SAP Thought Leadership PaperStrategic Sourcing

The Strategic Sourcing ImperativeUsing Best Practices and Automated Processes to Achieve Sourcing Excellence

Table of Contents

4 Managing Procurement CostsBest-in-Class Sourcing Organizations Win Measurable Success

Sourcing Best Practices

Contract Management Best Practices

Supplier Management Best Practices

SAP Solutions – Enabling Sourcing Excellence

9 Conclusion

3

Strategic sourcing offers a proven way for organizations to drive cost out of procurement activities and cultivate efficiencies across the supply chain. Sourcing, contract, and supplier management can be improved using automated processes and applying best practices. Sourcing technologies such as the SAP® Sourcing OnDemand solution deliver even greater efficiencies by providing collaborative resources to manage procurement projects and increase cost savings.

4SAP Thought Leadership Paper –The Strategic Sourcing Imperative

STrATegiC SourCing ChALLengeS

Managing Procurement Costs

Implementing lasting, positive, and inte-grated change to business processes is crucial for organizations to meet strategic goals and gain a competitive advantage. Strategic sourcing has long been estab-lished as a valuable set of processes for companies that want to reduce procure-ment costs. Organizations are increasing-ly viewing sourcing as a critical function with management-level objectives that tie in to the needs of the wider organization. The recent fiscal crisis, which brought many procurement teams to the front lines of business, created impetus behind the emergence of the chief procurement officer (CPO) as an executive peer in large organizations.

While approaches to sourcing are evolving over time, the primary driver continues to be the need for cost savings. In fact, this is the top priority for CPOs and procurement leaders. Ardent Partners’ chief research officer, Andrew Bartolini, found that “when it comes to procurement pressures in today’s global enterprise, there are savings and then there is everything else.”1 A 2011 Aber-deen Group Inc. report reaches a similar conclusion.2 Lower-ranking priorities include the need to improve sourcing performance, mitigate overall sourcing risk, and improve supplier relationship management (see Figure 1).

Sourcing is an increasingly popular choice for supplementing corporate efforts to stem an issue that continues to plague most organizations: savings leakage. Savings leakage can be defined as savings negotiated by the procurement team versus savings realized. According to Aberdeen Group, the average organiza-tion stands to lose nearly 2.7% of its iden-tified cost savings through savings leakage. The resulting annual losses for enterprises are in the millions of dollars.3

Why and how does savings leakage occur? The trend toward globalization and expanded supply chains has im-pacted the enterprise in unexpected ways. For example, incidents around the world, such as changing economic conditions or unpredictable environ-mental disasters, may cause sourcing disruptions and inflationary pressures that affect operations, suppliers, and customers. Procurement organizations must now perform risk analyses that take such scenarios into account when making sourcing decisions.

More predictably, savings leakage can also occur when business units fail to follow company policy and, instead, make purchases outside of existing contracts at prices higher than those negotiated by the procurement team. This is a scenario over which procurement can take greater control. The challenge lies in developing a collaborative working model with the finance team and other functions within the enterprise that brings more spend

Source: Aberdeen Group – The State of Strategic Sourcing – Building a Context for the Next Decade, April 2011

Figure 1: Top Strategic Sourcing Priorities

under the management of the CPO and the procurement organization.

The increased emphasis on cost control that has come out of the most recent global recession has accelerated the growing trend toward centralized sourcing and automated processes. Many organizations continue to do much of their initial work in spreadsheets that must be uploaded into the sourcing systems rather than capturing all process steps within a sourcing tool at the start. This means that creating a request for proposal (RFP), running an online auction, or analyzing spend data must be repeated with each sourcing project, thus impact-ing the productivity and flexibility of the procurement team. Some organizations also lack centralized insight into prior and current sourcing activities, making it diffi-cult to arrive at the right procurement de-cisions. To address these challenges, enterprises must adopt automated, repeatable processes and invest in sourcing technologies.

Top-down directives to increase cost savings

Need to improve sourcing performance

Need to mitigate overall sourcing risks

Need to improve supplier relationship management

60%

40%

32%

19%

5 SAP Thought Leadership Paper –The Strategic Sourcing Imperative

Despite the focus on the growing im-portance of the CPO, procurement, and supplier relationships, only a small per-centage of organizations in a recent Ardent Partners survey have made the required technology investments (see Figure 2). These few organizations have begun to achieve basic visibility into sup-plier information management, perfor-mance management, and risk management. Without this technology, manual sourcing events such as RFPs can be time consuming and burden-some, often taking months to execute offline. Organizations also risk missing important compliance mandates by not having a single version of the truth for sourcing data.

BeST-in-CLASS SourCing orgAnizATionS Win MeASurABLe SuCCeSS

Creating a clear sourcing methodology and process up front goes a long way toward establishing sourcing best prac-tices and realizing significant, measur-able results. Aberdeen Group has identi-fied several performance metrics that distinguish “best-in-class” companies – the top 20% – from the rest.4 Each of these metrics has a bottom-line benefit. “Best-in-class” companies have achieved the following:

• 80% of spend under management – This represents the percentage of non-payroll spend actively managed by the procurement group. For every dollar of spend under management, Aberdeen has historically quantified cost savings between 5% and 20%. Top-performing enterprises place nearly 37% more spend under man-agement than all other organizations in the Aberdeen survey.

• 78% procurement contract compli-ance – This represents the percentage of procurements that have been made within existing negotiated contracts.

• 12% realized or implemented procure-ment cost savings – This represents the actual cost savings that are deliv-ered to an organization after supplier invoicing.

• 0.26% rate of savings leak – This number is compared to a 2.70% rate of savings leak for average companies.

The majority, 52%, of best-in-class organizations have enhanced their spend analytics capabilities. Spend analysis has become a critical strategic tool that can funnel valuable corporate spend data into improving the planning and execution of sourcing. This spend-ing intelligence can also be useful when negotiating with suppliers. It requires development of specialized capabilities, including an active spend analysis pro-gram and cross-functional collaboration with finance, product, and sourcing groups, as well as enterprise-wide visi-bility into spend across all commodities and services categories. Best-in-class companies are also 30% more likely to use sourcing technology tools than other companies. Sourcing automates multiple strategic sourcing processes, including event creation, electronic bid-ding, scenario development, and suppli-er optimization to help ensure that or-ganizations use analyzed spend data to negotiate effectively with suppliers.

Aberdeen Group statistics provide validation and a compelling business in-centive for organizations to improve the effectiveness of their sourcing, contract, and supplier management processes by adopting best practices to achieve a su-perior standard of performance.

Source: Ardent Partners – CPO Rising 2011: Innovative Ideas for the Decade Ahead, July 2011

Figure 2: Percentage of Companies with Automated Sourcing Management Functionalities

6SAP Thought Leadership Paper –The Strategic Sourcing Imperative

SourCing BeST PrACTiCeS

To help procurement professionals achieve best-in-class sourcing perfor-mance, Aberdeen Group has identified the following best practices (see Figure 3):

• Alignment of sourcing, contract, and supplier management activities and objectives with the greater organization

• Enhancement of spend analytics capabilities

• Automation of strategic sourcing pro-cesses, such as requests for informa-tion, quotes, or proposals (RFx) and online auctions

A key objective for the CPO and procure-ment team is to expand the percentage of corporate spend under their manage-ment and eliminate spend that is out of compliance. Thus, a sourcing best prac-tice to consider is fostering open collabo-ration between the procurement organi-zation and the business units. Such an approach can make it easier for depart-ments throughout an organization to re-quest and obtain support for sourcing activities. This can be accomplished through a corporate portal or through a sourcing tool that is universally accessi-ble. The procurement team can more readily leverage its expertise and align its efforts with the overall organization and ultimately increase the percentage of corporate spend under management.

Another sourcing best practice is to provide a centralized repository of all related sourcing documents that are ac-cessible to all stakeholders. Documents and records can then be used for spend analytics, repurposed for new projects, or leveraged for standard reporting pur-poses. This approach also generates additional visibility for the procurement department.

Automation of strategic sourcing pro-cesses, such as an RFx or online auction, through a sourcing solution can enable new cost-saving functionalities. For example, the reverse auction is consid-ered the most powerful way to drive down costs. However, it is nearly impos-sible to run a reverse auction without a sourcing tool.5 A sourcing solution can produce substantial benefits over tradi-tional software, such as e-mail, Microsoft Word, and Microsoft Excel, and it can help ensure the least risk and greatest success for an auction event.

ConTrACT MAnAgeMenT BeST PrACTiCeS

Without proper insight into its con-tracts, a company cannot effectively control its top or bottom line. Nor can it easily access the data needed to comply with legal and regulatory requirements. Lack of contract visibility affects most companies that have not implemented a contract lifecycle management (CLM) so-lution. A CLM solution can be used to maintain an electronic contract repository and make contract information more ac-cessible. Contract visibility allows employ-ees to proactively manage business relationships. Purchasing managers are able to see when agreements will expire and can renegotiate contracts ahead of time for more favorable terms. Accounts payable and accounts receivable employ-ees are able to see agreed-upon payment terms and pricing and match that infor-mation to invoices.

Source: Aberdeen Group – The State of Strategic Sourcing – Building a Context for the Next Decade, April 2011

Figure 3: Best-in-Class Sourcing Strategies

7 SAP Thought Leadership Paper –The Strategic Sourcing Imperative

CLM solutions can bring significant benefit to not only procurement depart-ments but also legal and sales teams. For example, close collaboration between the procurement and legal departments helps ensure that the proper terms, con-ditions, and clauses are leveraged when contracts are being authored. Effective contract management technologies help organizations implement savings programs more quickly by closely linking the sourcing and contracting processes. This includes having the line items, pricing, and any preapproved terms and conditions of an RFx cascade into a contract after an award decision has been made. Such tools can also enable companies to monitor compliance and re-source contracts before their expira-tion. Contract management technology can further drive value by linking buyer compliance to supplier terms and invoic-es, including proactive compliance tools in both electronic-sourcing and direct purchasing systems. If prespecified con-tract conditions are not met, purchase orders or invoices are flagged.

Properly deployed, CLM solutions can contribute to cost savings by reducing savings leakage and helping ensure that all purchasing activity is compliant with existing supplier agreements. CLM is in use at 63% of the organizations that

are identified as best in class. Aberdeen Group found that companies using CLM solutions have a 32% higher rate of procurement contract compliance than companies without this key enabling technology. If you do not measure and monitor contract performance, you cannot know whether you are actually realizing the contractual benefits. Having the ability to enforce both internal and ex-ternal compliance to your contracts is the only way to maximize and unlock identified opportunities. To address per-formance management, a typical CLM solution includes audit functionality and a scorecard, or key performance indicator, tracking against a contract and enables usage reporting from the back-end system.

CLM adoption is taken in steps, begin-ning with the establishment of a well-structured and readily searchable central repository of contracts. Reports can be generated from this repository to get an understanding of what goods and servic-es are being contracted, and with which suppliers. With the repository in place, or-ganizations can then focus on improving contract authoring and track the perfor-mance of contracts for compliance with negotiated prices, rebates, thresholds, and penalties.

SuPPLier MAnAgeMenT BeST PrACTiCeS

Procurement organizations, as well as other functions within the business, can achieve significant savings and cost avoidance by effectively managing the performance of suppliers. Supplier management technology leverages sup-plier-specific metrics to track, monitor, and analyze the performance of key suppliers. Procurement teams are able to analyze forecast savings, compliance, and delivery metrics and convert that information into meaningful data that can aid in the negotiation process during supplier renewal time.

Supplier management technology improves the process of adding new suppliers, provides continuous valida-tion of supplier-provided information, and reduces the cost of managing supplier diversity programs. The ability to manage against a range of supply risk–related elements is also enhanced. It is often possible to build a business case for supplier management purely on cost-avoidance savings, such as the time and effort that are required to collect and maintain supplier registra-tion details. However, organizations typi-cally consider a range of other factors, including the ability to improve capital management within the supply chain.

“When it comes to procurement pressures in today’s global enterprise, there are savings and then there is everything else.”Andrew Bartolini, Chief Research Officer, Ardent Partners

8SAP Thought Leadership Paper –The Strategic Sourcing Imperative

Organizations that leverage a common supplier management solution and portal for supplier registration, data validation, and continuous profile management can significantly advance the achievements of the procurement team within the busi-ness. Procurement teams gain benefits from automated data gathering, such as contact details and banking information that enable new discounting and working capital management programs. This data can drive and support sourcing strategy, supplier implementation, and overall program compliance.

Technology tools, such as spend analy-sis, contract lifecycle management, sourcing, and supplier performance management, contain the elements needed to help companies achieve greater efficiencies (see Figure 4). These include higher rates of realized and im-plemented cost savings, higher rates of spend under management, and lower rates of savings leakage. Best-in-class organizations are able to understand spend behavior in actionable detail. Sourcing and procurement teams can analyze data by supplier, category, time period, and geography, for example, and develop intelligence on corporate spend-ing. This intelligence can then be used to help ensure contract compliance and help the CPO and team negotiate better contract terms, resulting in improved cost savings.

SAP SoLuTionS – enABLing SourCing exCeLLenCe

To enable the strategic sourcing process, SAP Sourcing OnDemand delivers a flexi-ble project management solution, includ-ing a shared, online sourcing project plan and savings-tracking functionalities. Also, the solution provides extensive tools and templates to create and man-age requests for information, requests for quotation, requests for proposal (RFP), and online auctions, which help an organization effectively evaluate suppli-ers, negotiate terms, and award con-tracts. The solution supports strategic sourcing across all categories of spend, including goods and services.

Internal and external collaboration are key to the strategic sourcing process. SAP Sourcing OnDemand enables cross-functional teams to provide internal feed-back on sourcing activities. For example, stakeholders within the business can help develop an RFP or score an RFP submis-sion from a supplier. Externally, suppliers can communicate with the business through an intuitive, user-friendly inter-face to create a profile, submit bids, and receive feedback. SAP Sourcing OnDe-mand can also integrate with back-end enterprise resource planning systems, enabling procurement teams to compare contracts with supplier invoices and help ensure supplier compliance with negotiat-ed contract terms.

Figure 4: Best-in-Class Technology use

Source: Aberdeen Group – The State of Strategic Sourcing - Building a Context for the Next Decade, April 2011

9 SAP Thought Leadership Paper –The Strategic Sourcing Imperative

Procurement professionals are on the front lines when it comes to managing supplier relationships. How well they per-form has a significant and lasting impact on the overall success of the business. At the core of a modern strategic sourcing program is business intelligence, which can be obtained through improved collab-oration among procurement, finance, and other groups across the organization. With strong leadership from the CPO, these teams can develop a proactive plan to adopt innovative approaches, best practices, and proven technology solu-tions to automate strategic sourcing, con-tract management, and supplier manage-ment activities. Successful execution of this strategy can result in significant cost savings as well as greater competitive advantage for the forward-looking enterprise.

AuToMATe Your STrATegiC SourCing ProCeSS

Conclusion

Learn More

To learn more about how you can accelerate your strategic sourcing initiative, increase cost savings, and improve your sourcing performance with the SAP® Sourcing onDemand solution, please visit www.sap.com/sourcingondemand.

referenceS

1. Ardent Partners – CPO Rising 2011: Innovative Ideas for the Decade Ahead, July 2011.2. Aberdeen Group – The State of Strategic Sourcing – Building a Context for the Next Decade, April 2011.3. Ibid.4. Ibid.5. Gartner Group – Magic Quadrant for Strategic Sourcing Application Suites, February 2010.6. Aberdeen Group – The State of Strategic Sourcing – Building a Context for the Next Decade, April 2011.

Develop a proactive plan to adopt innovative approaches, best practices, and proven technology solutions to automate strategic sourcing, contract management, and supplier management activities – and realize significant cost savings.

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