Mobilizing for Excellence

in Supply Management
If a company wants to excel, it must excel in its largest
cost area. Yet fewer than 10 percent of companies
leverage supply management excellence to deliver
and sustain a competitive advantage.

Mobilizing for Excellence in Supply Management 1

A.T. Kearney has been conducting global in-depth studies on supply management for the past
25 years (see sidebar: Research Background). Our most recent research, the Assessment of
Excellence in Procurement 2017, corroborated by companion A.T. Kearney studies, shows that
while many companies have made significant progress, there is still much work to be done.
Based on their effectiveness in addressing external spend, we divide companies into four
distinct groups. Leaders (7 percent) demonstrate excellent supply management capabilities
and spectacular performance. Aspirants (11 percent) produce solid results and are making
significant strides toward becoming leaders. The Pack (55 percent), while adding value, are not
transforming fast enough. Strugglers (27 percent) barely cover their costs, let alone add value.

Looking ahead, global shifts demand even more from supply management. The recent rise of
populism and greater focus on sustainability are forcing all companies to rethink their bias from
globalism to localism, and may force major shifts in the footprint of their supply base. Disruptive
technologies are reshaping processes, changing business models, and impacting cost struc-
tures. Advanced analytics allows companies to harness the complexity of big data, uncover
hidden patterns, and exploit the resulting insights. Artificial intelligence is being applied to a
range of activities from automatically classifying spend data to analyzing contracts to evalu-
ating sourcing and negotiating strategies. Robotic process automation is reducing cost struc-
tures and improving consistency and compliance. Additionally, M&A activity continues to grow.
These mergers increasingly rely on cost synergies to de-risk their economics which positions
supply management as the merger money machine.

These trends accelerate the need for chief procurement officers to manage change and deliver
true competitive advantage from the supply management component of their value chain.
Understanding how leaders succeed and transform themselves provides valuable insights for
all companies, regardless of size, industry, or geographic location.

Research Background

Beginning in 1992, A.T. Kearney
has conducted an ongoing series
of in-depth global research
studies on supply management to
help the profession and C-suite
executives understand the state
of the art and the impact that
excellence can have on business
performance. The Assessment of
Excellence in Procurement (AEP),
now in its ninth edition, examines
the use of leadership practices
across eight dimensions and their
impact on business results. The
initial 2017 AEP database has
more than 150 responses and
more are being added each week.
There is a broad mix of industries
(39 percent process, 22 percent
consumer industries and retail,
18 percent discrete
manufacturing, and 21 percent the Stakeholders research
services) and geographies (31 expands that research to provide
percent Americas, 46 percent a 360-degree perspective on
Europe and Middle East, and 23 supply management’s perfor-
percent Asia Pacific) in this mance. This research coupled
benchmarking set. with our Fortune 1000 client
experience provides the most
Three recent companion studies comprehensive view available of
provide additional perspectives supply management’s role and
on supply management perfor- impact across more than 5,000
mance. The Return on Supply companies.
Management Assets (ROSMASM)
Performance Check research
series tracks key benchmarks of
financial performance for supply
management organizations. The
Voice of the CFOs and Finance
Community research explores
their views on supply manage-
ment’s contributions to financial
performance, while The Voice of

Mobilizing for Excellence in Supply Management 1

Leaders Drive More Value
If a company is going to excel, it needs to excel at external spend, which represents, on average,
30 percent of a service company’s revenue and 50 percent or more of a manufacturing
company’s revenue. Leaders achieve nearly three times higher return on their supply management
assets (ROSMASM) score versus other companies, and they also deliver a broader array of value
(see figure 1). Leaders are two and a half times more likely to deliver a high impact on managing
supply risk, four times more likely on reducing structural total cost of ownership (TCO), seven
times more likely on driving innovation, and 13 times more likely on positioning their supply
management organization to be a talent source for the rest of the enterprise.

Figure 1
Leaders achieve nearly three times higher return on their supply management assets
versus other companies

External spend is the biggest Leaders get a broader array of value

portion of the value chain (% responding “high impact”)

1.6x 2.5x 4x 7x 13x

90%

Services Manufacturing
(avg.) (avg.) 68%
30% 50% 60% 60%
50%
42%
Leaders get nearly 3X
higher ROSMASM 22%
15%
Top quartile 13 7% 7%

Middle 50% 4.5

Short-term Supply Structural Innovation Talent
Bottom quartile 1 cost risk total cost source
Leaders All others

Source: A.T. Kearney analysis

Leaders do not rest on their laurels and are two times more likely to invest for the future in areas
such as:
• Positioning procurement as a strategic partner
• Transforming procurement by leveraging digital technologies (for example, block chain and
robotic process automation)
• Attracting and retaining high-performing talent
• Improving risk management capabilities
• Driving innovation with suppliers
• Measuring procurement’s contribution to the business

Mobilizing for Excellence in Supply Management 2

Formula for Success in Supply Management
Leaders attain and sustain their effectiveness by following a three-part success formula to
achieve excellence (see figure 2).

Figure 2
Leaders attain and sustain their effectiveness by following a three-part success formula

Team excellence
Category Catalyst for Supplier
excellence business alignment… excellence

The most powerful Compliance and

cost reduction lever, competitive advantage
identifying key through innovation and
business insights … and enables risk management
sustainable results

Generates 73% of procurement value Generates 27% of procurement value

Source: A.T. Kearney analysis

Team excellence provides a catalyst by which supply management aligns with and helps
shape the strategic goals of the company. It also enables sustainable results through
process design and implementation, technology investments, talent development, and
performance management.

Supply management is a business partner in leading companies. More than 90 percent of leaders
report to the C-level. They are three times more likely to have high involvement, and three times
more likely to have high impact in key business processes such as strategic planning, product
development, value chain redesign, and M&A. They are also more proactively involved and have
a higher impact across more functional spend areas.

Leaders transform their supply management operating models and organizations to focus on
strategic value-creating activities. They are three times more likely to devote at least 70 percent
of their total staff costs to strategic FTEs and standardize their processes, leverage automation
to streamline tactical activities, and drive compliance to effectively meet business needs. To
attract and retain their strategic talent, leaders provide entrepreneurial opportunities, invest in
skill development, and are three times more likely to focus on developing a leading “brand” for
their procurement organizations.

Leaders also create a high-performance environment within supply management. They have
strong performance management systems that generate actionable insights and provide a
springboard for improvement (see sidebar: Team Excellence).

Mobilizing for Excellence in Supply Management 3

Team Excellence

Performance measurement
to build business case for
procurement investment
After evaluating its performance
using the AEP, a global Fortune 50
company concluded that it
needed to dramatically increase
its contributions to the company.
Key to this was improving how
procurement worked with
business and functional partners
by evolving from a centralized,
tactical function to a strategic
business partner. This required
action on several fronts.
First, a joint planning process
focuses procurement on initia-
tives that drive the most value for
business partners. The procure-
ment function publishes an
annual management implemen-
tation (MI) plan with specific
goals and deliverables aligned
with overall company strategy.
The MI plan development is a
rigorous process that starts the
prior October and assesses
historic performance, market
conditions, and gap to
best-in-class.
Second, cross-functional goals
are aligned with key business and
functional partners. Once the MI
plan is published, individuals use
it as a basis for their MBOs so that
enterprise, procurement, and
individuals are completely
aligned.
Third, progress against the plan is
monitored regularly, including
the impact of both EBIT and total
procurement benefits (TPB). TPB
includes safety, cost manage-
ment, strategic sourcing benefits,
special projects, working capital
delivery, and productivity
benefits. Finance is fully involved
in benefits tracking leading to a
single source of facts and high
credibility of performance
metrics. The controller’s team
provides data for tracking cost
against budget. Dedicated
finance resources audit strategic
sourcing benefits, spot check
scorecards, monitor working
capital, and sit in on quarterly
progress meetings.
Fourth, fact-based decision-
making fosters an analytics
culture where informed decisions
are made based on real-time data
and analysis. There are timely
internal leadership reviews via
recurring, scheduled meetings.
Project pipelines are tracked at
the BU level and flexed to meet
quarterly goals.
These practices result in a higher
degree of transparency of
procurement’s value to business
and functional partners, which
drives better business decisions.
In addition to transparency, the
addition of a finance resource in
the function helps drive trust in
the accuracy of reported value
delivered. It also positions the
function as a partner with a
proven track record of delivering
against its commitments.
As a result of best-in-class
performance management, the
board approved an investment
in procurement (entirely in
personnel) for the first time since
2008. This investment is a direct
result of better alignment with
business needs, strong advocacy
from functional leads, and proven
procurement value for the
company. The procurement team
is on track to deliver a seven times
return on this investment.

Category excellence is the most powerful cost reduction lever generating about 73 percent
of procurement value. Additionally, it provides key insights about supply markets that
help to shape the company’s business strategy.

Nearly every CPO knows how to negotiate with incumbents and do competitive bidding, but
leaders are nearly three times more likely to apply a tailored set of methods to deliver value
based on a category’s supply and demand power balance (see sidebar: The Purchasing
Chessboard® on page 5).

Figure 3 on page 5 identifies the four quadrants based on supply and demand power. The tactics
used in the Manage spend and Leverage competition quadrants (for example, volume bundling,
supplier consolidation, demand reduction, global sourcing, tendering, and target pricing) are
approaches familiar to anyone skilled in sourcing. Not surprisingly, the typical company makes

Mobilizing for Excellence in Supply Management 4

Figure 3
Leaders apply a tailored set of sourcing approaches

A.T. Kearney Purchasing Chessboard®

High Methods used most; most impact

Methods used moderately; some impact

Change nature Seek joint
Methods used least; least impact
of demand advantage

Supply
power

Manage Leverage
spend competition

Low

Low Demand power High

Source: A.T. Kearney analysis

high use of these approaches, but leaders are twice as likely to use them systematically, and more
likely to get high impact from them.

However, in the upper half of the chessboard, suppliers have high power, potentially limiting
a company’s leverage. The Changing nature of demand quadrant includes methods to counter-
act supplier power by reducing dependency such as functionality assessment, complexity
reduction, and design for sourcing. Companies are less likely to use these methods due to the
skills, effort, and cross-functional cooperation needed to break the supplier’s hold. While
leaders are three times more likely to apply methods systematically, and are four times more
likely to see high impact, all companies have opportunities to improve in this quadrant.

In the Seek joint advantage quadrant, both supplier and buyer have high power. This scenario
lends itself to approaches where cooperation between the companies can benefit both of them
using tactics such as integrated operations planning, value chain configuration, and collabor-
ative cost reduction. The number of methods used in this quadrant is the lowest overall; however,

The Purchasing Chessboard®

The Purchasing Chessboard® is a framework that helps companies identify

and select the most effective set of approaches to use to reduce costs and
increase value for purchased goods and services. It describes four basic
supply-demand power scenarios and for each, the specific methods that can
be used with suppliers based on supply and demand power. For more infor-
mation, please visit www.atkearney.com/web/the-purchasing-chessboard.

Mobilizing for Excellence in Supply Management 5

Category Excellence

Delivering category excellence
when supply power is high
A large maker of industrial
chemical products operates in
a market with few large compet-
itors and a slew of smaller com-
petitors. All companies rely on an
oligopoly of chemical suppliers
that have the potential to control
supply pricing and capacity. While
this situation might be beneficial
to the larger company in the short
term (with supplier price increases
helping to drive out smaller com-
petitors that lacked the company’s
bargaining power) it recognizes
the need for a proactive approach
to protect it from continued price
increases.
The company employs a dual
sourcing strategy that relies on
approaches nicknamed castle
and bishop (see figure).
The castle approach seeks joint
advantage with suppliers by
developing more collaborative
behavior and securing more
favorable conditions. The bishop
approach goes further by
leveraging competition among
suppliers and sourcing from
alternative, low-cost country
suppliers. Timing of these moves
is crucial. Triggering the bishop
move too early benefits smaller
competitors, while making it too
late entrenches the oligopolistic
suppliers. Thus, a gated process
of continuous monitoring and
re-evaluation is put in place. With
these carefully orchestrated
moves, the company is able to
stay ahead of a dynamic supply
market and choose the best
strategy to maximize benefits and
competitive advantage. As a
long-term effect, the company
now has preferential access to a
strong supply market and is using
its strength in the value chain to
secure high margins.

Figure: The timing of the “bishop” and “castle” moves is crucial

Approach Future strategies

Project-based Value-based
partnership sourcing
Change Seek joint
nature of advantage
demand with supplier Total life-cycle Collaborative
concept cost reduction

Supply
power
Manage Leverage
spend competition
Expressive Leverage market
among
bidding imbalances
suppliers

Reverse Price
auctions benchmark
Demand power

Source: A.T. Kearney analysis

leaders are two times more likely to systematically use such methods, and four times more likely
to realize high impact for their efforts (see sidebar: Category Excellence).

Beyond applying a tailored set of sourcing approaches, leaders take category excellence a step
further. Leaders inform the strategic direction of the company by developing long-term plans
for important categories, where they gain key business insights about supply markets such as
the impacts of supply industry restructuring, competitor moves, and technological advances.

Mobilizing for Excellence in Supply Management 6

Supplier excellence ensures that suppliers comply with contractual requirements, and,
more importantly, that the company reduces overall supply risk and gains competitive
advantage through more rapid and impactful innovation from supply markets.

Leaders actively monetize the full supplier life cycle (see figure 4). While most companies have
processes for sourcing, selecting, and contracting with suppliers, leaders are more likely to
have focused initiatives to proactively manage their supply base footprint, and are more
effective in selecting and onboarding suppliers to meet their business needs.

Figure 4
Leaders monetize the full supplier life cycle

Differentiated outcomes for

strategic vs. mainstream suppliers
Sourcing and Compliance
contracting and payment
• 2X more focus on structural advantage
Supplier
• 5X more focus on innovation life cycle
• All leaders (vs. 50% of all others) have
innovation target
• 2X more focus on risk management
Joint
• 2X higher understanding of SRM
improvement
internally and externally
• 1.1X higher compliance management
• R2P is the most robust process
Well advanced Making progress Limited progress

Note: R2P is requisition to pay.

Source: A.T. Kearney analysis

Once suppliers are onboarded, attention turns to managing the contract. Leaders have
higher compliance to negotiated contracts. While the requisition to pay (R2P) process is
typically the most mature process for all companies, it is well-established and highly efficient
for leaders.

The third part of the life cycle is to focus on joint improvement. Here, leaders create differen-
tiated and highly effective programs for strategic versus mainstream suppliers, while 20 percent
of other companies do not even have a program for mainstream suppliers.

Leaders are twice as likely to focus strategic supplier relationships on long-term structural
advantage, including TCO and agility within the supply chain, and four times more likely to
focus on innovation so as to deliver faster speed to market, greater differentiation, increased
price realization, and lower risk of an unsuccessful commercial launch. Importantly, all leaders
have targets for supplier-driven innovation versus just 50 percent of all others (see sidebar:
Supplier Excellence on page 8). Leaders are twice as likely to focus on managing important
areas of risk such as supplier operational failures, natural disasters, cyber-security breaches,
and raw material price volatility.

Mobilizing for Excellence in Supply Management 7

Supplier Excellence

Systematic engagement key
to supplier excellence
A $5 billion company has a wide
product portfolio and segmented
businesses. As a result, procure-
ment needs to source very
different items such as rigid and
flexible packaging, resin, food,
chemicals, and all indirects,
which are each unique in supply-
demand power and sourcing
methods. One of the keys to its
success is supplier innovation.
A dedicated innovation and
sourcing management team
works as an interface between
R&D and suppliers. All three
parties agree to innovation
targets and regularly track
metrics. Businesses align their
innovation plans—upfront
through the three-year category
strategies and continuously
through innovation targets and
projects. They are supported by a
top-down mandate and regularly
report to the CEO and CFO on
progress. To date, more than $100
million in savings have been
achieved annually across various
categories, and the company is
recognized by the industry for its
innovation initiatives.

Seeking the Next Value Frontiers

Changes in the world economy, continued advances in technology, and increased competitive
pressures mean that successful supply management organizations must push the boundaries
of how they deliver value. This has implications for how the success formula of team, category,
and supplier excellence must evolve.

For team excellence, supply management needs to leverage digital and talent opportunities.
While leaders adopt more advanced analytics and technology, few, if any, companies have yet
to fully exploit advanced offerings such as robotic process automation and capabilities such as
analyzing complex bidding and award scenarios. While leaders continue to invest in attracting
and retaining the best talent, one company in particular is setting a high bar for all (see sidebar:
Talent Management as a Driver of Competitive Advantage on page 9).

For category excellence, supply management needs to move from sourcing individual
categories to radically rethinking requirements and integrating sourcing decisions across
suppliers and categories to deliver higher value at lower cost for end products. To learn more
about disruptive procurement, visit www.atkearney.com/documents/10192/8444909/
Disruptive+Procurement.pdf.

For supplier excellence, supply management needs to become the orchestrator in creating
virtual vertical collaboration with partners in the ecosystem, across the value chain, and within
the enterprise. To achieve virtual vertical collaboration, a company takes the lead with its key
suppliers to abandon traditional arms-length adversarial behavior, secrecy, and distrust to build
a bond and make mutually beneficial business decisions.

Lifting the State of Supply Management

If you are standing still, you are falling behind. To lift the overall state of supply management,
every company needs to mobilize for success regardless of where they lie along the spectrum
(see figure 5 on page 9).

Strugglers need to focus on delivering results today by using strategic sourcing and compliance
to deliver major cost savings, or risk being marginalized. The Pack need to establish credibility

Mobilizing for Excellence in Supply Management 8

Talent Management as a Driver of Competitive Advantage

A leading beverage manufacturer
needs to attract top talent and
offer those individuals excep-
tional opportunities to succeed
and grow within and outside
supply management.
Although supply management is
not initially on the radar for most
MBA candidates from the top tier
schools, the company has found
success in attracting these
talented people by marketing its
supply management brand and
displaying the range of opportu-
nities that its scale and champi-
onship competitor culture offers
to prospective employees. These
include signature opportunities
to negotiate hundred-million to
billion-dollar deals with suppliers.
It also provides transformative
opportunities to make big
changes happen, such as working
with suppliers to help them greatly
reduce costs while simultane-
ously introducing new products,
and reducing environmental
impacts. And it means giving the
team entrepreneurial opportu-
nities to be creative, especially in
less-developed markets, where
market structures, cultures, and
political realities require new
ideas and new business solutions.
A key approach to talent man-
agement is to focus resources
on high-leverage activities and
make those results visible and
celebrated. Tactical activities
are automated and centralized,
and the resulting savings are
reinvested in acquiring and
developing higher-caliber talent
to drive tomorrow’s strategies.
It invests heavily in people, with
the focus as much on category
expertise as it is on business
knowledge and teamwork skills.
Plus, the company moves talent
fast, recognizing high achievers
and giving them additional
responsibilities and challenges.
This helps keep the environment
challenging and rewarding for
talented team members.
The talent management strategy
of this organization has given the
company a unique advantage by
bringing the best talent on board,
providing opportunities and
developing capabilities to deliver
a wide range of value from the
supply markets, and injecting that
talent throughout the rest of the
enterprise.

as respected contributors and continue to add value. They need to assess their capabilities
against the success formula and establish priorities to transform their supply management
organizations by increasing the levels and range of value created. Aspirants need to build
the environment within the company that enables success—“going from good to great.” They
need to continue to deliver solid results, increase stakeholder understanding of how supply
management adds value, and gain stakeholder acceptance and recognition of current

Figure 5
Accelerate progress to earn or grow your seat at the table

7%

11% Leaders
55% Aspirants
Leverage brand
27% The Pack and talent
Go from good
Strugglers to great
Drive more value
from a broader array
Focus on
strategic sourcing

Source: A.T. Kearney analysis

Mobilizing for Excellence in Supply Management 9

Testimonial

Brad Gray,
Vice President,
Global Purchasing,
Dow Chemical
Company
About a decade ago, we were
convinced that as a corporate
purchasing function, our
centralized procurement
capability was world-class.
To verify our belief, we worked
with A.T. Kearney to do a rapid
assessment based on the
Assessment of Excellence in
Procurement (AEP). What we
learned was that we could double
our annual contributions to the
company by dramatically
improving our process discipline
along with the interface to our
internal business and functional
partners.
Since that time, our company has
used the AEP to fundamentally
reverse the course we were
on—from a centralized, tactical
function to a strategic business
partner that reports directly to
the COO and delivers high-impact
value on a regular basis to Dow.
To deliver this value, we embarked
on a transformational journey that
not only improved our process
discipline, but was successfully
tested through a series of
high-profile mergers, divesti-
tures, and acquisitions.
In addition, we use the AEP to
periodically challenge our
understanding and application
of leadership practices to help
us become more strategic and
deliver market-leading cost
reductions and value.

contributions and self-generated ideas to add more value. They can then use that acceptance
to foster a demand “pull” for supply management’s involvement going forward.

Leaders need to continue to nurture a culture within supply management that fosters success
on an ongoing basis. They need to anticipate and adapt as business needs and markets evolve.
Leaders must ensure that the supply management team understands and aligns with long-term
goals and strategies for supply management; challenges the team to provide a continuous
stream of value to the company; and continues to attract and develop a highly talented, high-
performing team.

Many companies use AEP as an assessment tool to develop a multiyear plan to achieve and
sustain leadership (see sidebar: Testimonial). To learn more about the Assessment of Excellence
in Procurement, and how you can participate, visit www.atkearney.com/procurement/
assessment-of-excellence-in-procurement-study.

Authors

Mike Hales, partner, Chicago John Blascovich, partner, London

mike.hales@atkearney.com john.blascovich@atkearney.com

Sonali Agarwal, director, New York Alex Thoresen, consultant, Chicago

sonali.agarwal@atkearney.com alex.thoresen@atkearney.com

Mobilizing for Excellence in Supply Management 10

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