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Category ManagementAdvanced Diploma

in Procurement and Supply

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Purchasing: the traditional view • Purchasers are not involved until an actual, real need is

presented to them by the user. They remain involved only until the need has been fulfilled and paid for.

• Purchasers have little contact with or involvement in user functions’ planning and scheduling, and play a service role to them, perhaps as a sub-function of finance.

• Purchasers have very little influence. • Purchasers’ freedom to make decisions is very limited,

and tends to be focused on individual transactions.

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A simple purchasing cycle

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Non-strategic procurement• Managing the organisation’s spend• Furthering the organisation’s strategies• Maximising value added or released• Minimising total cost of ownership• The end-to-end acquisition process

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Procurement takes over where sourcing leaves off

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Strategy

• Plan a methodical, justified, resourced sequence of steps towards explicit,

measurable targets

• Ploy a move in a competitive situation that will gain an advantage over a

competitor

• Pattern consistency, coherence and identity in the organisation’s actions

• Positionthe fit between the organisation and its environment

• Perspectivea (unique) worldview and interpretation of events and conditions

A useful strategy will advance the organisation in respect of one or more of Mintzberg’s ‘5 Ps’:

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Tactical purchasing/strategic sourcingTACTICAL PURCHASING STRATEGIC SOURCINGTakes place within the department Takes place within the organisationReports to lower-level management Reports to top managementIt has a short-term decision frame It has a long-term decision frameIt is mechanical and reactive It is creative and proactiveIt makes narrow demands on purchasers It requires broad knowledge and skillPeople process documents People create informationRoutine acquisitions rank equally with novel ones

Resources focused on novel acquisitions

Make this transaction good Make future transactions betterPurchasers are focused on their internal customers

Relationships with suppliers and value for end-users are important

Suppliers are antagonists Suppliers are resources

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• Aggregationreduces price per purchase and overall costs by reducing the number of transactions

• Categorisationclassification of organisational requirements to promote expertise, market

knowledge and innovation

• Outsourcing achieves value from third-party expertise and from reallocating resources internally

to core concerns

• Relationship managementfacilitates information and knowledge exchange with suppliers and key stakeholders

• Standardisationa standard set of policies and procedures for individual users and cross-functional

teams

Strategic procurement’s five key tools

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Categories of suppliers• Transactional suppliers

The organisation has little or no ongoing relationship with them.Every supply is on a one-off basis with no expectation of a repeat.Switching is easy.

• Performance-managed suppliersThe focus is on tactical outcomes rather than on building a long-term

relationship.

• Relationship-managed suppliers Seen as having some strategic value, so are nurtured.

• Strategic suppliers Business critical. They cannot be replaced, they account for a large proportion of spend,

or they provide highly volatile (prone to risk) supplies.

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Sourcing strategies• Crowd sourcing• Dual sourcing • Ethical sourcing • Global sourcing • Insourcing• Low-cost country sourcing • Multi-sourcing • Outsourcing • Single sourcing • Sole sourcing

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• Category management is an organisational philosophy that permeates and organises its activities and attitudes

• Strategic sourcing is a focused, technical, tool-driven supply chain activity occurring within the strategic decision frame

Category management and strategic sourcing

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Strategic sourcing steps• Profile the category• Develop the sourcing strategy• Identify suppliers• Evaluate suppliers• Negotiate and award the contract• Transition to the supplier and implement the contract• Monitor supplier performance

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Transactional purchasing

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The strategic approach to sourcing

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Increasing relationship strength between two organisations

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Categorising expenditures• Who specifies the product?• Why is it needed?• How is it authorised?• How is it ordered?• Who supplies it?• How is it received?• How is it paid for?• Where is it stored?• When is it used?• How is it disposed of?

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Cost analysis• Costs related to the organisation’s level of activity

• Variable costs – depend directly on the level of activity• Fixed costs – not affected by changes in the level of activity• Semi-variable costs – have both fixed and variable elements• Step costs – fixed costs that increase in steps

• Costs attributed to specified purposes• Direct costs – directly linked to a specific unit or aspect of the

organisation• Indirect costs or overheads – spread over a number of identifiable

units or aspects

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Product and period costs• Product costs

costs identified with the organisation’s products and services

• prime cost of production – the total of direct materials, direct labour and other direct costs

• production overhead cost – the total of indirect materials, indirect labour and other indirect costs of production

• Period costs costs treated as expenses incurred during the period and

not related to product or service delivery

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Labour costs• Payment on time spent

Employees are paid for the hours they have worked at an hourly rate. If they work no hours, they receive no pay.

• PieceworkEmployees receive a fixed amount for every task completed,

regardless of the time taken. Working on commission involves receiving a fixed percentage of every sale made.

• Salary paid at the end of a specified time periodEmployees are expected to work a notional number of hours

and to complete the tasks assigned to them.

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ABC (Pareto) analysis

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O’Brien’s version of Kraljic’s portfolio analysis matrix

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Massin’s CSSB matrix

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• They come from a similar supplier source• They have similar production processes• They have a similar use or purpose• They have similar material content• They have similar specifications• They employ similar technology

Massin’s sourcing groups with six criteria

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A section of a sourcing tree

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Bartolini’s scorecard• Internal and organisational factors

aimed at filtering out any spends that will be difficult to fit into a category approach

• Market factorsbased on Porter’s five forces, and examines supply market competition

• Supplier factorsdescribe the capabilities and attributes of the suppliers in the specific

category

• Procurement factorsfocus on the procurement process and how the use of a given category

impacts the organisation and its outcomes

• Category-specific factorslook at the unique attributes of the category that will determine

suitability for category approaches

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• Value chain positioning (VCP)the process by which the organisation positions itself in the

market to reflect a margin-cost analysis of all the supply and value relationships within their market

• Market positioning analysisthe organisation comes to understand the value creation and

cost aspects of its own supply chains and how this benchmarks against competitors

• Extended relational competence approachthe organisation creates supplier and customer relationships

that are underpinned with a solid idea of how value is created, what contracts should look like, how to install efficient boundaries, and how best to exploit core competencies

Strategic procurement implementation

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The CIPS model (part 1)

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The CIPS model (part 2)

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Vision, mission and values• Vision

the end-state that the organisation wishes to achieve

• Missionwhat the organisation exists to do now and into the

foreseeable future

• Valuesthe guiding principles and priorities that determine what the

organisation will and will not allow itself to do

• Strategieslong-range plans for furthering the mission and approaching

the vision

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• What the organisation needs from its purchasing and supply management function

• How the function is positioned within the organisation• Its governance structure• Its objectives and activities• Ideal capacity, capability, competence, and structure characteristics• How it manages internal customers, users and buyers’ needs• Standing policies over eg rationalisation, standardisation, value management,

supplier development, corporate social responsibility• Key processes supporting the organisation’s control framework• Performance monitoring, benchmarking, continuous improvement• Management of supply markets

Purchasing and supply management strategy

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Process and competence analysis• Constituency mapping

map stakeholders onto the organisation’s structure, along with their roles, involvement and requirements

• Competency mappingevaluate the competencies of all those involved in purchasing and supply

management

• Awareness and understandinghow well do owners, directors and senior management colleagues understand

the purchasing and supply management function?

• Knowledgeestablish who knows what within the purchasing and supply management

function, both technical and organisational information, what problems are caused by any information asymmetry, and how to fix them.

• Controlsall systems, policies, procedures, and controls should be analysed and

evaluated

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Acquisition – pre-contractStage 1 Identification of needStage 2 Procurement planStage 3 Marketplace solicitation and developmentStage 4 Evaluate and select suppliersStage 5 Receive and evaluate offersStage 6 Create contractual relationship

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Acquisition – post-contractStage 1 Contract and relationship managementStage 2 Receipt of product or serviceStage 3 Asset managementStage 4 Lessons management

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The OGC procurement process model

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• Develop the evaluation strategy

• Ensure end-users and stakeholders are involved in the specification

• Determine the procurement route

• Plan the purchase, ensuring all tasks and deliverables are identified in sufficient detail to allow progress to be tracked and managed

Requirements definition and purchasing strategy

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Contract preparation• Does the contract accurately represent the requirement?• Have stakeholder requirements and views been taken into

account?• Do potential providers have realistic solutions to meeting the

requirement?• Does the organisation have the necessary skills and resources

to meet its obligations under the contract, and for managing the contract?

• Have you had appropriate, expert legal advice?• Has the future contract manager been involved in the

process?

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Strategic sourcing Stage 1 Positioning the function for strategic sourcingStage 2 As-is analysisStage 3 Mapping the organisation’s supply chainsStage 4 Consolidate data and generate optionsStage 5 Option selectionStage 6 Sourcing plansStage 7 Identifying new suppliersStage 8 Evaluation

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As-is analysis• Customer and business requirements

what do our customers need and what does the organisation need?

• Spend analysishistorical usage analysis of goods and services; supplier positioning;

supplier historical analysis; transaction cost analysis; criticality of products and services

• Future spend analysisforward/expected usage of goods and services; trends in the market

• Market analysisassessment of market capability; analysis of power dependency in

supply chains; analysis of individual marketplaces; supplier preferencing; relative positioning of your organisation; supply chain cost analysis; the nature of the market and appropriate sourcing strategy; potential and actual size of the supply base

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The AT Kearney strategic sourcing model

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The AT Kearney 7-step modelStep 1 Profile the categoryStep 2 Select the sourcing strategyStep 3 Generate the supplier portfolioStep 4 Select the implementation pathStep 5 Negotiate with and select supplierStep 6 Integrate the supplierStep 7 Monitor the supply market and supplier

performance

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The strategic sourcing gemstone

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• Segment the spend• Determine category strategies• Set up the governance for the categories• Execute the strategy and supporting projects and

processes• Monitor performance

Mitchell’s category management framework

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The CIPS category management model

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The CIPS model• Phase 1 Kick-off

• Step 1 Initiate/prepare

• Phase 2 Prepare strategy• Step 2A Identifying opportunities• Step 2B Prioritising opportunities• Step 3 Prepare/present category strategy

• Phase 3 Deliver strategyStep 4 Implement category strategy/Change

recommendationsStep 5 Maintain

• Phase 4 Align and improveStep 6 Improve and enhance

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The O’Brien model

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O’Brien’s processSTAGE 1 INITIATION

STAGE 2 INSIGHT

STAGE 3 INNOVATION

STAGE 4 IMPLEMENTATION

STAGE 5 IMPROVEMENT

Starts with a ‘Kick Off’ workshop

Starts with a ‘Situation Analysis’ workshop

Starts with a ‘Strategic Options’ workshop

Starts with an ‘Implementation’ workshop

(No workshop)

Ends with a Stage Gateway Review

Ends with a Stage Gateway Review

Ends with a Stage Gateway Review

Has a mid-point Stage Gateway Review

(No Stage Gateway)

Realises benefits

(No specific benefits)

(No specific benefits)

Realises benefits

Realises benefits

Stages 1–3 take 1 to 3 months, typically Takes 2 to 6 months, typically

Takes up to a year, typically

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Pick a model and stick with it• Only one process should be in place within an

organisation• Everyone should understand it and actively embrace it• The language of the process should be relevant to the

organisation• The process should broadly follow and reflect the

fundamentals of category management, change management and best-practice business improvement

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Skill profile for category managers SKILL, ABILITY OR CHARACTERISTIC RANKING IN 2010 RANKING BY 2015Strategic thinking 24  1Teamworking 11  2Supplier market analysis 19  3Influencing & persuasion 12  4Total cost of ownership analysis 23  5Integrity & professionalism  1  6Listening  5  7Purchasing category strategy  6  8Market knowledge  8  9Change management 50 10

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STRATEGY RELATIONSHIP MANAGEMENT DOMAIN EXPERTISE

• Deep experience and formal procurement process and skills qualifications

• Strategic thinking

• Stakeholder credibility and relationships

• Supplier credibility and relationships

• Change management expertise

• Cultural contexts (there may be more than one)

• Consultative selling skills

• Technical skills requirements for the category and experience of the complexity level

• Sufficient (category) supply industry experience

• Detailed business experience in order to understand requirements

The category management skill set (White)

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Snell’s category manager skill set• Change management• Commercial awareness• Communication• Creativity• Flexibility• Leadership• Market knowledge• Persuasion• Procurement skills• Tenacity• Vision

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Financial management questions • How does financial resource use break down over the organisation? Which

business unit and cost centre accounts for what? Are there opportunities to aggregate spend and gain efficiencies and buyer power?

• What are financial resources buying? Are they paying for pointlessly differentiated inputs? Could they be more effective if used on commodities?

• What are the trends in spend?• Which assets add most value? Which have the most strategic value?• Are financial resources gaining value for money? Are they being directed to the

most value-adding, efficient and effective people, processes, suppliers and so on?

• How flexible is spend? How much is locked in to contracts? On what terms? What can be renegotiated?

• Where does orderly financial resource use break down and why? Where are the maverick spends and budget variances?

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• Analysis of the cost structureall cost elements should be readily identifiable

• Cost estimatingfor each part of the cost structure

• Discountingexpressing future cost commitments in a common time

frame, ie their present day (present value) equivalents(This is not the same as adjusting for inflation)

Three basic principles of wholelife costing

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• Customer relationship management• Customer service management• Demand management• Manufacturing flow management• Order fulfilment• Product development and commercialisation• Returns management• Supplier relationship management

The supply chain as a collection of processes

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• Materials and servicesthe actual building blocks of the supply chain, the inputs into each link

that are processed to create its outputs

• Informationthe organising structure of the supply chain, letting every part know

what is expected of it

• Financethe compensation exchanged through the supply chain that rewards

earlier stages for the parts they have played in providing inputs to later stages

• Valuethe point of the chain is to create value for the participants in the chain.

Value should flow from step to step to step, growing at each stage

The supply chain as a system of flows

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Fulfilling the consultancy role• Attitude – how they approach the work• Skills – what they can do• Knowledge – what they know• Differentiation – what unique benefits they bring to the work• Currency – how up-to-date they are• Client focus – how they see service and the wider social

interest• Ethics – their positions on standards, trust, confidentiality,

impartiality and objectivity• Cost-effectiveness – their flexibility, quality and value for

money

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The purpose of risk management • Objectives are more likely to be achieved• Damaging outcomes will either not happen or will

become less likely to happen• Beneficial outcomes will either be achieved or will be

more likely to happen

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Negotiation• Purposeful persuasion

each party tries to persuade the other(s) to accept its case or see its viewpoint

• Constructive compromiseall parties accept the need to move closer to the other

position(s), identifying the areas of common ground where there is room for concessions to be made

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Emotional intelligence (EQ)• Self-awareness

• Self-regulation

• Motivation

• Empathy

• Social skills

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Influencing: not negotiation• Influencing is not a single event or series of events – it is a

continuous process.• Influencing need not be an intentional (or even conscious)

process for either or both parties.• Influencing need not involve conferring, or two-way

presentation of arguments. • Influencing need not end with an explicit joint agreement.• Influencing need not involve compromise or movement by

both parties to reach middle ground.

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Techniques for building rapport• Subtly matching or mirroring the other person’s posture, body

language and/or volume, speed and tone of voice• Picking up on the other person’s use of technical words,

colloquialisms and metaphors • Picking up on the other person’s dominant way of

experiencing and expressing things• Listening attentively and actively to what the other person is

saying• Finding topics of common interest, and emphasising areas of

agreement or common ground where possible• Remembering and using people’s names

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Resolving conflict (Thomas)

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Collaborative relationships

• Product and process information exchange• Operational linkages• Co-operative definition of norms and expectations• Relationship-specific adaptations to products, processes or

procedures

Collaboration implies integration and adaptation by both parties, in terms of:

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Skills of the change agent• Vision and leadership• Managing strategy• Managing processes• Project management skills• Team-building skills• Interpersonal skills• Personal flexibility• Commitment, perseverance and stamina

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Situation, target, proposal (STP) • Define the problem or issue you are trying to understand

• Brainstorm and list everything you know about the current situation as regards the problem or issue as you have just defined it.

• Sort the results from the brainstorming into some suitable categories.

• Decide on the outcomes, positions and resolutions you want to result from this process • These are the target. Targets should be well-defined and ‘SMART’.

• Decide on an action by which you will achieve the target• This is the proposal.

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Procurement questions• What have we bought in the past and what do we need in the future?• How much did we buy in the past and how much do we need in the

future?• Who buys this and why and how do they use it?• Are we buying the right things?• What scope is there to buy something different that fulfils the same

need?• Are there any opportunities for improving efficiency in the way we buy

and use this category?• Are there any technological advances now or coming that will present

opportunities to us?

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O’Brien’s Day One analysis

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Past demand data• Seasonality is a consistent pattern tied into a particular timeframe

• Products and services behave in different ways at different stages in their lifecycle; adoption, maturity and decline all have in-built trends

• Business cycles are longer-term patterns characteristic to many industries; when they coincide they can form a general economic cycle

• Events are self-contained shocks that can cause a substantial change which may or may not be permanent, long-lasting or short

• Noise is unexplained behaviour and random fluctuations in behaviour that is by definition unpredictable and cannot be forecast

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RAQSCI requirementsREQUIREMENT CONCERNED WITH…Regulatory Complying with laws and regulationsAssurance of supply The availability and accessibility of products and

services when they are neededQuality Consistency and fitness for purpose of products

and servicesService The way in which products and services are

supplied; support activitiesCost Costs and prices, including terms and mechanismsInnovation Continuous improvement for the organisation eg

to reduce costs, increase value, or create competitive advantages

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Understanding the landscape• To formulate an analysis of the spend, category development and so on• To see how the organisation actually operates in terms of its buying

behaviour and the strength or weakness of the contracts it holds• To enable review of structures, systems and processes within the

organisation pertaining to buying so that new ones can later be planned• To assist in understanding what stakeholders currently want and need• Building engagement within the organisation’s stakeholders to positively

effect category management within the organisation• To understand the enormity of, and highlight the improvements that can be

made through, the changes that categorisation can bring• To assist in the development of necessary exit management strategies from

existing contractual arrangements• To identify quick wins where value can be extracted early or cost reduction

made

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• To determine the value extracted from existing contracts by virtue of the terms applied

• To ensure that there is compliance across the organisation to the terms and that value is being gained and/or liability is not being attracted through misdemeanour

• To ensure that default remedy and exit clauses are understood if there are to be changes to the contract through negotiation or re-competition

Understanding terms and conditions

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Gathering data on marketsDATA POTENTIALLY WORTH COLLECTING POTENTIAL DATA SOURCES• Market conditions and the factors

driving them• Trends• Suppliers operating in the market now• Potential entrants to the supply

market• Market competitiveness• Technology trends and emerging

technologies• Market segments and niches• Potential opportunities• Potential threats• Our power and share of spend in the

market

• Industry publications• Interviews and discussions with

suppliers• Interviews and discussions with

experts• Financial reports• Media reports• Consultants• Public indices (eg commodity prices)• Trade shows

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• If we are using generic products or services the buyer has more ability to swap out and change products and suppliers in the market place.

• If we are using tailored products or services, then the tailoring will come at a cost to us in respect of eg intellectual property rights over specifications and plans which will be protected legally.

• If we have chosen to deploy custom-made products and services, then there is only one supplier and the uniqueness is the key to the business.

• If we have chosen to use proprietary products, then the buyer is strongly influenced to continue to buy that product or service through supplier control.

Product and service spend categories

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Opportunity analysis (O’Brien)

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Ease of implementation• Ease to effect the change within the organisation • Ease in the market place in terms of difficulty to

source from the market place

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Developing a PPCA• Determine the direct and indirect costs that sit behind a

product or service • List all indirect costs associated with the running of the

organisation behind these products or services• For both the direct and indirect costs, identify cost

estimates for as many items as you can• For those areas that cannot be estimated, agree actions

as to how to assess these costs• Once your research is complete, review it and interpret

what it is telling you

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Using the Kraljic portfolio matrixStep 1 Classify using portfolio matrix

Step 2 Assess the strength of the organisation’s position in the marketplace

Step 3 Determine the required strategic response – either Exploit, Balance or Diversify

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Placing categories on the matrix • If a category is mapped to the right-hand side, it points to there being a

high profit impact and therefore great worth in allocating resources to optimise the category position through category management

• If a category falls in the leverage box, the appropriate improvement activity might be to secure better pricing from the market

• If a category is strategic, the organisation perhaps should develop a long-term relationship with a supplier to optimise value and minimise risk

• If you are working in the critical box, then there will be market difficulties and little impact to be made on profit for all the effort being put in

• If we are in the acquisition box, then this warrants little effort as there will probably be little gain

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The balance of power mapped on to the portfolio analysis

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Strategic response• Exploit

to maximise the strength of the current position and use it to leverage results

• Balancemaintain the current position

• Diversifydo something that enables the organisation to move away

from the current position to a more favourable one

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Categorising stakeholders • Internal stakeholders

members of the organisation who operate within its boundaries

• Connected stakeholders outside the organisation, but with a significant stake in its

activities, frequently through formal ties such as contracts

• External stakeholders the wider range of groups who are less directly affected by

the organisation’s activities and their results

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Mapping stakeholders

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Creating the team• Appropriate executive sponsorship is essential; it

challenges and reduces resistance

• Managers of staff members seconded to the team will want to know how the initiative affects them

• Do not be surprised if some managers blame time lost to the initiative for sub-standard departmental performance

• Market the initiative to gain the widest possible organisational buy-in

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Sponsor duties • Being the figurehead for the initiative and its visible executive lead• Being responsible for securing provision of team members seconded from

other functions and departments, and any other required resource• Briefing and inspiring the team and attending kick-off meetings• Corresponding with those involved• Representing the project and communicating its progress at the executive

level• Ensuring that any high-level business requirement or issues that might

impact the project are communicated to the team• Signing off the sourcing strategy in consultation with stakeholders• Being an ambassador for implementation, and securing the necessary

support and resources required • Removing any obstacles to progress

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Team activities • Participation in the category management process• Delivery of actions arising• Communications activity and engaging with

stakeholders• Collection of data and information• Pursuing quick-win opportunities

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Purposes of a team charter • To gain alignment of understanding of the project

and the roles of the team members• To serve as a basis for discussions with the sponsor

about what is expected of them• To provide a basis to secure agreement for the team

and project remit• To provide a definitive document that summarises

the project; its aims, people and targets• To gain the commitment of the team to the project

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Typical team roles (Belbin)ROLE DESCRIPTIONPlant Creative, imaginative, unorthodoxResource investigator Extrovert, enthusiastic, communicativeCo-ordinator or Chairman Mature, confident, a good chairpersonShaper Challenging, dynamic, thrives on pressureMonitor-evaluator Sober, strategic, discerningTeam-worker Co-operative, mild, perceptive and diplomaticImplementer or Company Worker

Disciplined, reliable, conservative and efficient

Completer-Finisher Painstaking, conscientious, anxiousSpecialist Single-minded, self-starting, dedicated

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Situational responsibilitiesIn every situation, somebody will need to:

• Define the task or deliverable• Execute the task or deliverable and see that it is completed• Validate or gain approval for activities, requests and

deliverables• Inform the task or deliverable • Participate in the execution and completion of tasks and

deliverables• Review the task or deliverable and determine whether the

goals have been met• Sign off the completed task or deliverable

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Porter’s five forces

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Industry types• Monopolies

industries with just one supplier and therefore no competitive rivalry

• Oligopoliesjust a few suppliers dominate the industrylimited potential for rivalry and great potential for power over buyers

• Hyper-competitionthe frequency, boldness and aggression of competitor interactions

creates a condition of constant disequilibrium and change

• Perfect competitionbarriers to entry are low and rivals are equally matchedprofits in these markets are not high, but are stable at the minimum

levels for survival

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The industry lifecycle

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Cycles of competition

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Issues with market segments• Variation in customer needs• Specialisation• Strategic customers

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• Reducing the number of suppliers in the supply chain• Joint development of new products• Having responsive suppliers• Use of integrated databases and systems• Continuous improvement programmes

Cost reduction through the supply chain

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• The relative sizes of the buyer and the potential supplier

• Whether they have done business previously, with whom and for how long

• What type of industry and power base is in operation for the products or services

• Who else the supplier is supplying and the degree of reliance upon them that those customers have

Context information for financial appraisal

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Investigating the market• What is the marketplace?• What is happening in the marketplace and,

importantly, why?• What is likely to happen in the future and why?• What are the trends in the market?• What alternative marketplaces exist? Would any of

these be better?

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STEEPLE analysisFACTORSocio-culturalTechnologicalEconomicEnvironmentalPoliticalLegalEthical

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The Boston matrix• Stars

• Organisation has a high share of the market and the market is growing.• Should be invested in further to maintain growth.

• Cash cows• Organisation has a high market share, but the market is mature and slow-growing

or even declining. • Should be ‘milked’ to provide cash for investments in future product areas.

• Dogs• Organisation has low market share and the market itself is not growing.• Should be dropped from the portfolio to release funds.

• Question marks• Organisation has low share, but the market is beginning to take off or has

significant growth potential.• Need to be watched closely and investment maintained to keep a presence.

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The Boston matrix

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Layout of a SWOT analysis

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Typical CSR stancesLAISSEZ-FAIRE ENLIGHTENED

SELF-INTERESTWORKING WITH STAKEHOLDERS

MAKING A DIFFERENCE

Attitude Comply with the law

It is sound business sense

Sustainability and the triple bottom line

Change society and markets for the better

Leadership priority

Fringe concern Be supportive Champion Part of the vision

Management mechanism

A middle management responsibility

Create systems to ensure good practice

Board level issue with organisation-wide monitoring

Every individual’s responsibility

Organisational reflex

Defensive against outside pressure

Reactive against outside pressures

Proactive It helps define us

Relationships with stakeholders

Unilateral Interactive Partnerships Multi-organisation alliances

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Why pursue CSR?• It is good to do good; the alternative is to do bad• Both customers and suppliers expect to see ethical behaviour• It is better for the organisation’s reputation• Accidental breaches of compliance are less likely• Profit is a very narrow and short-term definition of value• The organisation cannot distance itself from society• Being a proactive member of society increases the organisation’s knowledge of

and access to potential suppliers and markets

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Guiding principles of sustainability• Attitude

ensuring the organisation understands society’s expectations of it, states its own values clearly, then reinforces these in a way that creates a process of continuous improvement

• Building the capacity to actdeveloping the tools and approaches to improve

performance across the three pillars of sustainable development

• Checking progresssetting targets and measuring performance

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The impact of responding to CSR

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CIPS advice on CSR• Link with the organisation’s overall CSR policy and exert influence on its approach

from the supply-side perspective• Ensure the responsible sourcing strategy delivers what the organisation as a whole

is aiming for, and that its commitments are entirely practicable • Identify which aspects of CSR are likely to be important to the organisation overall,

and particularly within the supply chain• Get high-level corporate buy-in for the supply-side and communicate this to

suppliers• Review products, services and suppliers for potential benefits or risks from CSR

impact• Prioritise analysis and action on higher risk and reward areas, and check the likely

impact throughout the supply chain• Balance the CSR impact within the organisation’s overall sourcing strategy.• No two organisations have the same requirements and therefore a unique risk

model will need to be developed that encompasses social, environmental and economic risks (triple bottom line)

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Step 1: ResourcesStep 2: Competitive advantagesStep 3: Competitive capabilitiesStep 4: Sustainable competitive advantages and

capabilitiesStep 5: Core competencies

The hierarchy of the development of core competencies

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• Value provides potential competitive advantage in a market at a cost

that allows the organisation to realise acceptable levels of return

• Rarityrefers to those capabilities possessed uniquely by one

organisation or by only a few others

• Inimitability capabilitiesthose that competitors find it difficult to imitate or obtain

• Non-substitutability refers to providing products and services that are valued by

customers but are difficult to usurp

VRIN analysis of distinctive resources

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A generic value chain

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Supplier preferencing

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Attractive factors for a supplier • Purchases are high volume, or high spend• Your brand is well-known and it would give kudos to the supplier to

be able to name you as a customer• Good payment terms and payment on time• Degree of profit margin• Ease of servicing the account• The fit of your type of business and the associated supply lines with

the supplier’s future strategy and direction• The fit of your operating locations with the supplier’s future planned

geographical supply footprint• A developed, good relationship with the supplier which they want to

keep up

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Integration options

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The make or buy decision‘Buy’ advantages• Allows downsizing• Allows focused investments on

people and other resources in core competencies.

• Leverages the specialist expertise, technologies, resources and economies of scale of suppliers

• Enables synergy through collaborative supply relationships

‘Buy’ disadvantages• Costs of services and

relationship/contract management• Loss of control and difficulties

ensuring service standards• Potential reputational damage if

service or ethical issues arise• Loss of in-house knowledge and

competencies (for future needs)• Loss of control over confidential

information/intellectual property• Ethical and employee relations

issues of downsizing

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Make or buy: Baily et al • Internal sourcing (the make option) is excluded for any item

which cannot be made on available equipment or using existing resources subject to capacity constraints.

• External sourcing (the buy option) should be excluded for items which can be made economically with in-house capacity.

• Tactical decisions involve procuring equipment, personnel or other resources without changing the fundamental nature of the organisation’s asset base.

• Strategic decisions take place on issues around the vertical integration wherein entire business units are acquired or outsourced. This results in either developing or closing down part of the capabilities of the organisation.

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Determining strategic outsourcing suitability

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Sourcing options• Single sourcing

The organisation chooses a single supplier to provide the entirety of a given supply.

• Co-ordinated single-sourcing or parallel sourcingThe organisation enters into separate, parallel agreements

with different suppliers for different parts of the same supply.

• Dual sourcingIf single-sourcing is considered to be too risky, the

organisation consolidates its spend to two suppliers.

• Multiple sourcingInvolves using multiple supply sources for the same product

or service.

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Procurement functional focus aims• Provide supplies to match customer needs • Reduce stocks and improve reliability• Introduce early supplier involvement and simultaneous

engineering• Develop effective make or buy policies, integrate purchasing and

capacity planning• Reduce the supplier base, adopt partnership and co-makership

approaches, reduce product complexity, increase accuracy and reliability

• Work with suppliers to establish world-class standards, improve flexibility of response to market conditions, liaise with technology sources

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• The need to respond to changing environmental conditions• Movement towards a proactive role which emphasises the

strategic importance of supply chain performance for organisations as a whole

• Strategies for supplier relationships• Performance-oriented sourcing strategies that control the basic

features of quality, delivery, cost and service• Organisation of the supply function• Application of information and communications technology to

supply chain management activity

Managing strategic change within procurement

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• The role and positioning (or repositioning) of an organisation within the total supply and value chain

• The configuration of the chain or network, and the competitive or collaborative nature of the relationships within it

• The selection of strategic supply chain partners• Internal and trans-organisational processes for materials and

information flow • Collaborative and integrative arrangements, where

appropriate

Strategic implications of supply chain management

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Porter’s value chain

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Porter’s value network

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RACI analysis of stakeholders• Responsible

the most active level of involvement, these stakeholders are responsible for doing the work or achieving the outcomes in question

• Accountablestakeholders accountable for what happens, they are the ultimate,

approving authorities for the actions taken by ‘responsible’ stakeholders

• Consultthose stakeholders whose opinions need to be sought and with

whom we have a two-way discussion over the issues

• Informthose stakeholders least actively involved, they simply need to be

kept up to date with events, intentions and progress

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Relationship with stakeholdersThere are those who:

• Are against it happeningResistance to change is the single biggest cause of sourcing project

failure. If we ignore it, we leave an open goal to the project’s opponents.

• Let it happenPeople with nothing to gain or lose, who need to be negotiated into

positive enthusiasm.

• Help it happenStakeholders who are generally supportive and believe in the project.

• Make it happenStakeholders who are supportive, but can also enable the project.

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Issues to discuss with stakeholders • Their definition or specification of the category and the items

procured within it• Their forecast needs within the category and the sourcing

projects planned or underway to address them• Their fundamental business needs in the category• What is particularly important to the organisation as they see

it• How their needs can be better met• Problems or issues they have in the category• The changes they anticipate in the future• The breakthroughs they seek

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Generating strategic options Step 1: Develop option

evaluation criteria

Steps 2–5: Options generation Step 2: Free-flow idea generationStep 3: Identify key themesStep 4: Group and summarise ideas

by themesStep 5: Compile multi-layered

themed ideas into strategic options

Step 6: Evaluate strategic options

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• Definition of the strategic option, explaining what it is and what it means for the organisation

• Features and benefits, setting out what can be gained from the approach

• Specific short-term activities to be conducted by team members and other stakeholders to get the strategic option adopted and the project underway

• Long-term activities and goals• Immediate next steps

Elements of a sourcing strategy statement

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Business requirements

• Have access to corporate strategy, policies, objectives, business plans and the intended future direction of the organisation

• Have access to category historical data and other relevant commercial landscape information

• Have access to the business requirements and goals, and what influenced their development

• Understand the RAQSCI model and how it applies to the category and supports the build of the requirement

• Understand value levers as a checklist of opportunities to investigate and pursue

Engaged stakeholders need to:

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Contractual planning• A written contract is always advisable.• A formal document will need to be prepared setting out how the

external provider should make proposals for the business of the category to be delivered.

• Contractual difficulty between parties can arise as to when a contract is actually formed.

• Procurement personnel are not necessarily legal experts and need to refer to contract specialists.

• Significant study should be undertaken on contract law separately.• Formal contract documents should contain a traditional contract,

specifications, commercial details, relationship management details, performance reviews, account planning, and terms and conditions.

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Contents of an NDA• The parties to the agreement• A definition of what information is considered confidential• The period (term) during which information may not be

disclosed• Any exclusions from what must be kept confidential• Provisions restricting the transfer of data in violation of

national security• The term over which the agreement is binding• Obligations of recipients regarding confidential information• Permissible disclosures• Law and jurisdiction governing the parties and the agreement

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Some features of EU directives • Common procurement vocabulary

An EU-wide coding system for categories of products and services that might be procured.

• Competitive dialogueA procedure that may be used for complex contracts.Requirements are defined in output terms. Purchasers may seek initial proposals from suppliers and then

have dialogues with some or all of them in successive stages, prior to requesting final bids from those that can meet the output specification.

• Framework agreementFollowing a competitive process, an organisation may conclude a

framework agreement with suppliers against which it awards specific subsequent contracts.

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Reducing the time impact • Ensure the correct procurement route is chosen• Streamline the process as far as possible – use appropriate pre-

planning and manage the procurement activity• Examine the existing approach to determine whether there is a

leaner approach that could save time• Examine capability within the team and stakeholder group –

insufficient capability can add cost and time• Sourcing readiness – know what you want and plan how to get it• Know and manage rate-limiting steps that will hold up progress• Measure progress and put in place robust assurance processes to

maintain schedules

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Key issues in negotiation• Context

• Supply market• Procurement decision• Relationship between the parties

• AimsClear, realistic, achievable objectives provide the basis for an

appropriate negotiation strategy, and from this a negotiation plan can be set out.

• ChallengesConsider negotiation variables such as the following:

• Power• Time• Information

• ConcessionsWhat does the other party want?

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Market approaches – featuresCOMPETITION DIRECT NEGOTIATION• More supply options at any one

time.• A distant relationship with the

supplier is more likely.• Suitable for more generic or

specified products or services.• Formal, recorded, regulated process.• Rigorous assessment and structured

evaluation with transparent scoring.• Time consuming.• High preparation costs, but no

guarantee of success.• Requires substantial data gathering

and analysis.

• Fewer supply options at any one time.

• Direct face-to-face engagement highly dependent on personal interactions.

• Influenced by negotiators’ choices and experiences.

• Suitable for complex environments or specialist needs.

• Process responds to tactical moves and power plays.

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Market approaches – advantagesCOMPETITION DIRECT NEGOTIATION• Provides leverage in the market

place.• Forces suppliers to work against

each other.• Forces organisations to be more

specific about what they want before going to market.

• Needs audit trail which will demonstrate unbiased decision making.

• Notionally open, transparent and fair for suppliers.

• All potential suppliers work off the same information and criteria.

• Little scope for change or adaptation unless specifically requested by a supplier.

• Permits closer relationships.• More collaborative – only seriously

rated suppliers involved.• Flexible to in-process changes.• Terms of reference more open.• More responsive to individual skill

and initiative.• Reflects less programmable factors

eg supply market competition, geography, power, risk, complexity, relationships, and people.

• More likely to need a back-up plan; greater chance of failure.

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Market approaches – drawbacksCOMPETITION DIRECT NEGOTIATION• Prohibits close relationships with

suppliers during process.• Sets requirements for organisational

behaviours.• High cost and time impacts.• Organisation cannot choose preferred

suppliers.• Less flexible decision making;

constrained by pre-programmed criteria and process.

• More difficult audit trail.• More subjective and biased.• Less transparent.• Negotiation is an open-ended process

rather than a carefully defined event; not clear where it starts and finishes.

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RFP or RFQ sectionsSECTION RFP RFQIntroduction and background Yes Yes*Scope and boundaries Yes Yes*Contacts Yes YesConfidentiality statement Yes YesNon-commitment Yes YesTendering process details Yes Yes*Requirements Yes Yes*Anticipated volumes Yes YesQuestions Yes MaybeAlternative proposal Maybe MaybePricing No YesTerms and conditions Yes YesAppendices and attachments If needed If needed* Unless it has already been covered in a separate RFP, in which case refer back.

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Supplier selection steps• Initial qualification or pre-selection• The RFP/RFQ tender – either RFQ follows RFP or the

two are combined• Analysis of proposals and quotations• Shortlist of suppliers• Final evaluations• Supplier is chosen

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Forms of e-auction• Standard reverse auction based on a single need to be satisfied at a pre-

determined time where suppliers will offer to supply what is required for the lowest price.

• Cherry–picked auctions with multiple needs advertised where suppliers can choose which needs they are interested in meeting and bid solely on those.

• Bundled auctions where multiple needs are bundled together and suppliers must bid for the entire lot.

• Dutch auction – the auction closes upon receipt of the first bid.• Cherry Dutch auction – a multiple-lot auction that closes upon receipt of

the first bid for that lot.• Japanese auction – the auction starts at a pre-defined price point that is

reduced in steps. Each supplier must accept each price step or they must leave the auction.

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• Lot strategy• Specification• Price awareness• Inviting the right suppliers• Selection criteria• Resources, training and communications• Post-auction

Factors that must be considered in e-auctions

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Typical governance structure for category management

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BENEFIT APPROPRIATE BENEFIT TYPES OR QUALIFYING FACTORS

Price reduction New prices are lower than those previously paid for similar products or services.

Cost avoidance Avoiding costs that would have had to be paid.

Efficiency improvements

That is, doing the same things but better; with less consumption of resources. These must be capable of being quantified in terms of tangible benefits. Efficiency improvements can take place within the organisation, but may also be passed on from its suppliers.

Applicable types of benefit and qualifying factors (O’Brien)

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• Defining the competencies needed for category management and for running an effective implementation

• Assessing the existing competency levels• Targeted education, training and development to address

any gaps found• Mentoring, coaching and support, especially in the first

phases of category management• Review and assessment of ongoing needs

Ensuring the right capabilities in each team

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Choosing the sourcing process

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Integrator responsibilities • Translating performance specifications into design

specifications• Selecting and evaluating suppliers• Negotiating with suppliers• Tracking performance and resolving difficulties

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• To continue the search for value using the value levers concept

• To refine and optimise the business requirements• To communicate and engage with suppliers• To innovate in line with what the market can offer

and the changing needs of the organisation• To drive effectiveness by aligning and adapting

supplier relationships

The organisation’s agenda in category management

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• Complex process interdependencies• Performance measurement difficulties• Uncertainty in requirements• High supplier dependency

Factors affecting opportunism in relationships

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Segmentation of suppliers SUPPLIER TYPE NUMBER FEATURES RELATIONSHIP

Strategic suppliers

A handful Suppliers who can add significant long-term value and/or where there is a business risk or criticality

Close relationship with nominated owner

Preferred suppliers

10 to 100 Positively selected, managed and measured

Relationship extends to regular reviews

Regulated suppliers

10 to 10,000 Greatest number, least value

Retained or removed according to need

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Stakeholder buy-in

• A thorough understanding of the organisation• To be aligned with the organisation’s vision and longer-term

objectives• A deep understanding of what stakeholder and customer

needs actually are and will be

The entire project team needs to be able to operate well at a strategic level. It needs:

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Key techniques for managing change• Education and commitment

People need to understand and value the proposed change.

• Participation and involvementMake everyone part of the team.

• Facilitation and supportBe flexible where you can to defuse conflicts.

• Negotiation and agreementIf someone loses out in one way, they should gain (if that is reasonable) in

another.

• Manipulation and co-optationSometimes you need to buy the change from an opportunistic stakeholder.

• Implicit and explicit coercionLeast happily of all, sometimes the change just has to be forced through.

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Types of stakeholder• Partners – supporters of your change• Allies – supporters, if given encouragement• Fellow travellers – it suits their purposes to go along with you• Fence-sitters – who are not clear on what they want to do• Loose cannons – who may obstruct you at random, despite

having no interest in the change• Opponents – who oppose the change, but not you• Adversaries – who oppose both you and your change• Bedfellows – support the change, but do not trust you• Voiceless – who cannot influence anything however they feel

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Communications programmePROGRAMME ELEMENT DELIVERED THROUGH, FOR EXAMPLE…AwarenessBuild general knowledge and the appreciation of benefits across all stakeholders.

• Publications of all types, formal and informal• Endorsements from respected authorities• Visibility-building publicity

PerformanceImpact and results information, specific and appropriate to individual stakeholders.

• Intranet with detailed documentation• Newsfeeds• Key metrics• Achievements against targets

Change managementSmooth transitions between performance states with simple, targeted messages.

• Memos• Posters• Incentives

Knowledge transferTargeted know-how sharing and learning documentation.

• Centralised knowledge bank• Training

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• Current situation• Business requirements• Strategic analysis and insight• Options for change• Recommended sourcing option• Risk and contingency plan• High-level implementation plan• Cost-benefit analysis• Next steps• Appendices (as needed)

Sections in a category strategic sourcing plan

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Pointers about the plan• It must go only to internal stakeholders because of its content.• It will vary in depth and complexity depending upon the nature of the

improvement exercise and the category change programme.• Its purpose is to get organisational and stakeholder sign-off, and ultimate

agreement to the recommended course of action.• It also provides documentary evidence of the journey through the category

that can serve as an audit, support future change in the management of the category, and provide a baseline against which to track the programme.

• It should include all of the information in one document.• It will provide an excellent communication vehicle to stakeholders and

customers across the organisation.• Making the sourcing plan available on the organisation’s intranet is a good way

to present it to stakeholders across the organisation.• Sign-off of the category management sourcing plan is critical to the entire

process.

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Determining how to pitch the plan to stakeholders

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Performance goals• A longer-term, strategic view on the organisation’s supply

needs• A hand in shaping those needs such that they can be

fulfilled in a more value-adding way• The organisation of supply needs into categories that can

be managed with the same strategy• Developing the most appropriate relationship with each

of the organisation’s suppliers• Enabling the organisation’s systems and processes to be

more efficient, effective and economical

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Category manager duties• Ensure that contracts are implemented according to the agreed terms• Ensure all users keep to established agreements• Act as the main point of contact with suppliers and internal stakeholders• Resolve operational issues raised by contract users and suppliers• Communicate operational procedures to contract users and stakeholders• Report on supplier performance, transaction data, savings and continuous

improvement initiatives to stakeholders• Ensure all goods and /or services are provided in accordance with the

contractual requirements• Progress the continuous improvement opportunities identified during

strategic sourcing• Maximise opportunities to improve the corporate social responsibility of

the organisation and its suppliers

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Compliance monitoring• Price monitoring

making sure invoiced prices match with contract prices, and that any discrepancies are justifiable.

• CSR and sustainability monitoringare suppliers complying with the organisation’s policies? If

not, is the organisation protected from eg reputational risk and can it move on to alternative suppliers?

• Contract usersmake sure all internal personnel are using the installed

contracts; identify and address off-contract spend

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Continuous improvement• Specification improvement

That is, to keep track of changes, identify refinements, and communicate and implement these as necessary, including reviews of needs and the supply markets, trend tracking, options for substitution and aggregation, CSR developments.

• Process improvementEliminate non-value-adding processes through modifications to

current processes and systems, facilitating best practice amongst contract users and suppliers, supplier forums and workshops, focusing high value-adding suppliers.

• Knowledge sharingWith procurement in general and other category managers in

particular.

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Project planning

• Is quick to grasp• Enables the widest set of stakeholders to use it• Enables collaborative planning• Enables communication and discussion• Can be easily changed and updated

Complex plans with many detailed activities are ineffective. It is much better to have something that:

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The brown paper plan format

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Waves of activity

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• Cautious management culture• Business-as-usual management processes• Initiative gridlock• Recalcitrant executives• Disengaged employees• Loss of focus during execution

Reactive forces in organisations that hamper change

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Finalising contractsThe following areas are particularly significant:

• Agreed arrangements for the supplyeg details of the products and services, specification, service

level and so on. Business requirements documentation will form the basis of the contract structure.

• The required relationshipAccount management provisions, eg reporting, performance

reviews, obligations placed upon the supplier in fulfilling the contractual bargain.

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• Organising formal and informal discussions between the suppliers

• Providing the incoming supplier with access to guidance and processes prepared and used by the outgoing supplier

• Facilitating transfer of contract-related assets to the incoming supplier

• Arranging discussions between the incoming supplier and stakeholders, so the supplier can gain insight on requirements and expectations

Information and knowledge transfer to the incoming supplier

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The role of a contract manager• Participating, as necessary, in developing the specification and

approach to the supply market• Monitoring the supplier’s progress and performance to ensure

provision conforms to the contract requirements• Managing any organisational resources used in contract

performance• Authorising payments consistent with the contract terms• Exercising remedies, as appropriate, where a supplier’s

performance is deficient• Resolving disputes in a timely manner• Documenting significant events• Maintaining appropriate records

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• Expected outcome measures• Costs• Contract performance• Acceptance and rejection terms and rights• Contract dates• Complete addresses

Planning for contract administration

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The post-award discussions agenda• Scope ie what exactly the organisation is buying• Terms full contract terms and conditions• Requirements technical and reporting requirements under the contract • Administration applicable contract administration procedures, including

monitoring and progress measurement• Rights rights and obligations of both parties and the supplier

performance evaluation procedures should be clear, bothfor this contract and the implications for potential futurecontracts

• Potential problems and potential solutions and contingency plans• Payment invoicing requirements and payment procedures.• Authority members of the contract team should explain the limits of

their authority and obtain the same informationregarding supplier personnel

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Information infrastructure• Compliance tracking• Contracts databases• Dashboards• Decision support• Portals• Procurement intelligence• Reports• Spend analysis• Sourcing databases• Supplier and contract lifecycle tracking

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Stakeholder feedback• Prediction and control

Feedback is used to understand the links between cause and effect, making it easier to predict and control events.

• Mutual understandingFeedback enhances people’s mutual understanding of each

other and a situation, what they expect, what they experience, and what it means to them.

• Critical reflectionFeedback enables people to reflect on situations and

challenge the goals pursued.

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Evaluating supplier performance • Site visits• Supplier questionnaires• Organising existing data• Internal questionnaires• External certifications• Own certifications• Third-party reviews• Conversations with suppliers• Independent ratings• Contact with other customers

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Metrics used in benchmarkingORGANISATIONAL METRICS PURCHASING PROCESS METRICS• Number of full-time employees per

£billion of spend• Purchase spend as a percentage of

operating costs• Purchase spend per purchaser• Total number of suppliers by category

and legal entity• Number of suppliers per £billion of

spend• Head count supporting sourcing,

supplier relationship management, and order processing

• Number of non-procurement staff involved in procurement

• Ratio of managers to staff

• Average cost to process purchase order through to delivery and payment

• Third-party spend per order• Average cost to process invoices• Volume of ‘straight through’ orders

(where no human intervention is required)

• Level of compliant spend by category, supplier and order channel

• Average time to process an order• Average time to pay a supplier• Percentage of total spend covered by

purchase orders

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Metrics used in benchmarkingCATEGORY-SPECIFIC METRICS RELATIONSHIP-SPECIFIC METRICS• Price per hour, unit etc. for goods or

services delivered by the supplier compared with the sector average, competitor price point, etc.

• Payment terms• Service levels• Guarantee periods• Number of suppliers as a percentage of

category spend• Contract coverage• Savings delivery (with the ability to track

to the bottom line)• Delivery compliance• Dispute resolution• Environmental and corporate

responsibility compliance• Savings per head

• Percentage of spend not transacted through procurement

• Suppliers using procurement as first contact

• Suppliers using the organisation as a best practice case study

• Internal perception of the procurement function

• Stakeholder utilisation of commercial agreements

• Usage of procurement tools and processes

• Percentage of engagement of procurement early in the procurement cycle

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• Align supplier performance goals with organisational goals and objectives

• Determine an evaluation approach• Develop a method to collect information about suppliers• Design and develop a robust assessment system• Deploy a supplier performance assessment system• Give feedback to suppliers on their performance• Produce results from measuring supplier performance

Developing and deploying supplier assessment

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Supplier improvement• Contact the supplier and find out what went wrong and

why. The results of the performance assessment should be provided to the supplier and can create a basis for discussion.

• Once the causes of a problem, or set of problems, have been identified, the next step is to devise a supplier improvement plan.

• If the problem is too severe, cannot be fixed in a timely manner, or poses too much of a risk, the organisation may wish to stop doing business altogether with the supplier.

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Capturing dataSome of the key actions required:• Strategic review of consumption patterns, key performance

indicators and contract performance patterns• Benchmarking reviews and research• Tracking improvement patterns

Some of the expected key outputs:• Assessment of the success of implementing value for money and

continuous improvement opportunities• Revised strategic sourcing and category management strategies and

objectives• Recommendations for future directions with given categories and

suppliers (once current contracts expire)

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Benefits trackingKey actions required:• Define the baseline(s) against which objectives and benefits will be

measured• Review the progress of any continuous improvement opportunities

taken, and report the results to the most critical stakeholders• Review the objectives, key performance indicators and benefits

identified in strategic planning and at contract starts, and analyse their ongoing validity

Key outputs will include:• Tracked spend and savings against expected outcomes and budgets• A moving baseline (increased expectations) as price and non-price

benefits are achieved• Management information reports

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Potential performance measures

• Have a procurement structure that truly aligns to categories rather than functions or business units

• Have categories that are determined by risk and business impact rather than by size of spend or other criteria

• Spend the majority of their time on strategic activities as opposed to tactical ones

• Are experienced and have progressed through many strategic sourcing cycles• Comply closely to policy, and are monitored often and corrected as necessary• Participate in formal, category-specific external networking or benchmarking• Outsource some elements of category management• Are proactive in influencing internal demand behaviours, and respond to

external market shifts

High-performing category managers and category management approaches:

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• Productivityoptimal tools, processes and information systems to develop category plans in a much

shorter timeframe

• Resiliencytools, processes and information to accurately develop and manage categories as well

as model changes for ongoing improvement

• Precisiondata integration, gathering and warehousing provide reliable, precise, real-time data to

category managers, who can then model real situations with real data

• Responsibilityclear, objectively-judged ownership by individuals and functions through unambiguous,

trusted scorecards

• Revenue and performancethe critical benefits on which the category management process is considered either a

success or a failure

Benefits tracked by high-performing category managers

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Spend dashboard key areas• Categorised spend• Contract compliance• Supplier concentration or supplier tail• Levels of process improvement• Interactive spend by business area

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Potential weak points to target• Training and development• Fully deployed category strategies• Fully developed and deployed e-procurement• Management of indirect spend decision-making• Contract compliance• Properly developed market analysis• Fully integrated cross-functional involvement• Total cost• Market-integrated pricing

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‘Market’ price factors• Buyer volume• Supplier capacity• Buyer specification• Changes in raw materials and direct labour• Local, regional and global conditions• Currency rates• Supplier efficiency• Supply chain costs• Market timing• Actions taken by other buyers and sellers• Length of contract

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Risk perception analysis processUNDERSTAND THE PRESENT

IDENTIFY POSSIBLE FUTURES

TAKE ACTIONS TO ADDRESS POSSIBLE FUTURES

Risk perception

How do stakeholders see the situation?

What do stakeholders think will happen?

Communicate precautions.

Risk analysis What actually happens?

Make predictive models.

Set early warning markers.

Scenario analysis

Develop evidence. Develop and test scenarios.

Make action plans.

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Qualitative risk matrix

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Risk analysis matrix

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Scoring likelihood and impactSCORES FOR LIKELIHOOD SCORES FOR IMPACT

1 Has never happened in this industry

1 Would have no discernible effect

2 Has happened in this industry but never in this group

2 Would cost 10% of this business unit’s net assets if it happened

3 Has happened in this group but never in this business unit

3 Would wipe out this business unit if it happened

4 Happens occasionally in this business unit

4 Would cost 10% of group net assets if it happened

5 Happens frequently in this business unit

5 Would wipe out the group if it happened

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Types of risk• Process risks

Internal processes are the sequence of value-adding activities undertaken by an organisation. Process risk is the risk of disruption to these processes.

• Control risksControls must be put in place to ensure that processes operate within

defined and considered parameters.

• Supply risksThe risk associated with an organisation’s suppliers being unable to supply,

or making supplies that do not meet specification.

• Demand risksUnexpectedly high or unexpectedly low demand and the consequences that

follow.

• Environmental risksThese are often viewed as unmanageable or remote (eg terrorism,

earthquakes, the wholesale collapse of Western banking...), so hardly appear in risk assessments. This is a weakness in risk monitoring rather than any inherent mystery of the risks involved.

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Risk management • Risk identification is the process of asking ‘what could go wrong?’ • Risk assessment or evaluation is the appraisal of the probability and

significance of identified potential risk events• Quantifying its risks allows an organisation to prioritise planning and

resources to meet the most severe ones, and to set defined risk thresholds at which action on an issue will be triggered

• Risk management strategies are often classified as the Four Ts• The organisation will need to make contingency plans to counter

high-impact risks• Monitoring, reporting and review (‘what happened and what can we

learn?’) is an important part of risk management

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Risks and contingency measures RISK PROBABILITY IMPACT REMEDIES

Operations team becomes overloaded

High Medium Renegotiate workload with managers. Push sponsor for more resources.

Demand increases beyond forecasts

Medium Medium Check demand calculations and monitor trends.

Supplier fails to manage transition to plan

Medium Medium Detailed project planning and ongoing management.

New supplier becomes insolvent

Low High Make two credit checks. Investigate switching costs.

Users reject a new product

Low High Carry out trials first.

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Two levels of supply chain flexibility

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Efficient/adaptable supply chains EFFICIENT SUPPLY CHAIN ADAPTABLE SUPPLY CHAIN

Focus Establish control to reduce variability and thus cost to compete

Embrace volatility and develop a superior ability to adapt

Decision time horizon

Short-term, quarterly results Long-term viability, while maintaining positive cashflow

View on turbulence

Bad, as it causes instability and cost

Inevitable, hence the need to pre-empt it by creating adaptable structures

Approach to dealing with turbulence

Use six sigma and other tools to eradicate it where possible

Use tools to increase flexibility and ‘bandwidth’ to cope

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Structural flexibility

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Achieving structural flexibility • Supply chain execution

• Buffers• Responsiveness and agility• Collaboration

• Supply chain design• Diversified manufacturing footprint• Diversified sourcing footprint• Diversified plant layout

• Product design• Modularity• Postponement

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Assumptions in the DRP• Which assets are we protecting?• What time periods are we prepared for?• Which information and knowledge have we kept

operational?• What resources will be available following the

disaster in terms of staff, equipment, communications, transport, facilities and sites?

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Assumptions to examine • The organisation’s main facility has been destroyed• Staff are available to perform the critical functions identified in the plan• Staff can be co-ordinated and can report to back-up site(s) for critical

processing, recovery and reconstruction activities• Off-site storage facilities and materials are unaffected• The recovery plan is up to date• The plan is modular – small-scale disruptions can be handled with sections

of the main plan• Alternate facilities are available• Sufficient short-term supplies survive• Communications links are available• Transport is feasible• Suppliers offer the maximum support that they can

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Termination notices• A description of the exact services included in the

termination (including processes, sites and territories)

• A description of liabilities involved• Details of transition arrangements• A timetable with significant milestones• Details of the manager in charge of the exit

programme and any other necessary contacts• Reporting requirements