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Procurement in Turbulent Times: Creating Opportunity from Economic Adversity

A New Business Environment
By Kris Timmermans, Jeremy Robinson, Joelle Price and Jasmine Stephenson You only find out who’s swimming naked when the tide goes out. -Warren Buffett

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We are in difficult–if not unprecedented–times. House prices have fallen, stock markets have crashed and consumer confidence has plummeted. In industry after industry, businesses are bleeding red ink, laying off employees, being nationalized–or simply going under. From banking to automobile manufacture, from real estate to retail, the warning lights are flashing. In short, in little more than a year, prosperity has given way to credit crunch–and then recession. But with such change comes opportunity. Bad news for some is good news for others. In this economy, the winners will be those that exploit adversity to create a gap between them and the competition. The lessons from previous downturns are clear: it is during the recession, and immediately after it, that winners are best able to pull away from the losers–putting clear blue water between them and their erstwhile competitors.

Accenture has conducted extensive research into the characteristics of high-performance businesses. We have shown that companies that successfully position their supply chains as a strategic capability really do outperform the competition. Accenture’s research points to a relationship between procurement mastery and superior financial performance, with procurement ”masters” achieving procurement savings 30 percent higher than low performers, despite having procurement organizations that cost about half as much to run1. And present economic conditions offer an ideal opportunity for an invigorated focus on costs. At a stroke, the concerns of a few months ago regarding resource scarcity and supplyconstrained markets have evaporated. Freight rates have plummeted, bringing newly viable sources of supply into focus. Strains in the financial markets have raised the cost of working capital, leading to changes in the terms of business. In short, consolidation, currency swings and the credit crisis are rewriting the procurement paradigm.

In an online survey, Accenture asked senior procurement executives to tell us how they are being impacted by the current economic situation–and how they and their supply partners are responding2. Accenture then used the November 2008 CPO Circle3 “roundtable” session as a sounding board, calibrating and amplifying these views with particular reference to the actions that organizations are taking in response. The results are enlightening. There is indeed a new business environment emerging–presenting an opportunity for procurement masters to deliver still greater value to their organizations’ bottom lines. Our survey respondents–and the CPOs we spoke to at the CPO Circle–were of one mind. In today’s new business environment, significant opportunities are there to be had. And procurement leaders are playing a more prominent role in seizing them, moving beyond the function’s traditional boundaries and helping to shape the business’s strategic options.

1 High performance through procurement: Accenture research and insights into procurement performance mastery, Accenture, 2007 2 The survey findings are based on input from members of Accenture CPO Circle. The results provide directional information on the views of procurement executives. 3 CPO Circle is an Accenture sponsored peer-to-peer community that brings together senior executives responsible for sourcing and procurement strategy and execution.

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What are the impacts on Procurement?
Without exception, heads of procurement believe that the downturn is having an impact on them and their supplier organizations. What’s more, as Figure 1 shows, three-quarters of them say that it is “significantly effecting” their procurement functions. Virtually no part of the procurement process, function or organization is unaffected–from workload to resource provision, and from supplier relationships to talent management, the new business environment is undeniably posing fresh challenges.
77% 0% 23% No effect Somewhat of an effect Significant effect

Figure 1 Source: “Understanding the effects on Procurement in a volatile market” survey results, November 2008

Budgets and deliverables Typically, say procurement leaders, they are being asked to do more, with a lower cost base. As Figure 2 shows, for instance, more than half of respondents reported that procurement budgets have been cut–and for many CPOs, by as much as 15 percent. And, at the same time, savings targets have increased, with almost one in

five CPOs required to deliver additional savings of 15 percent or more. The good news: just as many respondents reported being able to capture those additional savings. At the CPO Circle, for instance, participants reported that many raw materials are more freely available compared to 2007 and the first half of

2008, and that prices were lower and “soft.” No specific levers for negotiation were needed to capitalize on the weaker economy, but the magnitude of normal and existing negotiation activities (of all types, including sourcing and supplier development) had been increased.

The impact of the current economic situation on Procurement Experienced a Decrease
14% 14% 5% 41% 50% 36% 9% 5% 23% 23%

Experienced an Increase
Budgets Costs FTEs Savings Targets Technology Investments
1%-15% 15% or more 5% 0 5% 5% 9% 5% 5% 0 41% 18%

*Figures not shown, represent those who had no change or did not know of a change

Figure 2 Source: “Understanding the effects on Procurement in a volatile market” survey results, November 2008

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Suppliers As Figure 3 highlights, the majority of respondents felt that the current economic conditions had affected their supplier relationships, and that supplier risk had increased. More than 50 percent reported that their suppliers had increased–or attempted to increase–the prices they charged, thus putting a strain on the relationship. What’s more, 45 percent of respondents said that their suppliers were actively resisting working capital reduction projects. Security of supply was also a key concern. Almost 20 percent of respondents reported that suppliers had not been able to meet their supply levels or needs. And for almost 15 percent of respondents, the situation has become so extreme that suppliers have been put out of business, or forced to merge with another company.

No wonder, then, that almost 70 percent of respondents said that they are monitoring more closely the financial stability of their suppliers. At the CPO Circle “roundtable”, for instance, it was broadly agreed that they were well aware of the risks of damaging suppliers through excessive demands for cost or payment term improvements. This viewpoint was reinforced by further feedback from the CPO Circle meeting, where supplier risk management was generally regarded as a major priority, with regular and intense monitoring of changes in supplier liquidity, as well as possible changes to suppliers’ customer priority rankings. Some companies present at the meeting reported moving away from their usual sole sourcing arrangements in order to spread the risk of failure across multiple suppliers.

Speed of response Timescales are tightening. Not only is the procurement function facing fresh imperatives, but the time in which it must formulate a response and execute that response has sharply shrunk. While the time to achieve changes in procurement savings, budgets, costs, spend and headcount inevitably varies widely across organizations, half of the respondents reported having only six months or less to reach changed budget levels. The danger is obvious: while focusing on the short term, businesses may lose sight of their longer-term procurement plans, thus undermining the sustainability of benefits.

Supplier Impacts Actions
Have increased, or attempted to increase, costs Are fighting/pushing back on working capital requirements reduction projects Have not been able to meet our supply level/ needs Have been put out of business or forced to merge with another company Our suppliers are not impacting us

0%

10%

20%

30%

40%

50%

60%

Response Figure 3 Source: “Understanding the effects on Procurement in a volatile market” survey results, November 2008

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Talent Management Qualitative and quantitative analyses both indicate that pressures on talent management within the procurement function are easing slightly–despite the pressures that the new business environment is placing on the procurement function itself. Feedback from the CPO Circle, for instance, highlighted that workforce morale was still good. Some additional training, in areas such as market trends analysis, for example, was being provided in order to cope with the economic downturn, but in general the caliber and skills of incumbent buyers was considered very good, and appropriate for all aspects of procurement—whether in respect of positive benefit-increasing activities (for example value addition or price reduction) or negative impact mitigation activities (for example negotiating de-commitment from existing supplier contracts when production turns down).

Within the broader survey, a similar picture was seen. With regards to the downturn’s impact on employee retention, for instance, Figure 4 shows that more than 40 percent of respondents felt the current volatility in the economy has made it less difficult to retain their best talent due to insecurity about the job market.

In short, at a time when procurement leaders are being asked to do more, and to step outside their traditional functional boundaries and take on a more prominent role, they can be confident that their best talent will be on board to assist in that.

Retaining our best talent is...
33% 43%

More Difficult The same (no impact) Less difficult I don't know

5% 19%

Figure 4 Source: “Understanding the effects on Procurement in a volatile market” survey results, November 2008

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So what are organizations doing in response?
Responses to the present economic climate can best be characterized by the following observation. “The problems are in the short-term,” we were told. “The challenges, on the other hand, are longer-term.” It’s a dichotomy amply illustrated by the tactics that companies are pursuing as they navigate what may be the turbulent economic conditions for a generation. As depicted in Figure 5, organizations’ short-term responses are around cash conservation, cost reduction, and supplier collaboration and relationship management–the latter, in fact, being the single most commonly adopted tactic. Two-thirds of respondents are re-evaluating or redefining their sourcing strategies; over half are placing an added impetus on low-cost country sourcing, and precisely half are increasing or tightening the key performance indicators with which they measure their supplier base. A third are increasing their payment terms as they respond to cash conservation pressures and the higher cost of working capital. Such responses are doubly interesting– interesting in their own right, but also fascinating for what they don’t include. Longer-term initiatives have been left untouched, for example. Anecdotally, the near-unanimous feedback from the CPO Circle “roundtable” was that longer-term initiatives such as procurement transformation programs continue with little or no changes in response to the present economic volatility.

Procurement Actions Actions
Increasing our focus/efforts on supplier relationship management Re-evaluating/redefining our procurement/ sourcing strategies and/or saving methodologies Going beyond our normal boundaries and getting involved in new and/or cross-functional areas of the organization Experiencing more pressure and emphasis on our role within the organization Increasing our focus on low-cost country sourcing Increasing and/or tightening our key performance indicators Increasing our payment terms Finding the decision making process around consumption cutting policies easier Not experiencing any impacts or taking action as a result of the market conditions
0% 10% 20% 30% 40% 50% 60% 70% 80%

Response Figure 5 Source: “Understanding the effects on Procurement in a volatile market” survey results, November 2008

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So what should organizations do?

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While organizations are to be commended for adhering to their longer-term procurement strategies, it’s clear that in the short-term their actions are focused on survival and the day-to-day necessity of dealing with the downturn. But for a highperformance business, that’s not enough. Such tactics play their part, but they’re not the whole story. Clearly, as Figure 6 shows, the winners in this marketplace will be those that take the opportunity created by the present economic conditions to create a gap between them and their competition. So how best to capitalize on the opportunity? Clearly, the first thing to understand is that different organizations will need to respond in different ways. Winning in this economic environment calls for a game plan tailored to your business, its marketplace and the competition. Before turning to the procurement function’s specific role in this, it’s necessary to first consider the context of the organization in which it operates. So, as a starting point, we recommend beginning with a review of how recession-driven “big picture” strategic imperatives might affect the business, such as: • Changing consumer spending patterns • A reduction in business spending • The impact of a shortage of credit • Changing global trading patterns Then, consider–again at a strategic level–the ways in which the business might respond to these. Clearly, various options will be available, and more than one strategy might fit a particular need. The list below, while not exhaustive, illustrates some of the diversity of the possible strategies available:

Average ROIC relative to industry
15 10 5 0 -5 -10 -15 -20 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Downturn Winners Losers

Winners are those that outperformed others in their industry for the six years following the recession of 1990-1991; losers are those that under-performed others in the industry Figure 6 Source: Accenture study based on financial results analysis of 850 of the largest companies in the US last recessions.

• Redesign the business’s operating model to streamline and simplify it. • Undertake an expansion of the investment in innovation. • Make selective acquisitions. • Upgrade the business’s human capital. • Upgrade its performance management systems. • Adopt green principles. Whatever the strategy or strategies chosen in response to the applicable strategic imperatives, two conclusions follow. The first conclusion is the importance of having a plan, and having it now, before the eventual upturn arrives. In other words: what is going to happen, and how are we going to respond? The second conclusion is the role of procurement in delivering the financial and operational resources to fund that plan–a “How are we going to pay for it?” question.

And here, Accenture has very distinct views on how to drive sustainable cost reduction and cash flow improvements during uncertain economic conditions–thus delivering those financial resources. From our work with high-performance businesses, and our extensive research into high performance as it applies to procurement, we have found that procurement winners tackle this by: • Driving down costs–sustainably, and in a manner which will not hamper the business’s ability to grow. • Generating cash from within the business through the effective and durable management of working capital. • Appropriate reinvestment of achieved savings, as opposed to taking them to the bottom line, in order to fund the potential investment required to achieve even broader or more impactful cost reduction or cash generation.

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Within 60 days Short Term • Implement smart consumption policies to reduce S&GA spent • Speed source spot buys and S&GA purchasing categories • Improve efficiency of media spending • Recover duplicate payments and discounts earned • Extend payment terms for nonstrategic suppliers • Move to one-day payments • Off-balance MRO inventory • Increase discount with common suppliers (PMI, X-BU) • Stop inventory item re-ordering by optimizing MRP parameters • ...

Within 3-9 months Mid Term • Reduce material costs, negotiate/ change suppliers • Reduce manufacturing cost through lean principles • Standardize BOM components • Streamline logistics network • Consolidate R&D • Reduce number of IT applications • Reduce inventories (safety stocks), demand- and inventory analytics • Set-up supplier collaboration actions • Sell non-required assets, sell-andlease-back • Renegotiate payment terms with suppliers and customers • Optimize product features through target costing • ...

Over 9 months Longer Term • Consolidate administration and use shared services for F&A, HR and Procurement • Outsource non-core functions • Increase off shore ratio • Consolidate/transfer plants • Relocate service, manufacturing to leading competitive countries • Increase contact manufacturing • Optimize tax structure with legal and audit experts • Improve field–and sales force utilization • Optimize Engineering foot print • Lower warranty cost through improved claims accuracy • Optimize asset maintenance • ...

Figure 7 Source: Accenture, Total Cost Restructuring, October 2008

Figure 7 outlines one example of possible short-term and longer-term actions that an organization could take to restructure cost within the business. Clearly, the procurement function will play a key role in delivering many of these benefits, and procurement leaders should be prepared to take the initiative in these areas. As well as looking to support broad business initiatives, CPOs must also ensure that the procurement function meets the demands of the business by ensuring that they provide the right products–and at the right price and the right time. And in this economic climate, this means working more closely with key suppliers to deliver mutual benefit.

In short, the current economic environment may be here for a while. To successfully manage through this turbulent time, and be well-positioned for when it ends, organizations need to drive both short-term and longer-term structural change. Procurement is at the forefront of this change, and the present economy marks an unrivaled opportunity for the procurement function to both raise its profile and be a key part of business’s response to the turbulent times ahead. So why delay? Start today.

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Authors Kris Timmermans is a Senior Executive in Accenture’s Supply Chain Management service line. He is the Global Lead of the Sourcing & Procurement practice. In the last 15 years with Accenture, Kris has lead a large number of global procurement and supply chain transformation projects for companies across different industries, including Automotive, Industrial Equipment, Consumer Goods and Services, Transportation and Resources. Kris holds a master's degree in Mechanical Engineering from the KULeuven and MIT, Boston. Kris is also a member of the ‘Procurement Leaders Advisory Board’. Based in Brussels, he can be reached at kris.timmermans@accenture.com. Jeremy Robinson is a Senior Executive in Accenture’s Supply Chain Management service line. He is the Lead of the Sourcing & Procurement practice, United Kingdom & Ireland. Jeremy has over 20 years of procurement and operations experience, leading business transformation projects and driving supply chain benefits across industries such as Logistics, Public Services, Financial Services, Consumer Packaged Goods, Retail, Communications & High Tech and Resources. Jeremy holds a master's degree in Food and Management Sciences from King’s College, University of London. Based in London, he can be reached at jeremy.robinson@accenture. com. Joelle Price is a Senior Manager in Accenture’s Supply Chain Management service line. Joelle has an extensive background in Sourcing & Procurement and specializes in P2P. Joelle has more than 10 years experience in consulting and has worked across a number of industries. Joelle has a degree in Mechanical engineering and an Executive MBA from Bristol University / ENPC Paris. Based in London, Joelle can be reached at joelle.price@accenture.com. Jasmine Stephenson is a Manager in Accenture’s Supply Chain Management service line and is a member of the UK & Ireland Sourcing & Procurement practice. Over the last 8 years, she has delivered projects within the Financial Services, Telecommunications, Automotive, Professional Services, and Retail industries. Jasmine also has an in-depth background in eAuction solutions. Jasmine holds two bachelor's degrees in Marketing and Spanish from Appalachian State University, Boone, North Carolina. Based in London, Jasmine can be reached at jasmine.m.stephenson@accenture.com.

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About Accenture Accenture is a global management consulting, technology services and outsourcing company. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. With more than 186,000 people serving clients in over 120 countries, the company generated net revenues of US$23.39 billion for the fiscal year ended Aug. 31, 2008. Its home page is www.accenture.com.

Copyright © 2008 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.

About Accenture Supply Chain Management The Accenture Supply Chain Management service line works with clients across a broad range of industries to develop and execute operational strategies that enable profitable growth in new and existing markets. Committed to helping clients achieve high performance through supply chain mastery, we combine global industry expertise and skills in supply chain strategy, sourcing and procurement, supply chain planning, manufacturing and design, fulfillment, and service management to help organizations transform their supply chain capabilities.

We collaborate with clients to implement innovative consulting and outsourcing solutions that align operating models to support business strategies, optimize global operations, enable profitable product launches, and enhance the skills and capabilities of the supply chain workforce. For more information, visit www.accenture.com/supplychain.