You would not expect your doctor to start treating whatever hurts you until she had examined you and diagnosed your condition. And smart purchasing organizations take the same systematic approach when they want to make significant performance gains.
Cost savings of $150 million resulted from applying that approach to a multi-billion-dollar global company ADR North America worked with in the chemical industry. Coming out of the economic downturn, top management felt it was a good time to find out how supply management might contribute more to its bottom line.
They wanted to avoid the typical “band-aid” approach that might address a few symptoms but not root causes of deficiencies. So they brought in ADR for a comprehensive analysis in three areas:
- Organization: Using ADR’s Current State Analysis (CSA) tool to identify organizational strengths and weaknesses
- Individuals: Using ADR Development Needs Analysis (DNA) to assess the skills of procurement staff
- Opportunity: Identifying specific areas of spend that had potential for big savings
Based on the “diagnosis” from those baseline assessments, ADR and the client were able to generate a viable plan to transform supply management and deliver significant value to the organization.
Current State Analysis (CSA)
Using information from interviews with senior executives, business unit leaders and purchasing staff across key client locations, ADR used Current State Analysis to score organizational skills along three dimensions: business alignment, processes and practices. Business alignment describes how the organization uses good general business practices such as human resource development, strategic planning and measuring performance. The processes dimension examines whether specific supply management processes are in place. And the practices dimension assesses how well the organization executes those processes.
The CSA in this case showed the purchasing organization had only basic skills in most areas. It was operating on a short-term planning horizon; lacked the ability to execute globally; and had a weak team below the upper ranks of procurement executives. However, in several key areas there were some strengths—strong top leadership, a focus on cost, a proficiency in using performance metrics and perhaps most important, an ability to manage change. Those strengths positioned the company to take the difficult steps required for a sustainable transformation.
The DNA tool is based on an online survey that has sets of standardized self-assessment questions as well as the ability to incorporate custom questions that address the unique characteristics of a company. The surveys deliver very reliable results that identify specific skill strengths and weaknesses for each individual, which are used as the basis for an individual professional development plan. DNA also aggregates data from divisions, business units or the enterprise as a whole. In this case, the surveys identified 17 areas where average skills were below “proficient” including price analysis; supplier selection and relationship management; and financial analysis.
In its deep analysis of the company’s overall spend, ADR consultants identified raw materials and indirect as two areas for immediate cost-saving opportunities. In raw materials, ADR looked at a nearly $2 billion spend in nine primary categories and identified potential annual savings of nearly $100 million (five percent).
Looking at a $270 million indirect spend, ADR identified potential savings of $55 million (12 percent) across three global regions. Total savings in the two areas came to more than $150 million.