Couverture

Titre

The Strategic

Purchasing Roadmap

A 7 step guide to cost optimization and value creation

for bottom-line results

4e de Couverture

Purchases from external suppliers represent 20% and up to 80% of companies' total revenue and keeping these expenses down is a critical issue for global financial performance and competitiveness.

As a result, the requirements of Executive Management with respect to the Purchasing function have greatly increased over the past few years. The Purchasing department must prove that it can have a positive impact on product quality and innovation, and also EBIT or working capital, and that it is contributing to decision-making regarding the company's strategic investments.

The argument put forward in this work is clear: the Purchasing Function is no longer a "support function" that simple carries out purchase requests. It is now a "Business & Financial Partner" of Executive Management, and it must substantially contribute to crafting and implementing strategy, and to financial steering, risk management, and value creation.

It must be part in the company's key decisions, which mainly rely on financial criteria, and work across all functions with the other Functional and Operational divisions.

The Purchasing function should serve as an active contributor to the company's competitiveness, on equal footing with the other functions.

This book is intended for Purchasing departments as well as Executive Management and Finance departments that wish to successfully transform the Purchasing function into a strategic driver for performance and value creation for their company.

Its aim is to provide the reader with a clear and concrete 7-step method to implement in order to make the changes expected by Executive Management and stakeholders, and thus holds the keys to writing Purchasing’s new roadmap to success.

Titre

Eric Salviac – Charles-Henri Vollet – Frédéric Bernard

The Strategic

Purchasing Roadmap

A 7 step guide to cost optimization and value creation

for bottom-line results

Copyright

This book has been published in association with

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Epub : 9782818804698

Introduction:

Preparing to Master the 7-Step Process for Purchasing Value Creation

The purchasing function has come to occupy a decisive position within companies in recent years, through the issues it handles in an unstable, globalized macro-economic environment. These issues – which are increasingly strategic and finance-related1, are crucial for business’ profitability. They are causing a major shake-up of Executive Management’s expectations for the purchasing function, its influence within the organization and its impact on the company’s results. It must be noted that the level of ambition and the challenges the purchasing function is asked to meet have increased substantially, and that it should see in this a real opportunity to position itself as an active contributor to the company’s development and growth. 2

Since the 2009 economic crisis, it has been necessary for purchasing to provide new solutions in order to recover good financial health and return to former levels of sales, while continuing to grow in a highly volatile environment. According to a recent study3, 70% of European companies state that changes will be coming in the field of purchasing – changes which will have a significant effect on their business. For 85% of companies, economic and financial profitability are placed at the same level of importance as customer satisfaction (86%) and the quality of the services provided. Companies must reconcile two concerns that appear to be mutually exclusive, as they do not pursue the same objectives: operational issues in the medium term and profitability-related financial issues in the short term.

Our conviction is clear and simple: the purchasing function has a strategic role to play. It is no longer a support function that simply executes specific tasks. Purchasing is now a ‘Business & Financial Partner” and it must create value by contributing significantly to developing strategy and taking operational initiatives, especially in relation to the supply chain. Therefore, this important contribution to value creation must be assessed, quantified and analyzed, and then purchasing must equip itself with powerful decision-making tools on this basis. It is no longer a question of recognizing that the purchasing function is increasingly finance-oriented but establishing it as a fact, accepting it as such and providing the means to integrate purchasing into business’ development, as well as of ensuring that it is a credible part of this process.

Figure 1: The purchasing function as a “Business & Financial Partner”

The purchasing function’s positioning within a company is no longer a matter of its place in an organizational chart or within the company hierarchy. It has become an “organic” concern in itself, defined by current strategic and operational priorities and the cross-disciplinary interaction that it develops with the company’s other functions. The purchasing function has become a member of the team in charge of conducting “business projects”, for the benefit of the whole company. This requires human relations skills and professional expertise of a different kind than those related to traditional purchasing activities, together with a more advanced understanding of the company’s other business lines and its overall strategy.

Acquiring new skills is now all the more necessary. The purchasing function must “do things from the top down”, be a source of initiatives and work on the same footing as other business functions. In this context, the ability to work in synchronization with all of the company’s other functions is key – whether as a strong contributor or as a project leader.

Figure 2: Purchasing function interactions within the company

What is the scope of the purchasing function?

The purchasing function is responsible for buying the goods and services needed for production and for the proper functioning of the business. To do so, the purchasing function encompasses two different kinds of activities:

Sourcing activities

Procurement activities

Upstream/decision-making activities: from spend visibility to contracting

Downstream/transactional activities: from selection and requisition within the supplier panel to supplier evaluation

Required skills: Analysis, strategic awareness, leadership, business acumen.

Required skills: Rigor, focus on service, responsiveness, attention to detail.

Figure 3: The purchasing cycle scope of activities

Chief Purchasing Officers (CPOs), purchasing managers, category managers and buyers must approach and manage a range of high-level problems that are directly related to financial problems. They must be knowledgeable about Return on Investment (ROI), Make or Buy analysis, contribution to results, cost control and Total Cost of Ownership, managing savings, price risk, compliance with internal control rules, control and adjustment of the purchasing budget, sales and operations planning, reverse factoring, reporting, variance analysis, price effects, etc.

The seven-step process to address the Financial and Business Partner agenda of the purchasing function, which allows to address the purchasing function’s shift toward becoming a “Financial and Business Partner” to maximize company value creation.

In this context of working toward value creation, the purchasing function must confront three types of new challenges in order to succeed: strategic, economic and human-related. We propose a seven-step solution to meet these challenges.

Figure 4: The Seven Step Process

Strategic challenges: Contributing to strategic decision-making and implementation

The purchasing function actively assists in re-focusing on the core business, which increases the need to implement an optimal purchasing policy including initiatives such as offshoring decisions, outsourcing projects, and transitioning to a "fabless company"4, for example.

It identifies (through reverse marketing activities) and selects, on a global scale, the suppliers that will allow the company to achieve its objectives in terms of quality, cost, timeframe, innovation, risks and corporate social responsibility, as well as its product variety and the time-to-market objectives for them.

It is responsible for developing and managing relationships with key suppliers. The function works in close collaboration with suppliers in order to ensure a high level of quality and make the most of their productivity gains and capacity for innovation.

Regarding innovation and supplier partnerships, the purchasing function can influence the company’s strategic trajectory: the purchasing function helps the company gain competitive advantages from its suppliers, and provides competitive intelligence at a limited cost thanks to a deep knowledge of the supplier market.

Lastly, the specific expertise and the networks of favored relationships developed with key suppliers constitute new comparative advantages that have value for the company as an intangible asset.

Economic challenges: Optimizing costs and controlling purchasing expenditures

The purchasing function works in conjunction with its internal clients upstream of the value chain in order to define functional needs, perform “design-to-cost” operations and contribute to analyses of Return on Investment for specific or joint projects.

The function incurs the company’s largest volume of external charges and is responsible for controlling – or even decreasing – this expenditure. This generally represents between 10% and 20% of revenue for companies in the services sector, up to 60% or even 70% of revenue for companies in the industrial sector5, and 80% to 90% in the trading and distribution sector. These proportions tend to increase when concentrating the company’s activities on its core business, which results in increased use of sub-contracting or outsourcing of production activities and the ensuing non-production activities.

The purchasing function calculates and validates the purchasing budget, and is involved in Executive Management’s and the Finance Department’s initiatives and cost-cutting plans. The purchasing function has a direct impact on a company’s margins and profitability, as it continues to be a margin optimization driver for Executive Management.

Expertise: Developing a high-level skill set

The purchasing function must increase buyers’ professionalism and skills in order to make them active parties to the growth in the company’s profits. This involves acquiring the technical and functional expertise of the purchasing profession, coherently with the other company functions’ business requirements.

The purchasing function must increase the use of the methods and tools that allow it to develop internal clients’ confidence, and develop skills in extremely varied fields (technical, legal and regulatory, technological, foreign languages, etc.)

Figure 5: Contribution of Purchasing to Value Creation

We propose a pragmatic, seven-step approach to responding to these challenges, which are directly linked to value creation, and to the new agenda of the purchasing function to deliver breakthrough bottom-line results.

1.  For example: innovation, differentiation, price positioning, earning market shares, bringing expenses under control, improving margins, etc.

2.  As an example, in terms of volume, global exchanges of manufactured products have multiplied by fifty since 1950, fuel products by ten and agricultural products by nine. During 2010, exports of goods increased in value by 22% (source: WTO, 2011)

3.  Study performed in 2010 by Ernst & Young Advisory on “Possible paths for companies’ return to growth” among 866 companies in 15 European countries, supplemented by 52 face-to-face interviews.

4.  Cf. Charles-Albert Michalet: Mondialisation, la Grande Rupture, Editions la Découverte/Poche, 2009, in which the author explains that the “dogma of insourcing is progressively giving way to another approach, that of outsourcing […]. The parent company moves upstream and downstream in the value chain by specializing in product origination, design and distribution. Manufacturing is left to the partners.”

5.  Toyota purchases amount to 85% of turnover.

Step 1: Developing a Purchasing Strategy and the Master Plan

1.1 Establishing a “strategic and operational contract” with Executive Management and the Finance Department

Executive Management’s concern with respect to purchasing performance is in being able to evaluate its contribution to the overall performance of the business, with particular emphasis on its contribution to value creation. From the point of view of the purchasing function, purchasing performance is judged its ability to deliver results. The way the purchasing function defines and measures these results must be approved by Executive Management and the Finance Department in accordance with their own objectives. Measuring purchasing performance must be defined, shared and validated by stakeholders in the business. In other words, the measurement process should be: 

Defined and constructed with the Finance Department;

Shared with the purchasing teams;

Communicated to, and discussed with, the branch or business unit’s corporate officers;

Approved by the Executive Committee so it is not open to interpretation when results are reported.

There are three levels of performance to be considered: 

The first consists in having a deep knowledge about external purchases, making it possible to:

Provide a true picture of purchasing expenses by category, by entity and by region,

Compare expense ratios (actual or as a % of revenues) between the various entities,

Know the market share of a given supplier by entity. 

The second consists in measuring direct savings and the cost avoidance reported monthly by buyers. The supplier service rate is also part of this performance level. 

The third level is more “strategic,” since it aims to:

Provide a concise overview of the contribution of purchasing to business performance: profitability, rate of return and growth;

Show the progress of the plans or programs included in the three-year or five-year plan (business plan) of the company.

 All of these levels will be included in three separate balanced scorecards, whose purpose is to enable decision-makers to be informed, lead the organization, identify trends and developments, measure the achievement of objectives (forecast/actual), analyze variances (cause/effect), communicate with the entire organization, empower all stakeholders based on clear objectives and develop areas for progress and improvement. These scorecards should be the primary reference for management and decision-making by those in charge.

Performance analysis plays a central role in the implementation and direction of the strategy and in assessing the achievement of objectives. Often based on specifically financial indicators, it has been seriously re-examined since the advent of other indicators that contribute significantly to business value creation (e.g., EVA, balanced scorecard). Consequently, we see that companies spend much of their budget on areas as diverse as customer and employee satisfaction, innovation and quality. These developments reflect a desire to involve all of an organization’s abilities to improve its overall performance in a sustainable manner. However, since the advent of enterprise network structures and virtual enterprises (horizontal integration with suppliers), it has become even more difficult to provide a common response to the notion of performance measurement. As Henri Bouquin states in Contrôle de Gestion et Budget, "Performance measurement is all the more problematic since:

The factors of competitiveness, creation, value and sustainability are distributed among the various responsibility centers,

There are significant timing differences with respect to the factors of competitiveness, value creation and sustainability.”

Thus, the stakeholders of a for-profit organization have goals that differ from each other because of the diversity of their activities. However, all these goals converge towards improving the overall financial viability of the company.

Measuring purchasing performance therefore requires that communication be established within the company: within the department, between departments, with Executive Management, but also with external stakeholders, i.e. suppliers. It should be a management tool that helps define priorities and motivate the department (rewarding performance). It should also emphasize the contribution of purchasing (value creation, competitive advantages).

Analysis of the operational performance of purchasing can bring opportunities for continuous improvement into focus:

Cost analysis,

Review of the status of the purchasing function within the company,

Assessment of the performance of the supplier panel,

Audit of purchasing expenses and quantification of savings opportunities.

Targeted changes persist due to measurable implementation of progress plans:

Purchasing project management and steering,

Enhancement of the performance of strategic suppliers,

Cost savings plan for purchasing categories,

Establishment of performance monitoring for the purchasing function. 

1.1.1 The purchasing function performance model

Purchasing performance is defined as an evaluation of the progress and quality of achievements in relation to objectives within a framework defined by Executive Management, leading to the development of action plans. Performance must also have a retroactive character: the actions taken and changes made as a result of a performance measurement must be taken into account (continuous improvement approach: identification of the cause of variances and modification of action plans).

In substance, purchasing performance is a variable concept, which depends on both the priorities of the company and on the maturity of the function, that is to say, on the impact it may have in creating business value.

Figure 5 presents the seven components of purchasing performance. The items most frequently cited and used revolve around costs and their reduction, and around quality, delivery times, innovation, risk, sustainability and the impact on cash of purchasing.

Figure 6: The seven components of Purchasing Performance

1.1.1.1 Total Cost of Ownership (TCO) and cost savings control

TCO

Cost management and control should be implemented according to a TCO approach, or "total cost of ownership." The difficulty is in defining the concept, especially while remaining consistent with the costing model defined by management control. Indeed, there are few companies where a recognized TCO model exists, and TCO is still a vague concept in terms of application. However, it is the only way to control purchasing costs throughout the life cycle of goods and services acquired. TCO makes it possible to examine the risk of cost variance—and to limit its unwanted effects—including in relation to hidden costs (e.g., costs related to inventories) and exceptional costs.

"Cost savings," or the contribution of purchasing to increased income for the company

Purchasing may contribute to the acquisition and development of a cheaper product by reducing the unit cost through purchases to "do more with the same level of resources," or to "do better with the current budget." One result of savings programs is to pass some of these savings down to customers to win market share by lowering the price. The impact for the end customer consists in obtaining a product at a similar price that functions better (increase in use value).

This requires control of expenditure6, one of the measurement tools that assess maturity in five key areas: 

The overall contribution of purchasing to the company’s performance

The drivers implemented internally

The supplier policy

Purchasing procedures (administrative)

Purchasing information systems (processes) 

It also requires savings program management, for which the (positive) impacts on net income and operating margin should be ensured. Although it is necessary to steer the realized gains to demonstrate that the function is improving and that all or some of the variable costs are under control, realized gains are not the only variable for measuring purchasing performance. Focus on earnings can lead to an increased level of risk, especially with respect to sensitive suppliers.

1.1.1.2 Sustainable development policy7

Corporate social responsibility (CSR) is the business application of the sustainable development concepts that integrate the three pillars: i.e. environmental, social, and economic.

Since the risk of losing its reputation is very strong for an organization, the purchasing function has largely appropriated CSR strategies8. Business ethics, especially under the pressure of some stakeholders, have become key criteria in choosing suppliers, which are therefore selected according to criteria such as protection of the environment, respect for human rights, respect for local peoples, respect for the process of worker compensation, etc.

The risks most frequently encountered for suppliers and subcontractors are:

Failure to comply with regulatory standards for environmental protection (environmental risks).

Possibility of bankruptcy due to pressure from stakeholders such as NGOs.

Failure to respect human rights (social risk and ethical risk).

Waste of water and energy in the production cycle (societal risks).

Failure to comply with contractual obligations (legal or “soft law” risk).

Absence of ratios and environmental performance indicators (monitoring risk that could lead to reputational risk).

Lack of internal culture on environmental issues: managers and governance (management risk). 

Also required is compliance with environmental regulations such as RoHS, WEEE and the REACH program.

1.1.1.3 Supplier panel goodwill and innovation

What makes a customer relationship "worth more" than a supplier relationship, and why? In other words, from the supplier relationship angle, how should we understand the value of this relationship from a non-financial perspective? This is not an issue on the customer side, since it is a matter of maintaining sales flow in monetary units and assessing their recurrence to decide on the value of the portfolio. From this purely financial standpoint, the value of the supplier panel is already reflected in the value of the customer base, if purchases are considered a direct cost, without which no sales would be possible.

On the supplier side, there is no assessment model as such for deciding on the value of supplier panel goodwill. We believe, however, that the supplier panel has an intrinsic value based more on qualitative than financial determinants. The value is focused around the supplier relationship instead of on its objective (the sale).

As an illustration, the co-branding practiced by some brands demonstrates the benefits of partnering with suppliers in promoting products. Such is the case, for example, of Intel and Microsoft with Lenovo, Dell or Compaq in the PC field, Pininfarina in the world of automotive design, Essilor in the field of ophthalmic lenses and the high-speed train (TGV brand) with Christian Lacroix9. In each of these cases, the supplier provides differentiation, innovation and a brand image.

It is therefore a matter of developing or maintaining an additional competitive advantage through active management of suppliers, which directly affects the value of supplier panel goodwill. To have incisive influence over the supplier relationship means, above all, to incorporate elements of strategic differentiation originating from the suppliers.

This requires reverse marketing and effective upstream supplier sourcing, as well as active management of the panel and of post-contract performance. It also requires working with the best suppliers, streamlining the panel and setting their level of supervision.

The following determines the value of supplier panel goodwill: 

Capacity for innovation

Capacity for growth

Proficiency with technologies

Cost control and management of economic performance

Control of business processes and quality

Risk level, especially in regards to shortage and failure

1.1.1.4 Supplier quality

This involves accelerating development and enhancing the contribution of suppliers to the quality of the product or service delivered to the customer.

Purchasing aspects should be integrated as soon as new products are created for customers, and throughout the production cycle.

Suppliers play a key role in the company’s delivery times and responsiveness in relation to its markets.

Suppliers are present at every stage of service production, which has an impact on customer quality.

To do so, a business must define a purchasing and supplier quality policy that incorporates the particular technical specifications and a quality assurance plan.

1.1.1.5 Internal customer service rate and OTIF

Managing the customer service rate and OTIF10

Managing the service rate11 with suppliers in conjunction with the supply chain manager is essential for responding better to demand. The goal is to make the service rate more reliable, bringing it as close as possible to a target value, and to limit variations.

Figure 7: Example of monitoring of service rate/delivery times

Management of internal processes from the time a need is expressed to contract signing.

The point is to know whether the purchasing function is optimized and internally consistent, enabling high purchasing performance.

To do this, it is necessary to rely on a standard internal process, which will be itemized in a purchase manual (usually available on the purchasing intranet). In this manual, procedures and tools should be clearly described in relation to the purchasing information system (if applicable). For example, there should be a description of the purchasing process for each segment (category), and the rules of engagement related to it.

1.1.1.6 Purchasing decision-making cash impacts (working capital)

The purchasing function makes a financial impact on the balance sheet through two components of the working capital requirement (WCR12) which are amounts payable to suppliers and a portion of inventory13. Automatically, the longer the payment deadline for suppliers, the larger the amounts payable to suppliers and therefore the greater this resource. Conversely, the greater the inventory volume, the higher the cash needs, and therefore the more financing is needed for the operating cycle14. At the same time, longer deadlines put suppliers at risk financially. The purchasing function, through its relationships with suppliers, therefore has a significant impact (is directly responsible) on the level of working capital requirement.

1.1.1.7 Purchasing risks management and mitigation

Purchasing performance is not solely related to the act of purchasing as such, but also to many external factors that influence it and whose circumstances are not always controlled. An outline of purchasing risks and consideration of risk factors throughout operational activities can help quantify the potential financial impact. Economic, financial (from the supplier perspective), industrial and legal risks should be analyzed. The ultimate goal is to avoid supply disruptions and problems with quality.

1.1.2 Purchasing performance incorporates supplier performance

The criteria for assessing suppliers have evolved towards an evaluation of the overall performance of a supplier in relation to the strategic requirements of the business. Thus we find service concepts (e.g. logistical and commercial performance, claims processing), risk concepts (e.g. sustainability, supplier risk management), compliance concepts (e.g. REACH, CSR), and even concepts related to ethics and conformity with an internal rules framework, etc. The assessment result is presented in the form of a list of rated criteria and culminates in an overall assessment score (rating) that can be used to classify suppliers, for example: a) in line with expected performance b) progress action plan, c) relationship to be reconsidered.

The primary objective is to ensure compliance with contractual obligations (e.g. functional and technical specifications) and to propose solutions in order to satisfy internal customers. The broader goal is to enable optimal selection of suppliers so that quality can be improved (e.g. "zero defects") as well as productivity (e.g. maximize the value/cost ratio).

For the buyer, it is a purchasing performance tool in the form of active management of the panel (e.g. comparability, inclusion/removal of a supplier, panel size) that is useful for implementing purchasing strategies, and an internal communication tool for problem solving (cross-functional).

Supplier performance measurement occurs:

At the time of qualification and inclusion as a supplier (i.e. as justification for selection) on the basis of clearly stated measures, surveys and contacts with the supplier’s references. This is an a priori approach.

During key stages of the relationship with the supplier: when implementing a new process or technological breakthrough, etc. At a given frequency (usually annually) at "supplier reviews" where topics such as cost reduction, innovative initiatives and sustainable development are examined and where contract and pricing terms, with any appropriate adjustments (e.g. year-end rebate, penalties, volume changes, etc.) are reviewed.

It can also be triggered in the context of a supplier audit, whose conditions of implementation are defined in the contract, if an event likely to jeopardize the relationship occurs15. 

It is therefore appropriate to include suppliers in a continuous improvement process (embodied by supplier progress plans), to improve the competitiveness of the company by relying on that of suppliers (shared performance) and to foster innovation research among suppliers (avoiding obsolescence, searching for competitive advantages). Supplier performance is an area that involves a number of departments and business functions: production, purchasing, quality, legal, etc.

The benefit of these reviews, in addition to assessing the performance of a supplier, is in developing and advancing upcoming situations, both internally and externally.

That is why it is crucial, based on the results obtained, to develop improvement plans to address identified weaknesses. The contribution to value creation made by such measures and thinking will inevitably lead the company to improve its system and by extension, its purchasing performance.

Figure 8: The purchasing performance dynamic

Example: A company whose strategy is to restore the operating margin and customer service rates

This company focused on four strategic areas:

the pursuit of productivity,

improving customer service rates (OTDR: On Time Delivery To Request),

project management to achieve operational excellence,

control over cash.

For the purchasing function, the strategy will focus on reducing costs and will be based on:

1 – A productivity plan

This consists in ranking spending with a focus on categories with few technical constraints with a highly competitive supplier market (indirect purchases). The goal is to implement competitive bidding16 and direct savings initiatives.

It also involves identifying direct purchases, for which the supplier market has developed in emerging countries (sourcing internationalization), and whose specifications can be easily challenged so that the total cost of these supplies is reduced.

2 – Improving the supplier service rate

This involves implementing a system of measuring the supplier service rate for direct purchases and applying a supplier guideline outlining the requirements in terms of timeframes, quantities ordered and quality, with the goal of switching over to PQA (Product Quality Assurance).

3 – Outsourcing project management. This involves identifying what are the products and services that can be outsourced ("make or buy" analysis).

4 – Deployment of the cash approach to purchases. It measures the target settlement periods per purchasing category and region, and/or to set up a process of securing consignment stocks with key suppliers. An opportunity analysis will be conducted with the Finance Department regarding rolling out a pilot "reverse factoring" project, followed by a program.

Example: A company whose strategy is to drive growth while maintaining its operational excellence

This company focused on four strategic areas:

development on market sectors adjacent to its core business through acquisitions,

development through organic growth in rapidly growing geographic markets,

development through acquisitions in mature geographic markets,

product innovation.

 For the purchasing function, the strategy will focus on the contribution to growth and be based on:

1 – A productivity plan. This involves developing a productivity plan focused on innovation with the preferred suppliers from the panel, based on value contribution (product/process), elimination of unnecessary costs (through lean manufacturing) and optimizing savings in light of the TCO.

2 – Strengthening the "key category management" approach. This involves capturing the new volumes from organic growth and acquisitions: grouping needs and aligning prices with identified common suppliers.

3 – Redesigning to cost. This involves launching redesign-to-cost projects for products sold for which purchases represent a significant share of the cost price (+50%). This leads to a reduction in the purchase price of materials and components, thanks to lesser functional constraints of the finished product.

4 – Risk management. In light of growth, enhance the risk mapping of purchased products and of the supplier panel to avoid disruptions in the supply chain that would imperil the company’s growth strategies.

 1.1.3 Requests by the Investor Relations Department to the Purchasing Department

In periods of high economic volatility or stock market turmoil, financial analysts, pension and investment fund managers, broker sales managers and other individual shareholders are heavily solicited, especially when indices collapse more than 40%, as was the case in 2008.

In addition, given the increase in negative externalities and their impact on business activity, shareholders are more frequently requesting non-financial reporting17, which is based on sustainable development principles. As regards Europe a law has been passed in 2001 concerning a new economic regulation (the NRE Act) which establishes a regulatory framework for non-financial corporate information. The annual reports of publicly traded companies are required to disclose information relating to the consideration of social and environmental consequences of their activities.

For example, Article 225 of the Grenelle 2 Act issued by French Government, which defines the CSR strategy reporting obligations for companies, also provides for compulsory reporting of environmental and social activity by enterprises with more than 5,000 employees. In practice, even SMEs are affected when their clients include large companies subject to this requirement.

The resulting shareholder engagement is based on the belief that consideration of social, environmental, ethical and governance factors leads to better financial performance of the money invested over the medium and long term, due to a more comprehensive understanding of risks and more committed management. Shareholder pressure manifests itself through the voting rights of shareholders, who make their expectations known at general meetings.

Therefore, in such heavily fluctuating and very volatile markets, it is crucial to explain the strategy of the company, reassure financial partners and develop an ongoing dialogue with investors.

Maintaining this dialogue is the role of the Investor Relations Department (IRD). In publicly traded companies, the CIRO (Chief Investor Relations Officer) acts as an intermediary between Executive Management and the financial markets.

The IRD actually has a wide range of responsibilities: relations with investors, individual shareholders and rating agencies, preparation of the annual general meeting and, of course, regulatory information.

Key activities for these departments include:

The release of financial results.

The company’s annual general meeting.

Review of all business lines.

Monitoring of the stock market.

Organization of regular meetings with analysts, fund managers and investors from around the world during roadshows. 

In short, the responsibility of the IRD is to put into perspective all the strategies and achievements of the operational divisions, which should be promoted among shareholders and analysts by the leaders of these divisions. In fact, every corporation today maintains a dialogue with, on average, about 300 investors per year.
Consequently, more and more business leaders are approaching financial market stakeholders, especially on theme days, to respond to increasingly specific questions from investors.

Internally, the IRD must be capable of involving the major operational or functional divisions, and then of moderating these interventions while avoiding any miscommunication that could have a negative impact on the share price.

It is therefore the IRD’s responsibility to pay attention and listen to the demands of the financial markets and convey investor expectations to Executive Management. Dialogue on governance issues is a recurring theme for the IRD which involves regular contact with rating agencies or managers of SRI funds.

Also, it is in this context that the IRD is becoming increasingly involved in drafting corporate annual reports and that the relationship with the Purchasing Department began to strengthen two to three years ago.

Requests by the IRD to the Purchasing Department cover five levels of involvement:

Level 1, fairly standard, is related to the amount of subcontracting purchases, for example, versus in-house manufacturing.

Level 2 appeared in 2006-2007 with the strong fluctuations in commodities, which led the Purchasing Department to show the IRD the tools to use to hedge against the rising prices of certain commodities. The Purchasing Department had to explain hedging techniques that use derivatives or supplier contracts.

Level 3 relates to supply risks. Due to increasingly probing questions about operational activities, the IRD must show the markets how the company secures its supply channels on some markets where resources are becoming scarce. Consequently, the Purchasing Department explains to the IRD how to develop programs to look for and identify alternative sources of supply in case it comes into contact with a supplier in a dominant position.

Level 4 is related to the reduction of purchase prices. On a broader level, the IRD wants to have a clear idea of how the teams in charge of purchasing have achieved concrete results in their collaborative work with the technical teams, including redesign to cost projects, to obtain more competitive purchase prices or industrial solutions.

Level 5 concerns energy efficiency and sustainable development. For example, in the chemical industry, the IRD seeks to promote the activities carried out jointly by the Purchasing Department and the Industrial and Environmental Risks Department. The goal is to prepare for the possible substitution of purchased products that are not considered in compliance with European REACH regulations, or to use equipment, products and services that reduce greenhouse gas emissions and energy consumption in general. 

All of these actions contribute to the integration of companies in SRI funds and may also lead the Purchasing Department to become involved in theme days organized for shareholders or financial analysts, which is, at present, still rare.

Nonetheless, the impact of purchasing performance in speeches made by CEOs & CFOs at roadshows is beginning to emerge, and demonstrates either improvement in the operating margin or that cost-cutting measures on purchases have made it possible to avoid a decline in the operating margin during periods of strong price increases.

1.2 Measuring the value created by Purchasing with Economic Value Added (EVA)

It should be possible to measure the contribution of purchasing performance to value creation at the enterprise level. This connection is essential for recognizing the value added by the function through its actions (purchasing activities, cost-savings plan, etc.) and the impact it has on net income.

To answer the fundamental question of "value creation," one must use an indicator that combines the basics of long-term company development: enhancing economic performance sustainably by making the best use of invested capital in a cost-effective way, in full awareness of the risks involved in getting there. This indicator will therefore take into account the financial results of the company and the cost of the capital used to achieve these results, which contains a risk factor tied to the economic sector. In traditional analysis approaches, cost of capital invested and risk are often overlooked. However, capital has a cost, and any decision to invest (as well as any "make or buy" decision) involves taking a risk.

Figure 9: The value creation cycle

The value creation indicator, also called “EVA” (Economic Value Added), is now an operational criterion for measuring value creation. It is calculated as the difference between net operating profit after tax and the weighted average cost of capital applied to invested capital to obtain the net operating profit18. EVA is an interesting decentralized financial management tool because it allows every level of the company to measure the performance of a unit by applying a given individual rate of return. In addition, EVA can be used in investment decisions, as can other tools such as NPV (net present value of future cash flows)19 to assess the suitability of the investment. EVA is therefore an indicator that can be deployed at every level of the company to help with steering the business and making investment decisions.

A product quality assurance and sustainable development certification process for establishing itself as a corporate citizen.

Figure 10: Calculating EVA

Formula for EVA:

EVA = NOPAT –IC * k

– NOPAT (or net operating profit after tax) is total revenue less operating expenses, amortization and taxes.

– “IC” is the amount of invested capital, i.e. the total equity and financial resources (loans) of the company. At the project level, IC represents the amount of capital to be invested to complete it.

– “K” is the weighted average cost of capital after tax.

The Weighted Average Cost of Capital (WACC) adopted and applied at the business level already incorporates some market risk ("beta"), which depends on the risk to the sector in which the company operates, and which therefore meets the remuneration requirement expected by investors. The weighted average cost of capital actually represents the minimum rate of return required by the company’s financial backers (shareholders and creditors) to finance investment projects, as well as retain those who are free to invest their funds in any company providing a more attractive return. It is independent of the financing structure of the company.

It represents the overall cost of financing the business and therefore includes a risk premium related to the sector in which the business operates, and which depends on the general interest rate level and the expected dividend rate related to the sector. Similarly, the WACC represents the minimum rate of return expected from investments (projects) made by the company.

It makes sense for any new project to generate a return at least equal to the cost of capital needed to finance it20. If the rate of return on investment exceeds the cost of capital, then the project generates a return greater than the cost of capital needed to carry it out. Therefore, the project creates greater-than-average value (which is very good news).

It should be remembered that the WACC is not a simple weighted average cost of the capital available to the business. This concept of risk premium and attractiveness is very important because, when differentiated according to economic sectors, it can ease comparison between different companies. The WACC is a "market" rate.

To simplify things, a table that lists the WACC by sector can be used to calculate EVA.

Figure 11: WACC rates by sector21

Industry

WACC

Industry

WACC

All industries

7.8%

Auto parts

7.3%

Computer hardware

14.6%

Food processing

5.9%

Hotels & resorts

8.3%

Life insurance

9.6%

Real estate

7.4%

Civil engineering

6.2%

Internet

8.7%

Consumer goods

6.1%

Software

8.2%

Airlines

7.7%

Media & advertising

7.1%

Food retail

6.6%

IT services

8.1%

Nonfood retail

8.3%

Temporary employment

10.6%

In summary, value creation takes into consideration the cost of capital needed to operate the business. EVA is the excess profit generated by the company’s activity in relation to the cost of financing by capital providers. 

Comparing WACC with ROCE

In fact, if the profitability of the company is greater than the cost of capital, then there is "surplus" value creation exceeding expected return on capital. We measure this profitability using ROCE (Return On Capital Employed), which is the ratio of operating profit after tax and operating capital22 (or capital employed). The cost of capital "k" is a cost determined by the market, since it represents the rate of return from the company required by investors which also includes a risk factor. The ROCE is profit identified by management and then measured.

The key point here is to compare the ROCE with the WACC23, or in other words, to compare a return on capital employed with a cost of capital related to the sector. If ROCE > WACC, it means that the company’s return on capital is greater than the cost of capital, performance is excellent and the company is "outperforming" the market. If the opposite is true and ROCE < WACC, then return on capital is less than the cost of capital. From an economic standpoint, the return is insufficient, and we can speak of "underperforming" relative to market expectations. Note that, in this case, EVA is positive as long as the cost of invested capital is covered by the operating profit (NOPAT). The company therefore continues to create value, but to a lesser extent compared to market expectations.

The EVA differential is calculated as follows:

EVA = NOPAT – IC * (k-ROCE)

In addition, any new project will have to generate a rate of return higher than, or at least equal to, the cost of capital needed to carry it out, otherwise value will be eliminated24.

For example, if the WACC applicable to the company is 10%, any new project with a higher rate of return, for example 12%, will create value. Otherwise, it will "destroy" value (if less than 10%, there is underperformance).

Figure 12: The comparison of WACC/ROCE

Analyzing “purchasing value creation” involves using a "value creation tree" to:

Understand and evaluate the role of the purchasing function in building operating margins, particularly through the costs that the goods and services purchased represent and the savings obtained (cost savings or cost avoidance).

Understand and evaluate the role of the purchasing function in mobilizing the company’s working capital through its impact on the working capital requirements (WCR25).

Handle "make or buy" decisions and the implications of these decisions on the use of capital.

Enable rapid evaluation of the supplier’s ability to create value when reviewing the supplier’s financial accounts.

Comprehend the levels of risk involved for it and third parties in achieving margin and capital objectives.

Figure 13: The value creation tree

In fact, observations show that most companies follow a model of strong cost reduction while neglecting the financial impact of their decisions on the company, and without sufficient consideration of exposure to associated risks. EVA is therefore a useful financial indicator for verifying if investments (strategic or tactical) generate a cash surplus. This approach also allows the buyer to clearly identify and quantify the drivers of value creation and can be used regardless of the company’s business sector.

Example: A company that uses EVA as a key performance indicator

A diversified business, having production, distribution (trading) and customer service activities uses EVA to steer its activities. The choice of investments is assessed in light of the value created: the net cash flow and capital committed must be identified for each project. The important thing is to put EVA in perspective, i.e. to not consider it only in the current year. 

Executive Management and the Finance Department share five major complementary concerns:

The sustainable (and profitable) growth of sales and market share,

primarily the concern of Executive Management

Increasing the operating margin thanks to product differentiation and innovation to avoid commoditization,

shared by Executive Management and the Finance Department

Achieving operational excellence by integrating productivity measures, improved service rates and cash management,

shared by Executive Management and the Finance Department

primarily the concern of Executive Management

Managing the strategic, human, operational and legal risks.

primarily the concern of Executive Management 

Consequently, Executive Management and the Finance Department should evaluate the effectiveness of their management in light of how well they respond to these five concerns, especially since they can enhance this effectiveness in their communication through the process of reconciling operating income.

To do so, having a master purchasing plan is essential; otherwise there is a risk of acting without a clear end goal. The master plan embodies both the objective and purpose of the purchasing function, provided it is based on the "real" objectives of the company, which, although necessary, is not sufficient in and of itself. In fact, it should in turn influence the objectives and strategy of the business: the corporate strategy and purchasing should therefore be fully integrated.

To meet purchasing challenges26, the purchasing function’s “products”27 must also be defined. They should be simple and expressed in terms of contribution to internal clients, and negotiated with line managers who will use them in their division or activity sector. These products must naturally meet the requirements of their business challenges28. Failing to keep this promise means exposing the purchasing function to increasingly strong criticism, as it will be perceived as a cost center without added value for the development, profitability and competitiveness of the business.

Positioning the Purchasing Department in a high-level dialogue to address the issues of the Finance Department and Executive Management has a prerequisite: a defined master purchasing plan (MPP). The MPP outlines the purchasing vision, mission, strategy, objectives, programs and action plans. To ensure consistency, it is based on the areas of strategic focus set out in the corporate plan, whose financial aggregates it adopts (from the business plan and budget) so they can be applied to each strategy by purchasing category and to the action plans for supplier portfolios. If the purchasing strategy is not "anchored" to the business strategy, those in charge of purchasing, the purchasing function managers and buyers will be unable to address and tackle high-level issues directly related to financial priorities. A lack of alignment would cause actions taken by buyers to be less visible, leading to a loss of efficiency and performance.

The MPP is an indispensable component of this dialogue, and its "language" is that of Executive Management: It talks about strategy, performance, value creation, etc., in financial terms.

1.3 Mapping purchasing expenditures and defining the baseline

The aim of mapping is to be a tool for managing purchasing by providing the most comprehensive view of external spending possible29. It is a prerequisite for any strategic thinking regarding the purchasing policy, whether in the context of reducing costs or taking advantage of purchasing synergies (takeover or merger). In this sense, it is a condition for the implementation of purchasing management control.

Mapping can also be used as a communication tool with other business functions in order to findings on purchasing practices and serve as a baseline for future decisions. This will involve determining the elements of an initial diagnosis: portfolio structure, concentration of classes (or families) and suppliers, identification of purchasing risks, etc., and controlling and steering spending, including through purchase hedging and budget forecasting. Mapping is then used to allocate spending by function and company production process, and to assess the role and importance of each good or service for the company (critical or strategic aspect).

Using a dynamic approach, spend mapping can serve as a starting point for the preparation of purchasing reports and for conducting any type of analysis such as comparing expense ratios (actual or as a % of sales) among the different entities and determining the market share of a given supplier or the benchmark of the supplier panel structure.

Figure 14: Dimensions and objectives of spend mapping

Mapping is a process that involves identifying, segmenting and categorizing all purchases of an entity (business, group, subsidiary, business unit) according to determined streams of analysis: amounts, suppliers, currencies, locations, types of purchases, etc. To be exhaustive, mapping should also include elements of qualitative assessment such as the state of the purchasing process by category to date (who buys what and how) with an assessment of the deviation from a benchmark best practice, for example in the form of a rating30.

It therefore requires:

Knowing at any given point what the company is buying (goods and services, OPEX and CAPEX, purchases held and not held in inventory, direct and indirect purchases), for how much, by type of purchase, by whom and to whom (suppliers, local markets, monopolies, etc.), where (geographic areas, subsidiaries, BU) and how (decision-making process).

Locating mass purchases by volume and amount (state of mass purchases to date according to portfolio segmentation), especially to determine the real purchase hedge ratio.

Establishing a database of issues (avenues and possibilities for economic optimization) to be used as the starting point for defining strategies on purchasing categories and for calculating and monitoring savings.

Having an overview of the supplier portfolio: identifying suppliers by purchasing category, geographic distribution and location, seniority of suppliers and their turnover rate, composition of the panel, etc.

Including knowledge of risks by family according to, for example, five specific classes of risks (economic, financial, industrial and quality, legal and contractual, business)31 that will be adapted according to circumstances and analysis needs.

Finally, for the sake of completeness, and in order to plan for the future (forecast purchases), it may be useful to include a map of consumption needs.

The result should be in the form of a database, typically created in Excel or Access, in which the organization of data will depend on objectives and on how complete we want the mapping to be. A series of analyses, graphics and recommendations should accompany this database to support decision making.

The Pareto chart or ABC analysis

The Pareto chart32 is used to rank the relative importance of different phenomena when quantitative data are available. It takes the form of a chart that facilitates analysis by displaying the relative importance of different facts and ranking them by cause in order of priority. It highlights the most important causes at the root of the largest number of effects, with the knowledge that 20% of causes are responsible for 80% of consequences.

This chart is developed in several stages: First we list the problems or causes to be analyzed, then we quantify the size and determine the percentage of each relative to the total, after which we sort these percentages by decreasing value and draw the chart. The final element is the curve of cumulative values whose points are plotted by adding the values of all the problems and causes identified earlier, until we reach 100%. Here we see the 80-20% rule emerge (20% of causes explain 80% of events).

The ABC curve divides the Pareto curve into three segments (A, B and C):

"A" represents 75 to 80% of the total.

"A" + "B" represents 90 to 95% of the total.

"A" + "B" + "C" represents 100% of the total.

Therefore, when the causes corresponding to segment "A" are dealt with, 75 to 80% of problems are solved.

This tool makes it easy to see at a glance which priorities need to be addressed.

In the case of mapping, the Pareto chart can, for example, represent the relative importance of the phenomenon of portfolio concentration in terms of suppliers (in other words, the composition of the panel) when quantitative data is available. The same can be done with the number of orders or invoices to analyze the concentrations (e.g. 80% of orders account for only 20% of sales, 15% of invoices account for 80% of purchases).

Figure 15: “80/20” Pareto chart

The chart above shows the distribution of purchasing spending by supplier. In theory, Class A, which accounts for 80% of purchases and 20% of suppliers, usually corresponds to strategic direct purchases. Class B, which accounts for 15% of purchases, corresponds to more current spending, and finally, Class C, which represents about 5% of purchases, corresponds to overhead spending or equivalents.

An analysis of the chart shows a high degree of portfolio concentration, with 80% of purchases tied to 22% of suppliers. As Class A is relatively concentrated, it presents a fairly high portfolio risk. In other words, given the amounts and concentration, default by one or more suppliers in this class could have significant consequences for the company. The company’s level of dependency with respect to its suppliers is a risk factor, and this representation can therefore encourage more open sourcing.

Examples of decision factors: concentration/distribution, negotiation levers, mass purchasing, panel optimization, etc.

The complexity/economic stakes matrix

The complexity/economic stakes matrix is a graphical representation of the purchasing portfolio by category that provides an overview of the relative positions of the categories compared to each other according to a criterion of optimization complexity, and the economic stakes criterion they represent. This matrix helps to visualize the actions required and the items to focus on for better control of the portfolio.

The table below provides a set of criteria to assess the complexity and economic stakes of a particular class.

Criterion: optimization complexity

Criterion: economic stakes

 Structure of the supplier market

 Market dynamics

 Knowledge of the market

 Market capacity

 Quality level

 Speed of technological development

 Barriers to entry

 Logistical/geographical constraints

 Political/environmental constraints

 Scarcity

Note: Each criterion is rated from 1 to 3

 Amount of purchasing spending

 Purchasing volume (number of orders)

 Relative weight (%) of the category in the portfolio

 Impact on customer perception

 Technology & innovation level

 Complexity of the product or service

 Required investment level

 Type of product (1: item; 2: component; 3: full function)

Note: The first seven criteria are rated from 1 to 3 (1: low; 2: medium; 3: significant)

The next step is to construct a graphical representation after selecting and rating the complexity and economic stakes criteria. A chart for an idealized portfolio is represented in Figure 15.

Method and key points

The preliminary work required for usable and consistent mapping is often tedious. Processing accounting data is a major undertaking due to the disparate nature of accounting databases and the lack of a common nomenclature between the purchasing department and other departments. Determining what data is needed, what data may be available and how to obtain it is a sensitive process in mapping, on which its quality (and credibility) depends. The data that may be available in systems includes:

Invoice lines: They allow for the identification of a supplier (but not necessarily the nature of the supplier’s business) and the amount actually charged at a specific date. The invoice must refer to an order (or at least to an order number). Particular attention should be paid to the billing method, which does not always reflect the reality of transactions (grouped invoices, subscription, etc.) and to the nature of the purchases linked to the invoices.

Figure 16: Complexity/economic stakes matrix by category (the Kraljic matrix)

Order lines: The order lines can give more information on the nature of the order (e.g. identification of items), and reconciliation with invoice lines can highlight any discrepancies (what the supplier billed for may be different from what was ordered). In practice, when settlement is initiated, the invoice should be reconciled with the order and any delivery slip (this is not always the case, and errors persist). Finally, the order lines provide information about the number of orders placed for each supplier and purchase category. This information can be valuable in assessing the volume of activity of the purchasing process.

Purchasing logs: In the absence of detailed information on invoices and orders, it may be necessary to settle for the accounting information contained in the purchasing logs. This is the least complete information, and depending on the "quality" of entries, it may be necessary to make manual checks and corrections (e.g. a single supplier can supply several categories of purchases, but the purchasing log will not reflect that, leading to attribution errors, etc.). To make use of this data, it will need to be organized by type of purchase. The allocation of spending to suppliers will be based on establishing a sequential link between the following: purchasing log, item number, invoice number.

In all cases, attention should be paid to the treatment of assets (to obtain net expenditure) and the VAT.

Example: Data request sent to the IT Department

“Recent 12 months of spend data from Accounts Payable, attributes include: vendor name, $ amount, General Ledger code, GL description, spend category/UNSPSC description (if available), invoice number, invoice date, discount terms, payment date, Purchase Order description, Purchase Order date, business unit, delivery address/location.” 

In each case, we should expect to have to reformat the data (if subsidiaries have different systems, for example), to collect additional purchasing data as needed and to combine the reconciled data collected. Unless we cross-check the purchasing data with the figures in the income statements of subsidiaries and the group, ensure that suppliers are correctly distributed between intra-group and external parties, and establish a definitive common supplier framework (especially with suppliers’ accounts), it is unrealistic to believe that mapping will be 100% reliable. We must therefore expect comments and objections on this matter. What matters is how confident we are that the results will enable sufficiently reliable decision-making: mapping is a management tool, not an accounting tool.

Supplier satisfaction surveys

Once we have completed the study of purchasing volumes and supplier positioning, it may be worthwhile to finish off with a supplier satisfaction survey in the form of questionnaires sent to the users of the products and services.

Figure 17: Supplier decision matrix

The appraisal should be weighed against actual purchasing spending to fuel potential decisions on panel composition. Decisions should take into account a study of supplier concentration (number of suppliers in a segment) to ensure a balanced portfolio and an analysis of the importance of each supplier: which are strategic, critical or replaceable compared to other choices?

Steps for mapping purchases

Step

Tasks

Preparation

Organize the portfolio (segmentation)

Define the size of the database to be set up

Establish the work plan and brief the survey teams

Collection and organization of mapping data

Prepare data requests

Collect accounting data, order lines, and office system data from respondents

Collection of non-accounting and qualitative data: surveys, appraisal and rating questionnaires33

Structuring of data based on nature of purchase/dates/amounts/ number of actions/bills/suppliers/ recurrence (Yes/No)/ contract/company/location/department (for example)

Portfolio analysis

ABC, complexity/economic stakes matrix, optimization options

Purchasing performance indicators such as:

- % of purchases managed by the purchasing department34,

- discrepancies between expenditures in the financial application and the purchasing/procurement application

- contractual coverage (purchases under contracts or frame agreements),

- % of invoices not connected to a purchase order

- % of usage for master agreements (or contracts under tender)

Major risk factors

Recommendations and factors for strategy and performance decisions

Example: Use case of purchasing mapping as a management tool

An internationally prominent building materials Group developed a tool to allow business units to manage their purchases using a continuous improvement approach as part of a purchasing performance plan. This tool can be used to map and analyze the purchasing portfolio in order to identify its strengths, weaknesses, and areas for improvement, set savings goals, measure its contribution to the group and track the improvements and results. This tool is divided into two major components: A (static) dated map of the BU's purchasing portfolio, used to identify opportunities for improvement, and a two-year action plan that includes objectives, a detailed schedule of the actions, and the responsibilities of all stakeholders involved.

The tool makes it possible to manage intra-group actions that involve multiple BUs, and local actions that pertain solely to the scope of the BU itself. There are two possible types of actions: Actions that use best practices or standard drivers (e.g. standardizing needs, competitive procedures, etc.) to generate savings, and actions that do not generate savings directly, but make it possible to institute best practices for improving savings (e.g. human resources, organization, process, etc.) The advantages include the ability to manage a database of more than 100,000 suppliers, homogenous segmentation, consolidating actions among all BUs combined, and savings that follow fixed rules and use a shared reporting procedure.

Mapping: A necessary step to defining the purchasing strategy

The above example also illustrates that mapping and the resulting analyses constitute a step in the purchasing strategy's planning cycle.

Figure 18: Purchasing strategy planning process

Likewise, mapping will shine a spotlight on several drivers for cost optimization, such as showing which purchases can be pooled, negotiating better with suppliers, defining contracts structured as master agreements or with no structure at all, rethinking needs at an earlier stage, etc.

1.4 Defining efficient strategies and action plans for each purchasing category

As described in the previous section on mapping, the categories have been segmented along two dimensions which set the starting point to figure out the strategy and associated actions plans for each Purchasing Category.

Figure 19: the Kraljic matrix

A - Clarify the concept of “category management”

Category management is a framework and set of practices used to manage category supplies to meet business objectives. A category is a group of materials or services that have similar supply and usage characteristics to meet business objectives established with stakeholders.

Figure 20: The Value of Category Management in Purchasing has to be rooted to stakeholder objectives

As shown in the following chart, “Category Management” combines three core activities. To make this clear, the following are some definitions that should prevent misunderstanding within purchasing teams and with internal stakeholders.

“Category sourcing” activity is the use of strategic sourcing (I) processes and techniques to optimize sourcing for a category and its constituent commodities/sub-categories. A category is comprised of lower-level commodities/ sub-categories, which can be products or services. A commodity is a defined product or service bought and sold in a supply market. It is typically characterized by the availability of functionally equivalent substitutes.

“Operational sourcing” activity (II) comprises the methods and associated techniques and tools used to optimize sourcing of goods and services to meet business requirements. It includes category sourcing as well as general/ tactical sourcing activities and cross-category sourcing support activities (e.g., competitive bidding techniques and e-sourcing tools).

“Procurement” activity (III) sets the framework of supply process and of actual supplier Integration management (SIM) and Supplier Relationship Management (SRM) to satisfy category objectives and business objectives.

Figure 21: Category management involves three types of activities

B - The stakes of Category Management

The current environment of price escalation, greater raw material and energy scarcity, supply market consolidation, extended supply chains, and service disruptions challenges even the most advanced purchasing organizations. Purchasing executives are prioritizing new in-kind strategies to deliver the next generation of cost reductions while balancing service, risk, and innovation imperatives.

To meet the demand for new category management strategies and improved savings performance—often with minimal additional resources—CPOs must ensure that consistent, repeatable practices are created and adapted for category assessment, planning, execution, and benefits tracking

Examples of questions to raise:

What is at stake for the diverse categories in the portfolio?

Do we have the “right” suppliers? The right number of suppliers (panel profile)?

What kind of relationship should we develop with our suppliers?

What risks may we have to cope with and mitigate?

What should be the best purchasing practices in this category?

Should we really have to buy or make?

…

Consequently, a number of dimensions and levers have to be taken into account to leverage a leading-edge Key Category Management approach relying on a number of pre-requisites including supply market analysis and benchmarking.

Based on the analysis made and the category’s sensitivity on revenue and/or the gross and operating margins, some key levers can be activated as mentioned below.

Figure 22: Key category strategy levers

Key category strategy levers

A: strategic categories

B: technological & technical categories (critical)

C: high volume categories

D: primary category (non-critical)

1

Specifications management

Redesign to cost

Redesign to cost

Standardization

Standardization

2

Risks

Active risk management & mitigation

Focus on securing supplier sourcing

Cost of change to evaluate; Competitive bidding on a two-to-three year basis

No risk

3

Sourcing focus

Manage & optimize TCO

Price/cost control

Secure delivery

Process simplification, reduction of administrative cost and time.

4

Make or buy

Make or buy decision (based on company strategic choices)

Buy or make if internal cost is competitive

Make or buy decision (based on sourcing risk)

Always buy

5

Supplier panel

Few suppliers by nature. Regular search for new suppliers.

Many approved suppliers (to ensure competition), few active suppliers.

Few suppliers by nature. Regular search for new suppliers.

Few global service providers.

6

Nature of supplier relationships

Long term partnership including joint development and experience sharing with suppliers

Must be in line with market trends and innovation.

Long term.

Must be in line with market trends; focus on productivity of the order-to-cash process

7

Price/TCO negotiation

Open-book policy TCO reduction with risk/product sharing.

Long-term savings.

Constant price reduction pressure. Exploitation of full purchasing power. Short‑term savings.

Price shall not be an issue.

The product price is not important compared to the TCO.

Indirect savings.

C – The Category Action Plan

The profile of the category will not be enough to ensure an action plan is successfully implemented since CPOs have to analyze the commonality of needs across the company’s various operational activities as well the level of supply market consolidation.

The aim is to evaluate the purchases according to two dimensions: 1) level of globalization of external spend by purchasing category, and 2) globalization of purchases according to supply market profile.

Figure 23: Level of Globalization of external spend by Purchasing Category

The x-coordinate is related to the segmentation of purchases according to the Business needs profile within the organization.

The question to answer is: Are purchasing needs

specific to one activity ?

common to several ones?

common to all activities, i.e. to the whole Group?

The y-coordinate is related to the level of globalization of the supply market per purchasing category.

The question to answer is: Does the supply market (or business stake) of a Category require management at:

the site level?

the country level?

the regional level (i.e. a continent)?

the global level?

Then you can break down your whole external spend by Category and position each of them within one of the 10 appropriate boxes available in the table shown above.

Of course all strategies and actions plans will have to follow such segmentation and the organization will have to be clearly explained to allow positive cooperation and interaction within all levels of management within the purchasing organization as shown in the following chart:

Figure 24: Purchasing Category Management - Roles & Responsibilities

The above synopsis should help clarify roles and responsibilities between local purchasing managers and Key Category Managers.

As an example, if the Business decides to consolidate the purchasing requirements for plastic parts at the global level for all branches by appointing a Key Category Manager (KCM), the strategy, supplier selection and management will be steered by the Global KCM. As a result, in that case, the Unit Purchasing Manager will supply his/her Business unit from third parties for which terms and conditions of purchase have been secured by the KCM.

On the other hand, should business efficiency require purchasing requirements to be consolidated at the site level, no KCM is appointed and the Unit Purchasing Manager takes full responsibility for managing the purchasing category.

Last but not least, it is important to understand that “globalization of needs at the Group level” does not necessary entail the use of “Global Suppliers”. In some cases it is more relevant to appoint a global KCM even if the supply base is local in order to ensure consistency and that quality meets company standards, as well as to perform an ongoing evaluation of market and legal conditions in different countries. In that case, a KCM dedicated to multi-branch coordination should be an efficient solution, but it requires in-depth cooperation between the KCM and the Unit Purchasing Manager. Such an approach is typically relevant for bought-in gas or electricity.

1.5 Choosing the best way to organize Purchasing

Choosing how to organize Purchasing in a way that's right for the company is an essential part of implementing the strategy and action plans. The organization and processes work to implement the strategy. For this reason, the CPO must define which purchasing operating model should be instituted, and how to organize the "purchasing network" in order to cover the function's sourcing and procurement activities.

There are several possible organizational models, from purely centralized to extremely decentralized. The reality on the ground shows us that there is no ready-to-use template, and that it is a fantasy to believe in a single, homogeneous structure. In fact, the organizational model goes hand-in-hand with the company's business, which is the decisive element.

One good method consists of starting by reviewing the function's strategy and the management processes of all purchasing categories, taking into account the level of performance expected by the internal client (see the "purchasing performance" model in section 1.1.1). The final structure of the org chart, the employees listed on it, and the links between them (dotted/solid lines) will be the result of an eight-dimensional analysis. Next comes the question of implementing this organizational structure within the company's structure, which raises several more questions regarding the mode of governance to adopt.

Figure 25: Defining and choosing the way purchasing is organized

Matrix structures

Very frequently, corporate groups are organized to include a group-level Purchasing Department, branch Purchasing Departments, or local unit Purchasing Departments within production sites or subsidiaries. The same business line may exist at both the corporate level (in which case it is tasked with strategy and harmonizing the purchasing processes, potentially acting as a "commodity leader") and a local level (in which case it is responsible for the budget and purchasing operations for its market).

The development of central purchasing units

When companies want to align a harmonized purchasing strategy and operational performance, they are increasingly turning to central purchasing unit as a solution. These organizations may come in different forms:

Internal, when the company is very large and has very large purchasing volumes in its market.

Semi-external, in the context of creating an EIG (economic interest group) or group purchasing organization that brings together multiple players in the same market in order to pool their purchases (volume consolidation to increase bargaining power).

External, via contractors and specialized marketplaces.

Central purchasing units are particularly common in certain industry environments. Big-box retail and specialized retail have instituted large-scale structures based on internal or semi-external models. Media is structured around central units, most frequently external ones, dedicated to the construction and fulfillment of their advertising investments.

The use of a central purchasing unit addresses several cost improvement goals by achieving significant purchase volumes, professionalizing purchases through function specialization, and sometimes outsourcing purchasing resources, which enables greater flexibility.

Organizing the purchasing function as a network of shared service centers

There are many reasons to make purchasing part of a shared service center: increasing operating efficiency to benefit businesses, increasing control over activities, reducing fixed costs (fewer FTEs), generating savings by pooling requirements and resources, aligning the purchasing strategy with the company's overall strategy, etc. However, depending on whether we want to emphasize procurement or sourcing, expectations and results will vary.

In order to maximize value creation, we are pushing the construction of shared service centers with high added value (expertise). Aimed at enhancing the maturity of the Purchasing function, this approach provides a real service to the end customer. From a practical point of view, this is reflected in a particular emphasis placed on sourcing, in order to target strategic, high added value purchasing categories (such as CAPEX or direct purchases) by doing in-depth work on the supplier panel. The aim is to raise the level of expertise and not limit purchasing to a support function.

A "center-led action network" kind of model is normally an organizational model used for purchasing in global organizations. In its most developed form, it consists of a web with three levels: (1) a core unit, in the form of a center of expertise led by category managers, is responsible for managing global needs and suppliers (sourcing, vendor management, master agreements, etc.); (2) one or more shared service centers, managed by the central unit, which are organized according to global regions served; (3) a network of purchasers (purchasers and lead purchasers) that keep a close eye on locations' needs and are responsible for handling and managing orders. In this context, it may be more appropriate for them to report directly (solid-line reporting) to the to the Purchasing function or to businesses than for them to directly report to one while still having responsibilities to the other (dotted-line reporting).

In order to optimize the placement of shared service centers and logistics systems, an overview of the flow of goods and financial flows is essential. This is accomplished through a total cost of ownership (TCO) approach that takes into account suppliers' locations, delivery points, any transfer prices, duties, local fiscal impact, etc.

Finally, the key factors of success are: establishing robust information systems and processes, setting out a clear service rate agreement, working together with the upstream logistics function, coordinating strong governance, having technical expertise in direct purchasing categories and never overlooking change management.

Assigned roles within a hierarchy

Purchasing must be organized in a way that fits the company's culture and business structure. In companies, four managerial levels may emerge: the corporate group, the business branches (or business lines), the regions, and the business units.

For this reason, depending on the group's governance, Executive Management must carefully consider what would be an appropriate structure, while bringing synergies to bear within these four levels in order to reduce the total cost of ownership for products and services purchased from outside suppliers.

Figure 26: Assigned roles within a hierarchy

Managerial Level

Executive Management

Finance Department (FD)

Department of Human Resources (HR)

Department of Industrial Operations

Purchasing Department

Reports to

Group

Group CEO

Group CFO

Group HR Director

Group COO

Group Purchasing Officer

Depending on the company's culture, the CEO, CFO, COO, or HR Director

Business lines

Business line CEO

Business line CFO

Business line HR Director

Business line COO

Branch Purchasing Officer

Depending on the company's culture, the CEO, CFO, COO, or HR Director

Regions/ countries

Regional CEO

Regional CFO

Regional HR Manager

Regional Operations Manager

Regional Purchasing Coordinator/Manager

Depending on the company's culture, the CEO, CFO, COO, or HR Director

Business units

BU CEO

BU's CFO

BU's HR Manager

BU's Operations Manager

BU's Purchasing Manager

Depending on the company's culture, the CEO, CFO, COO, or HR Director

Purchases are therefore fragmented and must work as a network, but this is not limited to the purchasing function. It holds true for all cross-business functions and for production-related operational activities oriented towards the needs of the company's clients.

Chain of command becomes less important once the purchasing manager at one of the four levels is assigned to one of the members of the Executive Committee (CEO, CFO, COO, HR Director, etc.), and this member understands the function's challenges and knows how to show its value-added.

On the other hand, the effectiveness of the purchasing function, regardless of its hierarchical position, will be maximized only if the four levels mentioned above have purchasers and Purchasing Managers who know each other very well, whose managerial scopes are well-integrated, and who are capable of developing a spirit of partnership and sharing within the Purchasing community.

As a result, within these complex, multi-branched organizations, the purchaser must be capable of quickly adapting to any type of partner in order to apply his or her knowledge, expertise and social skills. The purchaser must show courage, tenacity, diplomacy and humility in order to change, develop, and make his or her internal clients want to be credible partners. He or she must create this feeling of trust with his or her internal and external partners, because trust is fundamental to achieving the intrinsic goals of his or her job, which may be summarized as follows:

Better understanding the purchasing cost structure

Better evaluating strategic suppliers and their performance, and developing supplier goodwill in an ethical, sustainable fashion.

Improving information/communication flows and processes between the company and suppliers, as well as between the Purchasing Department and the Business and Operations Departments.

Encouraging innovation and skill-sharing.

Reducing product/supplier risks.

Developing the talents of his or her internal clients and future employees.

The development of project mode

In increasingly complex organizations, the purchasing function has begun to work in project mode: forming a project team (also known as a task force), defining needs, writing specifications, tracking, etc. Working in project mode involves either forming a team of purchasers in order to streamline purchasing portfolios across multiple sites, or one purchaser who works with other business teams. Purchases of complete, complex programs, rolling out an information-system-based project (e-sourcing/e-procurement), etc., are often handled in project mode within the company.

1.6 Building key purchaser skills

"Skill makes it possible to act and/or provide a satisfactory resolution to professional problems in a particular setting, putting various capabilities to use in an integrated fashion35". Skill is also "an individual taking initiative and responsibility in the professional situations he or she is faced with, practical intelligence in knowledge-dependent situations, and the ability to mobilize networks of players in the same situations, to share awareness of challenges, and to assume responsibility in certain fields"36.

Based on these two statements, a distinction can be made between:

cognitive skills: learning, technical knowledge, the ability to reason and process information

skills based on experience: technical expertise

cross-disciplinary skills: soft skills, project management, communication.

Figure 27: Key purchasing skills

Cognitive skills

Skills based on experience

Cross-disciplinary skills

Technical credentials and diplomas

Knowledge specific to one's professional setting: engineering, industry, language(s)

Special knowledge: financial management, legal, quality audits

Financial and technical analyses (financial analysis, NPV, make-or-buy)

Reverse marketing

Analyzing needs and writing specifications

Functional and value analysis, innovation

Negotiation

Budget and cost modeling

Purchasing risk management

Environment

Project management

Communication

Leadership

Team management and network management

Managing purchasing performance

Ethics and sustainable development

It will be necessary to determine the required skills by defining the businesses and describing the skills using a map of what already exists, both on the individual level and for an entire team of purchasers. Mapping the team's skills will help give a clear idea of the team's overall skills and how well they meet the company's needs.

With respect to cross-disciplinary (or "soft" skills), we should emphasize the need for the Purchasing Department to lay down "ground rules" so that the purchasers can do their work in accordance with "supplier goodwill".

In other words, this means defining behavioral and ethical rules. For instance, it involves working differently with suppliers on requests to lower prices, giving preference to a plan that lowers their own costs while defining the margin needed for them to grow. In our eyes, this is a concrete application to ethics and sustainable development that should be integrated into the business process of the supplier relationship.

How can you attract and retain the best?

Although the purchasing function contributes a great deal to the company's performance, it often has trouble attracting the right people. The question for the Purchasing Department to answer is therefore: How can we make the function more attractive?

Rule #1: In order to bring good people into the purchasing function, they need to be told how they'll be able to leave37. It's a paradox, but it reflects the need to consider the career path of the employees being sought out.

In order to prepare to leave purchasing, it is essential to cooperate on a regular basis with the company's business lines, and to develop knowledge other than purchasing expertise. Managing purchasing in a cross-functional team on cross-business matters is not just a best practice; it also meets these two prerequisites. This way, a purchaser may become a Project Manager in operations, and eventually assume operational responsibilities.

Rule #2: A purchaser’s project management, communication, and leadership skills are good for his or her purchasing performance, and also enable him or her to grow beyond purchasing.

Rule #3: "Force" certain purchasers to move into other functions if they are making rapid progress.

Rule #4: Take particular care when communicating with the function. As much as possible, provide optimal working conditions to attract talent.

Rule #5: Develop the concept of a "purchasing process" in order to create an identity specific to the function, and associate it with a set of varied skills.

The HR Director can help the purchasing function by providing, among other things: assessment methods and skills repositories that should be defined together, an individual performance management system (goals and assessment, variable compensation), support for the training plan, an analysis of recruitment needs, and help in steering employee career paths. The expected result of skills analysis will be to create the training plan, mobility plan, and recruitment plan and to adjust the compensation structure.

Balancing talents and skills

Creating a skills repository within the purchasing function is essential, as we have just seen.

The purchasing function needs to achieve a balance that brings together a cluster of skill sets:

– skills based on experience (e.g.: manufacturing processes and materials, service process engineering) with the products purchased and sold by the company

– business skills that include sales and financial skills (as we have shown in this work)

– strategic, cross-disciplinary and people skills.

However, the key to success is striking a subtle balance between the various profiles and developing future talents.

"Talent" refers to a person who has skills of his or her own, a tacit intuitive skill, a natural gift that is hard to impart through training. Talent reveals itself through a skill or skill set (if it does not reveal itself, it remains dormant).

Human resource specialists will say that it is more effective to develop talent by trying to develop an employee’s strong points rather than seeking to lessen weak points.

Additionally, talent is also characterized by the use of a personal style that can make a difference in one's professional achievements. This personal style results from the person's social skills and personality, and resists attempts at standardization.

It is in this context that the Purchasing Department must build its team, while keeping an eye out for talents that should be developed and retained within the company.

Breaking down purchasers as follows may provide a model to consider:

Figure 28: Standard structure of a purchasing team

30%

30%

30%

10%

Expert technical purchasers

- High level of credibility in Direct Purchasing with key influencers

Commercial purchasers

- High level of credibility in achieving fast, concrete results in strategic negotiations

Financial purchasers

- High level of credibility in laying the groundwork with the supplier panel in order to learn about their cost structure in detail, thereby optimizing the company's purchasing prices, while preserving their margin.

"Atypical" purchasers with a strong strategic and cross-disciplinary orientation

- A mix of the three profiles that develops talent with strong strategic, cross-disciplinary, and social skills

1.7 Planning and anticipating needs with Sales & Operations Planning (S&OP)

The S&OP (Sales & Operations Planning) process is the cornerstone for striking an optimal balance between strategic planning and operations planning, and guaranteeing a consensus between the goals of the Sales, Marketing, Operations (including the Purchasing Department) and Finance Departments. It is an integrated planning process that must ensure the consistent achievement of goals that are known to be hard to reconcile. Proficiency in the S&OP process is essential to achieving the required level of customer service, promptly and at the lowest cost, while preventing the risk of an interruption in procurement.

S&OP is a key link between financial planning and operations, and takes place very early in the production cycle. For the Purchasing Department, contributing to S&OP means: a) better anticipating needs, b) deploy its strategy for making purchases from a very early stage. The complexity and level of risk are high, as uncertainty regarding forecasts is significant38, and they are updated frequently. In return, it allows the Purchasing Department to position itself as closely as possible to the financial aspects of the strategy, and to promote the accuracy of its analyses.

Figure 29: Sales & Operations Planning process

The most critical issues are at the points of interface. Uncertainty lurks in every step, adding multiplier effects, such as increasing inventory by adding multiple safety margins. This is the "bullwhip effect"39: Even in markets where end consumer demand is stable, variations in demand are still generated, snowballing as they move along the supply chain, which amplifies overstocking. Only a highly integrated process can mitigate the phenomenon.

Figure 30: The bullwhip effect on inventories along the supply chain

The S&OP process occurs prior to management control and allows financial managers to make budget data reliable and adjust it to match the reality of operations, and then open the debate on any compromises. The S&OP process is an essential element in bringing purchasing and financing in line with regard to operations, with impacts on the valuation of the inventories40, the costing of operations, and cash flow forecasts (and therefore on WCR).

The S&OP process addresses the issues of uncertainty and prediction. It involves laying out and planning flows based on market demand, using the most reliable data possible, and is updated frequently enough41 to handle changes to production capacities and the way they are organized (the industrial master plan). This means streamlining the downstream supply chain by including goals and restrictions specific to clients, suppliers, subcontractors and wholesalers42. The issue is overhauling purchases based on fundamentals: managing the supplier panel, seeking out innovation, managing risk, and make-or-buy. Given the causes of variations in supply and demand, improved planning will also be beneficial by increasing load rates and distributing costs better (optimization).

This process is a deep structural element for the company as it is the only way to get good forecasts, and builds a strong connection between Executive Management, the Finance Department and the other functions. Within this framework, the Purchasing Department will be an essential interface because, within S&OP, it will highlight the opportunities and threats of the supplier market in order to avoid decisions that might not actually be effective because of factors such as saturated upstream markets that make it impossible to meet the growing demand of downstream markets.

Figure 31: Causes of variations in supply and demand

Demand variation

Supply variation

 Timing of orders and supplier-side planning

 Delivery lead time and predicting demand

 Size and makeup of the orders (batches)

 Quantities to be delivered, combining batches, stock outs

 Pressure on purchase prices

 Pressure on suppliers' costs (total cost is not well-understood)

 Information available about the products

 Releasing information to customers

 Diverse product lines and selection (innovation)

 Checking the creation and management of SKU43s (complexity)

 Changes in product specifications

 Quality and maintenance over time

 Timing and location of deliveries

 Distribution and transportation diagram

The S&OP process makes it possible to reconcile the oft-contradictory goals of the Sales, Marketing, Production, Logistics, and Finance Departments over the medium term (6 months to 1 year).

This means bringing the sales plan in line with the company's production capacities while meeting service goals (particularly serving markets and clients) and financial goals in order to offer a unique, achievable plan. The issue is one of balancing the sales plan (sales forecasts, introducing new products, withdrawing old ones, managing promotional offers, etc.) with the company's production and distribution capacities.

This approach makes it possible to:

Focus on critical factors while identifying risks.

Improve coordination within the company by encouraging operational resiliency, meaning the ability to absorb an unanticipated disruption with minimal impact on business.

Improve the company's profitability.

Optimize industrial and logistical applications, particularly the most critical ones.

Manage inventories while improving the level of service44.

In addition to the process itself, the success of S&OP deployment depends on the ability to change behaviors and methods of doing business. In other words, it marks a real change in culture, because it means constantly seeking a balance between the Departments' challenges and setting priorities to be managed based on operational risks and market changes.

The S&OP process is in fact a collaborative decision-making process in which a company holds monthly executive meetings to reach a balance between the sales plan's goals, the company's financial targets, and its internal production capacities in order to create a single, achievable plan. The process is initiated by Executive Management, which enlists the Sales Department in order to update its sales forecasts every month and forecast one month further into the future (a sliding window).

Standard activities include:

Collecting data, i.e. updating both the sales forecasts and the actual sales figures.

Creating a new sales forecast plan.

Comparing the previous plan and the new one.

Approving the sales forecast plan.

Communicating the new sales plan to production45.

The process continues with the Industrial Division, whose standard activities include:

Collecting data, i.e. actual production.

Taking into account the new sales forecast plan.

Comparing it with the previous plan.

Studying discrepancies and their effects.

If warranted, suggesting actions in order to adapt the development of production resources to changes in the sales forecasts.

The process ends with:

Preparing new plans and documents that will be handed out to attendees before the S&OP approval meeting.

The formal S&OP approval meeting is generally chaired by the unit or region's Manager, and its purpose is to:

Check that the plans have been carried out in keeping with the forecasts.

Sign off on the new plans.

Deciding which if any actions are necessary in order to adapt resources.

Decisions to be made

If the plan foresees significant, lasting increases in sales, the decisions may be to:

Initiate a make-or-buy analysis.

Look for new subcontractors.

Increase the number of temporary hires.

Invest in new equipment.

Initiate a recruitment plan.

Issue a request for tender in order to secure critical or strategic components.

If the plan foresees significant, lasting decreases in sales, the decisions may be to:

Recalibrate an excessively ambitious sales plan.

Reduce subcontracting and move operations back in-house.

Reduce the investment plan.

Revise the recruitment plan.

Put an end to temp hires.

Therefore, the presence of the Purchasing Department at the S&OP meeting is essential for:

Collecting information:

Knowing what level of business lies ahead, which helps convey exact volumes to suppliers and adapt the MOQs (Minimum Order Quantities).

If the sales are expected to increase, to anticipate the structural subcontracting or capacity needs that must be incorporated into the plan.

Finally, in order to be more accurate with suppliers about the level of safety stocks or anticipation stocks of critical materials or goods.

Sharing information:

If the forecast plan predicts a significant rise in sales, report on the upstream market's ability or inability to absorb demand for materials and components.

Alert sales representatives of the price impacts that result from upstream market trends.

As an integral part of the S&OP process, the Purchasing Department will efficiently develop its relationship with the Financial Department and Executive Management, as it can "naturally" align its action plans with financial, business, and industrial challenges.

6.  On a like-for-like cost basis, a 10% reduction in spending has the same effect on margins as a 100% increase in revenue (Source: Cap Gemini study, 2008).

7.  According to a 2008 Ernst & Young study on the deployment of corporate social responsibility strategies, most large enterprises have made significant commitments. Indeed, 73% of the French companies polled and 94% of the UK companies polled have set up a dedicated committee.

8.  According to a 2010 Ernst & Young study on sustainable purchasing strategies, the top three motivations for launching sustainable purchasing initiatives are: 1) protecting the image and reputation of the company (64%), 2) complying with regulatory and environmental guidelines (62%), 3) responding to needs expressed by customers (48%).

9.  Christian Lacroix is a famous French fashion designer (http://www.christian-lacroix.fr/en).

10.  OTIF: On Time In Full delivery.

11.  The service rate can be defined as the percentage of delivery at the promised time at the place of final distribution. The service rate is more generally defined as the achievement (or lack thereof) of a customer promise.

12.  Working capital requirement = Accounts receivable + inventories – amounts payable to suppliers; this is the amount of capital needed to finance the operating cycle.

13.  The policy on strategic stock, safety stock and MOQ (Minimum Order Quantity) for re-stocking orders determines inventory levels at time t.

14.  The same is true for accounts receivable: the longer the deadline granted to customers, the higher the WCR.

15.  The types of audit are: a) the systems audit that evaluates the ability of the supplier to control and improve his organization; b) the process audit that assesses mastery of a given process in terms of stability, reliability, etc.; c) the product or service audit that evaluates the ability of one or more processes to meet the requirements and specifications of the product or service.

16.  Competitive bidding: series of selective requests for tender sent to targeted suppliers to create competition and obtain quick gains (“low-hanging fruit”) on the basis of contracts for an indefinite term that can be terminated at any time with three months’ notice.

17.  Non-financial reporting accounts for the "sustainable development" measure of performance of a company using specific indicators. The main areas assessed include governance, human resource management, environmental performance, ethics, human rights, the customer/supplier relationship and dialogue with civil society.

18.  Pierre Vernimmen, Pascal Quiry and Yann Le Fur: Corporate Finance: Theory and Practice, John Wiley & Sons, 2011.

19.  See section 4.1.1 of the operational phase.

20.  When calculating NPV, we will see that the WACC is the minimum discount rate, which could be increased by the company.

21.  The WACC by sector is calculated assuming that the risk-free money rate is 3% and that the risk premium is 7%. We have: WACC = (sector Beta) * 7% + 3%, where the "sector Beta" is a risk coefficient linked to the economic sector. Source: Vernimmen, op. cit.

22.  See glossary. ROCE is also an interesting analysis indicator when performing the supplier financial analysis.

23.  This will be developed in Step 5: “Performing a proper supplier financial analysis”.

24.  The required rate of return of the projects depends on many parameters: amount, duration, country (risk) and the nature of the investment.

25.  By influencing inventory policies, supplier payment and reverse factoring to generate cash.

26.  We can break down purchasing challenges into five key objectives: 1) increasing the gross margin and operating margin, 2) making a lasting reduction to the WCR, 3) getting suppliers involved in increasing service rates according to customer requirements (which helps define correct inventory levels and therefore WCR), 4) identifying and reducing the risks associated with the purchased product/supplier combination, 5) professionalizing the internal stakeholders involved in the purchasing cycle.

27.  That is, what the company can expect from it in terms of services provided, delivery and production.

28.  This corresponds to the customer promise that product marketing managers summarize so well in a document known as the "copy strategy."

29.  According to Aberdeen Group, companies that have implemented a peer review of expenditure data found: a 25% reduction in indirect purchases, a 17% increase in controlled spending, a 15% increase in gains related to better quality sourcing, a 10% improvement in the alignment of services and deliverables with contracts (Source: Aberdeen Group "Spend analysis: Pulling back the cover on savings," October 2008).

30.  The mapping exercise should not be confused with a purchasing function assessment: mapping focuses on purchasing data and its analysis.

31.  Source: F. Bernard and E. Salviac, Fonction achats : contrôle interne et gestion des risques, Maxima, 2009.

32.  Wilfredo Pareto (1848-1923) showed that in the vast majority of situations, a few factors have a major influence on results. This is known as the Pareto principle, or 80%-20% rule, where 20% of factors account for 80% of the results. This uneven distribution is not uncommon and helps us distinguish the important problems from the less important ones. The goal of prioritizing problems is to be able to select which actions should be done in priority and therefore to focus on solving the most important issues.

33.  In the case of questionnaires, there should be a representative sample size of respondents to avoid bias in the final rating results. The mean, median and standard deviation of scores should be considered.

34.  Purchases that are not directly managed by the purchasing department are often called “maverick purchases”

35.  According to Sandra Bélier in Carré, P. and Caspar, P.: Traité des sciences et techniques de la formation, Dunod, 2004.

36.  According to Philippe Zarifian: Objectif Compétence. Pour une nouvelle logique, Liaisons, 1999.

37.  You have to know how to "recruit" and how to "de-cruit" (i.e., hire and fire properly).

38.  Demand is unpredictable and external shocks affect both supply and demand. As a result, the supply chain, including purchasing, needs to be agile, lean and highly responsive to sudden changes in demand.

39.  Source: Prof. Seungjin Whang of MIT.

40.  This involves finding the ideal balance between the quantities ordered, the frequency with which orders are placed and the impact on the prices negotiated. Next, finance takes over management methods, which do not directly concern purchasing (FIFO, valuation with the moving average price, etc.).

41.  Ideally, on a weekly basis.

42.  Good S&OP also has the effect of reducing anticipation stocks.

43.  SKU: Stock-Keeping Unit

44.  This means avoiding any risk of stock-outs.

45.  For industrial companies, the S&OP will be entered into the ERP's MRP (Materials Requirement Planning) module. Purchases will also be affected by the resupply rules and inventory policy included in the ERP.