Do You Have a Winning Hand? Driving Total Value of Ownership through Strategic Procurement
Accenture Strategy has found that procurement masters do not only contribute to the bottom-line, but also to the top-line growth of their companies. A well-run procurement organization can generate benefits that in addition to reducing costs can also increase growth, enable operational efficiency and sustainability, mitigate risk and foster innovation. In procurement, total cost of ownership (TCO) is a vital and widely tracked metric a success measure that is more useful and insightful than lowest cost. But even total cost of ownership has its limitations, mainly because it positions a procurement organization s contributions as solely monetary. Today, a well-run procurement organization can generate benefits that (in addition to reducing costs) increase growth, profitability and competitive strength. Contributing to the top-line, as well as bottom-line, is valuable to all organizations, which is why a new benchmark - total value of ownership (TVO) - should be put in play. Accenture Strategy can help you gain insight into how you can develop innovative strategies empowered by technology that will help your procurement organization drive a greater TVO. The objective of this material is to introduce the various procurement levers that drive TVO, and discuss a methodology to identify the optimal mix of strategies for a given situation. You will also be introduced to Accenture Strategy s online application, The Winning Hand, which can be used by procurement professionals to navigate and select the best fitting TVO levers for any category of spend. 1
The Four Elements of Total Value of Ownership For some time, Accenture Strategy has been analyzing the nature of TVO and has identified 48 specific levers that procurement organizations can combine to help raise TVO. These levers are organized into four categories or TVO Elements : 1. Price Price levers focus on reducing the purchase cost of a component, product or service by raising supplier performance, stoking competition among suppliers, and applying tailored methodologies across commoditized and more advanced cost management strategies. 2. Usage & Innovation Usage & Innovation levers focus on increasing the total value of materials and services by managing demand more effectively, optimizing design and quality specifications, and working directly with suppliers to maximize innovation and production acumen. 3. Risk & Sustainability Risk & Sustainability levers help a company to increase predictability; identify and mitigate risk factors; broaden the use of standardized components, materials and ingredients; identify creative re-use opportunities; minimize environmental impact; and raise the organization s status as a good corporate citizen. 4. Process & Operational Efficiency Process & Operational Efficiency levers focus on improving the quality and efficiency of operating processes within the procurement function, as well as across the company and throughout the supply chain. 2
Shaping Strategies for a Category of Spend Selecting the right levers is tricky. The idea isn t to select all the levers at once, but to shape a top-line and bottom-line focused strategy by choosing the right group of levers for any given situation. Choices depend on (among other things) your company s procurement strategy; the procurement organization s operational priorities and capabilities; the nature and level of desired improvements; the specific category of spend; market complexity; and how critical the component, product or service is to the company s business. Accenture Strategy s Winning Hand methodology considers three criteria to recommend the appropriate group of levers for a particular category of spend: 1. The Complexity of managing the category. 2. The Criticality of the category to the organization. 3. The Capability of the procurement organization to execute on advanced value management strategies. The three criteria act as filters that produce a calibrated set of levers applicable to a given situation. For example, a high complexity category that is critical to the organization, and is managed by a very mature and capable procurement team, would likely be able to use sophisticated and more involved levers. But an equally complex and critical category that is managed by a less experienced team would likely use levers that, while strategic in nature, are more easily executed. A simple graph can help you visualize the targeted procurement levers that are organized within the Winning Hand (Figure 1). Using market complexity as the Y axis and criticality to the company as the X axis, you can determine if your basic improvement approach should be more long-term and sophisticated, or whether a more tactical, readily implementable solution should be sought. For example, at the low end of each scale representing simpler buys and less-critical products or services it may be more appropriate to seek solutions that require less time, cost and resources. Conversely, a strategy for highly critical, highly complex products and services may require moreinvolved and longer-term approaches. Thus the levers you choose might focus on reaching across the organization, connecting more tightly with suppliers, and employing advanced analytics or other technology-enabled methods. Again, the Winning Hand also calibrates targeted procurement levers to an organization s capability and will tend to normalize its recommendations to the specific user while still following the logical progression represented in Figure 1. An example of this could be when an individual or an organization that is relatively new to procurement was planning procurement strategies for its most critical, most complex categories of spend; the Winning Hand would work to identify strategies that are appropriately rigorous but also more feasible for the organization to execute. Structure of The Winning Hand Cards To help procurement decision makers sort through the options, Accenture Strategy has organized the 48 procurement levers into a deck of playing cards (Figure 2). As the cards increase in value, so does the sophistication of the lever and associated effort required. 1. Each TVO element comprises a 12-card suit: Price diamonds; Usage & Innovation spades; Risk & Sustainability hearts; and Process & Operational Efficiency clubs. 2. All 12 cards in a suit relate to one of three high-level strategies: e.g., commoditized cost management or value chain integration. Thus there are three high-level strategies for each suit. 3. Twelve specific procurement levers (e.g., speed sourcing or distribution and warehouse optimization ) are offered for each suit four for each high-level strategy. 4. Each card contains a description of the specific procurement lever. 3
Figure 1: Scale of increasing market complexity and criticality to the company. Complexity More sophisticated Focus on long term Integrate across organizations Quick to implement Minimal resources Criticality Figure 2: A sample Winning Hard card, showing the TVO element, high-level strategy and specific procurement lever. Each suit represents one of the 4 Total Value of Ownership elements. Within each suit, there are 3 high level Strategies. Each Strategy contains 4 specific procurement Levers. Each card contains a description of the sourcing and procurement Lever. 4
Creating Your Winning Hand: An Interactive Online Application Procurement professionals can create a Winning Hand online using an interactive Accenture Strategy application. Based on your input, the Winning Hand application creates a hand with the greatest potential to maximize your organization s total value of ownership of a purchased ingredient, component, material, product or service. The Winning Hand application is accessed at http://winninghand.accenture.com. A username and password must be granted to access the application. Users can request a user name and password on the site s homepage, through any Accenture sourcing & procurement employee, or by sending an email to winninghand@accenture.com. Additionally users can request a hard-copy of the deck of cards for use alongside the online application in team strategy sessions or stakeholder workshops. The application contains five modules that can be accessed from the home screen: 1. Create your Winning Hand Procurement decision makers evaluate a category of spend based on criticality, complexity and their organizational capability selecting the most appropriate ways to maximize total value of ownership for the company s specific category and unique situation. 2. How to Play Online users receive explicit instructions on how to use and benefit from the Winning Hand application. 3. View all Strategies Users can survey all 48 Total Value of Ownership levers and associated content as reference material within any one of the four elements of total value of ownership. 4. Additional Resources Users access a library of Accenture literature pertaining to Sourcing & Procurement strategies and leading approaches to maximizing total value of ownership. 5. Sample Winning Hands Users scan a collection of category-specific, sample winning hands from other highperforming procurement organizations. 5
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Winning Hand Example Scenarios The Winning Hand concept and online application can help company s improve procurement performance by raising the top and bottom-line value of its purchases. The following scenarios demonstrate the Winning Hand s potential scope, flexibility and power. 1. Cable Company This business purchases millions of remote controls each year; and despite ongoing improvements, the procurement organization is under intense pressure to increase total value of ownership for remote controls. In this situation, a procurement professional using the Winning Hand application would enter a high score for all three criteria. The application would then recommend highly sophisticated levers from each suit (cards Jack Ace). The user would select up to two cards from each suit. In this scenario, a typical Winning Hand could be: 1. Within Price (diamonds), Collaborative Cost Reduction (the king) 2. Within Usage & Innovation (spades), Supplier Development (the queen) 3. Within Risk & Sustainability (hearts), Joint Materials Planning (the ace) 4. Within Process & Operational Efficiency (clubs), Distribution and Warehousing Optimization (the queen) Users of the application then have the opportunity to email themselves a summary of their Winning Hand for reference in planning for execution or for discussion with team members and stakeholders. In this scenario, the company actually found that there was very little room for the primary supplier to make pricing improvements and that there were several very simple SKUs that were not profitable for the supplier. The cable company was able to develop a new vendor for lower featured, lower margin products and to work jointly with its primary supplier to assure and jointly plan for supply which at this time frame was of the highest priority for business stakeholders. This sort of win-win scenario is common when pursuing a result under the Total Value of Ownership methodology and allows procurement to drive value to business beyond just acquisition cost. Complexity Criticality Capability High - Feature variations, cost ranges and quality discrepancies across suppliers are dramatic High - Device quality and functionality has a direct impact on the customer experience High - Team has sourced remote controls many times and has expertise in the category and with the supply base Scenario 1 winning hand. 7
2. Retailer Paints represent a high proportion of gross revenues and profits for this doit-yourself retailer, but purchasing of the product line is not centralized at a global level and the life-cycle of the products are poorly managed. The company is looking to standardize and streamline procurement of these products. In this situation, a procurement professional using the Winning Hand application would select a higher score for Complexity and Criticality, but a moderate score for Capability. The application would then recommend a mix of high and moderate sophistication levers from each suit (cards Seven Ace). The user would select up to two cards from each suit. In this scenario, a typical Winning Hand could be: 1. Within Price (diamonds), Global Sourcing (the 8) 2. Within Usage & Innovation (spades), Total Lifecycle Management (the 9) 3. Within Risk & Sustainability (hearts), Alternative Supplier Management (the queen) Note that a card does not need to be selected from all four levers. In this example the team decided that Process & Operational Efficiency initiatives were not a priority for the category at this stage. Starting with the guidelines provided by the three cards, the company launched a successful effort to aggregate buying power across global operations. It also was able to increase its market influence, raise control of product lifecycles, and mitigate some risk by building relationships with more than one supplier. Complexity Criticality Capability High - Very few suppliers deliver the required quality and quantities of paint the company needs High - Represents a high proportion of gross revenues and profits Moderate - Category managers are relatively new to the organization and have never sourced paint before Scenario 2 winning hand. 8
3. Consumer Goods Company This company spends millions of dollars a year on the internal consumption of office supplies. The category has never been sourced at the corporate level, so there should be significant savings opportunities from aggregating supplier relationships and contracts. In addition, the company has asked procurement to contribute to its environmental sustainability and corporate responsibility goals. In this situation, a procurement professional using the Winning Hand application would select a moderate score for Complexity and a lower score for Criticality and Capability. The application would then recommend levers of low to moderate sophistication from each suit (cards 3 through 10). The user would select up to two cards from each suit. In this scenario, a typical Winning Hand could be: 1. Within Price (diamonds), Periodic Competitive Sourcing (the 4) 2. Within Usage & Innovation (spades), Consumption Policy Creation (the 6) 3. Within Risk & Sustainability (hearts), Green Sourcing (the 6) 4. Within Risk & Sustainability (hearts), Diverse Supplier Management (the 5) 5. Within Process & Operational Efficiency (clubs), E-Sourcing (the 6) Note that more than four cards can be selected for a Winning Hand, as in this example the team chose to pursue two Risk & Sustainability levers due to their corporate reasonability goals. Basing its approach on the above combination of levers, the company improved its ability to manage price across multiple vendors, track spend, develop new recycling and reuse programs, and streamline the purchasing process via a new electronic-buying portal. Notice that the chosen cards provide a range of options from which the user and his or her organization can choose the most viable direction for the category. Complexity Criticality Capability Moderate - The initiative will have a multitude of stakeholders and require extensive standardization but is not overly complex in nature Low - Not critical to the company Low - Category has always been managed by local offices rather than by the corporate procurement function Scenario 3 winning hand. 9
Serious Play Every procurement organization can benefit in some way, shape or form from using the Winning Hand. At a minimum, the Winning Hand offers varying perspectives on how to identify and potentially help solve procurement-related challenges. But it isn t far-fetched to assume that users may also discover new ways to achieve the procurement function s most important goal: maximizing total value of ownership. Accenture Strategy s total value of ownership methodology and its Winning Hand deck of procurement levers offer a systematic approach for helping companies become procurement masters. By looking beyond lowest cost and even total cost of ownership, organizations may find new ways to raise the procurement function s contribution to business success. 10
For More Information If you would like to learn more about how Accenture Strategy can help you draw a Winning Hand and maximize total value of ownership, please email WinningHand@accenture.com or contact: Kai Nowosel kai.nowosel@accenture.com Manish Chandra manish.chandra@accenture.com Rob Fuhrmann robert.p.fuhrmann@accenture.com About Accenture Accenture is a global management consulting, technology services and outsourcing company, with more than 319,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$30.0 billion for the fiscal year ended Aug. 31, 2014. Its home page is www.accenture.com. About Accenture Strategy Accenture Strategy operates at the intersection of business and technology. We bring together our capabilities in business, technology, operations and function strategy to help our clients envision and execute industry-specific strategies that support enterprise wide transformation. Our focus on issues related to digital disruption, competitiveness, global operating models, talent and leadership help drive both efficiencies and growth. For more information, follow @AccentureStrat or visit www.accenture.com/strategy Copyright 2015 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture. 23-4964 / 15-0222