The Role of Procurement in an enterprise wide transformation programme Fit for Growth

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1 ,, The Role of Procurement in an enterprise wide transformation programme Fit for Growth CIPS Procurement Conference March 2018 Peter Chambers PwC Director, Procurement and Supply Chain

2 The need for transformation

3 Welcome to the new normal! In today s globally interconnected, digitally disintermediated market, there is no safe harbour when it comes to the bottom line Speed of technological change Sluggish global growth Geopolitical uncertainty Increasing tax burden Changing consumer Cyber threats Availability of key skills Over-regulation Terrorism Exchange rate volatility Populism Source: PwC, 21 ST Annual Global CEO Survey 3

4 CEOs are optimistic about global growth prospects 2018 saw the highest-ever jump to the highest-ever level of CEO optimism regarding global growth prospects over the next 12 months Source: PwC, 21 ST Annual Global CEO Survey 4

5 Over 70% of companies are not fit for future growth The secret to unlocking growth is to make deliberate choices not only about what to cut, but also about where to invest - Vinay Couto, co-author of Fit for Growth Our strategy is not well understood across the organisation 83% 81% The way management allocates its time is not driven by strategic objectives No clear consequences for managers who fail to support the company s strategic objectives 81% 78% Our company does not have the capabilities required to win Funding for critical initiatives gets channelled in an ad hoc / informal manner 75% 66% Low-priority initiatives get too much funding Source: Fit for Growth A Guide to Strategic Cost Cutting, Restructuring, and Renewal, V.Couto, J.Plansky, D.Caglar 5

6 Invest in your strategy to be fit for future growth Fit for Growth companies put their money where their strategy is which allows them to enjoy increased returns Source: Fit for Growth A Guide to Strategic Cost Cutting, Restructuring, and Renewal, V.Couto, J.Plansky, D.Caglar 6

7 Linking strategy to execution to be fit for future growth Fit for Growth companies effectively link strategy to execution Aligned and engaged organisation - Make the right decisions, faster - Align incentives with strategy - Build aligned culture Smart resource management - Invest in areas that really matter - Run lean in areas that matter less - Don t wait for red flags to take action Clear strategy and strong capabilities - Clearly understand how you make money in your business - Build world-beating capabilities to create value Source: Fit for Growth A Guide to Strategic Cost Cutting, Restructuring, and Renewal, V.Couto, J.Plansky, D.Caglar 7

8 Fit for Growth

9 Fit for Growth in a nutshell Fit for Growth: A guide to strategic cost cutting, restructuring, and renewal 9

10 Fit for Growth is a strategic approach to cost management Fit for Growth connects choices about costs, investment in capabilities and organisational and cultural evolution Company s strategy Clear articulation of the capabilities that really matter to strategy and ability to win in the market Focus on differentiating capabilities Invest in sustainable and differentiated capabilities funded by improvements in the cost structure Release funds Identify higher valueadded priorities for investment Align cost structure Develop a clear crossorganisational cost agenda, making deliberate choices from the front line to the back office Enable and sustain Reorganise for growth Implement an organisation model, processes, and systems that unlock potential and agility for growth 4 Enable change and cultural evolution Create an environment and evolve the culture to embed and sustain change in the organisation s DNA Source: Fit for Growth A Guide to Strategic Cost Cutting, Restructuring, and Renewal, V.Couto, J.Plansky, D.Caglar 10

11 How Where What What does a Fit for Growth transformation look like? Find the funds for reinvestment by questioning what you do, where you do it, and how you do it Value Business portfolio and capability choices Portfolio rationalisation What do we do? Zero-basing capabilities Organisation and location Business operating model Where do we do it? Outsourcing Footprint optimisation How (and how well) do we do it? Operational excellence Process excellence Spans and layers Digitisation Strategic supply management 11

12 What makes the Fit for Growth approach unique This is different from what companies normally do Fit for Growth is about enabling growth, not just cutting costs Cost reduction approach Benchmark-driven Applies cost levers broadly Focuses on structure Top-down communications Afterthought, crash-diet Philosophy Methodology Organisation linkage Change management Sustainability Fit for Growth approach Strategy-back, protects good costs Tailors cost levers to cut bad costs Applies holistic organisation design Culture-led, focused on critical few behaviors Integral, change lifestyle Source: Fit for Growth A Guide to Strategic Cost Cutting, Restructuring, and Renewal, V.Couto, J.Plansky, D.Caglar 12

13 The role of procurement

14 How does procurement fit in? The procurement function is instrumental in driving strategic supply management Portfolio rationalisation Digitisation Zero-basing capabilities Spans and layers Cost reduction levers Process excellence Business operating model Strategic supply management Footprint optimisation Outsourcing Extract more value from your purchases Strategic supply management is a holistic approach that seeks to maximise value in procurement rather than just optimising the buy. It addresses all price, cost, demand, and value levers for non-labour spending. 9 cost reduction levers in a Fit for Growth Transformation Source: Fit for Growth A Guide to Strategic Cost Cutting, Restructuring, and Renewal, V.Couto, J.Plansky, D.Caglar 13

15 Depth of Activity Procurement can deliver strategic value by leveraging the available value levers Procurement is an enabler for innovation and should use these levers to contribute strategically to the organisation Price Levers Cost Levers Demand Levers Value Levers Less Advanced More Advanced Increase spend coverage under contract Understand basic cost driver insights for products/services Conduct tenders/auctions Low Identify credible threats to incumbent supply base, e.g. designed-in competition Set multi-year savings targets Optimise timing of the buy for traded commodities Less Advanced Medium Rationalise supplier base Switch to cost advantaged suppliers Reduce internal process burden to manage supply & transaction flow Manage drivers of total cost of ownership to reduce internal costs Streamline logistics at supplier interface High Types of Levers Reduce consumption Identify functional equivalent products/services and modify specifications Use industry standards instead of custom designed parts/products Standardise according to overall product architecture Switch to substitute technologies with desired functionality Leverage supplier innovation capabilities to redesign products/services Improve quality and sustainability, leveraging supplier innovation Reduce supply risk Restructure supply base to optimise total delivered value Balance appropriate make/ buy/outsource decisions Influence product mix to favour products with greater supplier base leverage Establish supplier development set against should be cost and performance targets More Advanced Low maturity Medium maturity High maturity 14

16 Procurement can deliver added value by advising on sourcing innovation and supplier partnering What is innovation sourcing? What is the role of procurement within innovation sourcing and supplier partnering? Ideas Innovations Marketready products or services Organisation Suppliers Customers Procurement adds value to the business by detecting innovations in supply markets What can be achieved by innovation sourcing? Co-creating IP Influencing product or service portfolio decisions Disruptive cost structures Value generating functionality or capabilities Partnering for growth 15

17 Strategic supply management pitfalls to avoid Assuming that one size fits all : Every category faces unique challenges. Tailor your sourcing approach to the specific economics and supply market dynamics Honouring sacred cows: Every category should be in play, and all expenditures can be addressed over the appropriate time horizon Seeking control: Procurement should offer support and collaboration (rather than control) to functional departments, with a mutual goal of optimising value Chasing every last dollar: Focus resources on larger categories where strategic sourcing will pay big dividends Overlooking change management: Strategic supply management initiatives stall without a paradigm shift and the associated effective change management STOP STOP STOP STOP STOP Focusing only on cost: Construct incentive schemes to guarantee minimum required performance and actively mitigate risks STOP 16

18 Case study

19 Our client faced significant barriers to achieving their growth objectives An organisation wide transformation programme was needed to overcome the barriers while developing capability across the firm Cost Desired Strategy Sustainability Industry Costs of service, equipment and finance grew at a faster pace than revenue and market share Became increasingly difficult to remove costs The executive team developed a bold strategy for 2020 Six strategic challenges were identified which required an organisation wide transformation to overcome Sustainability was imperative Cost reduction was key however it needed to be undertaken in a broader context which incorporates customer ease of doing business The industry is known for the rife competitive tension, regulatory change and challenges 19 18

20 We assessed opportunities firm wide within the client s strategy using the Fit for Growth framework Clarity on strategy Clear strategy linked to business plans Comprehensive cost transformation Invest in growth Release funds Transform cost structure Invest in higher value-added priorities Cut costs & grow stronger Enable & sustain reductions Reorganise for purpose Accelerate change Align culture 19

21 Identified focus areas within the organisation Procurement was identified as strategically important to the Fit for Growth project objectives Strategic / Portfolio Choices What Do We Do? Change what is done Business / Product Portfolio Customer Value Proposition Strategic Way to Play Cost reduction opportunity Operating Model / Org Choices How Do We Do It? Change how service and operations activities are performed Outsourcing & Offshoring Operating Model Network Deployment & Operation Procurement and Sourcing Automation Labour Costs Channel Footprint Operational / Execution Choices How Well Do We Do It? Improve efficiency of activities; change how task and support activities are performed Sources: Strategy& analysis Planning Process Optimisation, Assurance Operating systems/ practices Operating policies/ procedures

22 Procurement freed up significant value for reinvestment into the organisation s strategic objectives Procurement freed up bad costs for reinvestment into good costs Discovery Idea Validate Plan Implement Track Realised value Initial data analysis identified areas of focus Ideation workshops were held to flesh out opportunities Identified opportunities were validated to determine feasibility and size Business case and implementation plan was developed SLT approval Procurement team implemented various initiatives Ongoing tracking, monitoring and reporting Weekly check held in the project Hub 21

23 There were many other benefits for the procurement team from the enterprise wide transformation Higher profile Further investment Strategic focus Fewer sacred cows Team upskilling Improved maturity Clear future plan Role in partnering Total value focus 22

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