Digital Procurement - APCADEC

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January 21, 2021 | Lisbon

Digital Procurement

McKinsey & Company 2

Isabel Santos

Boardmember

João Correia

Botelho

Chairman of the Board

Your hosts for today

Peter Spiller

Partner, Frankfurt

Raffaele Carpi

Partner, Lisbon


Agenda

Topic Time

Session opening 10 mins

How DnA is impacting Procurement and helping companies capturing value 30 mins

How to deploy DnA in Procurement 15 mins

Q&A 15 mins

Case study 20 mins

Relevance of Procurement during COVID 15 mins

Closing remarks 15 mins


Welcome !


Agenda

Topic Time




Q&A 15 mins

Case study 20 mins




Further increase in volatility and pace of change are the “new normal” after COVID

Source: Business Insider, World Health Organization, McKinsey & Company, Institute for fiscal studies (UK), Vault, S&P, Statista

42+

Countries

implemented

restrictive measures1

-56%

Crude oil price

change

350+

S&P rating

downgrades of

companies across

sectors

-80%

Demand reduction in

selected industries

(travel, hospitality)4

5.5x

Increase of remote

work in the US

compared to 2018

data

Unstable

supply chain

Price

volatility

Increased

financial risk

Shift in

demand

People and

operating model

Creating impact in

the “new normal”

will require a

different set of tools

and capabilities

1. Counted countries with full or partial lockdown due to coronavirus, as of 4/9/20

2. Listed on London stock exchange: Fossil fuels & distribution (-27%); Food and drug retailers (+21%)

3. S&P rating revision by April 2, 2020

4. Data from Denmark: Experience industry (including travel, tourism, and hospitality services) (-75%); IT/Telecommunication (-14%)


The “new normal” bears risks, but also offers many opportunities to the CPOs

Unstable

supply chain

Regional lockdowns

Regional lockdowns still in

place or emerging fast due to

still uncontained or new

COVID outbreaks

Strategic redesign

opportunities

Seize the opportunity to make

strategic shifts via supply chain

integration, localization, and

supply base redesign

Price

volatility

Economic volatility

Changing economic situation

manifesting in changing

material and energy prices, FX

fluctuations

Raw materials prices

Capture low materials prices

by reviewing existing

agreements, and create value-

leveraging volatility

Increased

financial risk

Increased number of

supplier insolvencies

Small and mid-sized suppliers

are at risk to face financial

distress

Increased M&A and

collaboration opportunities

M&A activities may present

opportunities to generate cash,

or invest in future growth –

alone or collaborating with

other players

Shift in

demand

Slowly increasing demand

Slow increase of consumer

confidence – temporary lower

demand vs. prior to crisis

Lower prices due to

overcapacity

While demand remains below

pre-crisis levels, suppliers will

likely have overcapacity

resulting in lower market

pricing

People and

operating model

Contact restrictions

Social distancing and remote

working impact collaboration,

and may cause reputation

damage if poorly managed

Talent and higher efficiency

In the changing labor market,

increased opportunities to

attract external talent and

implement more efficient ways

of workingOp

po

rtu

nit

ies

Ris

ks


Three major strategies address the current risks and opportunities

Steering room

Monitoring and steering

the supply chain

Rapid changes in supply and demand, as well

as increased cost pressure require the

procurement organization to achieve a step

change in transparency and rapid decision-

making abilities

Cost reduction along the value

chain

Driving cost efficiency through

collaborative measures

After COVID, it will become more difficult to

generate cost savings by traditional commercial

negotiation. Thus it will become even more

important to manage demand, accelerate cross-

functional spend optimization and jointly to

generate win-win opportunities with suppliers

Strategic redesign

New tools and capabilities

to build future resilience

Disruption in supply chain and demand pattern,

will require procurement to rethink category

strategies, tools and solutions to secure a

sustainable performance


Procurement organizations have prioritized 12 strategies to create sustainable impact in the COVID and post-COVID phase

1. Design to Value

2a: Raw material

optimization

1a: Supply chain

monitoring

1b: Value creation

control tower

2b: Indirect cost

booster

3a: Supply base

redesign

3b: Digital &

efficiency push

2c: Collaborative

DtV1

3d: Sustainability1c: Cash

control tower

1d: Demand

control tower

3c: M&A2d. Lean at

supplier

Steering room

Cost reduction along the value

chain Strategic redesign


Agenda

Topic Time




Q&A 15 mins

Case study 20 mins




Only operational

(e.g. mostly

creating purchasing

orders)

1 2 3 4 5Strategic (e.g. handles

all sourcing decisions for

the organization)

How would you define the role of the procurement area in your organization?

Please respond using the poll


Procurement has evolved from an administrative task to a strategic function, digital and analytics now opens a new horizon of impact

Source: McKinsey Procurement Practice

Operational

procurement:

Supporting order

fulfilment

Strategic

Sourcing:

Optimizing

commercial

terms

End-to-end

continuous

improvement:

Optimizing the value

chain

1 2 3 4 5

Advanced analytics-

enabled procurement:

Tapping on unusual

sources of value

Category

management:

Optimizing TCO

Top quartile

performers

Business partnering

to shape functional /

BU agendas

Superior make vs.

buy decisions

Future leaders

Analytics engine at

scale

Agile organization

and execution model

‘Middle of the pack’:

most companies

across sectors

Category strategies

in place to optimize

TCO

Negotiations

Excellence

leveraging analytics

Below average

performers for most

sectors

Category Strategies

in place

Emerging

collaboration with the

business

Bottom quartile

performers

Primarily

administrative

ordering tasks

Implementation of

systems to digitize

operational

procurement


Procurement has access to large volumes of data that contain valuable insights

© Copyright 2020 McKinsey & Company. This material contains the confidential and proprietary information of McKinsey & Company and is intended solely for

your internal use and may not be reproduced, disclosed or distributed without McKinsey & Company's express prior written consent

Client examples

through real-time monitoring of ~70 market indices in packaging 7% price adjustment potential

>5% YoY savingsthrough automated bots managing and flagging deviations across

a portfolio of 30k items in ~20 countries

using AA decision making tools and machine learning on

exogenous factors for agricultural commodities

3-16% cost savings

>20% price gap capture rate through driving parametric cleansheets for more than 3,500

temp labor roles in 2 weeks

by automatically screening supply base for risk indicators

across >30 different risk metrices aggregated across multiple

databases (screened 1,000 suppliers in 2 days)

High risk suppliers

identification


Yet, leveraging data to generate procurement value is challenging

Furthermore, a recent survey1

shows, that… Few observations across sectors (not exhaustive or in specific order)

1. Survey participants n=30, across industries with revenue > 1bn EUR

Automation possible, yet solution landscape not mature enough

Limitations in (advanced) analytics skills in the organization

Need for dynamic updates, given the speed of market/internal changes

Highly fragmented data sources and/or bad data quality

Capacity constraints in procurement teams for manual processing

Solutions implemented, but adoption rate is low

Capability challenges in translating insights into value captured

>86%of CPOs state they lack platforms to

perform real time data processing

<20%of available procurement data is leveraged

to drive decision-making and deliver value



1

2

3

4

5

6

7


An effective approach to transform procurement into a Data and Analytics enabled function is required to capture value

+10-40% financial impact, better risk management

and enhanced spend control

+30% faster response to opportunities, given the

ability to identify them real-time, and use

digital execution tools

(e.g., accelerated tendering)



Advanced analytics engine, based on a solid data

backbone, designed in a way that it can evolve dynamically

Operating model adapted to embed analytics in the ways

of working and make the most of the technology

Value-backed approach (vs. technology-forward) that

starts from a deep understanding of the high-impact areas

across the value chain

Agile transformation journey for efficient and successful

scale-up and accelerated impact capture

The value of Data & Analytics

in Procurement…


Example of value at stake: Data & Analytics doubled the pipeline and enabled YoY better than best-in-class levels going forward

60%

100%40%

Value from

other levers

Data &

Analytics

enabled value

Total

transformation

impact

yr 3yr 1yr -2yr -3 yr 2yr -1 yr 4

Nearly doubled the savings pipelineBuilt an 'engine' to sustainably deliver

best-in-class performance

Data & Analytics

transformation

Client example

How it was achieved What impact was generated

1. 2 data architects, 5 data engineers, 2 data scientists, 1 scrum master, 8 product owners

© Copyright 2020 McKinsey & Company. This material contains the confidential and proprietary information of McKinsey & Company and is intended solely for your internal

use and may not be reproduced, disclosed or distributed without McKinsey & Company's express prior written consent

Single digital and analytics

(DnA) vision

15 ERPs, >15,000 SKUs,

~10,000 suppliers, ~90 external

indexes into a single data lake

8 analytics use cases

20 new DnA roles1

200 category managers trained

>50% additional time on value

added activities

Best in class

Average


Architecting the transformation around the sources of value avoids unfocused, low-value-add investments in ‘interesting’ solutions

From: Technology-forward approach To: Value-backed approach

IT roadmap

Multitude of providers

Focus on what seems ‘most innovative’

No business case to support a scale-up

Clear direction with sharp objectives and focus

Use-cases to tap on the most relevant sources of

value

Agile process to choose solutions for each use-case


6 building blocks are fundamental to a successful Data & Analytics transformation

Org. and process

redesignData backbone

Capability building

Change

management

User interface

Data &

Analytics

procurement

transforma-

tion

Data and Analytics engine Operating model transformation

Analytics use-

cases


Selected use

cases

GCM dashboard and

performance cockpit

CPO dashboard and

performance cockpit

Digital workflow for strategy

development and execution

Digital contract

management

Contract

analytics and

performance

clauses

compliance

Spec & service

levels optimizer

Longer term

demand

forecast and

supply risk alert

Best-of-best

bench-marking

solution

Bid-analytics for

complex bids

Supplier

scouting

Future price

trending

Real-time

external market

input cost

monitoring

Real-time

Supplier

performance

tracker

Real-time

suppliers risk

monitoring

Suppliers

collaboration

platform

Digital

negotiation

factory

Supplier

qualification

acceleration

BOT for real-

time compliance

tracking

Internal

stakeholders

collaboration

platform

Spend controller

Forward-looking

inventory to

unit-cost

optimizer

Volume / price

optimizer

Bot suggesting

hedging /

negotiation

strategy based

on rules

Robotic Process

automation

Bot flagging

contract

expirations and

non-complianceE-Rfx

Advanced analytics Process automation Digital Journey & collaborationExample next

Global

category

management

key activities

Value

driver

Reduce spend from

specifi-cations and

demand rationalisation

Scouting supplier

markets for new

opportunities

Run negotiation and

lock saving potential in

contract

Track supplier

performance through

collaboration

Identify

potential savings

Identify value

opportunities with

suppliers

Ensure contract

compliance and

procure / manage

delivery efficiently

Track compliance,

performance

Manage suppliers

performance and

risks

Track and manage

contracts

Prepare and run

tender and

negotiations

Monitor marketOptimize demand

and specs

Analyze spend and

identify opportunities

Selection of use cases should be driven by the savings it can enable and the

improvement in category managers efficiency and ways of working

Use cases need to be selected based on areas of highest impact

Category-

specific analytics

Digital parametric

clean sheets

Indirect index

Marketing

efficiency for

growth


Category Analytics automate granular, category specific levers into trackable dashboards – Temp Labor exampleCategory Analytics Solution identifies category specific opportunities across the full range of TCO levers

Source: McKinsey Digital Procurement Service Line

Advanced analytics model defines potential savings

for standard Temp Labor levers based on input data…

Example output : Rationalize pay rate lever

.. dashboards for each lever display the opportunity

and generate insights for recommendations

Process Identify and switch volume between vendors to leverage

discounted rates8

Ensure compliance with contracted rates9

10 Rationalize and align contractual mark-ups,

Commercial

Levers

1 Align pay rates to benchmark

2 Align mark-ups to mark-ups

3 Build cleansheet rates

5 Re-align number of employees across tiers

(tier optimization)

6 Identify opportunities to allocate resources to

cheaper areas (location optimization)

7 Identify savings by hiring more temps

4 Reduce overall workforce hours for high pay

rate roles

Demand

Top 3 campaigns by

conversion

Comparison of rates paid for same role,

location and tier combination; savings

estimated by moving to optimized rate

Definition of lever and calculation

logic embedded in every lever

Multiple views showing savings by

supplier, location, hiring manager,

month and role


Should-cost for entire categories are calculated through scalable models estimate cost based on a few input parameters for each itemParametric Clean-sheets

Source: McKinsey

Example of a digital clean-sheet solution

applied to Titanium Dioxide

PredictiveSustainable

Faster Accurate

How digital clean-sheet

solutions can help

Illustrative


As new activities evolve, Data & Analytics transformations will change the way current procurement teams work

LeadershipController

Buyer Category manager

Current procurement teams will have

to adjust their way of working…

Business PartnersData Engineers, scientists /

UI/UX Developers

Translators /

Product Owners

… and be complemented with new roles to sustain

digital transformations


Capability building programs will need to be developed for each role

Advanced skills No skills

Target group Objectives

Analytics

delivery team

Able to use all use cases

Procurement

leadership team

Aware of all use cases

Data and analytics

champions (incl. PO)

Understand all relevant use

cases

Data and analytics

development team

Able to use their use cases,

understand all other use cases

Procurement

community

Understand all relevant use

cases

DnA hard

skills

Soft

skills

Proc.

hard skills

Spend and market

analysis

Negotiation excellence

How to get from data to

insights

Mastering different

use-cases

Problem solving

Managing change

Training modules

(examples)


Agenda

Topic Time




Q&A 15 mins

Case study 20 mins




Very limited

1 2 3 4 5Game-changing

What impact do you believe digital could have in your procurement area?


McKinsey & Company 26McKinsey & Company 26

Large pharmaceutical company

EUR 36bn revenues

4 GBUs: General Medicine, Specialty Care, Consumer

Health Care, Vaccines

73 production sites, in 32 countries; presence in 100

countries total

“Play to win” strategy to transform into a modern, agile

organization


A pioneer of digital and analytics in strategic

sourcing, enabling superior value capture

Collaboration with an ecosystem of suppliers to

maximize value-add

The function a key contributor to the financial

targets, innovation and sustainability agenda

Aspirations for Procurement


How is this being achieved?Technical solution

Procurement data

platform

Single source of truth;

high quality, granular data

Ownership in procurement;

decoupled but unified

Beyond a spend cube;

enrichment with internal and

external data

Value-back

use cases

Use-cases on largest

sources of value

Focus on opportunity

identification on price,

specifications

Agile approach; quick

scale-up beyond MVP

Buyer

cockpit

Intuitive, integrated interface,

driving adoption

Alerts and actionable

recommendations;

prescriptive analytics

Management oversight


Shifting >50% of the

time of a category

manager to

value-add tasks

Accelerating the

sourcing process by

30% or more

Creating new DnA

roles within

procurement

attracting talent

Reskilling our people

to be DnA-savvy and

more analytical

Transform the

culture: make digital

and analytics a

habit

How is this being achieved?Transforming the operating model


40%

60%

100%

yr 3yr -3 yr -2 yr -1 yr 2yr 1

Best in class

performance

yr 4

DnA enabled delivery

Delivering a step-change

in results by doubling

the typical

transformation savings

Leaving behind an ‘engine’

and operating model to

deliver sustainably

best-in-class impact

Value from typical

levers

DnA enabled

value

Total transformation

impact

The journey so far and impact achieved


Have a razor sharp focus on

delivering value

Focus on change and getting the

organization excited about the change

Tie it back to overall organization

strategy

Lessons learned from the experience


Agenda

Topic Time




Q&A 15 mins

Case study 20 mins




Our processes

are mostly

manual but are

assessing

potential use

cases to explore

1 2 3 4 5▪ We have a vision,

roadmap and team

and have captured

significant savings

Where is your organization in the journey of digitization of the procurement area?



A typical approach to the digital procurement journey

Source: McKinsey Procurement Practice

Vision

Assess where we stand

and define what do we

want to become

Diagnostic

Diagnose current

painpoints and

digitalization maturity

Design

Identify and prioritize

digital procurement

initiatives and develop

implementation

roadmap

Implementation

Implement initiatives

through agile sprints

and MVPsEmpowerment

Invest and improve

digital capabilities and

spend analytics

Detailed next


Significant potential Moderate potential No potential

A value heatmap of use cases vs. categories must bedeveloped to ensure focus on high value opportunities

Spend category Digital use case

4 Category strategy

workflow3 Should

cost2 Category

analytics1 Advanced spend &

supplier intelligence.. …

Additives

Resins

…

Temporary

labor

Marketing

…

Source: McKinsey

Client example

PR

NPR


Digital procurement initiatives are defined and prioritized to build the initial digital procurement roadmap

Source: Next-gen Procurement operating model service line

Client Example

Demand to

Source

Source to

Procure

Procure to

Invoice

Commodity platform

Smart catalogs

Requestor portal

Procurement

Navigator

Supplier performance

transparency dashboardMaster data management

solution

Vision: “An agile, efficient and integrated procurement

function with the expertise to continuously capitalize on

technology advancements to deliver total value”

Automated supplier

risk management

Overpayment

management

Procurement demand

planning platform

Business Process

Management solution

Digital procurement

capability platform

Supplier network

integration

Specification

management

platform

Category analytics

solutionDigital negotiation

support solution

Process Mining solution

Smart contracting

platform

Supplier portal 2.0

Wave 1 Wave 2 Wave 3

Invoice to Pay Performance Management Enablers


Agenda

Topic Time




Q&A 15 mins

Case study 20 mins




Please send us your questions

through the chat

We would love to hear your questions


Agenda

Topic Time




Q&A 15 mins

Case study 20 mins



We would love to get your feedback

Thank you all for your participation!

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