Re-inventing Direct Procurement | © Spend Matters. All rights reserved.

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Re-inventing
Direct Procurement
by Pierre Mitchell
Chief Research Officer, Spend Matters
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Introduction 3

Study Approach: Defining the Capabilities that Matter

and Learning from Leaders 4

Changing the Paradigm in Direct Procurement 5

Alignment on the Balanced Scorecard of Supply 5

Transformation and Leadership 7

Direct Procurement Capabilities that Matter—Beyond Strategic Sourcing 8

A Model for Success 10

“Supply Performance Management” and Supply Risk Management

are hampered by Poor IT support 11

“Design for Supply” introduces supply market power

when it really counts—before the costs are locked in 12

Multi-Tier Cost Management is Core Competency 13

Supply Network Design 2.0: Intelligent Design

for a multi-tier network of supply 14

Advanced Supply Planning: Beyond ‘Feeds and Speeds’ 16

Implementation Success Factors 18

Looking Forward 21

Appendix—Study Demographics 22

Links and References 23

About the Author 23

About E2open 23
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Introduction
The quest for innovation and global growth is leading to an increasingly
multi-channel, micro-segmented, localized and customer-focused value chain that
can only be supported by an agile and resilient “virtually integrated” extended
supply chain. So, the ideal management of the multi-tier chain of supply in value
chains must optimally provision and orchestrate internal and external partner
resources alike – which of course is no easy task! So who should be the lead
orchestrator in end-to-end supply management activities?

In 1983, McKinsey & Co. consultant Peter Kraljic published a seminal paper positing
that “purchasing must become supply management,” and that procurement
organizations must elevate their roles to manage the supply base more methodically
and strategically (e.g., using the famous complexity vs. impact matrix to segment
supply markets and associated supply management processes). Back then,
purchasing in the supply chain was primarily a back office role where buyer
planners helped launch, communicate, and expedite purchase orders.

Fast-forward to today, 30 years later, and things have certainly progressed. Most
procurement groups (supported by a bevy of consultants) have both formalized
and centralized their strategies and processes, with particular focus on strategic
sourcing methodologies to help “rightsize” the supply base. But, has procurement
become a truly strategic supply management transformation agent that helps
lead the redesign and orchestration of multi-tier supply beyond its primary role as
negotiator, cost cutter, contract manager, etc.?

Unfortunately, in the supply chain, the answer is generally no.

In this report, we will highlight how and where direct procurement organizations
are exerting their influence and leadership (or not) on the broader extended supply
chain. We will also examine the impact on performance, and specifically how more
advanced organizations are implementing 11 key supply management activities that
transcend traditional direct procurement (see Fig 4).
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Study Approach: Defining the Capabilities that Matter and Learning from Leaders

For the quantitative aspect of the study, we divided the study population into two groups. The first
was a “top capability” group containing the top quartile firms based on their average capability score
across the 11 evaluated capability areas shown in Fig 4 (see pg. 10). The ‘peer’ group was the rest of
the study population. We wanted to see if the “top capability” firms had higher performance than
the other firms. To ascertain performance, we had respondents self-assess themselves on nine supply
performance KPIs relative to their industry peers. Similar to the ‘top capability’ approach, we created
a “top performer” group for the top quartile performers on an evenly weighted scorecard for the
performance metrics shown in Fig 3.

Fig 3—Higher capability firms enjoy higher supply performance (25% on average)

We found a moderate-to-strong statistical correlation of capability score to performance score

(r-sq = 0.54) that can be seen either on the capability or performance dimensions.

The bottom line is that these capabilities matter, and they have an impact on performance (to the
tune of a 25% advantage, shown in Fig 3). The next part of the study analysis focuses on how
these capabilities are implemented, and this is where we’ll augment the quantitative results with the
qualitative lessons learned based on primary qualitative interviews and additional secondary research.
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Changing the Paradigm in Direct Procurement
1
This is similar to the transition that
Quality groups made decades
ago from technically driven
QA/QC corporate functions
to transformation-driven CI
(continuous improvement)
entities driving Lean and 6 Sigma
capabilities pervasively into the
business (i.e., “quality as process”
rather than “quality as function”).
2
E2open also helped sponsor
the report and we offer thanks—
especially with setting up some of
the executive interviews with their
most advanced customers (who
we’d also like to thank!)
Alignment on the Balanced Scorecard of Supply
One of the first problems to address is terminology. Giving an old-school purchasing
department the new moniker of “supply management” doesn’t change anything.
Rather, progressive direct procurement groups at leading manufacturers align
themselves with internal and external supply partners to systematically improve
their strategic supply management processes and capabilities. They examine direct
procurement not just as a process conducted by a stovepiped function, but rather
as a process to aggressively embed best practices into the broader inbound supply
chain. They integrate the best methodologies, techniques, and tools from multiple
domains—regardless of where the resources report1.
Consider the sourcing area, and the term “source” itself. Does it mean a
purchasing-led supply base rationalization process? Is it a tactical supply chain
purchase order planning and execution process? At advanced firms, strategic
sourcing and strategic supply planning are integrated with each other as well as
new product development, supplier collaboration, supply network design,
and other areas.
How should we define and measure this re-invented direct procurement
organization that advocates and leads the transformation of the broader multi-tier
chain of supply? Spend Matters recently conducted a quantitative study with ISM
(The Institute for Supply Management)2 to assess the:
• Alignment of procurement’s objectives with the supply chain organization
• Level of formal procurement influence on broader supply-side processes
• Degree of adoption of more advanced capabilities
• Impact of such capability adoption on a balanced scorecard of supply
performance
• Lessons learned from the capability leaders in how they achieved success
We also conducted over a dozen interviews with supply leaders at some of the
world’s most advanced manufacturers for their candid off-the-record insights.
Direct procurement is technically part of supply chain, but this doesn’t mean their
objectives are always aligned with those of the broader supply chain group (Fig 1).
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Fig 1—The supply chain scorecard is more ‘balanced’ than procurement

in terms of focus on growth, innovation, and flexibility/resiliency

It’s not surprising to see cost reduction and supply assurance at the top of
procurement’s list, and it is encouraging to see a deeper focus on strategic
partner collaboration.

In the supply chain, strategic partners can include ODMs (original design
manufacturers), CMs (contract manufacturers), 3PL (3rd party logistics) firms, BPO
(business process outsourcing) firms, information/technology providers, and others.
These external partners are not just suppliers to source and monitor. They are also
extensions of the firm that can help satisfy the broader supply chain objectives such
as innovation, M&A, and sustainability. But this can only happen if they are properly
utilized and best practices are aggressively adopted!

This is where procurement has an opportunity to expand its role from the input
cost reduction owner to being an advocate for improving broader supply outcomes.
Procurement must influence internal and external supply chain partners to improve
the collective supply capabilities of all process participants.
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Taming the multi-tier problem Interestingly, advanced firms were concerned

because they were more outsourced, or they
“wanted to know what they didn’t know.”
Procurement respondents were more concerned
with cost and risk visibility.

Supply chain respondents were more concerned

with multi-tier supply planning and execution,
particularly in high-tech. Overall though, as
shown in the chart, while cost visibility was an
issue, supply assurance of all forms form the
majority of the multi-tier problem.

This multi-tier problem is multi-faceted, and

has many root causes (mistrust of trading
partners, lack of systems). One respondent said
the “inability to create communication channels
with more than first tier suppliers” was the
biggest problem.
As more supply chain processes (make, move,
store, service, transact) are outsourced,
visibility generally disappears. We asked study
participants what aspects of this issue were most
concerning to them.

Transformation and Leadership

A high procurement “quantity of spend management influence” during sourcing does
not imply a high “quality of supply management influence” across the end-to-end
supply chain.

Transformation and leadership requires influence. Dale Carnegie sold a lot of books
on this topic (75 years ago!). But being a high quality influence is just as relevant
as ever, especially in supply-side processes where single accountability is murky.
For procurement, standard benchmarks for direct spend influence hover around
90%, so things look great, right? But this spend influence is typically defined as
“procurement being involved during the sourcing process.”

What about all the other processes in the inbound supply chain? What type of
influence is exerted there?

We asked this question and found that although a slight majority of procurement
organizations owned the sourcing process, a minority of firms could say the same in
over a dozen other key process areas (Fig 2).
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Fig 2—Beyond sourcing, procurement has a relatively low level of influence and responsibility
for broader supply management processes

Even with “managing the matrix” as part of process leadership, few firms allow
procurement to drive key processes such as strategic third-party management/
innovation, inventory/supply planning, and more. Worse still, 30-50% of these firms
have no real procurement participation at all. Whether procurement hasn’t been
invited (or hasn’t delivered), this is clearly a problem.

So, let’s begin to unpack this problem and see how others are solving it. More
specifically, we will evaluate how those with the most advanced capabilities and the
highest supply performance are building the specific capabilities in the processes
above—and in the individual capabilities spelled out in Fig 4 (see pg. 10).

Direct Procurement Capabilities that Matter—

Beyond Strategic Sourcing
In this study, we assumed that organizations have already performed some level of
strategic sourcing in terms of analyzing their spend and rationalizing their supply
base. Some of the capabilities evaluated do support strategic sourcing (e.g., cost
modeling), but also go beyond it (e.g., using supplier collaboration for joint cost
takedown projects).
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We grouped the 11 capabilities we studied into four main groups, including

a ‘foundational’ category for performance management and then three
main process-centric categories:

I. Guiding and ensuring supply performance. Defining KPIs (and capability

metrics), targets, gaps, priorities, and projects that ensure balanced supply
scorecards at multiple levels – and that the supply performance is protected
via supply risk management.
1. Supply risk modeling/monitoring (“heat maps”, external intelligence
for predictive analysis or compliance monitoring, etc.)
2. Integrated performance management (aligning KPIs for business units,
product lines, spend categories, suppliers, etc.)

II. Design for Supply. Designing products and services to systematically tap
supply (internal or external) market power for the purposes of innovation, reduced
costs, sustainability, or customer satisfaction.
3. Innovation support (early supplier involvement; make vs. buy; crowdsourcing;
etc.)
4. Multi-tier cost modeling, forecasting, and intelligence

III. Designing the Supply Network. Designing and re-designing the extended
supply network to optimally position supply resources (inventory, tooling, logistics
assets, labor, etc.—whether internal or external) to meet multiple concurrent
objectives from diverse stakeholder segments.
5. Supply base segmentation to drive category management,
supplier management, risk/regulatory, etc.
6. Multi-tier raw material inventory positioning (including at suppliers)
7. ‘Tax-advantaged’ supply strategies

IV. Planning and executing supply against demand within the network.
Optimally matching supply to demand within the current supply network while
providing feedback to strategic supply processes for needed changes.
8. Translation of S&OP to a multi-tier collaborative supply plan
9. Dynamic supply allocations based on supplier rebates, penalties, capacity,
lead times, etc.
10. Performing “buy-sell” to buy on behalf of smaller suppliers
11. VMI support (JIT Warehouses, inventory visibility, etc.)

We asked study participants the extent by which they had adopted these 11
capabilities. They are shown below in Fig 4 for both the “top performer group” (i.e.,
the top quartile performers on the performance criteria shown in Fig 3) and the rest
of the study population.
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Fig 4—Top [quartile] performers have higher capability levels than peers;
capability levels still vary widely

It should be apparent that as the capabilities get more complex (from “basic”
supply base segmentation analysis at the top, down to “buy-sell” support and tax
sheltering, practiced by larger international manufacturers) the level of adoption
drops off and varies quite a bit within each.

A Model for Success

An operating model that features cross-functional and cross-firm alignment around
the balanced scorecard of supply.

Before diving into various process-specific capabilities, it’s important to mention

that one of the recurring themes was cross-functional and supplier alignment,
and this isn’t so much about specific organizational hierarchy. Although the top
performers had a slightly higher level of centralization via a single procurement
executive responsible for all direct procurement, the connectedness of procurement
to other groups and suppliers was what made a difference. Almost a third of the
“top capability” firms adopted a supply chain strategy/CoE (Center of Excellence)
group that drove improvements across procurement, operations, logistics, quality,
engineering, etc.—compared with only 6% for their peers.

The pace setters we interviewed aggressively pursue all paths to transformation,

not just purchasing-centric methodologies. They are happy to take the projects/
priorities and approaches adopted from anywhere (supply chain network design,
Lean/6 Sigma, sustainability, B2B information networks, etc.) if they have the
potential to unlock value. This is where supply chain centers of excellence prove
useful, not just in best practices benchmarking and transformation planning, but
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also in ensuring that the proper governance structures are in place (e.g., a
cross-functional supply risk council) and that measurement systems are aligned
from supply chain performance to spend/supply category performance to supplier
performance—even down to a purchased SKU level.

Some of these groups may be part of a separate profit center, and even a
separate fiscal entity (e.g., located in a tax advantaged country). But even without
this governance structure, procurement can merely use a well-run supplier
management approach to coordinate the priorities, projects, and capabilities of
different internal groups (risk, EH&S, quality, IT, engineering, logistics, etc.), helping
to drive them into the extended inbound supply chain in a coordinated way.

Case Study— HP’s PPS (Printing conflict minerals, etc.) and a deeper push
into western China.
and Personal Systems) business
unit is a good example of such Although the tier 1 supplier network has been
massively rationalized, it now creates the
cross-functional integration. challenge of orchestrating an equally massive
tier 2 and tier 3 supplier network to support
HP’s corporate head of direct procurement
the different “supply chain pipes” (click here
reports to the head of operations for PPS (who
for a description of these that include the Value
also serves as global CPO).
Added Pipe, the Low Touch Pipe and the No
Touch Pipe), or the proverbial “supply chains
HP is very advanced, but since 2009, PPS has
within a supply chain.” These can change within
used its “Supply Chain Optimization” approach
a product lifecycle and also be driven back to a
to align procurement with logistics and the rest
tier 2 component level.
of the multi-tier network with a combination
of improved processes and tools that not only
Luckily, HP has a strong competency in
reduced supply network complexity by nearly
managing a multi-tier supply network
one-quarter and direct suppliers by almost
with its buy-sell process (that we’ll touch on
50% (down to just over 1,000 for over $40B in
later).
spend!), but also supported other objectives such
as HP’s focus on supplier and environmental
responsibility (carbon emissions, workers rights,

“Supply Performance Management” and

“Supply Risk Management are hampered by poor IT support
Performance management and risk management are the two key capabilities
in “guiding and ensuring supply performance” shown earlier. They ensure that
scorecards are defined (at different levels for various stakeholders), aligned to
diverse priorities, and “protected” via a supply risk management program of some
sort. A supply market intelligence capability is also needed to help inform these and
other key processes (e.g., cost/price intelligence for sourcing activities).
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Unfortunately, the IT requirements to handle complex scorecarding, data

integration, and analytics are daunting. This area is a work in progress for even
the most sophisticated firms we talked to, with a strong prevalence of spreadsheets
and custom systems. Still, it’s one of the most active areas, and companies are
trying to at least implement the monitoring systems that can notify staff if there’s
a potential problem.

After the recession of the late 2000s, supply
risk management was a very popular corporate
program to identify potential supplier failures,
and also natural disaster risk and other threats
to supply lines. Risk types were defined,
“heat maps” generated, gaps identified, and
remediation steps executed—down to the
location and even part level.
But, risk is not a one-time phenomenon, and it’s
not limited to tier 1 suppliers. Many research
studies have shown that tier 2 supply is one of
the biggest problems, and many manufacturers
are trying to focus on supply chain ‘agility’ and
‘resiliency’ as a more systematic approach to
dealing with supply volatility and risk. This is not
a one-time supply risk project.
Rather, it needs to be systematically “baked” into
other supply-side processes such as extended
supply network design, buy-sell, supply planning,
and contract management.
One firm that has successfully addressed this
problem is a telecommunications equipment
manufacturer (see case study on page 17)
that set up an agility program for certain tier 2
components that are ‘risky’ and in need of agility.
This is defined by the parts needing shorter
lead times and/or higher upside capacity to help
mitigate the risk of demand side volatility relative
to customer services levels and corresponding
impact on product revenue/profitability.
We will dive into some of these details shortly,
but the basic lesson here is that procurement
is applying a more sophisticated segmentation
(similar to the Krajlic 2x2 matrix discussed
earlier) to not just tier 2 supply, but also
into ongoing supply planning and supplier
contracting (e.g., upside flexibility) and
collaboration (e.g., lead time reduction, VMI
planning).

Study Respondent: “Make sure that your risk mitigation plans are current!”

“Design for Supply” introduces supply market power when it

really counts—before the costs are locked in
When discussing the broadest sense of matching supply to demand, it’s necessary
to address how to best tap suppliers when it really counts—at the time of design
when innovation is practiced and productized (and when the majority of product
costs are locked in).

Study Respondent: “Start early. Inject yourself into the process at the earliest
possible time with sales and engineering. The more you know sooner, the sooner you
can engage the supply base.”
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For procurement, this is not just about being involved from the phase-gate
development process and then sourcing components from a single tier BOM (Bill
of Material) to existing suppliers on the approved vendor list. Developing strategic
supplier relationships AND supply market intelligence is critical to wring the most
innovation and value from supply markets. It’s the difference between being an
innovation-centric “gate opener” rather than just a compliance-centric “gatekeeper.”

Gate openers have:

• Senior executive support to set up the resources and processes for externalizing
such innovation. P&G’s Connect & Develop program is an obvious example,
but there are dozens of others: open innovation events, supplier innovation
centers, supplier study groups, co-location/rotation of staff, joint technology
roadmapping, etc.
• Strategic SRM programs that segment the truly strategic suppliers as customers
of choice, allowing deep collaboration on revenue uplift programs, cost
reduction projects, value analysis/engineering, and any types of joint capability
development.
• Pre-M&A work to identify innovative and game-changing suppliers. We
interviewed a Life Sciences manufacturer who called this “Invent to Order.” They
supported a key business strategy of embedding new technology into a ‘system’
that would essentially ‘give away’ the customized device to make money on the
consumables over the product lifecycle.

A deep competency in cost management to perform multi-tier cost modeling

which in turn requires multi-tier BOMs, process models, input cost libraries, price
forecasts, etc. The result is not just “should cost” analysis to support negotiations
and collaborative cost reductions. It’s also the target cost needed to make money
and the gap to “should cost” and “could cost” under different supply chain designs.
This competency is also needed on an ongoing basis because pro forma profit
planning can’t exist without input cost planning and forecasting. Who can do this?
The best CPG manufacturers can, and many bulk chemicals firms live and die on it.
One good example of a discrete manufacturer doing this is Borg Warner. You can
read a case study here.

Multi-tier Cost Management is Core Competency

Cost management is a massive topic that goes well beyond this paper’s scope,
but it’s important to address. Cost management should not be confused
with cost accounting. While the latter is useful to post PPV (purchase price
variance) values to the general ledger in a standard costing regime, its narrow
book value approach does not support the true activity and market-based
approach for evaluating total costs and procurement performance in today’s
volatile and global multi-tier supply chains.

This narrow measurement system bestowed on procurement is perhaps the single

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greatest detriment to the journey from purchasing to supply management. At

the best firms, procurement actively works with finance, operations, suppliers,
and a bevy of third-party providers (one study interviewee had over 25 cost
estimation providers in place!) to build a competency that supports multiple areas
beyond strategic sourcing events: customer quoting, make vs. buy analysis, and
collaborative cost reduction efforts with suppliers. Honda, Toyota, and John Deere
are masters of this.

Cost management is decidedly unsexy, but critical as a core competency for any
manufacturer. If you believe that all supply is in scope for supply management
(i.e., an internal manufacturing plant is evaluated like a supplier—just as a key
supplier’s factory might need to be managed with similar rigor as an internal one),
then product cost management will primarily be about supply cost management.
Therefore, procurement will have a key role to play.

This doesn’t mean procurement does the activities alone. Rather, it helps build
an organizational capability to perform cost management—such as during the
design process. A “design for cost” process is a critical capability that is often
associated with a “Design for Manufacturability & Assembly” (DFMA) methodology
that helps ensure that a product design can be executed, either internally or
at a supplier’s factory.

The same is true for the design of the supply chain itself. It must be advanced, but
it must be executable with the right resources: people, tools, management support,
etc. This is the subject of our next capability area.

Supply Network Design 2.0: Intelligent design

for a multi-tier network of supply
Designing a product based solely on existing components, suppliers, and supply
chain resources only goes so far. At some point, it’s necessary to re-think
how they design the entire multi-tier supply chain, with multi-tier cost modeling
and cost management.

HP is a great example to revert to. The company was very successful with
its “Design for Supply Chain” efforts in the mid 2000’s, but also with
its “Buy-Sell” capability. Buy-Sell has allowed HP to design a supply chain that
is heavily outsourced to ODMs and CMs, but they still retain supplier control
and collaboration with the tier 2 and tier 3 suppliers.

HP has been deliberate and adamant about retaining key engineering and
manufacturing staff (augmented by third parties) in core processes/technologies,
having them work alongside procurement and other supply chain staff to
continually and cross-functionally optimize the extended inbound supply chain.

Most people know the Buy-Sell program for how HP uses buying power to
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3
This multi-tier procurement model is
also popular with major automotive
and A&D OEMs who buy metal on
behalf of their suppliers. Honda
Trading of America sources 60-70%
of its steel, aluminum, and plastics
purchases on behalf of its supplier.
Similarly, ‘supply chain finance’
programs use a large buyer’s low
cost of capital to lower the trade
credit rates for suppliers (and get
some gain sharing too). P&G’s
recent program around this is
featured here.
negotiate with tier 2 suppliers, and then uses ‘price masking’ to keep favorable
pricing proprietary (so CMs/ODMs/competitors can’t lean on suppliers to demand
comparable pricing—and reduce HP’s advantage3).
But there’s more to this story. Although most companies don’t have HP’s buying
power, some of this model can still be emulated. But it requires appropriate
technology to orchestrate. It’s not just a simple drop-ship process, but rather
a multi-tier execution run in conjunction with a VMI hub (a ‘J IT warehouse’ that
replenishes the CM/ODM sites). The P2P process for direct materials is not a
simplistic Req-to-Pay process like that found in many indirect spend categories. It’s
a complex inbound supply chain execution process. Without the ability to execute,
the best sourcing and planning activities are for naught.
Beyond Buy-Sell, there are many other examples of capturing more of value by
designing a multi-tier supply network. Before sharing some, it is important to clarify
what we mean by “supply network design 2.0” and how it differs from the traditional
notion of supply network design. The latter has historically focused on using
high-level ‘steady-state’ optimization modeling tools to re-jigger plants and
warehouses within a firm’s internal supply chain. In contrast, advanced firms mix
and match the following elements of the network design, driving them upstream
into the multi-tier network:
• Determining optimal postponement points and inventory positioning that
may be owned by the supplier. When considering the use of massive contract
manufacturers and their respective network capabilities, many more options
can open up. One study interviewee viewed CMs as core to his global operation.
Another CPO actually set up an advisory council with the presidents of strategic
CMs to build alignment, transparency, and trust.
• Modeling critical upstream capacity to allow for multi-tier capacity planning and
contractually securing upside flexibility. HP’s Price Risk Management program is
a great example of optimizing these complex decisions.
• Sourcing transportation that optimizes the assets of shippers, suppliers, and
third-party logistics providers. Procurement has a key role in working with
the supply chain transportation department, operations, IT, and the logistics
suppliers themselves to ensure smooth implementation and perform ongoing
re-sourcing as needed.
Study Respondent: “Create an inbound logistics team to manage the process.
Maximize efficiencies through control of all inbound freight from supplier facility
to your plants.”
• Using tax-efficient supply chain techniques to augment a buy-sell model
by establishing a corporate trading entity in a low tax country (Switzerland,
Netherlands, Singapore, etc.) or special economic trade zones within a country.
This is very popular in consumer packaged goods, pharmaceutical, IT/Telecom,
automotive, etc. Given the regulatory scrutiny on such practices, these are
broad supply chain groups set up as separate fiscal entities that work hard
(accompanied by their tax advisory partners) to demonstrate a true arms-length
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business to regulators.
• Designing flexibility into the network through alternate parts, dual sourcing,
multi-tier/region buffer stocks, alternate tooling, contingency plans/playbooks,
product/platform redesign, lead time reduction, financial hedging, and
other methods.
• Segmenting the supply base on multiple dimensions (spend category, supplier
type, risk type, customer/demand type, geography, compliance requirements,
etc.) to “rightsize the processes” appropriately for each segment rather than
using a one-size-fits-all approach.

Once the supply network is generally implemented, you can move toward some of
the progressive techniques to match supply to demand and then execute on the
promised commitments.

Advanced Supply Planning: Beyond ‘Feeds and Speeds’

Align S&OP strategy intelligently into multi-tier execution—collaboratively
with suppliers.

Demand drives supply. In traditional supply planning, planners evaluate projected

time-phased material and capacity requirements derived from external and internal
demands and then check for the ability to execute (rough-cut capacity planning).
Raw material requirements might even be shared with suppliers to give them some
advance visibility. But, there are a few issues:

• What if the firm uses contract manufacturers? How can this information be
passed on to tier 2 suppliers? How do we share requirements through multi-tier
BOMs and routings?
• If demand is coming from several different upstream channels, is it wise to lump
all the requirements together as a dampened consensus demand signal to feed
further upstream (and to merely size the inventory buffers to hopefully absorb
fluctuations that inevitably show up)?
• What if some form of supply allocation rules that transcend simplistic fixed
percentages for allocating supply to different suppliers are necessary?
• How do we reflect reality with the supply plan in factoring in contractual
requirements with suppliers, such as penalties or rebates?
• How can we get early commitments from suppliers to ensure they can execute,
especially if there’s a demand spike (rather than only finding out when the PO
drops, or worse yet, when materials don’t show up)?
• What if forecasted supplier price increases are on the horizon when a contract
renews or price escalators take effect? How will that feed back into the plan,
especially if eroded product margins will change demand itself?
• Similarly, how do we deal with end-of-life issues when it’s necessary to run out
raw material existing stock (which might be sitting on the suppliers’ books)?

Most traditional supply planning processes don’t deal well with these issues, and
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readers will likely have additional industry- and company-specific ones to add. Even
if a firm has a strong S&OP (Sales & Operations Planning) process, procurement
and other inbound supply chain staff be integrated into this process, plus they
must also have the tools to deal with the above scenarios and bring the suppliers
in as well. If this doesn’t happen, the plan will not reflect reality on the ground, and
downstream problems will inevitably flair up.

Study Respondent: “Share your forecast, but also update regularly so a trend could
be noticed or problems on the supply side may be foreseen.”

Case Study: Telecommunications is a virtual “supply chain within a supply chain”

Equipment Manufacturer
We highlighted this firm’s agility program for
critical components earlier, but we’re more
interested in its advanced supply planning
capability. Although the firm felt that customer
collaboration and demand planning processes
made it best in class relative to its peers,
monthly forecast accuracy still ranged in the
60–70% range.
Accommodating demand variability by
systematically translating it to critical supply
requirements and then collaboratively working
with suppliers to assure the supply lines is key.
It focuses not so much on the 75% of SKUs that
the CM manages, but really on the rest, namely
the SKUs in the agility program that are tied
to high revenues/profits. The firm works with
suppliers to reduce lead times and contractually
ensure upside flexibility.
But it also uses an innovative software tool that
accommodates the segregation of demand
based on forecast variability, customer-specific
service levels, and other factors so that there
at a [tier 2] component level.
Therefore, whenever demand spikes (or drops)
outside these more fine-grained tolerances,
the firm and its suppliers are notified so
that appropriate decisions can be made. The
decision could be to do nothing, or it might
merely refine some of the planning parameters.
In more drastic cases, it involves changing
quantities, allocations, expediting, etc. And it
also potentially affects the supplier contract
and scorecard, which procurement must keep
aligned to actual performance (including
supplier responsiveness/flexibility).
Once this is done, the suppliers can do their
formal “forecast commits” via EDI, and then
the remaining execution takes place through
the VMI hubs and the supply chain execution
systems and linkage into ERP. This formal
and automated commitment process is key to
establishing the system of record for measuring
promised/committed vs. actual performance.
Supply risk must be baked systematically into other
supply-side processes, not performed as
a periodic or even one-off exercise.

More broadly, the overall process cited above creates a collaborative link between
planning and execution that helps to failsafe the execution by doing more robust
fine-grained planning—with better tools.

Of course, a lot of ongoing ‘plumbing’ is required to keep the execution systems

integrated (e.g., transportation and warehouse management, import/export
Re-inventing Direct Procurement | © Spend Matters. All rights reserved. 18 of 23

tools), and nearly all interviewees were in a never-ending ERP upgrade/

consolidation process.

And process execution costs should not be ignored. Based on 2013 process
benchmarks from The Hackett Group, typical procurement organizations allocate
nearly 70% more of their activity-based costs for transactional processes in direct
procurement than their ‘world class’ procurement counterparts. If you are spending
35–40% of your procurement labor and outsourcing on transactions rather than
10–20%, the opportunity cost of precious budget squandered on wasteful expense
vs. productive investment is a tragedy, especially given all the opportunities we’ve
laid out so far.

Implementation Success Factors

In the study, we expected that success factors such as top management
commitment, use of good tools, clear ROI definition, alignment with trading
partners, etc. would all be cited as critical. As Fig 5 shows, this was indeed true.

Fig 5—Top Enablers of Successful Implementations

But this is a complex area, and the “Other” bucket in Fig 5 is indicative of the
breadth of domain-specific enablers needed for success.
Re-inventing Direct Procurement | © Spend Matters. All rights reserved. 19 of 23

It was also clear that the pacesetters shared some common attributes. They were
motivated by the quest for ongoing value creation that made them aggressively go
after new cross-functional and cross-enterprise methods to unlock new value when
they hit a wall. This quest was not always pleasant, especially when old business
strategies no longer met new global business realities (see “LapCo” case study on
the next page).

There were also multi-year journeys that used external benchmarking to learn
the “art of the possible” before choosing which capabilities made the most sense
for them specifically. Finally, they rigorously executed and used the best people
and partners that they could find. They practiced what they preached in terms
of tapping supply market power, and used a broad ecosystem of providers from
the physical supply network players (e.g., CMs, ODMs, 3PLs) to supply chain
information network providers to support their IT requirements.

From an IT perspective, the scope of the inbound supply chain is so large that there
isn’t any single provider, nor even class of application that is supporting all
of the 11 capabilities that we’ve outlined. However, there is a clear trend toward:

• SaaS (Software as a Service) applications moving to “the cloud” to reduce

technology ownership costs and speed up innovation cycles
• Applications that can model and orchestrate “virtually integrated” multi-tier
supply networks in order to:
• Connect previously stovepiped processes (e.g., planning vs. execution;
PLM vs. SCM vs. SRM; etc.) like discussed throughout the paper
• Use information, analytics, and intelligence as a competitive edge to spot
opportunities and risks – whether just to keep supply lines flowing
(e.g., predicting adverse events) or to uncover hidden opportunities
• Utilizing secure and IP-protected supply chain information networks that provide
not just transactional document exchange, but also collaborative process
support and value-added services for content, analytics, and intelligence
as just mentioned
• Driving towards industry-specific and cross-industry standardization for process
definitions, regulatory compliance documents, data syntax and semantics
(master data and workflow data), measurement frameworks, and technology
infrastructure such as PaaS (Platform as a Service) and IaaS (Infrastructure
as a Service)

So, in essence, we’re talking about a trend towards near real-time extended supply
network design (and re-design) and execution. But, if we may be so bold, we
believe that the future will not just be about a broader cloud-based supply chain
application footprint, but rather a supply chain information network that also serves
as a supply chain PaaS where the platform provides a ‘loosely coupled’ set of
applications and value-added services integrated into the platform and network(s).
Think of this as a supply chain equivalent to what Salesforce has done with its
Force.com PaaS, but deeper in terms of process specificity. It might seem like a
stretch, but it’s closer than you might think.
Re-inventing Direct Procurement | © Spend Matters. All rights reserved. 20 of 23
Case Study: How Multi-Tier
Supply Management Helped
Save “LapCo” from extinction
A well-known PC manufacturer (that we
will call “LapCo”) was facing a crisis. It was
wildly successful with its consumer-facing
configure-to-order supply chain. However, by
the mid-2000’s, PCs, in the words of a senior
supply chain executive we interviewed, were
“starting to look like toasters with price points
at $500-750.” The firm found itself selling into
a cutthroat retail channel with demanding
customers (“NEVER miss an order” was a key
mantra), in addition to supporting the firm’s
enterprise business. So, cost became mission
critical to survival, and air-freighting laptops
from Asia to US-based final assembly locations
obviously was not a sustainable supply.
So, the firm outsourced fixed configuration
models to large contract manufacturers, but the
inability to strongly control upstream supply
not only had cost disadvantages, but also risk
issues as became evident in 2006-2007 with
battery shortages that cropped up. The firm
took a multi-pronged approach. First, it set
up a separate trading organization that would
perform a “Buy-Sell” model with items like
LCD displays and batteries, and also use tax
efficient supply chain methods (e.g., buy raw
glass and mark it up in low-tax/no-tax areas).
Although the tax benefit was felt to be ‘icing
on the cake’, the visibility and supply assurance
in this virtual model was the key. To wit: “we
didn’t have to stand up anything but supply/
demand signals.”
Of course, there were challenges. The make vs.
buy decisions were frequent—and critical. Every
platform entailed specific negotiations with CMs
on the BOM about who had the volume and
who would own the contract. As the executive
said: “We were careful with the categories and
where you need a category strategy. We had a
whole procurement department that had a pretty
cool continuity of supply strategy… this is easy
to screw up.”
The firm also worked with a third party
technology provider to build a multi-tier
platform (including multi-tier BoM) that
supported the virtual orchestration of demand/
supply signals, inventory visibility (none of
it held by LapCo), and total cost tracking
throughout the system from tier 2 suppliers to
various VMI hubs near the manufacturing sites.
From a logistics standpoint, the firm picked
the 3PLs, and then “set the network protocol”
that all partners used for execution. The firm
was very process-centric and procurement was
part of the core cross-functional design team,
helping the team not just with category strategy,
market intelligence, and sourcing execution,
but also helping to build standard component
libraries, performing supply-demand matching
(e.g., translating forward looking supply
pictures back to demand estimates and making
adjustments), and various other processes.
By overhauling the multi-tier supply network,
this firm was able to get cost competitive with
its peers and to survive the 2008-2009 recession.
While the industry remains hyper-competitive
and the firm’s future success is not guaranteed,
it has at least stayed in the game so it can play its
cards down the road.
Re-inventing Direct Procurement | © Spend Matters. All rights reserved. 21 of 23

Looking Forward
Hopefully, this report has illustrated the vast opportunity available to direct
procurement organizations and broader supply chain organizations seeking to
capture this larger prize associated with optimizing the multi-tier supply network.

Yet, finding the best place to start can be overwhelming. We recommend a

combination of top-down and bottom-up approaches. The top-down aspect
involves taking stock of the broader supply chain strategy (which we’ll assume is
aligned with business strategy) and translating the balanced scorecard of supply
down to the direct procurement organization, the key internal stakeholders, and out
to suppliers. This ensures partner alignment to the most pressing business issues
(revenue, innovation, sustainability, globalization, etc.) that must be reflected in
the supply chain priorities, procurement priorities, and hopefully supplier priorities.
Of course, use ‘organizational judo’ to align to the most critical priorities that have
C-level attention…and budget.

If nobody in the firm is taking enough proactive and deliberate leadership in

building the capabilities needed to execute on this balance scorecard of supply,
this is procurement’s opportunity to define a broader set of strategic supply
management services rather than just executing on a narrower cost-focused
set of sourcing services. As Tom Linton, the CPO and Chief Supply Chain Office
for Flextronics often says: “You have to lead the business or it will lead you.” Such
leadership requires internal and external benchmarking to show others in your
organization the size of the prizes that await—and then prioritizing the largest
capability gaps that can be meaningfully executed in a self-funded way.

From a bottom-up standpoint, map the prioritized opportunities to your “in flight”
projects and priorities to see where there is alignment (or not). You may end up
shifting things around or completely mothballing others. But, re-inventing direct
procurement is obviously not about business-as-usual. It’s about bringing best
practices and transformation to the broader supply management opportunity—with
benefits ascribed to all the process participants. If direct procurement organizations
can be advocates for improving strategic supply outcomes rather than just owners
of purchased cost reductions, and if they can learn from the leaders to apply
the best strategies, methods, and tools, the world will be very bright for them and
their organizations.
Re-inventing Direct Procurement | © Spend Matters. All rights reserved. 22 of 23

Appendix—Study Demographics
The study was conducted during June–August 2013 through a combination of
an online survey for quantitative analysis (n=122) and augmented by a set of
qualitative interviews with supply executives at large progressive manufacturing
firms who have chosen to remain anonymous due to the confidential nature of
many of the insights. The industry, functional, and size breakouts are shown below.
Study participants ranged from manager level up to the VP-CPO level.
Re-inventing Direct Procurement | © Spend Matters. All rights reserved. 23 of 23

Links and References

Commodity Price Management at BorgWarner Part 1: The Tip of the Iceberg in Supply Analytics
http://spendmatters.com/2013/05/02/commodity-price-management-at-borgwarner-part-1-the-tip-
of-the-iceberg-in-supply-analytics

HP Supply Chain - The concept of Supply Chain Pipes

http://h30507.www3.hp.com/t5/Supply-Chain-Management-Blog/HP-Supply-Chain-The-concept-of-
Supply-Chain-Pipes/ba-p/41203#.Ujy2CmRgZyY

Exploring A/P and Procurement Best Practices at P&G: Lesson 1

http://spendmatters.com/2013/06/03/exploring-ap-and-procurement-best-practices-at-pg-lesson-1

About the Author

Pierre Mitchell leads the procurement research activities at Spend Matters. He has
25 years of procurement and supply chain industry and consulting experience, and
is a recognized procurement expert specializing in supply processes, practices,
metrics, and enabling tools and services. Prior to Spend Matters, he was the first
industry analyst to put procurement research on the map for both AMR Research
(now Gartner) and later at The Hackett Group. He has also led numerous operations
and systems transformations at Fortune 500 organizations. Industry positions
include manufacturing project manager at The Timberland Company, materials
manager at Krupp Companies and engineer at EG&G Torque Systems. He holds
an engineering degree from Southern Methodist University and an MBA from the
University of Chicago. His recent writing can be found at:
http://spendmatters.com/author/pierre/

About E2open

E2open (NASDAQ: EOPN) is a leading provider of cloud-based, on-demand

software solutions enabling enterprises to procure, manufacture, sell, and distribute
products more efficiently through collaborative planning and execution across
global trading networks. Enterprises use E2open solutions to gain visibility into and
control over their trading networks through the real-time information, integrated
business processes, and advanced analytics that E2open provides. E2open
customers include Celestica, Cisco, HGST, HP, IBM, Lenovo, L’Oréal, LSI, Motorola
Solutions, Seagate, and Vodafone. E2open is headquartered in Foster City, California
with operations worldwide. For more information, visit: http://e2open.com