Business transformation can be a daunting task for any organization to undertake. As the economy begins to show signs of recovery, companies seeking to shift their strategy away from cost-cutting and toward growth and value creation are learning this the hard way.
Based on experience with clients across industries and borders, we’ve seen that a robust approach to supply chain transformation can help companies transform the way they source, manage and buy materials and services to become true business partners with their “internal customers.”
KPMG used this approach with a leading North American midstream corporation (referred to as “Midstream”) as documented in the case study, Supply Chain Transformation: Vision to Realization. The case study profiles the journey this company took and the results they achieved.
Supply Chain Function Seeks Evolution
Companies today are looking to Supply Chain as a key lever to lower capital and operating expenses, optimize working capital and enhance revenue. This trend is especially evident across the natural gas midstream and utility businesses, due to ambitious capital expenditure projects –many of which tend to be over-budget, thereby underlining the need to control costs.
For Midstream, the VP of Supply Chain wanted to make a substantial impact on his newly inherited organization. Having recently moved over from Operations, he recognized that supply chain was an administrative after-thought and lacked interaction with its internal customers. Traditionally, the Engineering and Operations groups conducted much of their own sourcing activities and relegated Supply Chain to a tactical, “paper-pushing” role for years.
In addition, the organization suffered from a number of disparate legacy processes that resulted from a series of mergers and divestitures. The VP recognized the need to move his function further up the maturity curve in order to support future demand driven by capital expansion projects and increased operational maintenance needs.
In developing an overarching strategic approach to the transformation, the following questions were contemplated:
• How does one change the “business unit first” mentality that has persisted for some time to an “enterprise-wide” lens that reflects a more strategic and unified organization?
• What does “good” look like, and how does one get there?
• How do we realize the value from the transformation effort without losing focus on sustainability of value for the long term?
An Integrated Approach To Transformation
Midstream’s goals were ambitious: realizing $100 million in benefits within three years. Recognizing the scale of the change Midstream was seeking, an integrated and accelerated approach was developed in conjunction with KPMG to amplify savings, accelerate benefits and sustain value. The approach comprised of four key components/phases:
Define Vision and Guiding Principles – Every journey must begin with the end in mind. Define the enterprise-wide vision of Supply Chain, which was in support of the goals of corporate management. Capture key overarching rules voiced by management and promote these principles to guide decisions to be made throughout the program. At this stage, it was important for the organization to focus on becoming “good” rather than “excellent,” as the cost to achieve the latter could be insurmountably high. The vision of Supply Chain, therefore, had to be realistic and realizable.
Develop Roadmap and Establish Business Case – Conduct an initial assessment of the Supply Chain function to identify a full range of improvement opportunities based upon a maturity model and industry benchmarks. Develop an integrated top-down and bottoms-up business case for the program that included both the hard and soft benefits to establish credibility and commitment. Based on the ease of implementation and business impact, prioritize the opportunities that would help lead toward its long-term vision of becoming a world-class Supply Chain organization.
Execute Program – After validating the business case and selected the opportunities to pursue, develop an implementation plan to execute the opportunities efficiently and effectively. For example, some transformation efforts would be managed as a single Supply Chain-sponsored effort with a central program management office, a dedicated change management team and distinct work streams.
Sustain and Monitor – The ability to sustain the change and continue to capture and even increase savings after the formal program ended is a critical success factor of any transformation. It is important to design an organization and metrics that would continue not only using the established processes and tools from the transformation, but also look to develop and seek more opportunities. It is also helpful to establish a formal knowledge transfer program for each work stream to confirm the company’s readiness to support the processes going forward.
Building The Future Vision And Closing The Gap
The long-term vision would be incomplete without the input of the internal customers. Working collaboratively with key representatives across the business, Midstream formulated a vision that was supported by the following objectives:
• Manage spending effectively, leveraging the purchasing power of the enterprise.
• Develop and foster strategic partnerships with key suppliers and internal customers.
• Enhance visibility to company spending and transparency around procurement process.
• Increase process efficiency through elimination, simplification and standardization of activities.
• Automate procurement transactions and adoption of enabling tools.
• Foster conformance to the recommended contracts, processes and tools.
• Become an organizationally efficient Supply Chain that delivers measurable, sustainable value to the business.
• Attract, develop and retain highly competent Supply Chain professionals.
• Identify and provide proper controls for Supply Chain risks.
Most Supply Chain organizations are at various levels of sophistication across the different dimensions of Supply Chain excellence. The company’s level of Supply Chain proficiency can be mapped to a maturity model which establishes a baseline to determine the gap to achieve the desired state. Midstream’s assessment yielded 40 opportunities to increase savings and drive value throughout the company’s Supply Chain.
These opportunities were prioritized based upon business impact and ease of implementation and mapped to a set of functional and time dimensions to reflect the evolution of Midstream’s Supply Chain function. This transformation map was used to gain consensus from the key stakeholders to move forward to next critical element, the business case.
A robust, integrated business case was developed by Midstream to facilitate an understanding of the underlying cost levers for the various initiatives and quantify the expected return on investment. A critical factor in the acceptance and success of the Supply Chain transformation would be agreement among managers on the benefits of the program. It was important to define and track hard-dollar benefits, and to translate the benefits into a language the Finance group can understand.
By comparing Midstream’s existing data to a series of industry benchmarks, KPMG was able to quantify the expected realizable hard and soft savings associated with the transformation program and validate the dependencies and priorities for the initiatives on the transformation map. Further, the analysis demonstrated the additional benefit that Midstream would expect from launching a holistic transformation program in lieu of only a series of strategic sourcing waves.
The results of the analysis confirmed the transformation program would not only deliver the upfront negotiated contract savings, but also build the infrastructure to ensure the savings were delivered to the bottom line and sustained via an integrated approach, thereby yielding greater savings. KPMG estimated that 47% of the potential benefits would not be attained if Midstream pursued a piecemeal approach to the transformation effort.
The final step was to group the set of transformational opportunities into distinct program work streams and develop an overall program schedule. KPMG sequenced the activities so that Midstream could realize benefits early in the improvement journey and achieve credibility while also building the underlying foundation for long-term sustainment.
For Midstream, the transformation effort realized benefits that exceeded 20% of the initial targets established in the business case, due largely to the integrated approach that was taken. Savings were mainly identified through category excellence and contract compliance audits, in which more than 25 spending categories were strategically sourced, and selected strategic supplier contracts were reviewed to identify unintentional errors and opportunities for contracting improvements.
To effectively capture and deliver upon these savings, standardized processes and enabling technologies were implemented across the Supply Chain functions, including source-to-contract, purchase-to-pay, inventory optimization and employee expense management. Finally, sustaining the savings enabled by the new processes and technologies required Midstream to implement a new organizational model within Supply Chain, along with a robust talent management strategy that monitored progress, allowed for future growth and fostered a culture of continuous improvement.
As a result of its efforts, Midstream is now considered the leader among its industry peers, but their journey for Supply Chain excellence continues on.
Supply Chain Transformation: The Journey Continues
The transformation of a Supply Chain organization should not be seen as a single project or a series of independent efforts, but as a carefully coordinated set of interdependent initiatives, each contributing to the company’s vision of becoming a leading Supply Chain organization. World-class is not a destination, but a journey that should be sought on a continuing basis.
As in the case with Midstream, the journey did not end when the transformation effort came to a close. Rather, the success of the long-term transformation is a continuing journey, which depends on the ability of the organization to sustain the benefits and continue its improvement path after the primary transformation activities have been completed.
Business transformations are challenging for any organization and the pressure to demonstrate value from Supply Chain initiatives is higher than ever before for corporate executives looking to manage costs and enhance revenue. Changing the perception of the Supply Chain function to that of a strategic business partner focused on value and innovation, rather than cost and compliance, remains a key hurdle for midstream and utility businesses.
As a result, meaningful steps up the Supply Chain maturity curve require an integrated approach for Supply Chain transformation. Successful business transformations ultimately require the projection and realization of compelling financial benefits.
To visit the full case study, Supply Chain Transformation: Vision to Realization, visit www.kpmginstitutes.com/advisory-institute
Toby Yu is a director within the Procurement Advisory Services group at KPMG LLP, the U.S. audit, tax and advisory firm.
Samir Khushalani is a principal with the Strategy & Operations Advisory Services group and the practice leader for KPMG’s National Strategic Sourcing and Procurement Advisory service line.