FORMATIVE ASSESSMENT 1 [100 Marks] BUILDING A WORLD-CLASS GLOBAL PROCUREMENT ORGANISATION The $20 billion industrial company was big and far-reachinga global market leader with a presence in more than 60 countries and aggressive financial targets. To reach those targets, top management turned to procurement to generate savings. But when executives took stock of the existing procurement organization and capabilities, the massive challenge they faced came into sharp and discouraging focus. What was wrong? The procurement organization struggled with factors that were largely out of its control. The company's nearly 700 procurement employees functioned in strong but separate kingdoms across countries. They worked toward different objectives and had a poor track record for succeeding in global projects. Among the many issues: The global procurement function had less power than it needed, operated without a clear mandate and struggled to convince countries to participate in a coordinated global effort. The rare times when people did work together, the collaboration was ineffective. Coming to terms with this misalignment, missing skills and inadequate capabilities meant one thing: Global procurement was likely to disappoint. While this scene may be the extreme, elements of it will be familiar to executives and procurement professionals in every industry. Procurement is often the biggest cost item, in some industries accounting for as much as 80% of total costs. And it is often one of the first areas companies target when they want to generate cost savingswith good reason. Depending on the industry and the point of departure, we have seen companies achieve initial savings of 8% to 12% in the first 18 months of a serious effort, followed by a trained organization reaping 3% to 4% savings each year. In the case of the industrial company, more than $600 million in potential savings was on the table. However, when many companies set out to achieve those benefits, they find themselves face to face with a daunting obstacle: Procurement organizations often are not optimized to make the most of the opportunities. For example, business unit leaders may hold sway over how to organize procurement and may design it for their own needs, not for global performance. In fact, when Bain polled 75 North American executives about their procurement capabilities, nearly all readily admitted that organizational hurdles made it difficult to reach full savings potential. Our work with hundreds of clients has helped us pinpoint the four major areas where companies fall short: Mandate and buy-in. Global procurement isn't taken seriously, operates without a clear and broadly agreed upon mandate and constantly struggles to convince countries or business units to coordinate efforts. Roles and responsibilities. Often there is a mix of global, regional and local responsibilities, with poor collaborationa situation exacerbated by a lack of clarity on which categories are managed at what level and how. There's also minimal systematic involvement of functions such as operations, IT and R&D. Skills and capabilities. Companies often fail to globally define required skills. There's little transparency on individuals' performance. And not everyone seems to be up to the challenge. Key enablers. Definitions and standards vary across the global organization. Spend transparency is often minimal. Performance tracking isn't designed to provide real insights into progress. Systems are also poorly developed. Thankfully, companies are discovering a way out of this global procurement quagmire. The industrial company and other procurement leaders build highly skilled global organizations that seamlessly connect across dozens of countries, efficiently managing categories at the global, regional and local levels. They operate with crystal-clear responsibilities, and work in tandem with operations and business functions. These companies have learned that transforming a global procurement organization takes time and careful planning, but it pays off. Consider the case of a financial services company operating in more than 40 countries. A year after starting its transformation, the company is now on target to save 8% of its total spending and is positioned to make those savings stick year after year.

Question 1 (25 Marks) In light of the case study provided, reflect on some macro and micro issues that are considered as major hindrances towards creating a world-class global procurement organisation.