it's about people - eipm · it's about people how talent & mindset ... •procurement...

It's About People

How Talent & Mindset Makes All the Difference

12th EIPM Annual Purchasing ConferenceArchamps, December 6, 2007

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What we would like to believe …

•Due to the large depth of externalvalue-add we have a substantialbottom-line impact

•Due to the cross-functionalnature we draw the best talent

•Due to the strong commercialrequirements we breedmanagement material

… and what the reality oftenlooks like

•Procurement is the graveyard ofthe enterprise

•Procurement is a professionalsilo

•The CPO is often based in thefinancial community

3

Content

Procurement people pay

When structure matters

Collaborate to prosper

Getting from here to there

Human resources for PSM 101

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Content






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Foremost it’s all about Performance … and cost is no small part of that

PSM performance

"Contribution to companysuccess relative to cost,revenues, quality andexecution speed"

Source: McKinsey

PSM health

Capabilities &Culture"The way PSMprofessionals think,feel, and conductthemselves in theworkplace,individually andcollectively"

Strategic alignment andposture"PSM alignment and support ofbusiness strategy"

Categorymanagementand execution"What PSMstrategies andprocesses thecompany followsto create value"

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Structure &Systems"How the resourcesof the PSM functionare managedthrough formalstructures and howthe function interactswith other companyfunctions"

Source: GPE Team of McKinsey and SMI

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Let the facts get in the way of a sad story

Surveyed and/or interviewed over 300 best in classcompanies from all geographies and majorindustry sectors; 70% with > 5 USD bn in revenue

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Developed a qualitative survey based on acomprehensive performance framework of driversand best practices

�Research was conducted in collaboration withSupply Management Institute (SMI) of EuropeanBusiness School

� Results statistically correlated and validatedconfidence level >95%

Conducted deep dive interviews with McKinseyexperts with experience from 1000+ procurementengagements over the last 5 years

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0.6

2.33.5Average survey scores across

all driversScale 1 - 5

An evolution in PSM practices … … results in higher performance

-0.5

0.8

1.4

12.7 15.5 17.7

AnnualPSMsavings

AverageEBITDAmargin

Annualreductionof COGS

Percent

2.1

2.8

3.4

Absolute valuesAverage acrossindustries


Purchasing pays – cost do matter … (1/2)

Low Medium High

Confidence level ofcorrelations > 99%!

PerformersLow Medium High

Performers

8

An improvement by 1.0 averagesurvey score … … results in higher performance

* Relative to revenues, i.e., controlling for product price decreaseSource: GPE Team of McKinsey and SMI

Percentage points +2.2

+1.1

+4.5

Average survey scores acrossall driversScale 1 - 5

AverageEBITDAmargin

Annualreductionof COGS*

+1.0

AnnualPSMsavings

Purchasing pays – cost do matter … (2/2)

Confidence level ofcorrelations > 99%!

Absolute valuesAverage acrossindustries

9

* Overall performance calculated as average of standardized PSM savings, reduction of COGS, and EBITDA marginSource: GPE Team of McKinsey and SMI

15%

25%

Talent andcapabilities

16%

Mindsets andaspirations

Strategicalignmentand posture

Other44%

Capabilities & cultureand business strategyalignment make thedifference between lowand high performance

… but people matter mostRELATIVE SHARE OF IMPACT ON OVERALL PERFORMANCE*

10


High

Medium

LowHighMediumLow

Survey scores

Self-assessment

Low performers areoverly optimistic and donot see the potential

Overestimationby 0.5

Underestimationby 0.5

High performersare very criticalin their self-assessment

The best see the journey – while high performers recognize theyare on a journey low performers fail to see their opportunitiesSURVEY SCORES

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12

38

342135

11 10

27

0

30

25

34

35

Decentralized

Mixture of centralizedand decentralized

Centralized

Lead-buyer network

100%


High performers to a greater extent operate a center-leadorganization that balances coordination and flexibility …Percent

Low Medium HighPerformers

13

Top 10 companiescenter-lead theirorganization tomaximize PSMvalue creation

31

2016

30

23

All remainingcompanies

0

50

30

Top 10companies

DecentralizedMixture of centralizedand decentralized

Centralized

Lead-buyer network

100%


… and for the top 10 performers the difference is even strongerin favor of a center-lead modelPercent

14

… and in realized influence on spendThere are differences in formalPSM spend controlled …

Percent of total spend controlled* Survey score 'Influenceand reach of PSM'**

7177 79

1.8

2.4

3.1

* Spend figures stem from baseline survey, i.e., are self-reported by CPOs** Survey scores stem from interview, i.e., are rated by interviewers; drivers included: Influence of PSM function,

Business compliance, Demand and specification managementSource: GPE Team of McKinsey and SMI

"Winners always want the ball!"

Low Medium

Performers

High Low Medium

Performers

High

15

6570

61

2312 12

93

414

7

20

CPO reporting below seniormanagement team

CPO reporting to seniormanagement team member

100%

CPO is member of seniormanagement team

CPO reporting to CEO


Low Medium

Performers

High

Strong organizations are heard – with the CPO reporting directlyto the CEOPercent

16

54

58

62

80

75

67

19

33

66

8

11

15

8

19

14

56

70

29 8Automotive & assembly

21 11Chemicals and pharma

23 0Others*

17 0 3Materials and construction

17 0High tech and telecoms

105Energy and utilities

011Packaged goods

011Financial institutions

14 6

100%

Total

* Including retail, travel and logistics, entertainmentSource: GPE Team

Averagesurveyscore

3.24

2.88

2.88

2.65

2.67

3.19

2.43

3.19

2.49

• CPOs in high-performingindustries such as A&Aare often member of themanagement team

• CPOs in low-performingindustries such asFinancial Institutions orEnergy and Utilities mostoften report below seniormanagement

Expectation is KingPercent

CPO reporting belowsenior management teamCPO reporting to seniormanagement memberCPO reporting to CEOCPO is member of seniormanagement team

17

Source: GPE Team

Expectation about PSM value creation

31

1217

41

110

0

50

35

3

03

28

58

11

100%

It is indeed not only about cost – the expectation is higher!

69 percent of CPOs in top-performing are expected todo more than cut cost…

…they have the support ofthe organization, right upto the top

…and they negotiate withother business units aspeers and argue their caserobustly

Performers

Low Medium High

Very low

Survey score

Low

Medium

High

Very high

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Human resources for PSM 101 �

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Medium and high performersrealize USD 15 - 20 mn moresavings

Example(USD 1 bnspend)

Medium and high performersinvest USD ~1.5 mn* into morestrategic buyers

* Assuming USD 0.2 million costs per strategic buyerSource: GPE Team of McKinsey and SMI

1921

13

-0.5

0.8

1.4

Per USD 1 billion spend Percentage points

Number of strategic buyers Annual reduction of COGS

A people ROI of 10 - 15x is not bad

Low Medium

Performers

High Low Medium

Performers

High

20

Top 10 companiesemploy asignificantlyhigher share ofstrategic buyersthan the rest ofthe companies

72

50

50

28

Transactional buyers

100%

All remainingcompanies

Top 10companies

Strategic buyers


For the top 10 performing companies, the focus on strategicbuyers is very strongPercent

21

Training

Tailored trainingHigh-performing purchasingfunctions tailor the training thatpurchasers receive, e.g., throughjob rotation (76 vs. 36 %)

PSM career paths

Broad experiencePurchasing managers in top-performing purchasing functionshave worked in other functionsbefore (86 vs. 23 %)

Source: GPE Team

Individual categorymanager capabilities

23

34

29

31

60Low

4

47

23

3Medium

03

46

44

7

High

100%

23

34

11

54

20

30Low

4

47

132

Medium

3

47

36

3High

100%

34

2529

98

26

110Low

34

32

0Medium

5

21

46

20

High

100%

Strong raw materialsHigh performing PSM functionsemploy purchasing managerswith analytical expertise andgeneral management back-grounds, in addition to deepcommodity knowledge(6 vs. 51 %)

Very low

Low

Medium

Survey score

High

Veryhigh

To build the PSM organization capabilities, the CPO has toselect the right people, and then develop and train themPercent

22

Source: GPE Team

PSM vision Change readiness Focus on strategy execution

26

3034

29

110Low

3

43

23

1Medium

25

35

43

15

High

100%

Communicate the visionCPOs in in top-performingpurchasing functions articulate aclear vision for achieving a broadset of goals (58 vs. 11 %)

Build a culture of innovationPurchasing executives in high-performing functions contributeto a culture of continuousimprovement (62 vs. 11 %)

Focus relentlessly on executionHigh-performing purchasingfunctions achieve or exceed theirgoals (63 vs. 9 %)

Very low

Low

Medium

Survey score

High

Veryhigh

Right people and effective training is not enough, CPOsalso need to foster an entrepreneurial mindsetPercent

34

2617

0Low

3

50

20

1Medium

02

36

55

7

High

100%

37

11

44

187

18

29

90

30

22

Low

0

57

100%

21

High

4

Medium

0

41

23

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5

5

20

15

10

10

35

10

Source: GPE Team of McKinsey and SMI, McKinsey experience

… high performing program

… high performing SM buyer

Skills needed for implementation

• Negotiation skills• Market/supplier know-how• Incentive contracts, index/cap prices,

competitive bidding

Leverage purchasing power

• Close cooperation betweenR&D, purchasing, andproduction departments

Leverage product changes• Standardize• Find substitutes• Change product specification• Design to cost• Demand management• ...

• Close cooperation among sites,site management buy-in necessary

• Internal knowledge transfer• Joint-efforts with suppliers• Supplier management strategies

(make vs. buy, modular sourcing, etc.)

Optimize processes• Optimize handling, administration,

processing• Reduce inventory• Reduce joint costs with suppliers• Design to process• ...

Total

CM skills MFTcollaboration

Program

… by fully working in a MFT

5

30

40

30

Impact by …

Impact mainly through:

• Change suppliers• Renegotiate contracts• Bundle• ...

25

15

45

Tight price control is a start, product definitions andprocess optimization create the bulk of PSM impactINDEX (100 = Total savings in Percent TCO)

25

PSM impact on productdevelopment

Product developmentGet involved during theconcept phase(78 vs. 13 %)

PSM impact on manu-facturing and distribution

PSM impact on marketingand sales

PSM value creation in M&Asituations

Source: GPE Team

38

26

20

49

10

1300

Low

38

23

3

Medium

2

32

31

15

High

100%

39

23

11

39

8

19

30Low

44

23

2

Medium

4

36

36

13

High

100%

21

31

25

2510

58

21

00Low

29

141

Medium

37

23

5

High

100%

19

19

53

166

4

22

17

4

Low

35

25

5

100%

High

19

Medium

10

46

Manufacturing anddistributionContinuously interact(85 vs. 21 %)

Marketing and salesActively engage (65 vs.21 %)

Merger or acquisitionGet involved in the due-diligence phase(43 vs. 75 %)

Very low

Low

Medium

Survey score

High

Veryhigh

Top performing PSM functions work in cross-functionalteams to realize impactPercent

26

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Key elements to anchor sustainable change

Operationalactions for

change

Foundationfor change

3 Build required skills andcapabilities

• Build skills and capabilities inPSM unit

• Leverage skills and capabilitiesinto business unit organizationsthrough multifunctional team work

• Upgrade talent pool as necessary

4 Establish necessary formalmechanisms

• Establish PSM organization(s) cross-functionally linked into business units

• Define clear savings targets andmetrics

• Establish incentive scheme and holdpeople accountable for results

• Establish required PSM informationsystems

1 Foster understanding andconviction of the team

• Develop story for change andsuccess in PSM consistent with theoverall company story

• Actively create occasions to deliverthe story PSM internally and tointernal customers

2 Role-model new behavior

• Initiate visible PSM leadershipactions

• Establish opinion leaders for changein PSM group as well as businessunits

• Foster cross-functional interaction inmultifunctional teams

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The CPO should take the lead in moving the purchasing organizationto the next level

Increase the rawtalent base

• Hire young, high-potential individuals with little direct experience

• Consider a wider range of possible sources of talent (e.g.,different internal functions, diverse industries and back-grounds)

Develop talenteffectively

• Teach fundamental tools through a basic PSM curriculum

• Build high-level skills through an apprenticeship approach todeliver tailored continusous development and learning throughexperience

• Install mentoring and buddy systems

Influence mindsetsand aspirations

• Develop a compelling, positive and personal reason for change

• Choose effective role models to pioneer new approaches (e.g.,“connectors”, “mavens”, “salesmen”)

• Identify specific training needs and deliver tailored help

• Remove structural barriers to change

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