0 Procurement & Sourcing: Moving From Tactical to Strategic 2013 ISM Survey of Procurement Executives
Moving From Tactical to Strategic: 2013 ISM Survey of Procurement Executives 1 Table of Contents Introduction and Key Findings... 2 Survey Methodology... 3 Respondent Demographics... 4 Top Business Priorities for Procurement... 6 Cost Reductions and Savings... 8 Revenue Growth and Profit Improvements... 10 Risk Management... 11 Procurement Transformation... 12 Supplier Performance and Sustainability Management... 14 Supplier Collaboration and Innovation... 15 Spend Under Management... 17 Improve Working Capital... 18 Compliance with Customer Requirements... 20 Procurement Organizational Costs... 21 Strategic Nature of Trading Partner Relationships... 22
Moving From Tactical to Strategic: 2013 ISM Survey of Procurement Executives 2 Introduction The Institute for Supply Management TM and BravoSolution conducted a Web- based survey in the summer of 2013 to understand the emerging business priorities for procurement and supply chain executives in addition to uncovering the key underlying dimensions of that business concern. Key Findings Supply chain executives are focusing on fundamentals: o Improving cost reductions and savings (mentioned by 60% of respondents) o Revenue growth and profit improvements (mentioned by 30% of respondents) o Risk management (mentioned by 28% of respondents) Although improving cost reductions and savings is on the minds of a strong majority of respondents, most acknowledge that only incremental savings of 10%, or perhaps 20%, in some cases, is achievable. o Even though greater than 90% of respondents report they measure total savings as a percentage of spend, a notable minority (25% or more) don t measure the savings derived from RFX processes, collaborative sourcing initiatives, and other methods of controlling spend. Revenue growth and profit improvements are also of concern. Again, mostly incremental improvements of 10% or 20% are targeted by initiatives supporting this priority. o Reduced supply costs is most often mentioned as the tool to help achieve their improvement goals of 10% or less or 11% to 20%. o Although reduced organizational costs are cited by most respondents as an area to examine, that area is also mostly deemed to be capable of only contributing incremental improvements. Risk management rounds out the set of the three most mentioned business priorities. Respondents indicating risk management as a priority were asked to report on their preparedness to mitigate a menu of common risks. o It was found that only about one- half of respondents firms were prepared to mitigate reasonable levels of general supply chain management risk, supplier financial risk, and operational risk.
Moving From Tactical to Strategic: 2013 ISM Survey of Procurement Executives 3 Survey Methodology A detailed survey was created by BravoSolution and finalized and administered by ISM. The survey was fielded for an extended period because of the high level of respondents being sought. The sample included executives at the director level and above, at customers of ISM and was fielded in two separate waves: o An initial wave of 5,001 invitations was sent on June 17. o A second wave of 4,465 invitations was sent on July 31. Each wave was reminded at least twice. Fielding continued through August 27 and yielded 545 usable responses, for an overall response rate of 5.8 percent. Usable responses generally separated into two types: responses that fully answered the detailed follow- up questions on business priorities (372 records) and responses that only documented the respondent s top three business priorities for 2013 (173 records). The latter records were accepted as usable (but not complete) because the objective of the study was to understand business priorities overall.
Moving From Tactical to Strategic: 2013 ISM Survey of Procurement Executives 4 Respondent Demographics Respondent Position Study participants were generally executives (director or above) in the procurement functions of their organization: 89% of respondents were directors or above with 40% of respondents holding the title of vice president or above. The senior level of the respondent pool is reflected in the fact that 74% of respondents are leaders of decision- making groups (62%) or sole decision- makers (12%). Respondent Industry The respondents brought with them their viewpoints from a great diversity of industries. 64% of the respondents were from non- manufacturing industries. 36% of respondents were from manufacturing sector. Respondent s Position/Role and Company Industry Figure 1
Moving From Tactical to Strategic: 2013 ISM Survey of Procurement Executives 5 Respondent Company Size More than one- half (55%) of respondent s firms booked $500 million or more in annual revenue and 59% of respondents reported that their firms have a headcount of 1,000 or more. Not surprisingly, the annual levels of direct and indirect spend were also relatively large. Nearly six out of ten respondents (58%) reported that their organizations have an annual direct spend of $100 million or more and 57% reported an indirect spend of $50 million or more. (Figure 2) Organization s Size and Spend Figure 2
Moving From Tactical to Strategic: 2013 ISM Survey of Procurement Executives 6 Top Business Priorities for Procurement Following the classification questions, each respondent was shown a list of 24 topics identified to be of recent concern to procurement and sourcing executives: Procurement Transformation Procurement Perfect Order Procurement Organizational Costs Revenue Growth and Profit Improvements Compliance with Customer Requirements Improve Working Capital Improving Order to Cash and Source to Settle Cycle Times Improving Cost Reductions and Savings Improving Regulatory Compliance with Government Agencies Improving Customer Loyalty Improving Driving Revenue Improving the Strategic Nature of Trading Partner Relationships Risk Management Supplier Collaboration and Innovation Supplier Performance and Sustainability Management More Spend Under Management Outsourcing of Procurement Outsourcing of Sourcing Outsourcing of Supply Chain Re- shoring of Manufacturing and Sourcing Raw Materials Technology Implementation Services Augmentation Top Procurement Business Priorities for 2013 Figure 3
Moving From Tactical to Strategic: 2013 ISM Survey of Procurement Executives 7 From this list, respondents were asked to identify their top organizational priorities in 2013. Because of the comprehensive nature of the list, 11 topics received sufficient responses for a more detailed examination: Improving Cost Reductions and Savings (60%) Revenue Growth and Profit Improvements (30%) Risk Management (28%) Procurement Transformation (23%) Supplier Performance and Sustainability Management (23%) Supplier Collaboration and Innovation (19%) More Spend Under Management (19%) Improve Working Capital (15%) Compliance with Customer Requirements (14%) Procurement Organizational Costs (9%) Improving the Strategic Nature of Trading Partner Relationships (9%) Focus on Top Mentioned Procurement Business Priorities for 2013 Figure 4
Moving From Tactical to Strategic: 2013 ISM Survey of Procurement Executives 8 Cost Reductions and Savings A strong majority of respondents (60%) selected improving cost reductions and savings as a top priority, and that also reflects the primary reason why organizations choose to create and maintain a professional procurement capability. While cost reductions and savings are a priority, the magnitude of savings targeted indicates that executives believe much of the savings potential has already been realized. Overall, 60% of respondents are only looking to save an additional 1% to 10% on spend. 20% are aiming for an 11% to 20% savings on spend. Methods for Achieving Savings Of the various avenues for achieving their goals, the most likely vehicle was formal RFI, RFP, RFQ or RFX processes. Nearly one- half (45%) of those that will use this method expect up to 10% savings, but almost one- quarter (22%) expect savings ranging from 11% to 20%. For those using collaborative sourcing, sourcing services, or an e- sourcing tool, the volumes of savings expected apportioned out similarly (with approximately 40% expecting 1% to 10% savings and 20% expecting 11% to 20% savings), but the proportion of users expecting no savings at all from those methods grown steadily (from 16% to 23% to 31% expecting 0% savings, respectively). Although currently the least often cited as a means for achieving savings, advanced optimization techniques bucked this trend somewhat with the proportion expecting 0% savings being tamped down to 19%.
Moving From Tactical to Strategic: 2013 ISM Survey of Procurement Executives 9 Cost Reductions and Savings: Percent Improvement Targeted for 2013 Figure 5
Moving From Tactical to Strategic: 2013 ISM Survey of Procurement Executives 10 Revenue Growth and Profit Improvements Revenue growth and profit improvements trails the leader with only 30% of respondents indicating that this was a priority for them this year. Again, the magnitude of expected savings is most often in the 1% to 10% range. However, the distribution of expected savings does vary somewhat by means achieved. Reduced supply costs was most often cited as the avenue to growth and improvement. Relatively large proportions of respondents felt there are between 1% to 10% improvements possible (39%). Only 25% thought an 11% to 20% improvement is possible. Even fewer respondents (20%) believed that improvement greater than 40% is likely. Similarly, most respondents looking to improved supplier and procurement performance and reduced organizational costs felt that growth in the 1% to 10% or 11% to 20% ranges was most likely (61% and 58%, respectively, when both ranges are combined). Among those seeking revenue growth and profit improvements, in contrast to the 20% who believed 41% or better gains are achievable through reduced supply costs, larger proportions felt that improved customer satisfaction (22%), optimized sourcing (30%), more spend under management (29%), and faster speed to market (33%) offer more opportunity for gains in the 41% or better range. Revenue Growth and Profit Improvements: Percent Improvement Targeted for 2013 Figure 6
Moving From Tactical to Strategic: 2013 ISM Survey of Procurement Executives 11 Risk Management The third most often chosen priority, the risk management question battery indicates that firms are prepared for varying levels of risk. The respondents were best prepared for four risk areas, with more than 50% of respondents indicating that they were prepared to mitigate 71% or more of perceived risk in: supply chain management risk (n=102) supplier financial risk visibility/alerts (n=100) operational risk management (n=98) supplier performance risk monitoring/alerts (n=98) The other five risk areas were both less frequently reported on and also less likely to be as well hedged. In particular, only 30% of respondents reporting on multi- tier supply chain visibility/alerts and only 38% of respondents reporting on natural disaster tracking/alerts stated they were prepared to mitigate 71% or more of perceived risk. Respondents had the least to say about weather risk tracking/alerts (n=76) and with 41% reporting an ability to mitigate 71% or more of risk. Risk Management: Level of Preparation to Mitigate Risk Figure 7
Moving From Tactical to Strategic: 2013 ISM Survey of Procurement Executives 12 Procurement Transformation Procurement transformation is a wide- sweeping issue. Excluding other, respondents were asked to report their organization s status with respect to 21 recognized transformational strategies. Data for this issue was gathered via a two- step process: 1. Respondents were shown a menu of the 21 strategies and asked to check off those their organization had completed. 2. Then, for only those items that were not marked as complete, the respondent was asked to estimate the degree of completeness being targeted for 2013. This method helped ensure consistency within the respondent s answer. Good progress has been made against procurement transformation; however there are still areas for improvement. Five key strategies were reported by a strong majority of companies to be either completed or nearly complete: business strategy: objectives and plan developed, plan communicated to organization, executive sponsor identified and communicated, organizational design introduced, and commodity and category management strategy all were reported to be complete by more than 60% of concerned respondents, with business strategy: objectives and plan developed being reported as being complete by 84% of concerned respondents. Procurement Transformation: Initiatives Completed or Underway (Part 1) Figure 8
Moving From Tactical to Strategic: 2013 ISM Survey of Procurement Executives 13 Among the other five strategies reported in figure 8, only one (supplier development, collaboration, and innovation strategies and controls) was not expected to be at least 80% complete by the end of 2013 by a majority of respondents. Figure 9 illustrates the level of expected completeness for the ten remaining transformational strategies. Mentions of these strategies quickly dropped off and expected levels of completeness lost focus with only two items (employee career development roadmap and raw materials strategy and controls) expected to be more than 80% complete by a majority of respondents by the end of the year. Notably, the three least mentioned transformational strategies are sourcing outsourcing, supply chain outsourcing, and procurement outsourcing. All three were reported upon by only about 40% of respondents. Among the relatively few individuals reporting status on these items, only 16% or less of respondents deemed those efforts complete and, for all three, about 60% of respondents expected 0% additional completion on those strategies this year. Procurement Transformation: Initiatives Completed or Underway (Part 2) Figure 9
Moving From Tactical to Strategic: 2013 ISM Survey of Procurement Executives 14 Supplier Performance and Sustainability Management Supplier performance and sustainability management was the other third tier priority, being chosen by 23% of respondents. This series of questions served to contrast concerns about performance with sustainability issues. For the five supplier performance measures and the six sustainability measures, the most commonly reported target for improvement was 1% to 10%. 1% to 10% was never reported as a target by a majority of respondents, but this level always garnered the largest proportion of reports (targeted by 20% to 30% of respondents). It is interesting to note a lower level of interest in sustainability measures as compared with performance measures. At 15%, fill rate was the performance measure with the largest proportion of don t measure responses. For the sustainability measures, the proportion of respondent s organizations not measuring more than doubled to 32% and then increased item by item until it stood at 43% don t measure for the water item. Supplier Performance/Sustainability Management: Percent Improvement Targeted for 2013 Figure 10
Moving From Tactical to Strategic: 2013 ISM Survey of Procurement Executives 15 Supplier Collaboration and Innovation Those respondents that indicated supplier collaboration and innovation to be a priority were shown two types of questions. Ranking exercise: Of nine statements pertaining to collaboration and innovation, respondents were asked to rank the importance of as many statements as applicable to their situation. The assigned rankings were tallied and averaged and are presented in figure 11. The two statements with the best (in this case, lowest) scores were also the statements ranked most often. This indicates that, in addition to being important, they were generally recognized as being of some applicability to almost all respondents organizations. We have an open channel of communication with all suppliers and Our suppliers are a necessary part of our ability to do business were ranked number one by 43% and 27% and provoked a response from 70 of 73 respondents. While found to be applicable by fewer respondents (n=58), when it was applicable, We segment our supply base to facilitate our relationship management was ranked either 1 or 2 one- half (50%) of the time. Supplier Collaboration and Innovation: Ranking Importance of Statements Figure 11
Moving From Tactical to Strategic: 2013 ISM Survey of Procurement Executives 16 Open response exercise Respondents were asked to complete the sentences: Without our supplier we would... (n=67) To have world class suppliers we need our supplier to... (n=72) With regard to Without our supplier we would..., most answering respondents acknowledged in some fashion how important their suppliers were to the success of their business (although three mentioned turning to alternatives). To the prompt To have world class suppliers we need our supplier to..., respondents most often stated that their supplier needed to develop a stronger and tighter relationship with the respondent s organization. Supplier Collaboration and Innovation: Respondent Sentiments Table 1
Moving From Tactical to Strategic: 2013 ISM Survey of Procurement Executives 17 Spend Under Management Although spend under management was the seventh most chosen priority, it may be that it ranks as a very important priority to those choosing it. Conversely, it may be inferred that many organizations believe they have maximized the amount of possible spend under management making this a lower priority now. The first conclusion was implied by the relatively even distribution of targeted percentages for improvement: while 1% to 10% and 11% to 20% are the most often targeted percentage ranges for improvement, non- trivial proportions of respondents believe they can achieve 60%, 70%, 80%, even 90% improvement. In fact, nearly one- fifth (18%) of those seeking to improve spend covered by sourcing plan had a target percentage range of 91% to 100%. Given these characteristics, it seems reasonable to surmise that there are considerable amounts of low- hanging fruit to be harvested at these respondents firms and that there is a push to do a considerable amount of harvesting. Spend Under Management: Percent Improvement Targeted for 2013 Figure 12
Moving From Tactical to Strategic: 2013 ISM Survey of Procurement Executives 18 Improve Working Capital 15 percent of respondents reported that improving working capital was a business priority for procurement. For these firms, increasing supplier payment terms and reducing their inventory are a part of their plans. Supplier payment terms Currently, 58% of respondents seeking to increase supplier payment terms are on a 16 to 30 days schedule. Forty- three percent of respondents reported that their goal is to be on a 31 to 60 days schedule. With regard to average turns of inventory, the net impact of the shifting proportions is an increase in the number of turns. The difference between the proportion of firms currently experiencing 1 to 3 turns (18%) and the proportion of firms with 1 to 3 turns as their goal (down to 5%) was one indicator of this trend to increase the average number of turns. Working Capital Initiatives: Current and Goal Average Days and Current and Goal Average Turns Figure 13
Moving From Tactical to Strategic: 2013 ISM Survey of Procurement Executives 19 Among firms with a priority on improving working capital, reducing their inventory was by far the highest ranked priority (average rank: 1.39). Fully two- thirds (67%) of respondents ranked this item as #1 with another 27% ranking this item as #2. Working Capital: Ranking Importance of Areas to Improve Figure 14
Moving From Tactical to Strategic: 2013 ISM Survey of Procurement Executives 20 Compliance with Customer Requirements Working to improve elements of compliance with customer requirements was a 2013 business priority for 14% of respondents. The follow- up to this topic was a ranking question that presented five statements (plus an other, specify option) regarding supplier compliance with customer requests. On time, in full, correct quality specifications was clearly very important to respondents with 88% ranking it 1 or 2 (with 61% ranking it 1). Over all tallied rankings, this statement achieved an average rank of 1.64. Lower costs posted an average rank of 2.65. Just over one- half (52%) of respondents ranked it a 1 or 2 (with 25% ranking it 1). The third and fourth items (faster time to market and more reliable products) achieved average ranks of 3.14 and 3.24, respectively. For faster time to market, 79% ranked it a 2, 3, or 4. A slightly greater proportion of respondents (84%) ranked more reliable products as a 2, 3, or 4. Compliance with Customer Requirements: Ranking Importance of Compliance Focus Areas Figure 15
Moving From Tactical to Strategic: 2013 ISM Survey of Procurement Executives 21 Procurement Organizational Costs Respondents choosing procurement organizational costs were asked to share their cost goals for the three categories of direct costs (raw materials, fixed and variable operations costs, and direct labor) and three categories of indirect costs (materials/services, fixed and variable indirect costs, and indirect labor). Figure 16 provides an illustration of how the respondent s organizations stacked up with regard to those cost goals. Direct raw materials costs and indirect materials and service costs had the largest cost goals with 60% of respondents reporting a direct materials cost goal of less than $250MM and 64% of respondents reporting an indirect materials/service cost goal of less than $100MM. For the other components of direct and indirect costs, more than two- thirds and up to more than 80% of respondents reported cost goals of less than $50MM. Procurement Organizational Costs: Purchased Materials Cost Goals for 2013 Figure 16
Moving From Tactical to Strategic: 2013 ISM Survey of Procurement Executives 22 Strategic Nature of Trading Partner Relationships Nine percent of respondents indicated that the strategic nature of trading partner relationships were a business priority. Of those respondents, they went on to the follow- up question which asked them to rank the importance of seven statements (plus other ) related to strategic trading partner relationships. Supplier performance is ranked as either 1 or 2 by 71% (with a majority [54%] ranking it 1) to give it an average ranking of 2.09. Of the next three highest ranked statements (supplier collaboration to meet joint goals, triangular collaboration: customer, buyer and supplier, and supplier risk, with average rankings of 3.42, 3.48, and 3.58, respectively), supplier collaboration and supplier risk were both ranked 3 by more than one- quarter of respondents while triangular collaboration was ranked either higher or lower, with only 4% ranking it 3. Strategic Nature of Trading Partner Relationships: Ranking Importance of Components Figure 17
Moving From Tactical to Strategic: 2013 ISM Survey of Procurement Executives 23 A note on charts and figures: The charts and figures in this paper seek to communicate complex information in a logical and straightforward manner. Within this paper, the following conventions are used: When a data point has a value of 4% or less, no data label is shown. Although all percentage scales on the instrument were at 10 percentage point increments, two or three scale points are sometimes combined to improve readability (e.g., rather than 1% to 10% and 11% to 20%, sometimes 1% to 20% is shown). In most of the non- ranking vertical bar charts (e.g., figure 5), the following apply o The items are arranged left to right by decreasing n or count of responses. For example, in figure 5, the leftmost bar illustrates the variable with the highest number of responses (n=240) and the rightmost bar the variable with the lowest number of responses (n=103). o Percentages in the bars are based upon the number of valid responses for that variable. o The non- responsive answers Not applicable, Don t measure, and Don t know, are represented as unlabeled lines so that the reader may see how lack of response or action changes from variable to variable. These lines are on the same scale on the left (so the value of Don t know for the rightmost variable of figure 5 is approximately 52%). o For each chart, the percentage of non- responsive answers is based upon the Total n of a priority item ( 257 in figure 5). In the ranking vertical bar charts (e.g., figure 11), the following apply o The items are arranged left to right by decreasing average rank (which is the same as increasing value). For example, in figure 11, the leftmost bar illustrates the variable with the highest average rank ( 2.47 ) and the rightmost bar the variable with the lowest average rank ( 6.45 ). o The average rank is shown as a line that overlays the vertical bars. The values are shown in full black and to the right of the data point. The scale for the rank is on the right. o Only valid rank values were included in the average rank calculations. o The grayed percentages on the bars are based upon the number of valid rankings for that variable. o The non- responsive answers Not applicable, Don t measure, and Don t know, are not shown.
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