Procurement's Next Frontier - The Future Will Give Rise to an Organization of One
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Procurement’s Next Frontier The Future Will Give Rise to an Organization of One by Kai Nowosel, Abigail Terrill and Kris Timmermans
2
Procurement’s Next Frontier
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Chapter 1: The Emergence of the Virtually Integrated Enterprise. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Chapter 2: The Organization of One Takes Shape. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Chapter 3: Cloud Computing—Leading Through Content. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Chapter 4: The Industrial Internet of Things—A Wake Up Call for Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Chapter 5: Procurement Is Poised to Ride the Analytics Wave . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Chapter 6: From Augmentation to Automation—Cognitive Help Desk Agents Are Only the Beginning. . . . . . . . . . . . . . 36
About the Research. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
3Introduction
In January 2012, Eastman Kodak Co. filed for
Chapter 11 bankruptcy. It marked the end of an
era for one of the world’s greatest innovators,
a company that played an important part
in the lives of millions of people for more
than 130 years through the famous “Kodak
moment.” The change came swiftly: In the
span of just seven years, from 2005 to 2012,
the company lost half its revenue.1
This remarkable decline wasn’t due to Kodak’s lack Kodak’s experience is not all that uncommon. The procurement with digital technologies to evolve
of innovation or to waning interest in photography. business landscape is littered with companies that to meet tomorrow’s demands. The precedent
In fact, the company invented the very technology have been unable or unwilling to take bold steps exists: Procurement has not truly reevaluated how
that creates the more than 70 billion digital photos in the face of new trends or challenges. Comfort technology could fundamentally shift its essential
uploaded to Facebook each year today.2 Rather, with the current way of doing things and aversion components, some of which hail from more than
what led to Kodak’s downfall was fear—fear that to risk can freeze companies in time, making them 3,000 years ago,5 in at least two decades.
digital technology would cannibalize its lucrative vulnerable to more forward-thinking competitors.
This report, based on a comprehensive research
film business.3 This fear led Kodak to ignore the In many ways, the procurement organization effort involving interviews with more than 50
trend toward accelerating digitization for 37 years finds itself at the same kind of crossroads Kodak leading executives and procurement experts (see
after creating the digital camera in 1975,4 and faced. In the past two decades, procurement has About the Research for details), explores in depth
prevented the company from making the changes had tremendous success in centralization and the challenges and opportunities facing today’s
necessary to capitalize on consumers’ rapid cost savings. Yet that very success may make procurement organization. It reveals how digital
embrace of it. procurement organizations fearful of taking technologies will revolutionize the procurement
the drastic steps required to completely rebuild organization and its professionals in five to seven
Our research paints a vivid picture of what the procurement
organization of the future will look like. The question is, which
companies are prepared to embrace it and which will remain rooted
in the past?
4years, and the far-reaching effects this revolution the point that strategic suppliers are seen as simply professionals embedded within the business and
will have on the very essence of how procurement part of the overall company. This relationship will uniquely connected back to a smaller, central, core
interacts with internal business stakeholders and be greatly enhanced by the use of technology, decision-making team supported by advanced
the external supply base. It also suggests that this allowing tight collaboration for virtual integration. technology. The embedded professionals will spend
new digitally powered procurement organization This tighter collaboration will be conducted, the bulk of their time addressing business issues
will continue to significantly drive down its most critically, in the area of innovation. As part while applying procurement knowledge. The core
operating costs while delivering more strategic of the virtually integrated enterprise, suppliers team will use real-time transparency of information
value to the larger enterprise. Our research paints a will increasingly be relied on as a major source on demand, supply and pricing to handle
vivid picture of what the procurement organization of new ideas that can help give the company a business strategy, global demand and supply,
of the future will look like. The question is, which competitive edge. policy, compliance, and global strategic supplier
companies are prepared to embrace it and which management. This new structure, which will require
Within the business, we also foresee a dramatic
will remain rooted in the past? new skills and roles with a more strategic focus, will
change in the procurement organization itself, as it
evolves into a new structure featuring procurement
A New Digitally Driven,
Strategically Focused
Procurement Organization Figure 1. In 2007, Procurement Masters saved 10 times what it costs to run procurement
After decades of effort, procurement has harvested 2007: It pays to be good
the low-hanging fruit: It has helped the business $82
optimize its purchasing spend while becoming 10x
much more efficient in its own right. $63
Consider the 2007 Accenture High Performance in
4x
Procurement study,6 which found that procurement
masters saved 10 times as much as it cost to run
their procurement organizations—in short, it paid Cost to procure *
to be good. Just four years later, the 2011 update $16 Savings delivered *
of that study7 found that procurement masters had $8
*On US$1 billion of controlled,
evolved in their approach to procurement: They still
normalized spend
focused on savings and cost-effective operations,
but were also asked to take on far more, with a Low performer Master
focus on quality, sustainability, innovation and risk
management. More was asked of procurement
masters than ever before, and the masters delivered
(see figures 1 and 2).
Figure 2. In 2011, Procurement Masters expanded their focus to generating value beyond cost savings
Today, procurement is even more efficient. The 2011: More is asked and more is delivered
typical procurement organization’s operating cost is
approximately 0.8 percent of the enterprise’s overall Total Value
spending8 (down from about 1 percent in 20079). of Ownership
Some industries, given the nature of their business
and spend distribution, do even better, averaging
between 0.5 percent and 0.7 percent.10
In the next several years, our research suggests
Procurement
the definition of “value” will evolve from a focus
Performance
exclusively on cost reduction and savings to work
that helps differentiate the company strategically.
Procurement increasingly will be evaluated by more
advanced measures, ones that are intimately linked
to the company’s strategy and financial metrics.
How will procurement respond to this new set of
demands?
Cost & Cash
We anticipate the emergence of what’s called the
Procurement Mastery
virtually integrated enterprise, founded on intimate
relationships with a smaller group of strategic Masters Contenders
suppliers that allow both buyer and seller to derive
much greater mutual and strategic benefit than in
the past. In such a relationship, the demarcation
between buyer and supplier becomes blurred, to
5enable the procurement organization to focus on Figure 3. 2015-2022: The future will give rise to an organization of one
strategically differentiating activities and generate Cognitive Computing
much broader value (see figure 3).
The catalysts for and enablers of this new vision
of procurement are four key digital technologies.
ed
Cloud computing will serve as a foundation for rat Sta Busi
teg e keh n
procurement’s digital strategy: It will be characterized n ris
p o
En lly I
es ers
s
ter
by greater usability, making employees more
ld
ua
Virt
productive and engaged; and it will provide access to
more content the organization can use to facilitate
core procurement activities. Real-time analytics, Smaller,
paired with advanced use of the Industrial Internet Industrial central Analytics
of Things, will generate deeper and more valuable Internet procurement
insights that can greatly enhance decision-making of Things core team
as well as identify potential issues and mitigation
V ir t E n t
strategies. And cognitive systems will serve as digital
s
ea m
ua er
en de d
agents integrated into the fabric of procurement,
lly p
nt
be
tT
d
r i s egra
I
eventually handling not just transactional activities Em em
e te d
(such as help desks), but also more strategic pursuits ur
P roc
(including spot-buying and even intelligence
augmentation for category management).
Perhaps the most significant finding of our
research is that these digital technologies will do Cloud
far more than enable procurement to continue
of pre-approved private and public “shops” (i.e., with strategic suppliers to share insights and
to incrementally improve how it works. Rather,
including content from outside the company) ideas, as well as collaborate on innovation
they allow the organization to gather and analyze
from which internal customers can select goods programs via common social media methods.
more and richer real-time data to drive better,
and services, supported with business logic that It will also provide uncharted suppliers with
smarter and more accurate decisions. Ultimately,
guides their purchasing based on policies, preferred an avenue to collaborate with the company on
they make it possible for procurement to literally
suppliers and contracts. The mall will include possible future innovations (see Chapter 1).
question everything it does, even some things that
a robust service desk that directs customers to
have been core to procurement for decades or Virtual Category Room
the right shops and provides spot-buy services
longer (such as the purchase order). Questioning
as required, as well as virtual agents delivering This is a virtual central gathering place to which a
the fundamentals of the organization and its
consistent and automated buying support. company’s category managers will go to keep track
processes is vital to transform procurement into
These services will be enabled by a mix of digital of their in-flight projects based on where they are
the organization necessary to deliver the strategic,
disruptors, including cognitive systems through in the process by category. In addition, category
high-value results that senior executives now
intelligence augmentation and, where possible, managers will be able to find relevant market
expect it to deliver.
intelligent automation (see Chapter 6). intelligence data for their category—both what
the category managers upload themselves as well
The 5 Apps: The Technology Supply Analytics
as content that is pushed to them automatically
Foundation of the New The Supply Analytics apps will bring together by content aggregators. Because the Virtual
a wide variety of data and, through a standard Category Room is powered by social media, it is
Procurement Organization dashboard, will enable both procurement and context driven. Category managers’ preferences
Our research shows that procurement will undergo business users to interpret analytics to solve and collaboration behavior will influence
a fundamental shift in the next five to seven years, specific problems or answer questions. Big Data recommendations they receive, for example, for
both in how it is organized and how it interacts will be a key component of the Supply Analytics contacts or opportunities.
with the business and the virtually integrated apps, bringing in information from outside sources
enterprise. Digital disruptors are catalysts such as the Industrial Internet of Things (see Supplier Network
and enablers of this overall shift, supporting Chapter 4). Crucially, Supply Analytics apps will no The Supplier Network, which will be accessed via
procurement in every aspect of what it knows, longer simply provide information and insights. an app, connects a company seamlessly with the
decides and does. The infrastructure supporting They will mature to a point at which, via cognitive supply market, the Virtual Company Mall (i.e., for
procurement’s needs by 2020 consists of what computing capabilities, they can recommend transactions of purchase orders and invoices),
Accenture calls The 5 Apps, representing the main decisions and opportunities for procurement to and to the Supply Analytics apps. Powered by
“app bundles” that will be required for procurement capitalize on (such as supply optimization and technology solutions supporting tendering,
to be successful in the future (see figure 4). The 5 savings opportunities). performance assessment, supplier discovery and
Apps are as follows: supplier interaction, the app is also linked to
Virtual Supplier Room
both the Virtual Supplier Room and the Virtual
The Virtual Company Mall
This virtual collaboration room is a critical Category Room.
Owned and managed by procurement, the component of the virtually integrated enterprise.
Company Mall will feature a cloud-based set It will enable the company to virtually interact
6These technologies will serve as the underlying infrastructure
of procurement in 2020, in the form of The 5 Apps.
Figure 4. The 5 Apps
Internal
Stakeholders
Cross-functional Business
teams Users
Virtual
Category Room Virtual
Company Supply
Virtual Mall Analytics
Supplier Room
Supplier Network
Innovators
Other Buying
Strategic Companies
Suppliers
Logistic
Transactional
Uncharted Providers
Suppliers
Suppliers
7Chapter 1: The Emergence of the Virtually Integrated Enterprise Companies will rely more heavily than ever on a small group of strategic suppliers that will be asked to help substantially reduce costs and risk but, even more important, to significantly boost the top line through more effective innovation. 8
Suppliers are not created equal, and shouldn’t By thus becoming what Tom Linton, chief Another example of the virtually integrated
be managed as such. While this has always been procurement and supply chain officer of enterprise in action is the alliance a leading
true, our research suggests this maxim will be Flextronics, calls a “virtually integrated enterprise,” communications company is building with more
even more relevant in the next five to seven years. a company takes another step in the evolution than 30 key suppliers. The focus is on both cost-
We expect the polarization between strategic from the vertically integrated enterprise of the reduction initiatives and new services that they
suppliers and all others to become even more past, shedding ownership of physical assets can jointly provide to enhance revenue. But the
extreme, and strategic suppliers to have a much and processes in favor of a portfolio of external virtually integrated enterprise is not necessarily
greater impact on a company’s growth agenda. organizations operating those for them. limited to suppliers. Other entities—including
universities, supply institutes and complementary
Indeed, our research strongly points to a future In the virtually integrated enterprise, Linton
companies—may also participate. For instance,
in which a company will develop a more intimate envisions a scenario in which strategic suppliers
four consumer goods companies that share the
relationship with fewer strategic suppliers. In this could actually set up shop inside his own
same private equity owners and some board
relationship, the demarcation between buyer and facilities—such as the Starbucks cafe in Target
members have teamed up on initiatives to
seller will become less distinct, and suppliers will stores or the Ralph Lauren boutique inside
collaboratively source and reduce costs.
act and be treated as part of the buyer’s company. Nordstrom or Macy’s—so parts could be ordered
For instance, in the future, strategic suppliers directly from suppliers and paid for without the Yet although strategic suppliers and partners
likely will be seen as simply an extension of the need for purchase orders. “In that way, suppliers typically have the most impact on an
company’s manufacturing or product design have direct access to all the demand signals from organization, with future-looking plans for
and development processes. If the relationship all of our factory floors,” he explained. Linton full integration, they form only the top of the
is truly intimate, suppliers could even end up said he could even see charging suppliers for three-tiered supplier ecosystem of the future
assuming a fully integrated role on the product such access—similar to the slotting fees major (see figure 5). Similar to today, companies will
development team, participating in all internal retailers charge consumer goods manufacturers also maintain a network of tactical suppliers
meetings without separation alongside the to guarantee prime shelf and display space in on which the focus will be extreme efficiency.
company’s employees, helping to come up with the store. As we discuss later in this report, the routine,
next-generation products. non-strategic nature of these relationships and
transactions will lend themselves to a high degree
of automation and much less human interaction.
Figure 5. In the Virtually Integrated Enterprise, procurement becomes one with selected suppliers
Uncharted Strategic Transactional
Suppliers Suppliers Suppliers
Virtual Virtual Supplier Room, Supplier Network,
Supplier Room Analytics Cognitive Agents, Analytics
Smaller, central procurement core team
9“We created a team with one of our suppliers to develop a totally new
product that could solve some of the problems and issues that our
customers had,” noted Eva Andrén, vice president and head of group
sourcing at Ericsson. “This new product was first on the market...”
The third tier comprises a set of providers One company is high-tech manufacturer Ericsson. organization and we allow the supplier to discuss
companies will use more extensively and their philosophy and the business units to talk
“We created a team with one of our suppliers
effectively than they do today: “uncharted” about their challenges. The idea of ‘connect the
to develop a totally new product that could
suppliers, which are currently unknown to a dots’ is to take pieces and parts from across the
solve some of the problems and issues that our
company but may provide relevant products, breadth of our organization, match them up with
customers had,” noted Eva Andrén, vice president
services, and innovation that could be useful to a supplier’s capability, and create meaningful
and head of group sourcing. “This new product
the company at some point. projects out of that.”
was first on the market, where we were way
In the future, a company’s access to its supplier ahead of our competitors in developing and The future approach to innovation may look more
ecosystem will be managed through digital delivering to our customers before any other like what McDonald’s does today. The company
technologies. Strategic suppliers will be connected player on the market had a similar product.” runs a series of permanent supplier councils, each
to the company via the Virtual Supplier Room, focused on new product development in a specific
allowing the intimate collaboration and exchange When relevant, BASF category or area of the business. “We have a
of information necessary to be mutually beneficial chefs’ council, in which all of our suppliers’ chefs
to both buyer and seller. For the uncharted tier,
Corporation’s Chris Toomey come here [at McDonald’s headquarters] and work
supplier networks and a controlled portion of “bring[s] in a group of suppliers with our chef on new product development,”
the Virtual Supplier Room will allow appropriate for three or four days” to address said Francesca DeBiase, the company’s vice
access and communication channels between a growth challenge. president of Worldwide Supply Chain. “We also
buyer and seller to facilitate innovative ideas. have supplier councils for each product—potatoes,
chicken, beef, and toys, for example.”
Similarly, a chief procurement officer of another
“Procurement is 50 percent company related that, “Procurement is 50 percent The unique aspect of the council system is that
responsible for innovation.” responsible for innovation. Category managers it brings together companies that are otherwise
are responsible for asking the innovation question fierce competitors to have them focus on
The full supplier ecosystem will remain important any time they’re having a strategic conversation innovations that benefit McDonald’s. “Suppliers
to a company’s competitiveness. However, with a supplier. R&D or innovation technology who would otherwise not speak to each other
strategic suppliers, operating as part of the never tackle a challenge on their own—we take come to our Council Meetings and talk about
virtually integrated enterprise, will have an even them out to the supply base to look for solutions.” best practices and what they can do to help the
greater impact on a company’s ability to grow McDonald’s system,” DeBiase explained. “If one
Currently, in most organizations, teams from
profitably. They will, of course, continue to play of them comes up with an idea that’s a process
buyer and seller come together for an innovation
a major role in helping to reduce waste and risk. improvement—that drives the business and saves
challenge. Sometimes, the teams are charged
But much more important, they will be looked to money—they know that part of their responsibility
with focusing on a specific idea, other times they
as a major source of innovation that can give a as a supplier to McDonald’s is to share that with
are gathered to brainstorm ideas about a more
company a substantial competitive edge. their competitors for the value of the system.”
general topic. Typical of these approaches is how
BASF Corporation operates. DeBiase says these suppliers are willing to do this
Virtual Integration Drives “We work very closely with our businesses to
not just because McDonald’s is a massive company
with an equally massive purchase volume, but also
Greater Innovation identify what their growth priorities and their
because “they know we’re going to be with them,”
growth challenges are,” explained Chris Toomey,
Indeed, the biggest benefit by far of the virtually she said. “They all know they’re all going to have a
BASF Corporation’s senior vice president for
integrated enterprise model is more robust certain part of the business. I think that goes back
procurement for North America. “And then one
innovation that can dramatically increase revenue. to the fact that we do have long-term suppliers
of two things happens: Either we bring in a
In fact, several companies participating in our who have business units dedicated to us, and with
group of suppliers for three or four days and
research are beginning to work in such a way which we’ve developed long-term commitments
task them with trying to address this growth
today, providing a signpost for the future. and partnerships on trust.”
challenge with us; or we have ‘connect-the-
dots-type’ meetings, where we bring the supplier Flextronics has taken things a step further
together with our representatives from across our with its Product Innovation Centers, where
the company features capabilities or pre-built
10modules from its suite of strategic suppliers. The focus on start-ups is critical, Linton says, exist today of a tightly integrated process that
Such centers are particularly valuable for because of how innovation has changed. spans the supplier’s and buyer’s teams, and of
entrepreneurial ventures looking for help in technologies that can support such a process (e.g.,
“It used to be, big companies did a tremendous
getting a new product off the ground. “Say you’re the automotive industry). But there is still room to
amount of innovation. Now, 90 percent of
a start-up company and you’ve got an idea for grow across a number of industries.
innovation and new products are coming from new
new headphones,” said Tom Linton. “You would companies, or off the back of a napkin. What we’ve One emerging technology that shows promise
walk into our innovation center and find, for done is change our models to adapt to capturing is the Virtual Supplier Room, which serves as
example, resin suppliers, components for wi-fi, new ways of innovating products, and trying to do a virtual central gathering place to which a
components for wiring and components for that in a way that accelerates time to market and company and its suppliers can go to stay in
acoustics. You would walk out of there in 90 days improves product quality and reduces cost.” touch with each other (see figure 6). Among
with a set of headphones designed the way you other features, it includes a dashboard with key
want them. We also have 3-D plastic and metal Executives we spoke with generally acknowledged
metrics (such as supplier performance, demand
printers that actually will produce a 3-D version that collaborative innovation between
information, supplier capacity and material
of a blueprint overnight.” procurement and suppliers is key to their
availability); a platform based on current and
company’s survival. But to be effective, it must be
emerging technology that supports increasingly
based on a relationship in which everybody from
Flextronics has changed their both buyer and supplier realizes that innovating
tight virtual collaboration on specific projects;
model to capture new ways of together will benefit both companies, and that
and a collaboration board that provides an
overview of ideas and challenges affecting both
product innovation to accelerate there is no barrier to sharing ideas. That’s not
parties, consolidated across the key domains of
time to market, improve quality, always easy to do. For example, asking engineers
innovation, cost management, market volatility,
to share or even cede responsibility can be
and reduce cost. met with considerable resistance. One global
supply risk and sustainability. A built-in tool
helps facilitate ideation and opportunity selection
manufacturer removed that obstacle by instituting
According to Linton, the Product Innovation among teams.
the well-known concept of a “Not Invented Here
Centers—which, at this writing, are working Award,” which it gives to its own R&D people To support innovation beyond core strategic
with approximately 100 start-ups—leverage the who exhibit the open minds needed to capitalize suppliers, the Virtual Supplier Room could contain a
capabilities of Flextronics’ strategic suppliers to on innovation from outside the company. The special sub-room for uncharted suppliers. Through
accelerate promising new products to market. If point is, a company needs to break down internal this room, uncharted suppliers could learn about
the product is successful and the start-up wants barriers before it can effectively integrate outside the company’s key issues, introduce themselves and
to scale it, Flextronics can immediately ramp up suppliers into its innovation process. present their own solutions. Uncharted suppliers
those capabilities in production facilities around would have limited access to other features of
the world. A company also must have a formal process and
the broader Virtual Supplier Room to maintain
technology to support innovation so the right
the confidentiality of discussions between the
ideas are identified and nurtured. Some examples
company and strategic suppliers.
Figure 6. The Virtual Supplier Room provides transparency and collaboration with the right suppliers at the right time
News Feeds Communication Board
Cover Stories
News Technology
Supplier Collaboration Board Uncharted Supplier Submissions
Topics Grapevine
Innovation
Cost Management
Market Volatility
Supply Risk
Sustainability
Ongoing Projects Sharepoint Key Contacts
Chat / Message Board
11Figure 7. The 5 Imperatives of the Virtually Integrated Enterprise
1
Strategic Harmony
5
Staying Sharp in the
Supplier Ecosystem
The 5 Imperatives
of the Virtually
Integrated Enterprise
2 Transparency through
Technology
4 Motivated Alliance
Manager
3
Cohesive Talent
Planning
12Five Key Structural Elements each other in the relationship, and then jointly relationship with each supplier. And the role—
share all the strengths and weaknesses we typically filled by a very senior executive—may
of a Virtually Integrated have seen,” noted Volker Bargon, the company’s not even be part of procurement; it could reside
Enterprise Model corporate senior vice president of purchasing. in manufacturing or in a business unit. By placing
As the preceding discussion on innovation “Open and honest feedback from both sides responsibility for strategic suppliers in a role
suggests, a prerequisite of a virtually integrated establishes a less defensive ground for important separate from traditional procurement category
supplier model is complete transparency that discussions—what can we do to improve the management, a company makes it a focus area for
fosters a high degree of trust and enables a relationship and what do we need to get out of that person. He or she can, on a full-time basis,
more seamless flow of innovation ideas across our way?” concentrate on making the endeavor successful.
company and supplier. This means there can be However, assessments are just one part of Regardless of who is in charge, the skills required
no secrets on either side. Both buyer and supplier the equation. Developing the truly open, for alliance managers are the same. They must
must be completely open about their strategies, transparent relationships necessary for a virtually be adept at relationship management and have a
plans, capabilities and limitations. That kind of integrated enterprise requires five other, more deep understanding of the sourcing process. They
honesty and openness is the foundation of the “structural” elements (see figure 7). also must have expertise that matches that of the
relationships McDonald’s has with its small group suppliers being managed—for instance, a strong
At a high level, there must be tight alignment
of strategic suppliers, which represent the vast engineering background in the case of an alliance
between buyer and seller in strategies, business
majority of the restaurant chain’s spend. manager for high-tech suppliers.
plans, goals and targets. The keys to maintaining
such alignment are strong formal governance The final key element involves keeping the
“We’ve had [strategic (led by very senior executives on both sides), joint supplier ecosystem robust and sharp. To that end,
suppliers] tell us, ‘...The level metrics, appropriate contractual components and procurement will need a capability to conduct
supplier incentives that include profit sharing. ongoing supplier scouting. That’s where having
of transparency, the level
uncharted suppliers as part of the ecosystem
of trust that you put in us, Technology will be a crucial driver of transparency,
can be valuable. For example, a procurement
giving both parties vital information on such
it’s at a different level than organization may find uncharted suppliers a viable
things as inventory levels, buyer and seller
with other customers.’ And capacity, downtimes of crucial production
option to handle travel spend (via a company such
as booking.com, which could assume ownership
we really believe that’s a facilities or machines, and shipment status, as
of the entire category). It also can help a company
competitive advantage for well as access to a broader ecosystem of suppliers
easily tap into a network of providers that
from which to draw as the business evolves.
us,” said Francesca DeBiase of aren’t actively selling products or services to the
Although currently no mature software tool exists
McDonald’s. to provide the full range of information that will
company (but could or should be) uncover new
technology the company may be missing out on,
be required over time—the few solutions that do
“We spend a lot of time with those suppliers and determine if current strategic partners are still
exist today are largely custom systems—that’s
talking about our growth plans, our development competitive with other suppliers.
expected to change in the next few years.
plans and where we want to innovate,” explained
Francesca DeBiase. “We share with them a large Transparency also extends to talent.
volume of information. And we’ve had them tell
Conclusion
“We’re spending a lot more time on reviewing
us, ‘You guys are totally different. The level of talent plans with our suppliers,” said DeBiase. “We While there’s plenty of evidence to suggest that
transparency, the level of trust that you put in us, ask them the same questions we ask ourselves: Do deeper, more substantive relationships with key
it’s at a different level than with other customers.’ you have the right people, and the right number suppliers can be an advantage for both buyer and
And we really believe that that’s a competitive of people, to support our growth?” seller, executives we spoke with also agreed that
advantage for us.” establishing such relationships is neither easy nor
In the future, companies and strategic suppliers quick. It requires a significant change in culture, as
will likely conduct joint recruiting to ensure the well as patience and determination. And even when
“Open and honest feedback quality of talent, and may even consider job the initial transformation is complete, companies
from both sides establishes rotation across companies. must remain diligent to ensure the strategic
a less defensive ground,” One of the biggest issues companies need to relationships that took so much time and effort
according to Volker Bargon of address as they adopt the virtually integrated to establish continue to be productive, and that
enterprise model is organizational in nature. suppliers don’t become lazy or complacent or begin
Boehringer Ingelheim. Today, responsibility for strategic supplier to take advantage of their “embedded” status.
management is generally part of the scope of Implementation challenges notwithstanding,
Ongoing assessment of the relationships is critical
the category manager’s job. But as suppliers are based on our research we believe the virtually
to maintaining transparency. For example, in areas
seen less as an outsourced part of manufacturing integrated enterprise will become a reality in the
where co-creation is vital to generate desired
and become more integrated with the company, next few years. Companies such as McDonald’s
results, Boehringer Ingelheim runs 360-degree
a formal role responsible for strategic suppliers and Flextronics give a glimpse of the benefits
feedback evaluations of the supplier relationship.
is emerging. This “alliance manager” won’t that can accrue when they make deep supplier
“We are interested how both partners on their
get involved in negotiations, but rather will partnering a core element of their procurement
different organizational levels mutually perceive
concentrate on building and nurturing the and overall business strategies.
13Chapter 2: The Organization of One Takes Shape A new strategically focused procurement organization is taking shape that promises to help procurement deliver value to the business far beyond securing needed supply at the best possible cost. 14
What will the procurement organization look like in However, while many are attracted to this ideal A Focus on Delivering Value
2020 from a structure and skills standpoint? The state and believe it’s realistic, questions remain
majority of the executives we spoke with as part as to what it would take to become reality. Many Beyond Cost Savings
of our research agreed we’ll likely see procurement recognize that achieving a successful embedded According to our research, the value delivered by
evolve to a fundamentally new model that enables state will require procurement to first formalize, the ideal procurement organization of the future
the function to more effectively align value professionalize and fully coordinate itself as an will assume a much broader meaning. Most
with the business’ strategies. This new “ideal” organization to capture as much of the value and executives we spoke with agreed that cost savings
procurement organization of the future will focus synergies as possible. Thus, a number of those we will continue to be part of value.
on strategically differentiating activities, with interviewed tend to approach the evolution a bit
“There’s always going to be a component
procurement professionals becoming embedded more cautiously. In all cases, where companies
of savings—that’s the fact of life,” said Bill
within the business and uniquely connected back ultimately end up—and how long it takes them to
Mangen, vice president of strategic sourcing and
to a smaller, central, core decision-making team get there—will be influenced greatly by a variety
procurement for Cox Communications. “I don’t
supported by advanced technology. Any non- of factors, most notably their culture and industry,
think that’s ever going to go away from what
differentiating activities will either be conducted the maturity of their current procurement
we’re doing.”
by technology or managed by the virtually organization’s structure and capabilities, and the
integrated enterprise (see figure 8). pace of technology’s evolution.
Figure 8. Embedded procurement teams and the virtually integrated enterprise will operate as one entity
ated
t
r
eg e Sta Bus
n
I ris ke in
h
rp es ders
En lly
ol
s
te
ua
Virt
Smaller, central
procurement core team
...parameters for...
Non-strategically Strategically
differentiating Business strategy, differentiating
Global demand and supply,
Policy, Compliance,
V ir t E n
Global strategic supplier
s
management
eam
ua ter
tT d
en dde
lly p
nt b
r is egra
I
e
e te d Em em
o c ur
Pr
15Figure 9. How will your future procurement organization measure value?
EBITDA
EPS
Reduction in function’s budget
Supplier innovation
Time to market
Other
But, as Mangen noted, in the future, value will executive vice president responsible for strategic “Most of the low-hanging fruit has already been
be thought of much less in terms of how much sourcing and procurement. The Dutch high- sourced,” agreed David Annett, vice president,
procurement saved the business on a particular tech company’s chief procurement officer has sourcing and real estate at the National Bank of
deal or at the end of the year. “I think [value] is a seat at the executive committee level—he’s Canada. “[Procurement] can go to a business unit
going to be broader in terms of how we align to one of ASML’s top 10 executives—and, as such, and say, ‘We can shave X percent off of your spend
the company’s strategy.” (see figure 9). has significant input in shaping the company’s by doing this.’ That’s great, but most of that has
Next-generation procurement organizations will strategy. At this level, the CPO is no longer been done. So it’s really now about what is strategic
be measured and rewarded on their contribution focused on advising what suppliers will do, but and what the priorities of your internal partner
to a variety of business results the larger instead, on what ASML will do—a massive shift groups are where you need to focus to go to the
enterprise is trying to achieve. These include, for in perspective and responsibility. For example, next level. Procurement will have a leadership role
example, EBITDA (earnings before interest, taxes, he can determine that certain suppliers could to play, but the partnership with internal business
depreciation and amortization), EPS (earnings do a far better job than ASML managing units is where the success in the future years is
per share), reduction in functions’ budgets, risk specific activities and subsequently transfer going to come from.”
mitigation, supplier innovation, time to market, responsibility to those suppliers.
sustainability, diversity, commodity price risk Another benefit of this broader view of value is
management, driving continuous improvement that it enhances the organization’s reputation.
and compliance. One company that participated As one executive told us, it makes procurement
in our research, ASML, is already headed down important to the entire company even in boom
that path, according to Paul van Attekum, the times, not just during a recession when the main
focus is saving money.
16New Roles and New Skills Embedded Resources the company other than procurement. Many
organizations are already at this point, or are on
Doing More Strategic Work Embedded resources in the business will focus on their way. For instance, today there are cross-
To deliver this broader kind of value and focus on strategically differentiating activities by becoming functional teams combining procurement and
strategically differentiating activities, procurement an integrated part of the business. For instance, specialist (e.g., engineer) resources. In the future,
organizations will need a model comprising new they will help the business create more value by these two skills will commonly be embodied in
skills and roles with a more strategic focus. Our working with R&D, product development and one person who will be embedded in the business.
research found that two groups will emerge. The suppliers to develop new products, reduce time
to market and solve problems with products or Importantly, the concept of embedded resources
first is a group of procurement professionals does not mean that the business will build their
who are fully embedded in the business as production. They will help implement supply and
demand strategies through product innovation, own procurement organizations again (much
business leaders, and who spend the bulk of their as what happened with shadow procurement,
time addressing business issues while applying product cost management, specification
rationalization and consolidation (working with in which ungoverned distributed procurement
procurement knowledge as appropriate. This is organizations flourished). These embedded
what André Le Lerre, vice president at Ericsson, the core decision-making team on demand
as appropriate). And they will help manage resources, who will be skilled in procurement
called “the thin front line.” and working in the business, will continue to
commodity price and supply risk at both the
business unit and market levels, in conjunction be governed by the company’s procurement
André Le Lerre of Ericsson with a global team as conditions warrant. mandate coordinated by the central core team.
sees a “thin front line” of The non-strategic demand will either be handled
Given this more strategic focus, these individuals by the business in a skilled and compliant
procurement professionals will have markedly more advanced and diverse manner through the use of automation, or it
embedded in the business, skills. This new professional will need to at once be will be managed by members of the virtually
focused on strategically a change agent, collaborator and risk advisor who integrated enterprise.
is technically savvy, has deep finance knowledge,
differentiating activities.
understands how products are developed and is
The second is a smaller, core decision-making adept at building relationships. Often, he will be a
team supported by cognitive computing specialist with expert knowledge in some business
(which we explore in Chapter 6) and analytics domain—such as biochemistry, depending on
(which we discuss in Chapter 5), with real-time the need—and likely will come from an area of
transparency of information on demand, supply
and pricing. This team will tackle higher-level
cross-business unit procurement requirements.
The technology infrastructure required to make
this new, smaller core team a reality will largely
reside in The 5 Apps, as we described in the
introduction to this report.
At ASML, the Dutch high-tech company’s chief procurement officer
has a seat at the executive committee level—he’s one of ASML’s top
10 executives—and, as such, has significant input in shaping the
company’s strategy.
17Core Team this smaller, central core team to support and agent to work together to aggregate demand and
enable the business strategy. Therefore, the improve the cross-business unit purchasing of
The core team of decision makers will likely business strategy parameters will concentrate components through the “normal” procurement
be much smaller than the typical central on identifying and prioritizing ways in which the activities (i.e., aggregate demand, find best source
procurement organization of today. That’s largely company generates business value (beyond cost and contract). In this scenario, the intelligent
because of technology, which will assume a savings). For example, the team may monitor agent would be responsible for augmenting
bigger role in handling day-to-day procurement prevailing and forecast economic conditions and (and where possible, providing automation to)
activities (even ones currently considered strategic alter the company’s balance between top-line the embedded teams throughout the process
and requiring significant human involvement). growth and cost reduction accordingly. of securing supply. See Chapter 6 for more on
Accenture experts believe this team, which will cognitive computing and intelligent agents.
have far different responsibilities than the larger Global demand and supply parameters will include
central organization of today, will concentrate using advanced analytics to better understand Policy parameters will manage the specific way
mainly on five key parameters: evolving trends and forecasts in demand (e.g., in which the purchasing of core and non-core
aggregated demand across business units and categories are governed to give a company a
• Business strategy aggregation partners) and implementing potential competitive advantage. In the same way that
• Global demand and supply changes in sources of supply. travel policies dictate pre-purchasing timelines
of itineraries, class of travel allowed by level,
• Policy Consider the example of a manufacturing
and consequences for non-compliance, policy
company. An embedded team member who
• Compliance parameters will equally manage additional
is responsible for multiple categories and
• Global strategic supplier management categories (such as research and development or
business requirements could be informed by the
contract labor).
Each of these will be handled by a combination global demand and supply intelligent agent (a
of people and technology (including cognitive computerized agent) that there is an opportunity Compliance parameters will enforce demand,
systems). In the most advanced cases, core to save money in a number of ways: aggregating supply and policy parameters. This will involve
team members will be responsible primarily for the purchasing of components across business understanding maverick behavior, agreeing with
defining the underlying parameters of the digital units, understanding demand, identifying the business on how to adapt the automated
technologies (e.g., intelligent virtual agents and alternate or equivalent components, technically algorithms to manage compliance, and defining
analytic algorithms) and managing stakeholders certifying the use of the new components, and the interventions required for non-compliant
in the business who are willfully non-compliant. recommending and securing a source of supply. individuals. Non-compliance will, for example,
The embedded lead could then decide to connect extend into using predictive analytics to flag for
Business strategy parameters will be owned by
the appropriate embedded business unit teams review and intervention requisitions that have a
the chief procurement officer and will set out
with the global demand and supply intelligent high likelihood of being fraudulent.
the principles and guardrails required to allow
Figure 10. In advanced cases, the smaller, central team will manage parameters more than people and processes
Smaller, central
procurement core team
...parameters for...
Business strategy,
Global demand and supply,
Policy, Compliance,
Global strategic supplier
management
18Finally, global strategic supplier management will People, arguably, are the biggest wild card in approximately 0.8 percent today.12 Best-in-class
address overall risk in global strategy. This will the transition. Change, especially as dramatic as industries do even better, averaging between
also involve identifying the company’s unique, the one our research is pointing to, is difficult. 0.5 percent and 0.7 percent.13 Our most recent
strategic relationships and coordinating those Legacy procurement people with long-standing, research suggests the aggressive use of digital
relationships at the highest levels (see Chapter 1 traditional methods, as well as others affected, technologies in the future may both significantly
on the Virtually Integrated Enterprise). The core will need help to make the transition. reduce the cost of the procurement function
team will work in conjunction with the embedded and dramatically increase the function’s return
business unit teams, which will be operating with “People tend to hold onto on investment (ROI) by delivering much greater
suppliers at a more granular level on initiatives business value beyond cost savings.
such as co-innovation and other projects.
certain aspects of their jobs
According to several executives, some elements of
that they feel most comfortable
As this team evolves in the near term, non- this new organization—such as the advanced skill
strategic, tactical procurement activities will be with,” observed Al Williams, set, business advisory capabilities and focus on
eliminated, completely automated or handled by chief procurement officer strategically differentiating activities—are already
a member of the virtually integrated enterprise. at Accenture. in place or on the agenda. These companies have
Travel purchasing is a good example of this path a head start on the journey, and their progress
to automation. Just over two decades ago, travel “People tend to hold onto certain aspects of from here can be instructive to other companies
was purchased in the business as employees their jobs that they feel most comfortable with,” looking to reshape their procurement organization
needed it, with little regard for policy, preferred observed Al Williams, chief procurement officer at and skills to thrive in a future where much more
suppliers or optimum pricing. By the 1990s, travel Accenture. “If you have a category manager who will be expected of them.
purchasing had been centralized through official has been doing strategic sourcing for 15 years,
The bottom line: Today’s chief procurement
travel help desks. In the early 2000s, technology and his job is now more of a relationship manager
officers will be required to take themselves, their
enabled travel purchasing to be pushed back spend advisor, that’s a big change to deal with.”
team and the business on a significant journey.
into the business, as it funneled people to The second issue involves technology. Executives But the time and effort will ultimately pay off
specific vendors. Eventually, the tools became were unsure of whether the technology exists to in the form of a procurement organization that
sophisticated enough to be able to control make the future-state organization possible. And can interact with the business more strategically,
compliance based on policy restrictions. We even if it does exist, many believe the time, cost support the business more effectively and
expect other similar categories to follow this path and complexity to implement it would be a major generate business value as never before.
toward automation. obstacle. In fact, interviewees generally agreed
In the remainder of this report, we take a closer
In the next five years, the team will use more that their organizations often struggle even
look at how four key digital technologies—cloud
advanced technology and analytics that getting basic effective procurement technology
computing, the Industrial Internet of Things,
recommend decisions. As we discuss in more in place, let alone more advanced solutions.
analytics and cognitive computing—will form
detail in Chapter 6, in 10 years, advanced The key factor in the speed of the adoption of
the foundation of the procurement organization
technology in cognitive computing will be able more advanced technologies is whether those
of the future and will be key to procurement’s
to facilitate more strategic procurement activities technologies will be pervasive (such as the
ability to evolve to meet the increasing demands
as the system learns over time—including, for internet or a phone app is today) or will require
of the business.
example, the use of intelligent virtual agents implementation (such as an ERP or eProcurement
in key aspects of category management. system), which will take longer.
This expanding use of technology in more The third issue revolves around the core decision-
sophisticated ways will be key to enabling the making team. Although executives agreed there
right people to make the right decision at the would be a central procurement team—even
right time with the right information or advice. if much of procurement is embedded in the
business—the size, scale and function of such a
Considerations for the team was another matter for debate. What fits
one organization may be completely unworkable
Road Ahead in another.
For this new organization to come to fruition, three
key issues must be addressed.
Conclusion
The first is a distinct lack of consensus among
executives on what’s exactly involved in making The preceding “ideal” future-state procurement
the transition to the future-state organization—in organization reflects the next step in the
part, of course, because the starting point varies evolution of procurement’s focus and scope,
by organization. But other reasons also play a role. one that we believe will generate a substantial
Cost, the structure and complexity of the current reduction in the cost of the organization itself and
organization, the nature of the market in which a corresponding shift in the value it generates for
the company operates, the corporate culture, and the business. Previous Accenture research efforts
government regulations are just some of the issues found the typical procurement organization
executives said will influence the route taken. cut its operating costs from about 1 percent
of the enterprise’s overall spending in 200711 to
19Chapter 3: Cloud Computing—Leading Through Content As late movers more aggressively embrace cloud solutions, usability and content will replace low costs, standardization and faster access to new technology as the source of cloud-based competitive advantage. 20
Cloud computing is about to make its mark on The Next Battleground: However, as more procurement organizations
procurement in a very big way. At the World join the early cloud adopters, lower costs are no
Procurement Congress in 2013, Flextronics chief Usability and Content longer the key driver of competitive advantage.
procurement and supply chain officer Tom Linton What’s the new source of cloud-based To recapture that competitive advantage,
presented cloud computing as one of the top 10 competitive advantage when everyone is using former early adopters must set their sights on
trends that will affect procurement in the next the same standardized, best-practice processes productivity and engagement gains, a major driver
10 years.14 And by far, most executives we spoke and technology? Our research suggests leaders of which is usability.
with believe the cloud will play a strong role in will find an edge in two ways: by choosing the Refreshed as well as completely new cloud
procurement in the coming years. That’s critical, as solutions that boost productivity and engagement solution options offer simple, friendly and
the cloud is the stepping stone to being virtually by offering superior usability; and by enriching intuitive user interfaces while maintaining the
connected to the external world in a meaningful content and applying analytics to that content to functionality needed by global procurement
way. It provides access to powerful new content generate insights that lead to better procurement organizations. Such features make the solutions
and analytics-based insights, as well as ways to decisions. eminently more usable and, hence, become a key
connect and collaborate more deeply with the lever for keeping employees engaged and more
supply network. From lower costs to higher productivity
productive. The key to capitalizing on usability in
and engagement
However, as late adopters of procurement the future will be finding the right mix of usability
cloud make an aggressive shift to using cloud To date, one of the most common benefits of and robust functionality. This will get easier as
technologies, the historical benefits of lower cloud computing has been a lower operational existing cloud providers enhance the usability
costs, process and technology standardization, cost structure. For example, in one consumer of their solutions and new cloud providers
and faster access to new functionality will goods and services survey of source-to-pay complement high usability with functionality that
become commonplace. While these benefits once technology costs against net revenue, ranges of matches that of mature providers.
gave leading adopters of procurement cloud 0.046 percent to 0.132 percent were common,
Hans Melotte, vice president and chief
technology a competitive advantage, they will with the best-in-class numbers reached by greater
procurement officer at Johnson & Johnson,
not be differentiating in the next three to five cloud adoption.15 The cloud changes the financial
sees the benefits of improving the overall
years. Thus, with the majority of procurement requirements of procurement technology from
user friendliness of purchasing interfaces. He
organizations capitalizing on cloud benefits, an initial outlay of cash for implementation plus
says employees increasingly wonder why the
leaders of the future will need to look elsewhere maintenance to a service-based fee over time. This
technology at work can’t be as easy and intuitive
for cloud-based competitive advantage. shift lowers a procurement organization’s overall
to use as the tools they use in their personal lives.
cost to serve stakeholders.
It frustrates them. More importantly, it impacts
their productivity at work, and therefore also
impacts a company’s ability to innovate and grow.
Figure 11. There will be a new source of competitive advantage for future procurement cloud adopters
Procurement cloud’s
competitive
advantage today The future’s advantage...
...is a completely new beast!
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