“Industrialization” of sourcing and procurement operations
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The document discusses how procurement operations can be "industrialized" through processes like shared services and global business services (GBS) to improve efficiency and strategic capabilities. It argues that procurement is currently one of the least industrialized functions compared to others like finance and HR. Industrializing 30% of procurement activities through GBS could generate $30 million in benefits for every $1 billion in revenue. The document outlines a four-step approach to selecting an optimal target operating model and provides examples of companies that improved procurement through implementing advanced models.
“Industrialization” of sourcing and procurement operations
- 1. PROCESS • ANALYTICS • TECHNOLOGY “Industrialization” of sourcing and procurement operations Generating Procurement Impact Whitepaper 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.
- 2. GENPACT | Whitepaper 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
- 3. GENPACT | Whitepaper 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. 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. 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. Figure 1 - Significant potential may still exist for “industrializing” procurement operations Across industries, companies display a reduced propensity to manage procurement processes when they are compared to finance, HR, and IT processes 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. Figure 2 - Companies can realize significant business impact from industrializing procurement support functions Source: Everest GIC database; Genpact analysis Procurement processes Financial processes IT processes HR processes Industry-specific processes BFSI Energy and utilities Manufacturing, distribution and retail Healthcare Technology Telecom Others 38% 20% 19% 11% 11% 6% 8% 18% 58% 40% 27% 15% 69% 61% 31% 44% 11% 17% 43% 17% 33% 17% 9% 6% 10% 13% 6% 17% 5% 8% 1% 4% 4% 4%
- 4. GENPACT | Whitepaper Figure 4 shows that most of the industrialized (and globally delivered) procurement operations are found in 5- to 10-year-old GBS organizations. 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 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. Most of the industrialized (and globally delivered) procurement operations are found in 5- to 10-year-old GBS organizations. Figure 3 - The full benefits of GBS are realized after the foundational stages are completed 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 0-2 years Reduce complexity, drive efficiency Operational excellence, efficiency, variable cost Maximize effectiveness and continue to drive cost 2-5 years 5+ years • Consolidate internal buy-in • Stabilize operations (people, process, technology), SLA • Sharing of processes with a cost impact of +5-10% • Ad-hoc solutions with duplication of activities between corporate and GBS • Process optimization with defined SLAs and KPIs • Target global centers with 10-25% net cost savings • Push standardization and advanced technology (e.g. cloud computing) with additional 10-15% cost savings • Radically expand scope (functional, geographic) • Clarify new business case • Aggressively explore hybrid models Keystrategicchallenges Set Up Growth Maturity Life sciences GBS experiences display maturity curve Manturation of practices starting to enable leapforgging Figure 4 – The procurement function gets included in more mature GBS setups than finance and accounting 0 - 2 years 10 20 50 30 60 40 70 80 2 - 5 years 5 - 10 years ProcurementF&A Maturity of GBS (years) OccurenceofprocessesinGBS >10 years Source: Genpact experience Source: Everest GIC database; Genpact analysis
- 5. GENPACT | Whitepaper 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 Summary 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 .Figure 5 - Actionable choice patterns emerge by triangulating four themes What efficiency, effectiveness, risk, and standardization are acceptable during and after transformation? Will resources released from transaction processing and control be reoriented towards decision support? What structure and operating model should the Finance organization have to support the emerging business model? What new processes, people practices, and technologies are required to achieve the desired objective? Boundary conditions New delivery DNA Resource redirection Organizational choices a b c d Source: Genpact experience
- 6. About Genpact Genpact Limited (NYSE: G) is a global leader in transforming and running business processes and operations. We help clients become more competitive by making their enterprises more intelligent: more adaptive, innovative, globally effective and connected. Genpact stands for Generating Impact for hundreds of clients including over 100 of the Fortune Global 500. We offer an unbiased combination of smarter processes, analytics and technology through our 62,000+ employees in 24 countries, with key management based in New York City. Behind Genpact’s passion for process and operational excellence is the Lean and Six Sigma heritage of a former General Electric division that has served GE businesses for 15+ years. For more information, contact, procurement.services@genpact.com and visit, www.genpact.com/home/solutions/reengineering/global- business-services and www.genpact.com/home/solutions/indirect-source-to-pay Follow Genpact on Twitter, Facebook and LinkedIn. © 2014 Copyright Genpact. All Rights Reserved. 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 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.