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How procurement at UPS transformed itself from a transactional function to a strategic partner

PL Staff

How to transform your procurement function to bolster its capabilities and help cement a new relationship with the wider organisation?

World Procurement Awards 2022 shortlisted initiative

This initiative was shortlisted for the Ivalua Procurement Excellence Award at the World Procurement Awards 2022 after being assessed by a judging panel of 37 experts. The panel was impressed by the progress being made and felt this initiative should be shared and celebrated.

Challenge

Five years ago, global logistics company UPS’s procurement function was far from playing a strategic role.

Excluded from planning meetings and strategic decisions, and with a team lacking the knowledge and relationships to drive real change, procurement was extremely decentralised, in control of just 30% of global spending and focused mostly on tactical, transactional activities.

By building the capabilities and relationships needed to transform the function into a strategic partner, its new CPO Jose Turkienicz promised to deliver more than $865m of savings and improve the company’s working capital position by $1bn within five years.

Delivering on these ambitious goals required the team to implement a dramatic overhaul of the procurement function that would bolster its capabilities and help cement a new relationship with the wider organisation.

Approach

The transformation programme progressed over three main phases. The first step focused on two key workstreams:

  • Engaging consultants to deliver initial savings work that could create ‘quick wins’.
  • Creating a new procurement centre of excellence, headed by a vice president, to build the function’s capabilities.

Procurement was then able to embark on the main bulk of its transformation, including implementing new teams, transitioning other functions’ spend to procurement and implementing a category management structure.

Finally, with the new functional operating model in place, the team was in a position to focus on creating further value – including creating a revenue-generating unit, UPS Procurement Services.

UPS transformation timeline

Embarking on the transformation

To build trust internally and win support for the longer-term aspects of the transformation, the first two years of the four-year transformation were focused on delivering “quick wins” and building the necessary capabilities needed for the future function.

Initial savings work

The first step in the transformation was to demonstrate the potential savings that procurement could create if properly structured and resourced.

To do that, the procurement team engaged a team of consultants, who “ushered” the existing team to deliver savings from its existing spend under management by focusing on foundational category management approaches including negotiation, consolidation and vendor rationalisation.

This was a collaborative effort between the consultants and existing category leads, who worked together to quickly identify opportunities for savings, and implement category strategies and sourcing events.

Creating a procurement centre of excellence

In tandem with that work, Turkienicz also appointed a leader to create and run a procurement centre of excellence (COE), which would be responsible for building the structure needed to develop new functional capabilities and elevate procurement to being a trusted business partner, with a key role in both procurement-specific and company-wide strategic decisions.

This was an external hire, Mathieu Bradier, who had a mix of previous experience that included leading transformation projects and leading the integration of procurement teams through mergers and acquisitions.

Its team of around 100 staff was split in two, with approximately half focused on procurement excellence specifically and the remainder acting as the category teams for UPS outside its home market of the US.

The full transformation roadmap

With evidence of its savings potential and strong leadership in place, procurement was then able to move forward with its wider transformation plans.

New and revamped central teams

Ensuring the central support teams were in a strong position to help the function deliver against its goals was key to growing procurement into a strategic partner.

The existing procurement finance and governance teams were redesigned with extra capabilities, paving the way for the centralisation of procurement with a global category structure that replaced the function’s previous decentralised approach.

The 18-strong procurement finance team is responsible for tracking savings and cost avoidance, as well as handling matters such as working capital, payment terms and supply chain finance. It also acts as the single point of contact for other finance teams within the company.

The governance team takes charge of procurement policy and compliance, change management and stakeholder training – communicating changes in procurement’s structure and approach to the wider organization. This team has 200 members, although some of these are focused specifically on systems and data, and source-to-pay modernisation programme and transactional purchasing.

The teams were also tasked with expanding UPS’s days payable outstanding (a ratio indicating time taken to pay bills) to improve the company’s working capital position. They achieved this by:

  • Offering extra supply chain finance support
  • Implementing end-of-accumulation-period payment terms
  • Renegotiating contracts

To ensure the function had the necessary skills and capacity to deliver on its aims, new teams were also created within the COE that focus on:

  • Strategic sourcing
  • Advanced analytics
  • Capabilities development

The strategic sourcing team executes the vast majority of competitive strategic sourcing events across all categories at UPS, using e-sourcing tools and complex optimisation techniques to ensure optimal outcomes. They ensure all events are conducted and documented according to UPS best practices and support category leads in their strategy creation and execution.

The advanced analytics team uses sophisticated technologies and methods to create visibility and insights from the vast amount of data available both within UPS and from external data sets, pushing the boundaries of what procurement can achieve.

The capabilities development team is in charge of creating onboarding processes for all new staff to ensure they were prepared for the role, as well as documenting knowledge management and each process that’s carried out within the function to ensure these are delivered consistently.

All of the new teams were staffed and trained by the COE on new policies, procedures, and tools within a year.

Bringing more functions’ spend into procurement and expanding the category structure

To maximise its ability to deliver savings and support strategic decisions across every business unit, procurement needed to manage a much greater proportion of UPS’s overall spending.

In the past, the function had been focused predominantly on a small number of indirect categories such as packaging but, over time, the new leadership aimed to expand procurement’s share of spend across a multitude of categories.

Colleagues across procurement, led by the CPO, worked on a unit-by-unit, country-by-country basis to engage with stakeholders across UPS’s business units to persuade them to bring spend under procurement’s management.

This was initially focused on the most straightforward categories, such as utilities and UPS’s automotive fleet before shifting to more complex commodities such as rail and air freight towards the end of the transformation.

As these new categories were brought into procurement, corresponding category teams were established – in some cases through new hires but also by bringing across staff from within the business who were previously responsible for expenditure. Altogether, procurement’s headcount grew from roughly 375 to 600, although the total headcount for the company decreased as some roles were consolidated.

Change management

While pitching the benefits of the transformation to procurement staff was straightforward given the opportunities it opened up, the team did face some pushback from internal stakeholders concerned about the prospect of handing over control of their expenditure to another function.

To overcome this, procurement’s leadership emphasised the function’s role as an enabler, talking them through the opportunities to improve their department’s profit and loss. As the transformation has progressed, the function has been able to show the benefit of its work in new categories it has taken responsibility for and uses this success to make the case for taking charge of further categories.

Becoming a profit centre

Having successfully transformed its own processes and capabilities, UPS also identified an opportunity to create a group purchasing organisation that would allow it to contribute to revenue and ultimately become a profit centre.

Launched in 2021, UPS Procurement Services leverages the function’s category expertise and relationships to offer discounts to suppliers and customers. In essence, this involves UPS’s category teams negotiating special rates with its suppliers that it can offer to other companies it has a relationship with.

As well as being able to generate revenues by taking an administration fee for each deal signed, this arrangement also helps to increase UPS’s leverage as it is effectively buying in greater volumes and also increases the attractiveness of UPS to customers who value the access to the deals it has negotiated.

Outcome

Results

By investing in its capabilities, overhauling its structure and building trusted relationships with internal stakeholders, UPS’s procurement function has been able to position itself as a valued strategic partner that can support vital decisions and is on course to become a profit generator.

Four years after the beginning of the transformation, the function has far exceeded its five-year targets, with key commercial successes including:

  • Working to build trust and demonstrating success to other functions has allowed procurement to bring more than 90% of global spend under management, up from 30% in 2017
  • With revamped data and analytics capabilities improving its decision-making abilities, the function has been able to deliver savings in excess of $1.8bn – more than double the five-year, $865m target procurement initially committed to.
  • Efforts by the finance and governance teams has helped UPS to improve its working capital position by $2.7bn – far exceeding its $1bn target

Meanwhile, UPS Procurement Services is on target to deliver a revenue contribution in excess of procurement’s total costs by 2024, which will turn the function from a cost-centre to a profit-centre.

Furthermore, the COE has been able to deliver the transformation while maintaining UPS’s progress in supplier diversity, increasing diverse spend by 40% and doubling spending with black-owned business in 2021.

Advice for others

For other procurement functions pursuing a similar transformation journey, Bradier gave the following advice: “Build a roadmap to the end goal and stick to the end goal, but don’t be afraid to be flexible to change the intermediate deliverables. Capitalise on successes and accept some things might go slower in some areas but will eventually come around.”

Next steps

With the initial steps of the transformation successfully delivered, UPS now aims to continue driving improved performance through the modernization of its source-to-pay process. So far this has included deploying a new procure-to-pay system in the US and Canada, as well as the global implementation of e-sourcing tools, with the current focus on developing a new advanced contracting process to be rolled out globally.

Image: William Barton / Shutterstock

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