King-Sized: Innovative Ways to Deliver a 50% Reduction in Indirect Spend Simmons Bedding Company Dion Ferrell VP, Strategic Sourcing Ivalua Inc. sig.org/summit
Innovative Ways to Deliver Significant Reduction in Indirect Spend October 12, 2017
Procurement Transformation Procurement Organizations operating with a mandate causes tension, damages trust and promotes unhealthy relationships. Background Challenges Medical Device Manufacturer had a tactical/transactional Purchasing function. The function reported to Finance and did not have annual performance goals. A 3 rd Party assessment was performed, emphasizing the need to invest in Strategic Procurement capabilities with a goal of $130mm of sustained cost savings over 3-4 years. A CPO was hired to begin the journey of a Center-Led Procurement organization and deliver against the goal. 1. Talent Management & Development 2. Establish Policies & Procedures 3. Force Change Management 4. Monitor Performance 5. Observations 6. Themes Control vs. Influence Mandate vs. Collaboration Inside-Out View vs. Outside-In View Misaligned Metrics, Goals and Incentives Procurement Savings vs. Financial Realization Several challenges existed when I was hired as a Category Manager to support Marketing Services that would require a vastly different approach from what had been taken prior. There was a need to reestablish trust, provide meaningful insight, and drive execution of results in a collaborative manner. The following opportunities to succeed consisted of: 1. Relationship Management 2. Business Understanding 3. Respecting the Journey 4. Domain Expertise 5. Data Intelligence 6. Deliver Results 7. Reporting Approach Phase I: Procurement Category Management Phase II: Department Strategy Development Phase III: Enterprise Strategy Development Phase IV: Governance 3
Procurement Transformation There were four distinct phases of the evolution that led to transforming a Purchasing Department to delivering significant Enterprise Value. Phase I Category Management Spend Analytics needed to gain a deeper understanding of the financials/spending behaviors Business Strategy ask questions to better understand the enterprise & function strategies Procurement Strategy needed to develop a comprehensive category strategy to support business Execute Plan execute the pipeline of projects Monitor Results leverage new found relationships to communicate results Phase II Procurement Strategy Talent & Organization Assessment assess the team s capabilities and top-grade talent (run vs. change). Stretch Goals establish stretch targets that seem unachievable that causes talent to think about breakthrough approaches (devise plan). Goal Alignment work with CFO to align goals between the enterprise and Procurement. Budget Review review performance against budget. Budget Planning incorporate plan into budget process. Phase III Enterprise Strategy Budget Effectiveness assess the overall effectiveness of the budgets assigned Zero Based Budgeting move to zero based budgeting and build Procurement pipeline within the annual budget Align Incentives use the newly aligned goals to influence compensation of all employees Drive Collaboration deliberately plan for consistent interactions with Procurement and its stakeholders Program Management focus efforts to ensure results Governance Procurement Council establish a team of senior leaders to take an active role within the journey Alignment use the council to foster alignment, buy-in, collaboration and acceleration of the benefits Savings Realization determine what to do with the savings prior to project kick-off / execution Accountability having the business leaders invest in the process and to become active participants Continuous Improvement drive improvements to the process 4
Phase I Category Management 5
Phase I Category Management Marketing Services Introduction Marketing Spend = $57mm Highly Complex & fragmented environment How to win quickly Outcomes Drove $2.7mm of year-over-year (YOY) savings in 2 months by gaining an understanding of the environment, the Marketing Strategy, key relationships, and spend profile. Partnered with CMO s to align on opportunities, conducted joint negotiations, and strengthened agency relationships. Onboarding (0-2 mo.) Building (3-12 mo.) Barriers (0-12 mo.) Expansion (0-12 mo.) Establish Trust Develop Deeper Strategies Constraints to Success Replicate Approach / Results Seek to understand, not know the answers 1. BU AOR Negotiation ~ 25% rate reduction (RR) 2. Corp. Comm. Brand Architecture ~ 25% RR 3. Japan AOR Negotiation ~ 20% RR 4. BU AOR US Agency Selection ~ 7% RR 5. BU AOR Global Agency ~ 19% RR 6. Mkt. Research Negotiation ~ 7.5% RR Drive cross-collaborative projects across Business units. 1. Global Print Reduction Program ~ $2mm 2. Digitizing Assets (ipad) ~ $0.8mm 3. US Sales Meeting Cost Reduction ~ $1mm 4. Meeting Management Reduction (Glbl.) ~ $3mm 5. Media Buying Reduction ~ 0.2mm 6. Global Agency Onboarding Strategy Savings erosion: volume, business reinvestment, poor budget performance. Ability to educate the business - high turnover, limited engagements with stakeholders. Limited Spend Visibility - no purchase orders. Scope creep of projects -poorly defined requirements. Capital Process was loosely defined - did not include the ongoing expense elements. Expand personal influence beyond Marketing into other business functions. Top grade Procurement Talent expand reach to sacred areas. Enhance Spend Visibility spend analytics and financial walk. Establish Procurement Council and formalize charters. Incorporate Procurement Pipeline into Budgeting Planning Process. Member Firms and DTTL: Insert appropriate copyright (Go Header & Footer to edit this text) 6
Phase I Category Outlook Category Information Budget/Spend Understanding Category Knowledge Financial Reporting (HFM Accounts) (Bus. Leadership) Financial Reporting Oracle (iprocurement) Business Intelligence (Procurement Finance) Category Manager Market Intelligence (Procurement) Business Strategy Spend Analytics Procurement Strategy Marketing Plans Key Marketing Activities Staff Meetings Sales Meetings Leadership Consortiums Spend Reporting (Hist.) Contract Assessments PO Utilization Category Mgmt Pareto Analysis Supplier Rationalization Value Creation Supplier Relationship Mgmt Contract Dev. Voice of Customer
Phase I Category Approach The data used was General Ledger data that the Corporate Finance team was familiar seeing which established credibility and a familiar reference Marketing Services Category Detail General Ledger Account - HFM Sub-Category KCI Cons - 2010 Marketing Services Category Spend X7250 - Exhibitions Exhibitions $8,948,156 X6550 - Marketing Consultancy Mktg Consultancy $8,693,427 X8000 - Clinical Research Clinical Research $7,459,959 Promo Items 3% Mkt Research 1% Product Samples 1% Symposia 0% X8050 - Clinical Studies Clinical Studies $7,390,237 X8070 - Product Development Product Development $7,086,489 X7100 - Advertising Advertising $5,515,331 X7450 - Brochures/Literature Development Brochures/Lit Dev. $5,462,527 X6950 - Printing Mktg Print $2,964,182 X7350 - Promotional Items Promotional Items $1,531,866 X7150 - Market Research Mkt Research $839,516 X7200 - Product samples Product Samples $376,122 X7300 - Symposia Symposia $209,385 Total Category Spend $56,477,199 Brochures/Lit Dev. 10% Advertising 10% Product Development 13% Mktg Print 5% Clinical Studies 13% Exhibitions 16% Mktg Consultancy 15% Clinical Research 13%
Phase I Category Approach Marketing Services Sub-Category Company Cons Non Bio-US Bio US EMEA Canada South America APAC Japan Mktg Consultancy $8,693,427 $0 $6,529,099 $1,933,525 $204,406 $0 $26,397 $0 Mktg Print $2,964,182 $835,900 $939,750 $909,900 $0 $0 $149,586 $129,046 Advertising $5,515,331 $3,133,327 $1,421,181 $723,857 $56,184 $0 $94,231 $86,551 Mkt Research $839,516 $0 $266,784 $50,475 $6 $102,696 $2,842 $416,713 Product Samples $376,122 $7,569 $14,364 $196,682 $42,928 $0 $86,257 $28,322 Exhibitions $8,948,156 $1,533,139 $1,764,544 $4,104,222 $279,635 $30,706 $559,856 $676,054 Symposia $209,385 $0 $0 $123,440 $0 $0 $85,945 $0 Promotional Items $1,531,866 $236,118 $0 $839,870 $73,103 $1,960 $338,060 $42,755 Brochures/Lit Dev. $5,462,527 $2,043,102 $1,620,522 $1,416,808 $147,077 $2,209 -$1,575 $234,384 Clinical Research $7,459,959 $5,375,847 $0 $1,976,338 $0 $0 $0 $107,775 Clinical Studies $7,390,237 $5,371,964 $1,988,796 $29,477 $0 $0 $0 $0 Product Development $7,086,489 $3,767,733 $0 $3,318,756 $0 $0 $0 $0 Total $56,477,199 $22,304,700 $14,545,040 $15,623,350 $803,340 $137,571 $1,341,598 $1,721,601 Percent of Global 100.00% 39.49% 25.75% 27.66% 1.42% 0.24% 2.38% 3.05%
Phase II Procurement Strategy 10
Phase II Maturity Assessment Measuring the various dimensions allows for clear alignment of success. Dimension Key Attributes Assessment 1= Limited 5 = Best-in-class Comment Strategy Category specific strategies Balancing user demands against cost reduction Use of all possible sourcing levers 2 Category structure in place, not leveraged Category tactics implemented with incremental impact Strategies limited to few sourcing levers Processes Organization / Skills Performance Management Robust strategic sourcing process including RFIs, RFPs, expanded bid-lists Use of advanced analytical techniques Balance between centralized and de-centralized Skill sets optimized between business and technical Metrics tracking and reporting visible and actionable 1 2 2 Use of leading practices understood but seldom utilized Limited focus on driving improvements Silo approach limits sharing of best practices Unbalanced loading of resources makes improvements difficult Small group with limited Sourcing Professionals Limited focus on the stakeholders Limited data visibility, budgets and metrics Limited action taken against metrics Technology Using technology as a means to an end e.g. erfx, spend databases and analytics 1 Spend data not in readily usable form (i.e.by item, by supplier) No spend analytics capability
Phase II Strategic Approach
Phase II Procurement Evolution Predictable Value Creation is a function of the evolution of Procurement s maturity. Supplier Relationship Development Q3 and Beyond Q1 & Q2 Implementation Supplier / Spend Evaluation Supplier Rationalization Strategic Sourcing Supplier Enabled Innovation Value Creation BP Tolerance BP Acceptance BP Partnership
Phase II Strategy Development A Robust Understanding of the Financial Environment and Business Strategy is Vital to Having a Successful Procurement Strategy. Understanding of Business Environment Limited Understanding Financials / Spending Historic Spending Data A/P PO Budgets Data Sources / Systems Maximo Baan LN Corporate Card Freight Commitments Database Independent Contractors Database EAR ETQ My Sign Business Strategy Business Partners Vision BP Strategy Documents Key Imperatives / Business Priorities Strategic Alliances Investment Strategies SWOT Analysis Understanding Value Stream Limited BP Engagement Supply Mgmt. Strategy Category Impact Category Management Supplier Diversity SWOT Analysis Supplier Relationship Management Supply Positioning / Supplier Preferencing Risk Mitigation Supplier Enabled Innovation Comprehensive Business Understanding
Phase III Enterprise Strategy 15
Phase III Financial Walk Align Procurement s contribution to the Enterprise Financial Walk to demonstrate the impact of Procurement s contribution. PROBLEM: UNDER PERFORMANCE TO EBITDA TARGETS. OVERSPENDING TO BUDGETS. 2016 OBJECTIVES 2016 ACTUALS REVENUE: REVENUE: BUDGET: BUDGET: ACTUALS: ACTUALS: EBITDA: EBITDA: 2017 OBJECTIVES 2017 ACTUALS 2017 OPPORTUNITIES OPPORTUNITY: REVENUE: REVENUE: REVENUE: OUT OF SCOPE AID THE BUSINESS IN MANAGING SPENDING MORE EFFECTIVELY. IMPROVE EBITDA PERFORMANCE. BUDGET: ACTUALS: EBITDA: BUDGET: ACTUALS: EBITDA:?? BUDGET: OUT OF SCOPE ACTUALS: EMBED IN BUDGETS EBITDA: EMBED IN BUDGETS NEXT STEPS: BUSINESS AND PROCUREMENT ALIGNMENT ON FINANCIAL GOALS. IMPROVED VISIBILITY AROUND FINANCIAL PERFORMANCE. 2017 ACTIONS: PROCUREMENT BUDGET MANAGEMENT: (PROACTIVE) INCLUDE SOURCING PIPELINE WITHIN THE 2017 BUDGET PLANNING MONTHLY REPORTING / VALIDATION: (PROACTIVE + REACTIVE) PLAN, PRESENT AND REPORT AGAINST PROJECT EXECUTION TO PROCUREMENT COUNCIL PROCESS IMPROVEMENT: (ON-GOING) ESTABLISH A SPEND BASELINE AND MEASURE PERFORMANCE OVER 3 YEARS AGAINST BASELINE POLICY DEPLOYMENT: IMPLEMENT POLICIES TO AID COMPLIANCE, COMPETITIVE BIDDING, AND FIDUCIARY RESPONSIBILITY
Phase III Financial Walk Compared Prior Year Actual to the PY Budget to demonstrate challenges. 17
Phase IV Governance 18
Phase IV Governance Establish a Procurement Council and present the projects to the council prior to project execution. Projects >$10m spend or $1m savings potential Develop Category Plans Stage 0: Project Charter Project Execution (Joint Collaboration) Stage 1: Savings Validation Stage 2: Savings Realization Stage 3: Savings Reporting Stage 0*: Project Charter Project Charter Presented to Procurement Council (Monthly) Savings Categorization (Budget, Upside, Recovery) Project Sponsorship and Approval Granted Stage 1: Savings Validation Baseline Definition and Savings Projection Pre-Approval / Validation Granted Present and Seek Approval to Corporate Finance (Controllers/FP&A) Stage 2: Savings Realization Track and Monitor Actual Project Performance (Timing) Confirm Savings Disposition Savings Reclamation Stage 3: Savings Reporting Report Actual vs. Reported Savings to Procurement Council Perform Gap Analysis (if required) Develop Compliance Plans and present to Executive Committee
Phase IV Savings Challenge The Procurement Council takes the confrontation out of the discussion as Executive Leaders determine how to treat savings not Procurement. Need: Savings Capture & Reinvestment Process Pre-approval of Expenditures Internal Process Champions Outcomes: 1). Protect the Savings Realized 2). Drive 75-85% Improvement 3). Drive Accountability Prioritize Projects Capture Savings Winning Outcomes Opportunity: Identify Savings Purposefully Deploy Align Procurement resources to the areas of greatest business need, Aid the business in accomplishing business objectives (greater ROI), and Aid business in achieving EBITDA performance.
Organization Execution Guidance Phase IV Enhanced Savings Model Procurement Council: Oversight & Compliance required to drive change. 1. Prioritize Activities Business Objectives Spend Oversight 2. Allocate Resources Project Teams Define Programs 3. Realize Savings Monitor & Verify Results Monthly Reviews Assess Opportunities Program Prioritization Requisition to Payment- (P2P) Identify Resources Execute Projects Cross-Functional Teams Savings Analysis Ensure Compliance Mitigate Loss (of Value)
Phase IV Governance Steering Committee leadership and support is critical to improve the Company s financial performance. CPO Sponsor Core Team CFO FP&A BU Controllers BU President Function Leaders Procurement Finance Procurement Extended Team (Corporate) Invite appropriate stakeholders to participate as needed Legal General Council IT CIO HR CHRO Goals: 1. Strengthen Alignment Business / Finance / and Procurement 2. Savings Realized and Purposefully Deployed 3. Balance Savings with Reinvestments 4. Enhance Visibility & Accountability of Spending 5. Keep Costs Out of the System
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Session #26 King-Sized: Innovative Ways to Deliver a 50% Reduction in Indirect Spend Simmons Bedding Company Dion Ferrell VP, Strategic Sourcing jdm@ivalua.com Download the App: sig.org/app Tweet: #SIGfall17