourcing strategy, P2P transactions (e.g., post-purchase requests), S2P analytics and local operations, including sourcing support, purchase requisitions, spot buys and contract execution. Given these dimensions of an S2P function and their varying impacts on shaping the maturity of operations, it is evident that a chief purchasing officer’s task is arguably a multifaceted one. From managing end users and the plant head’s expec- tations (e.g., complex goods and service demands, delivery pressures), to maintaining a persistent cost-containment focus, to conforming to sus- tainability requirements while balancing supply risk, the CPO’s role can be mind-boggling and complicated, particularly when it comes to play- ing catch-up with long-term challenges and S2P trends and staying ahead of the competition. Thinking and Working Proactively Considering the multidimensional complexities, what should CPOs focus on? Besides the fundamentals, CPOs must get com- fortable with next-set practices that will shape S2P strategies in the coming years. This will require them to master the following: • Real-time market intelligence: Technology advancements in data capture and cloud-based distribution is making market dynamics more transparent, since real-time information about prices can be accessed across trading channels and online B2B marketplaces. The availability of relevant data is forcing procurement organiza- tions to move ahead and build data models that predict changes in commodity prices. Likewise, they must use analytics to access supply risks and compliance data assimilated from internal and external sources, using advanced Decision Tree-based models that enable category managers to establish a robust risk profile of their critical parts/services and the associated savings. The collective multiple data sources will form the building blocks for a 360-degree view of the category — covering all aspects, such as risks; TCO and savings; product/service technology advancements/maturity; quality; compliance, and supplier performance — resulting in negotiation scenarios informed by robust analytical engines. • Evolving supplier partnerships: Based on the principles of core competence, S2P leaders will recognize that there is much to be gained from their suppliers. For example, suppliers are more knowledgeable on key technological advance- ments in the product/services they provide — compelling category managerstoevaluate them not merely on innovation, but also on how the suppliers integrate their own p ro d u c t /s e r v i c e lifecycle activities with customers’ S2P activities. In addition to staying price-com- petitive and remain a provider of choice, suppliers will move up the value chain not just by catering to specific product or service needs, but also by delivering an all-encompassing solution. By bringing in “out- side-in” views on technology; owning auxiliary activities around the product/service; using IT effectively; and participating in joint product design/development of innovative commercial models involving variable and outcome-based pricing, suppliers will begin to own a larger share of the partnership with their custom- ers. This type of supplier partnership model will also require category managers to design a supplier-evaluation framework to assess suppliers’ product/service offerings in a com- prehensive manner. cognizant 20-20 insights 4 By bringing in “outside- in” views on technology; owning auxiliary activities around the product/service; using IT effectively; and participating in joint product design/ development of innovative commercial models involving variable and outcome-based pricing, suppliers will begin to own a larger share of the partnership with their customers.
- 5. cognizant 20-20 insights 5 • Risk management: Procurement organiza- tions will need to develop holistic strategies for managing risk, including total risk exposure, risk-mitigation investments and risk-transfer pricing. Newer risk-transfer options introduced by financial services companies will become the norm for CPOs and their S2P teams to consider during the risk-exposure planning process. Mitigating risk will involve external collaboration between the organization’s S2P function, its suppliers and its key customers. The use of statistical analysis and simulation- based advanced risk models (e.g., Bayesian, Monte Carlo) — seamlessly integrated with the S2C activities — will become the norm for category managers, enabling them to evaluate multiple “business-value-at-risk” strategies. • S2P outsourcing maturity: A heightened focus on S2P core competencies starts with an assessmentofwhattheorganizationcansource, followed by the identification of partners that it can rely on for support of non-core S2P activities (i.e., P2P and certain components of tactical sourcing activities). At the same time, as S2P sourcing matures, organizations should expect to see a second phase of development, where companies begin to jointly innovate with their partners — delivering Kaizen initia- tives across S2P activities, and exploring new sourcing and supply chain financing models to drive competitive performance, manage risk and optimize working capital. These factors will cause the S2P function to evolve — propelled by progressive capabilities such as an advanced commodity trading desk for category managers and multi-tier engage- ment with suppliers to afford end-to-end visibility across commodity supply chains. By adopting these sophisticated capabilities (e.g., hedge, for- ward contracts, etc.), S2P functional heads can demonstrate the financial impact on gross margin, EBITDA, cost of risk and capital. DIFFERENTIATOR (current state) Sustained value creation • Category-level enterprise coordination. • Supplier development, enablement. • Integrated SRM system. • E-Sourcing. • Market volatility management. Supplier as extended partner • Value-added services. • Global supply competence. • Traceability & visibility extending to production plans. • External compliance. EXCELLENCE (future state) Real-time market intelligence • Multi-tier visibility. • Data models to predict commodity prices. • Robust analytics engines for scenario-based optimization. • Analytics-informed reporting and decision making. • Variable and outcome-based pricing. Evolved supplier partnerships • Innovation from suppliers. • Focus on end-to-end solutions. • Enhancing service to internal customers. New risk management strategies • Mitigate risk through collaboration. • Holistic risk strategies. • Predictive regulatory and enforcement insight to customers. S2P outsourcing maturity • Increased outsourcing to service providers. • New business models. FOUNDATIONAL • Savings & P2P efficiency. • Spend management. • Material visibility, risk awareness. • Supplier management. • Internal compliance. • Fact-based, one-on-one negotiations. 3 1 2 The Future of S2P: Drivers of Change Figure 5
- 6. cognizant 20-20 insights 6 Embracing a Transformation Approach It all comes down to CPOs needing to ask the right questions: “How do I transform my S2P function from a mere support activity to a strate- gic business enabler that eliminates bottom-line erosion, delivers competitive advantage for my enterprise, ensures stickiness with customers and supplier alike, and is viewed as a true partner to my business?” Our S2P transformation framework addresses these challenges by providing both strategic and tactical intelligence to advance S2P functional capabilities. The framework’s built-in S2P exper- tise, coupled with sourcing-category proficiency, can unearth every potential area of TCO erosion and help ensure sustainable value — leading to true S2P transformation. (See Figure 6.) TECHNOLOGY LEVERAGE S2P PROCESS & STRUCTURE SUPPLY BASE DEVELOPMENT & MANAGEMENT S2P PLANNING & ORGANIZATION S2P STRATEGY COE PILLARS Key deliverables: Sourcing & procurement strategy Key deliverables: Savings plan development, cost optimization Key deliverables: Market making, supplier rationalization Key deliverables: Best-in-class S2P processes, actionable KPIs, aligned organizational structure Key deliverables: Enablement of all critical S2P stages with best-practice tools & technology S2P advisory S2P business process services S2P technology The S2P Transformation Framework Elements of an S2P Opportunity Assessment Figure 6 Figure 7 1. OPPORTUNITY ASSESSMENT 1.1 Category Mangement 1.2 Supplier Management 1.3 Change Management 1.4 Sourcing Review • Data classification. • Analyze procurement. • Demand/forecast aggregation. • Category portfolio analysis. • Sourcing strategy. • Identify cost-reduction opportunities. • Design activity impact analysis. • Business case preparation. • Supplier on-boarding. • Supplier rationalization. • Supplier risk and finan- cial analysis. • Supplier collaboration. • Supplier catalogue management. • Risk management. • Training. • Communication. • Savings tracking. • Sourcing and procure- ment efficiency. • Compliance. • Supplier performance tracking. • Working capital analysis.
- 7. cognizant 20-20 insights 7 Our holistic approach aligns with a business’s growth and margin objectives, and is built on three pillars: S2P advisory, technology, and busi- ness-process service. The tight interoperability of our framework’s modular sub-components within these pillars helps to ensure positive outcomes of S2P operational/tactical initiatives, as well as business growth measured against KPIs and com- petitive, differentiation-related metrics. The framework’s components cover the core areas of S2P — from opportunity assessment (S2P strategy and planning) as shown in Figure 7 on the previous page, to market-making, execution and monitoring (S2P operational/tactical). Each of these elements are distilled into multiple levels of processes and activities, with a logical set of specific controls (metrics), organizational roles and enabling technology. We believe that the focus should not be limited to automation and process digitization. A holis- tic transformation methodology (see Figure 8) should be capable of identifying and executing quick wins on a steady basis (a Kaizen approach), and institutionalize the larger transformation mandate (S2P policy, strategy, procedures, struc- ture and change management). Looking Forward An organization’s current S2P shortcomings, plus the ongoing challenges posed by globalization and other external factors, oblige S2P heads to make sound, proven choices in every aspect of S2P, from strategy to execution. With this in mind, we offer key recommendations for S2P leaders looking to enable true S2P transformation: • Make proactive investments to build a value- driven S2P strategy (rather than focusing purely on cost-containment) — emphasiz- ing business outcomes in a sustainable and repeatable manner. • Evaluate and design an optimal S2P operating model that is supported by a robust governance structure, value-focused S2P processes and metrics, and best-in-class technology. • Adopt SMAC (social, mobile, analytics and cloud) technology options such as cloud, omni- channel business collaboration, and real-time business intelligence on price volatility and business risks, driven by predictive analytics. • Innovate and automate S2P planning and execution processes to drive faster time to market, introduce new products more frequently, and reduce legal, financial and operational risks. • Service management. • Governance. • Vendor strategy. • Streamlined processes. • Technology. • Performance. • Management. Spend Analytics Category Strategy Procurement Operation Accounts Payable Catalogue Management KAIZENCORE COMPONENTS • Continuous S2P excellence. • Develop new sourcing competencies. • Drive innovation through S2P technology. ADOPTION • Pilot, rollout. • Standardize services. • Business value audit. • Multi-vendor ecosystem. • Industrialize. • Quality assurance. • Stakeholder engagement. • Multi-BU/Geo. governance. Employing a Holistic Transformation Methodology Figure 8
- 8. About Cognizant Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out- sourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 100 development and delivery centers worldwide and approximately 219,300 employees as of September 30, 2015, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant. World Headquarters 500 Frank W. Burr Blvd. Teaneck, NJ 07666 USA Phone: +1 201 801 0233 Fax: +1 201 801 0243 Toll Free: +1 888 937 3277 Email: inquiry@cognizant.com European Headquarters 1 Kingdom Street Paddington Central London W2 6BD Phone: +44 (0) 20 7297 7600 Fax: +44 (0) 20 7121 0102 Email: infouk@cognizant.com India Operations Headquarters #5/535, Old Mahabalipuram Road Okkiyam Pettai, Thoraipakkam Chennai, 600 096 India Phone: +91 (0) 44 4209 6000 Fax: +91 (0) 44 4209 6060 Email: inquiryindia@cognizant.com © Copyright 2015, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is subject to change without notice. All other trademarks mentioned herein are the property of their respective owners. TL Codex 1656 About the Authors Gopal Anandan is a Director within Cognizant Business Consulting’s Manufacturing and Logistics Practice. His seventeen years of experience includes business and technology consulting, process inno- vation and product development. He has led multiple strategic and tactical initiatives at multinational and Asia-based companies in the areas of business transformation, IT strategy for SCM/operations, and digital and advanced analytics. He holds an M.B.A. from the Indian Institute of Management, Bangalore, India, and a Bachelor of Technology degree from Indian Institute of Technology, Roorkee, India. He can be reached at Gopal.Anandan@cognizant.com | LinkedIn: https://in.linkedin.com/in/gopalanandan. Antriksh Kumar Sinha is a Senior Consultant within Cognizant Business Consulting’s Manufacturing and Logistics Practice. His seven years of experience includes working in the automotive sector and across diverse consulting engagements with leading OEMs. His areas of expertise are product plan- ning and development, supply chain and procurement, and telematics. He holds an M.B.A. in operations management from SPJAIN, Mumbai, India and a Bachelor’s Degree in mechanical engineering from NIT Allahabad. He can be reached at Antriksh.Sinha@cognizant.com | LinkedIn: https://in.linkedin.com/in/ antriksh-sinha-b429a826. About Cognizant’s Manufacturing and Logistics Cognizant’s Manufacturing and Logistics business unit operates as a trusted partner to global manufacturing lead- ers, helping them accelerate business performance in the digital world. The unit is recognized for its forward-looking approach by industry gurus, such as IDC MarketScape, which bestowed on it a “Leader” rating for service lifecycle management. Our business consulting professionals ensure that manufacturing and logistics clients receive excep- tional business results from their technology investments and sourcing programs. Our domain solutions leverage digital technologies to build smart products, connect with digital consumers, provide real-time visibility into manu- facturing operations, and automate knowledge work with cognitive computing. Learn more at www.cognizant.com/ manufacturing.