Assessment of Excellence in Procurement Survey

2

Contents

Page

Introduction 3Background 4Key Insights 51. Executive Summary 6-82. Introduction 93. AEP 10-214. ROSMA© (Return on Supply Management Assets) 22-245. Key Findings 25About the author 26Sidebars 27Appendix 28

Introduction

3Introduction

The Assessment of Excellence in Procurement (AEP) survey has been run by A.T. Kearneysince 2000 and has achieved a global reputation for insight into procurement trendsaround the world.

So CIPS Australasia was delighted to have the opportunity of directly participating in the new AEP survey to bolster input from this region and, for the first time, get a realunderstanding of how professional procurement in this region compares internationally – and specifically to the USA and European approach.

From around April 2011, CIPSA members from many leading organisations throughoutAustralia and New Zealand kindly invested significant time in completing the survey questionnaire and I thank them for their efforts.

There is much to digest in this report, and many useful comparators for resource-pressedprocurement teams; not least being some rare indicative spend-per-head ratios. Much ofthe report can be used to support and business case in-house effort.

But there is also a warning. The idea that Australians are “fast-followers” of global standardsis not going to suffice for this country. Australia aspires to global standards as leaders notfollowers.

The three proven levers to improve procurement capability – People, Process andTechnology – have to be leveraged to enable the profession to perform to its full potential.

This report can help people justify the investment needed. There is much to do still.

Good luck.

Jonathan Dutton FCIPSManaging DirectorCIPS Australasia

Melbourne, October 2011

Background

4 Background

A.T. Kearney’s Assessment of Excellence in Procurement (AEP) is one of the most comprehensive studies in the supply management industry. Produced every three to fouryears and including global organisations from various industries, the AEP provides a broad,complete view of procurement’s current state and future trends. In 2011, CISPA partneredwith A.T. Kearney to better understand the Australian market as it compares to other markets.

The AEP study is based on A.T. Kearney’s House of Purchasing and Supply℠ framework.Roughly 200 companies, covering a wide range of industries have already participated in the study, with more than 500 expected to complete the survey within the next few years. More than 20 leading Australian companies, representing the full range of businesses,including energy, banking, insurance, construction and large-scale manufacturing (see figure 1), have already participated in the 2011 AEP. As a result, the insights identifiedhere will prove valuable to the Australian procurement community.

Key Insights

5Key Insights

The 2011 AEP study generated the following key insights, which will be discussed in further detail later in the paper:

1. Procurement’s reach and mandate has never been wider although a gap still existsbetween the procurement “leaders”—13 companies in the study with the top overallscores and world-class performance in several dimensions—and their followers. Forexample, 100 percent of leaders have had their “procurement mandates” communicatedto and accepted by their companies, while only 53 percent of followers, and 22 percentof Australian companies, have such a mandate. Thus, there continues to be considerableroom for improvement.

2. Procurement leaders still deliver as much as one and a half times the savings of followers although the gap is closing. When compared to Australian companies, leadersare delivering up to 1.8 times more benefits. Thus, understanding what procurementleaders do and developing strategies to improve procurement capability could offer significant benefits, both domestically and globally.

3. In 2011, the need to measure procurement’s “value” in order to justify continued investment grew in importance, after being identified as a major area in the 2008 study.

4. Leaders are, on average, twice as focused as followers on supplier relationship management (SRM) objectives. All leaders said reducing the total cost of ownership(TCO) is a primary objective as they move forward.

5. Procurement professionals today require significantly more skills than they did in 2008.Project management, change management and supplier development are high-demandskills that are consistent with procurement’s growing mandate and increased focus onSRM.

1. Executive Summary

6 Executive Summary

The A. T. Kearney House of Purchasing and Supply℠ framework forms the basis for the2011 Assessment of Excellence in Procurement (AEP) Study. This framework focuses oneight main areas to assess an organisation’s procurement, as outlined in figure 2.

The 2008 AEP foresaw procurement’s growing role in delivering significant value and making a major impact on their organisations’ business performance. To help organisationsmeasure the value of procurement, a new metric was developed and added to the 2011AEP study: A. T. Kearney’s Return on Supply Management Assets (ROSMA©), a new metricthat ties procurement performance to its financial impact, using CFO-friendly terms.ROSMA assists procurement in reinforcing its impact on the company’s wider financialhealth and helping it meet overall business objectives.

The 2011 AEP study identified five macroeconomic forces that will influence the globalbusiness environment and procurement over the coming decade. The procurement function must take the necessary steps to ensure it is ready and able to cope with a rangeof global forces, including globalisation, demographic shifts, new science and technology,natural resource constraints and rising activism (see table 1).

World-class procurement organisations—the leaders from our study—continue to generatesignificant value for their companies, despite the macroeconomic conditions and increasedcompetition. In Australia, for procurement to be most effective, it needs to be aligned toboth global developments and local strategic trends shaping the business environment(see sidebar: Strategic Trends in Australia).

At the organisational level, the 2011 AEP finds that procurement leaders are achieving cost savings of between 120% and 150% of those achieved by the rest of the companies in our survey, and 150% and 180% of Australian companies. They do this through superior sourcing efforts and by taking responsibility for an increasing portion of theirorganisation’s total corporate spend. They are deepening their procurement functions by

7Executive Summary

taking advantage of a broader mandate, employing dynamic 'value creation' strategies andimproving the factors and functions that underlie their procurement capabilities.

The average performance of Australian companies in both the AEP study and according toROSMA was in the third quartile—an average AEP score of 1.23 and a ROSMA score of 4.4.

However, there is a wide differential in procurement performance in Australia—AEP scoresrange from 0.46 to 1.95, and ROSMA scores range from 1.5 to 8.5. In other words, there is significant room for improvement in procurement management for many Australian companies, especially considering what has already occurred in global procurement.

One area for improvement opportunity that stands out the most for Australian market is operating process management. The average Australian company score is 0.84, in the lowest quartile. Overall, Australian companies can improve on their operating process management by implementing the following strategies:

■ Put standard processes in place for all procurement activities and track the level of adoption and use

■ Focus on continuous improvement in procurement

■ Increase collaboration across business units and with suppliers

■ Use lean and Six Sigma techniques to review or redesign procurement

■ Implement a formal competitive bidding and negotiation process with suppliers toaccount for market changes during the contract period to ensure maximum value

Table 1: Global Trends and The Impact on Procurement

Global Forces Impact on Procurement Procurement Responses

8 Executive Summary

Several other improvement opportunities identified for Australian organisations to enhancetheir procurement performance will be detailed in depth later in this paper.

On average these performance improvement opportunities, founded on a ‘stages of excellence framework’, can be used by most CPOs to develop their end-to-end procurement strategies, albeit completing the AEP framework on an individual organisational basis will provide a more targeted set of opportunities.

2. Introduction

9Introduction

Procurement is moving well beyond its traditional role as a bottom-line-focused function to one that is a true competitive differentiator driving organisational growth. Worldwide,procurement is steadily growing in importance and prestige, and CPOs have gained amuch stronger voice at the top levels. Today, as a result, more companies are aligning theirprocurement strategies with their broader corporate strategy.

To maximise the impact of procurement’s effectiveness, more firms are using adaptive procurement organisational models to maximise spend leverage, by balancing controlbetween central and local units, and meshing procurement with the organisational structure and philosophy. Procurement leaders have increased their sourcing’s strategicfocus by applying techniques and resources to manage an ever-increasing share of the total corporate spend base.

The procurement leaders in the AEP have addressed most of the major concerns in thefunction—poor spend visibility, unclear spend governance, incomplete sourcing coverage,limited focus on productivity, unclear results, poorly tracked key performance indicators(KPIs), and a failure to use lean process principles—and are moving forward into newareas to improve procurement’s performance and impact. Most followers, on the otherhand, are still working to close this gap.

In particular, the leaders have moved into analytics, an area where they can build a competitive advantage by generating new business insight services focussed on three critical areas: prediction and estimation, simulation, and optimisation.

The AEP and ROSMA framework provide the ability for organisations to better understandhow their procurement function works and allows an organisation to understand morefully the bottom-line impact of its procurement function.

10 AEP

A.T. Kearney’s AEP process benchmarks an organisation’s procurement performance usinga consistent, unbiased evaluation process that ranks it against leading global companies.

Companies are evaluated against the eight dimensions in A.T. Kearney’s House ofPurchasing and Supply Management framework, which includes 33 leadership practicesand 1000 sub-elements. From this, 13 global procurement leaders were selected as top performers.

AEP survey participants evaluated their own companies’ ability to meet various standards.Performance ratings provide participants with an assessment of how well they have adopted procurement leadership qualities and a comparison to leaders, regional peers, others within their industry, and similarly sized companies.

3.1 Overall AEP PerformanceThe combined score of all Australian firms that participated was 1.23, in the third quartileof results (see table 2). Compared to worldwide performance, only in supply managementstrategy, sourcing and category management, and supplier relationship management isAustralia above average. While first-quartile performance is obviously desirable for all companies, there may be only marginal benefits for moving up to that level, particularlyinvestment costs along with the smaller size and domestic focus of many Australian firms.In the parts of the Australian economy where global multinational corporations competeand their procurement functions are first - or second - quartile performers, procurement performance must match international competitors or else they risk surrendering theircost advantage.

3.1.1 World PerformanceWhen comparing Australian performance to the rest of the world, we see a significant gapbetween Australian companies and that of study leaders when it comes to many leadershippractices.

Worldwide, few organisations have formally and systematically adopted all leading practices for procurement leadership. Even among leaders, performance varies significantly, as does the size of the advantage they have over the rest of the companies in the survey. The 2011 AEP Study results show that nearly all companies have some roomto improve in procurement. Companies that have not yet (or only somewhat) adoptedbest-practice processes and policies could be missing out on large gains in business performance.

Table 2: AEP Scores by Dimension

Overall Performance

DimensionAustraliaScores

1.28

Overall StudyAverage

2.56

Top ScoreOverall

1.95

Top ScoreAustralia

1.26

GeographicRegion

Average

1.23

es bAEP Scorable 2:TTa y Dimension es b

Dimension

manceorerfall PerOv

Scores

mance 3

Australia

2.1

Average

1.28

Overall

2.56

Top ScoreOverall Study

Overall

2.56

Australia

1.95

Top ScoreTop Score

Average

6

RegionGeographic

2.1

3. AEP

11AEP

3.1.2 Asia-Pacific PerformanceRelative to the Asia-Pacific region, Australian organisations performed better on average in all leading practices except operating process management and knowledge and information management. In general, Australian firms lead the region in procurement performance. Still, the region as a whole trails European and American companies.Australian companies were found to have an overall AEP score of 1.23 (quartile 3), withbetween quartile 2 and 3 performance across the eight dimensions of the House ofProcurement and Supply and the ROSMA levers. The ROMSA score was found to be 4.4which compared well will followers but lagged the leaders (see figure 3). The need andareas for improvement are outlined in the ensuing paper.

As European and North American companies focus more on Asia-Pacific, regional procurement performance will likely improve thanks to these companies’ investments, and local competitors’ moves to keep pace. Australian companies will be required toincreasingly refine and improve their procurement performance to provide the most business benefits.

3.1.3 Australian PerformanceIn Australia, the gap between procurement leaders and followers is much smaller than at the global level. The study, however, does identify a handful of Australian firms whoseperformance far exceeds local peers. This helps to demonstrate an achievable local standard for Australian organisations to aim for, given local conditions.

We have identified several improvement opportunities that Australian organisations can use to boost their procurement function’s performance. Using a periodically updated“stages of excellence framework,” these opportunities can help CPOs to develop their end-to-end procurement strategies. (However, completing the AEP framework on an organisational basis will provide a more targeted set of opportunities.)

12 AEP

3.2 AEP Performance and Improvement OpportunitiesThis section takes a closer look at the leading practices and improvement opportunitiesthat can lift procurement performance into the top quartile. Though not exhaustive, it doesrepresent typical improvement activities.

3.2.1 Supply Management StrategyFor supply management strategy, Australian firms scored 1.38, high in the second quartile(between 1.33 to 2.00). This score and resulting improvement opportunities are brokendown into three leadership practices (see table 3).

Aligning procurement with corporate strategy is becoming more important, as is allowingprocurement to take a greater role in defining the overall business strategy. Australianfirms perform well in this area, but need to do more to maximise their impact.

The AEP study shows that 36 percent of the leading companies’ procurement chiefreports to the CEO or COO, compared to only 26 percent for followers. For these leaders,procurement’s increasing status has allowed it to take a hands-on role in directing the business plan, contributing to business-unit strategies and working with stakeholders toestablish expenditure targets.

All 13 leaders have plans in place to create synergies across business units by having procurement work closely with the business units; fewer than half of the remaining companies in the survey have similar plans. When it comes to aligning the individual elements of procurement strategy, the leaders focus on innovation, by improving the speed of internal product innovation and developing and accessing external sources forinnovation; minimising risk exposure; creating new business opportunities with suppliers;ensuring supply continuity; and developing an optimal global supply footprint. These helpnot only with managing costs, but also with the development of top-line growth strategies.

3.2.2 Organisational AlignmentFor organisational alignment, Australian organisations had an overall score of 1.28, placingit in the third quartile (scores from 1.01 to 1.45). This performance score and resultingimprovement opportunities are broken down into three leadership practices (see table 4).

Table 3: Supply Management Strategy Opportunities

Leadership Practice Improvement Opportunities

13AEP

The AEP study finds that most procurement functions follow a centre-led model, featuringcommon policies, approaches and practices for purchasing company-wide. Leading companies typically use a mixed, centralised-decentralised model for indirect materials and services, with purchasing responsibilities split by function or category. A centralisedcoordinating function reports organisationally to a geographic or business unit, but manages categories on behalf of the company as a whole.

It’s worth noting that procurement leaders and the rest of the companies in the study allocate more than 75 percent of their procurement employees to strategic activities, eliminating the historic advantage leaders once enjoyed. For Australian firms to maximise procurement’s impact, they must increase spend controlled to drive lower overall inputcosts from suppliers.

3.2.3 Sourcing and Category ManagementFor sourcing and category management, Australian companies had a 1.32 score, in the second quartile of performers (between 1.23 and 1.70). This performance score and resulting improvement opportunities are broken down into three leadership practices (see table 5).

Table 4: Organisational Alignment Opportunities

Leadership Practice Improvement Opportunities

Table 5: Sourcing & Category Management Opportunities

Leadership Practice Improvement Opportunities

14 AEP

Leading procurement organisations use many methods to tailor their sourcing and category management strategies, based on relative supply and demand power. Theseinclude changing the nature of demand, managing spending, seeking joint advantages with suppliers, and leveraging competition among suppliers.

For two decades the “Sourcing GemStone” and its six value drivers have been a mainstayfor procurement professionals. Beyond this, A.T. Kearney’s Purchasing Chessboard has alsohelped organisations improve their sourcing. The chessboard’s four broad strategies, 16approaches and 64 methods, based on the relative power of a company and its suppliers,help develop better category and organisational sourcing strategies (see figure 4).

By taking a rigorous approach to strategy development across categories, business unitsand geographies, leading procurement organisations consistently bring superior results,even as they stretch traditional sourcing boundaries. Sourcing and category managementmethods being used by leaders to reduce costs to a far greater extent than followersinclude product teardown, collaborative cost reduction, joint process improvement andprice benchmarking.

Leaders generally use a blended approach that leverages tried-and-true procurement strategies while also selectively applying leading-edge practices.

Despite the potential risks, companies continue to source from emerging markets as theyseek cost and margin improvements. To a lesser degree, they are also emphasising low-costcountries in pursuit of supply chain efficiency. Sourcing from emerging markets has continued with significant increases in all BRIC countries (Brazil, Russia, India and China),with increased sourcing from Brazil, Russia and especially India anticipated over the nextfew years. Sourcing from China, however, is likely to taper off due to local wage inflation

15AEP

(from a shortage of skilled labour), increased logistics costs as factories move inland toaccess labour pools moving from the agrarian sector, growing domestic demand, and likelyappreciation of the yuan.

Because of the size of the Australian market, companies will need to collaborate with suppliers in some product categories to provide the scale needed to justify the company-specific R&D investment. Thus, the most strategic suppliers will be innovation leaders intheir areas. Procurement leaders will need to manage these external relationships moreclosely as their suppliers become buyers, partners and potentially even competitors.

3.2.4 Supplier Relationship ManagementFor supplier relationship management, Australian companies had an overall score of 1.31, placing it in the second quartile of performers (scores from 1.23 to 1.70). This performance score and resulting improvement opportunities are broken down into sevenleadership practices (see the top four in table 6).

While procurement has traditionally focused on cost, the leaders today consider otherlong-term factors when selecting suppliers, including the potential to create additionalvalue and innovate, the ability to take on a greater role in the value chain, and the possibility of reducing exposure to supply disruption risks.

Few companies take a strategic approach to identifying their strategic suppliers althoughthose considered leaders use a range of criteria to segment and evaluate potential suppliers. With leaders placing significantly more importance on procurement's role insupplier-driven innovation and top-line growth, as against followers and Australian companies, there will be increased pressure for both to do so (see figure 5).

Table 6: Supplier Relationship Management Opportunities

Leadership Practice Improvement Opportunities

16 AEP

With this in mind, procurement leaders will have to move beyond traditional approaches,such as cost-based sourcing, to more collaborative efforts with suppliers that considerinnovation and operational excellence as paramount concerns.

Collaboration between procurement and suppliers will only increase in coming years as leaders develop cooperative networks of suppliers to improve the value of products.Those organisations that collaborate across the value chain are seeing significant benefitsby sharing relevant information as appropriate, employing cross-functional teams and usingonline collaboration technologies to their fullest potential. Also, leaders are increasinglyreaping the benefits of partnerships, which meet or exceed organisational goals at nearlytwice the rate of the followers in terms of supplier contributions to product and serviceinnovation, time to market for products and services, and increased innovation from thesupply base. Collaboration offers a powerful demonstration of how procurement canextend past its traditional bottom-line focus and help increase revenues and create marketadvantages.

Risk management is also growing more important as firms work to avoid supply disruptions. AEP study participants say they consider top-line and margin risk mitigation to be even more of an issue than bottom-line risk. As risk management comes to the forefront, procurement will have to keep in mind that the best price does not necessarilymean the best value.

Among leaders, 83 percent systematically use internal risk mitigation strategies to ensuresupply continuity, develop category management contingency plans, align supply securitywith their overall business risk tolerance goals, and define, measure and track risk management and supply chain KPIs.

17AEP

Leaders maintain constant vigilance against market disruptions which represent a risk to their businesses. They systematically employ a range of risk management strategies tomitigate those risks as best as they can. Furthermore, supply risk mitigation is a key area of leading organisations’ procurement strategy, and frequently a prominent metric for evaluating the function’s performance. Leaders are also twice as likely to track all dimensions of risk for their strategic suppliers, which better prepares them to deal withmarket disruptions (see table 7). Some companies have also begun factoring in long-termanalyses to measure megatrends such as population growth, standard-of-living increases,and the growth of alternate energy sources.

Australian procurement functions are in a strong position to leverage processes from elsewhere in the company. However, if these do not exist, they could take a leadershiprole in their development. During the 2011 summer floods on Australia’s east coast, manybusinesses were caught unprepared when their suppliers invoked “force majeure” clausesto limit their liability. It highlights just how important crisis management is for procurement.

3.2.5 Operating Process Management For operating process management, Australian companies averaged a 0.84 score, putting it in the third quartile of performers (between 0.68 to 1.04) over the four leadership practices (see the top three in table 8). Australian companies clearly trail overseas performance in this area.

Worldwide leaders aim to develop and maintain strong enabling capabilities and processesin the areas of performance, knowledge, information and human resources management tohelp ensure their ongoing success that appear lacking in the Australian context.

With new metrics constantly being introduced to track procurement successes, and leading-edge technology being used both internally and externally to reinforce suppliercontracts, track spending, manage demand and run advanced sourcing events, procurementhas the tools to improve operating process management significantly.

Table 7: Risk Management

Sources of MarketDisruption (risk)

Risk MitigationStrategies Employed

Risks DimensionsAssessed

Risk EvaluationMethodologies

18 AEP

While more companies are adopting sourcing technology, few companies have fully implemented standard transaction processes across all categories. In Australia, sourcingtechnology should focus on gaining increasing insight into product and supplier spending.Discounts from e-sourcing may be unattainable because of the smaller number ofAustralian suppliers that use it.

The search for talent and ideas to drive operating process improvement will likely need togo global since finding enough of such talent in Australia is difficult.

3.2.6 Performance ManagementAustralian companies have an overall score of 1.46 in performance management, in thethird quartile of performers (between 0.88 to 1.48) across the four leading practices (see the top three in table 9).

Table 9: Performance Management Opportunities

Leadership Practice Improvement Opportunities

Table 8: Operating Process Management Opportunities

Leadership Practice Improvement Opportunities

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Leaders use comprehensive approaches to measure supplier performance, examining factors beyond cost savings and service-level KPIs, including holding joint two-way evaluations.

Sixty-nine percent of leaders in the AEP regularly use supplier scorecards, compared to 31 percent of the rest of the study. Fifty-four percent use two-way supplier evaluations,compared to 13 percent of other respondents. It is clear that leaders aggressively measureprocurement performance to spur improved performance.

Also, leaders also more commonly initiate communications with underperforming suppliers as a basis for initiating corrective actions—a crucial step that reduces or avoidsfuture costs and offers an increased competitive advantage.

Performance management technology will help procurement increase its influence, as it can more accurately measure procurement’s achievements, as well as measure its trueability to mitigate risk, improve supply chain security, focus on sustainability, improve innovation and incorporate predictive measures. The more accurately procurement’s benefits are articulated—the better understanding of its role in profitability—the morelikely its influence will increase.

3.2.7 Knowledge Management In knowledge management, Australian organisations had a score of 0.95, placing it in thethird quartile (ranging from 0.67 to 1.00) among the four leadership practices (see table10).

AEP

Table 10: Knowledge Management Opportunities

Leadership Practice Improvement Opportunities

20 AEP

Most procurement organisations are working with CIOs to implement procurement technology. Still, many AEP respondents say they feel they are lagging best practices, mainly because their companies place a low priority on procurement technology.Improved technology ensures standardised data and allows spending to be measured by increasing how well procurement can code items and suppliers. It allows companies to have a greater level of visibility and more control over their spend. Overall, improvedtechnology should bring cost savings and improved results.

3.2.8 Human Resources ManagementFor human resources management, Australian organisations had an overall score of 1.26, inthe third quartile of performers (between 0.80 to 1.28). This area includes five leadingpractices (see table 11).

AEP leaders are doing a better job at formalising career planning, development andadvancement for procurement employees and taking a forward-looking approach to attract and retain the best talent to ensure future success. As there is already a dearth ofprocurement talent, this area will be crucial for improved procurement performance overthe long-term.

Leading procurement organisations are more likely to employ executive recruiters, workwith universities and use internal transfers to recruit and attract procurement talent. Andto retain this talent, leaders rotate high-potential employees through different functionsand geographies, continuously monitor compensation levels, and employ non-monetaryrewards to supplement more traditional incentives.

Table 11: Human Resources Management Opportunities

Leadership Practice Improvement Opportunities

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Leaders also stand out by offering substantial training, particularly for skills such as spending analytics, sourcing strategy development, and negotiations and contracting. As procurement’s standing grows, so will the need for a wide range of skills; Australian participants noted, in particular, change management, project management and, surprisingly, spend analytics (see figure 6).

Considering the overall skills shortage in Australia, retaining and attracting procurement talent will ensure strong procurement performance.

AEP

22 ROSMA© (Return on Supply Management Assets)

4. ROSMA© (Return on Supply Management Assets)

Necessity and technology are driving a shift in procurement performance management.Procurement is pushing away from past challenges toward a future with spending visibility, active project pipeline management, high spending coverage, validated sourcingresults and joint planning with stakeholders. As business leaders ask for more visibility, better governance and more effective KPIs from their supply management organisation,A.T. Kearney’s ROSMA brings new clarity, rigor and convention to procurement. ROSMAwas developed to provide a bridge for the CPO to engage the business community andhelp communicate the hard financial results procurement delivers.

This year’s AEP study was significant, since it is the baseline year for A.T. Kearney’s ROSMAscore, which shows the economic performance of procurement. ROSMA was incorporatedinto the 2011 AEP to develop a database of performance benchmarks that will help supplymanagement organisations around the world compare their ability to generate financialresults and determine ways to improve their performance.

The ROSMA framework has several key attributes:

■ A sustainable framework for procurement performance management

■ Insight into how-supply management can create value, enabling CPOs to set their agendas and optimise performance

■ A platform for holistic discussion with stakeholders

■ Language that resonates with the CFO

■ Performance benchmarks on a peer-to-peer basis or among industries

Fifty multinational companies helped develop and refine ROSMA. A.T. Kearney validatedROSMA by using the 2008 AEP study data from almost 600 companies. The 2011 data, with already roughly 150 companies, will add to the benchmarking capabilities of this newindicator of procurement economic performance.

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4.1 ROSMA FrameworkSimilar in concept to ROI (return on investment) or RONA (return on net assets), ROSMAis based on a simple formula that divides financial results delivered by the invested supplymanagement assets. Financial results delivered is calculated by combining key drivers:spend coverage, spend velocity, category yields, compliance and additional benefits.Invested supply management assets combine period costs and structural investments (see figure 7).

4.1.1 ROSMA ScoresThe ROSMA score measures the financial impact of supply management on the business.The AEP’s leaders scored an average 7.3, while the remaining companies averaged 4.6, and Australian companies scored a 4.4. Having a strong ROSMA score comes from strong,mature processes that improve the financial performance of an asset. AEP leaders have alarge advantage over other companies, including those in Australia (refer figure 7).

Australian organisations can improve their ROSMA scores by finding ways to improve theirperformance processes. AEP survey participants in the received improvement advice withtheir individual feedback reports (see Sidebar 2).

ROSMA© (Return on Supply Management Assets)

24 ROSMA© (Return on Supply Management Assets)

4.1.2 Improvements through use of ROSMAROSMA’s improvement options translate directly into improving the financial performanceof the organisation. As figure 8 shows, PPM transformation using ROSMA can bring majorfinancial improvements by focusing on improving spend coverage, velocity, category yields,compliance and procurement costs.

5. Key Findings

25Key Findings

The 2011 AEP Study finds that the procurement function must be a more strategic partnerthan in the past in order to bring the maximum value to the company. A comparisonbetween the 2008 and 2011 AEP Studies shows the following changes to key themes (see table 12):

As the AEP’s procurement leaders show, the function must align with the business needs of the company to reduce costs—it must be more than just a credible business partner, but also become a strategic co-contributor with a vital role in corporate success. Leadingprocurement functions have improved risk management, enhanced collaboration capabilities, integrated performance management, adopted leading technology andimproved talent management. They also transparently plan, set, track, measure and managetheir performance and share it with key stakeholders.

Procurement’s stature has expanded across the board. At leading companies, procurementhas earned a mandate to invest further in its capabilities to produce better results in anincreasingly complex environment. This is a mandate that all procurement functions—particularly those in Australia—will need to adopt to improve into the future.

Table 12: AEP Study Key Themes

StrategicDirection

Broader Mandate:

ValueAdding

Processes

Dynamic Value Creation Strategies:

Broader Mandate:

Dynamic Value Creation Strategies:

KeyEnablers

Capability Enablement: Optimised Processes and Resources:

2008 Themes 2011 Themes

26 About the author

About the author

Enrico Rizzon, the author, is a Partner at A.T. Kearney. His primary focus is in theProcurement & Analytic Solutions (PAS) and Operations Practices, particularly in the areaof efficiency driven profit improvement programs. Enrico has deep experience in theseareas, with over 20 years consulting and industry experience. Prior to moving intoconsulting he held various senior roles at Orica/Incitec Pivot including GM Transformation,GM Integration, Corporate Planning Manager and running various business units over a17 year career.

Sidebars

27Sidebars

Sidebar 1

Strategic Trends in AustraliaPrepared by Maurice Violani - principal at A. T. Kearney's ANZ Strategy Practice

What procurement trends does Australia face in the future?

Carbon tax. The triple bottom line—people, planet and profit—will become a fixture oftomorrow’s corporate environment. In particular, firms will have to adjust to economicsof carbon tax regimes. For procurement this means working internally and externally toreduce carbon footprints.

High Australian dollar. The higher Australian dollar is both a blessing and a curse forAustralian businesses. Selling goods in Australia from largely Australian inputs has neverbeen more difficult, as competition from cheaper overseas products increases at the sametime, overseas sources are at favourable rates.

Rise of Southeast Asia. China and India have long been major suppliers and customersfor Australian organisations. These countries will continue to be an important supplier,particularly in value-adding manufacturing and services, but other Asian countries such asIndonesia and Malaysia will become more viable alternatives as Chinese and Indian costsincrease.

Integrated regional supply chains. The high Australian dollar and Asia’s rise willincrease the regionalisation of manufacturing, with many Australian organisations andsubsidiaries of global players making decisions to optimise their overall supply chainacross the Asian region. In practical terms, it means relocating supply chains to cheaperlocations and constructing supply chains and networks of suppliers to serve a widerregion in a seamless, lower-cost, more flexible way than ever before.

Sidebar 2

ROSMA Improvement Example: VelocityAustralian companies ranked in the third quartile for velocity. One aspect of velocity is thevolume of executed initiatives. Let’s look at their attributes and possible improvementopportunities.

Improving cycle-time data. Australian companies can increase velocity by bettermeasuring, capturing, analysing and reporting cycle time data. Efficiently addressing spendwill increase the chance of higher financial results delivered.

Using e-tools. What percentage of spend is addressed by e-tools? eSourcing is just onestrategy that can speed up the sourcing process, increase the number of sourcing eventsand increase procurement’s reach.

Lowering cycle times. Working to reduce average project cycle times will increasevelocity.

28 Appendix

Appendix

The following additional figures have been extracted from the CPO 100 presentation delivered in August 2011.

29Appendix

30 Appendix

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About the author

31

© Enrico Rizzon. Licensed to CIPS Australia Pty Ltd

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