CIPS BT Procurement Masterclass 16 th May British Telecommunications plc

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1 CIPS BT Procurement Masterclass 16 th May 2011 British Telecommunications plc

2 Masterclass - Key Areas BT Key Procurement Facts Importance of Procurement to Company Performance Best Practice Processes Strategic Sourcing & Consolidation of Category Spend Cost Transformation Risk Management Approach to Market Reaching the Optimal Deal

3 BT Key Facts BT spend with external suppliers > 11 billion / year 333 BT Licensed Buyers Delivery to BT Group a net reduction in costs of > 1bn FY10/11 10 BT Licensed Buyers in Ireland Licensed Buyers in BT Procurement : Operate with the Authority for all buying activity in BT Aim to maximise global leverage of BT's spend Manage and aim to simplify the supplier interface Up-front involvement in the bid process in order to understand and manage supply risks and to manage supplier selection Continued engagement throughout the contract life cycle to drive profit improvement and benefit delivery

4 Why is Effective Procurement Important? Global Leverage Manage Suppliers Security of supply Get Things Right First Time Manage / Mitigate Risk Reach Optimum Deal Process Efficiency Deliver Savings Governance & Control To make a significant, valued and measurable contribution towards an organisation s performance Integral to business strategy support corporate goals - understand what the business is trying to deliver

5 Impact of Procurement Activities on Company Profitability.. The value of purchased goods and services is usually a high % of an organisation s revenue Cutting costs with third parties, services and capital items, can make a dramatic improvement to the organisation s bottom line. = The Leverage Effect Every saved in purchased materials increases pre-tax profit by a As lower prices are required to compete, reduction in purchasing costs = lower prices without losing profit margin

6 Purchasing cost reduction has much higher impact on profit than turnover increase Turnover Increase % Purchasing cost reduction 4.5% 2% purchasing cost reduction has same impact on profit as 12% turnover increase 4.5% purchasing cost reduction has same impact on profit as 28% turnover increase Purchasing cost reduction 2% Share of purchasing spend in % Example for: 6.5% return on sales 40% purchasing spend share in total product price

7 World Class Procurement and Best Practices

8 What is World Class Procurement?... Attributes Integral to business strategy supports the drive for corporate goals Buy-in at Board level Investment in enabling technology e.g. etools allow buyers to focus on the strategic agenda Simplifying Processes Engagement with internal stakeholders selling the strategy Upskilling of procurement people Procurement passion and enthusiasm Outputs Improvement of Business profitability Developing supplier relationships innovation & insight Delivery of change / process improvement / collaboration Delivering advantage to the business, relative to competitors Sustainability & Corporate and Social Responsibility Deliver more for less It s a journey of continuous improvement!

9 Total Cost of Ownership. It is critical to assess total cost of ownership as lifecycle and internal costs may represent larger savings opportunities than the supplier price Transport Insurance Duties Stock Capital charges Service and maintenance Spare parts Testing Warranty Waste Write offs Time to request product/serv ice via supplier Other direct administrativ e costs System costs Indirect salaries Other OH costs Supplier price Logistics costs Lifecycle costs Administrative costs Costs not directly related to the procurement of goods/services Total costs

10 Best Practice summary. Understand what the organisation is buying Categorise the spend Understand Total Cost not just Price Identify key suppliers / segment Understand the Risk Ensure Purchasing strategies are aligned with business objectives Understand how much of your spend is fully managed Support Procurement people development add value

11 Strategic Sourcing and Consolidation of Category Spend

12 Strategic Sourcing & Consolidation of Category spend Some fundamental questions. How much do we spend on goods and services? Where & with whom? What are we buying? Categorise Through what process? Who in the organisation buys the goods / services? Why are we buying them? Strategic Sourcing Leverage total purchasing across each product category to those strategic suppliers that offer best overall value Procurement is integral to Change Management

13 BT Procurement Strategic Sourcing 5 Stage Programme Stage 1: Understand the spend - Agree on a common set of spend descriptors Stage 2 : Conduct Global Spend Analysis - Consolidation of data from multiple finance platforms Stage 3 : Develop Sourcing Waves - Supply market dynamics and criticality to business Stage 4 : Opportunity Assessment - Identify addressable spend Stage 5 : Drive the strategic sourcing

14 Cost Transformation

15 Cost Transformation - Objectives Change behaviours within the organisation - focus on cost, waste and profitability Work with internal stakeholders to analyse and understand operational cost drivers & identify opportunities for purchase optimisation Improving Processes Increasing Efficiency Establishing Best Practice Measurement: YOY profitability impacting benefits: unit price reductions, volume discounts, rebates, more efficient processes Cost Avoidance: New deals, Bid work, elimination of liabilities & exposures Cash Flow: Capex deferrals / leasing etc.

16 Some Cost Transformation examples BT NI 11 Programmes completed 10/11 including: Crush Costs elimination of waste Revenue Generation Capex Programme Marketing Events Energy Programme

17 Risk Management & Supplier Watch Every purchase from a third party = potential risk Uncertain economic times must be vigilant against potential supplier failures & subsequent impact on your organisation Protect Supply Protect Brand Protect Customers How? Review supply chain to assess areas of high impact Identify any suppliers at risk of financial failure Systematic & detailed review of critical supply chain Factors to consider: Single source of supply Difficulty in changing supplier Criticality to end customer / revenue Supplier dependency on revenue with single source

18 Risk Management & Supplier Watch Regularly review financial stability of key suppliers Review quarterly results Maintain watch on press coverage Maintain effective supplier contacts Assessment of key indicators Risk should be an adjudication factor when selecting a supplier Process should be BAU Proactive monitoring Introduction of Generic Standards Supplier Risk Assessment tools Financial Review D&B, Moody s, Accounts Supplier key areas of risk model Supplier Capability Questionnaires / Assessments

19 Supplier Key Areas of Risk The Supplier Key Areas of Risk (SKAR) Finance Does the supplier have sufficient financial resources to meet its obligations? Capacity Does the Supplier have sufficient capacity to make required number of goods or deliver the required amount of service? Quality Does the supplier have an adequate Quality Management System to consistently deliver the required quality? Product Does the product meet technical specification; comply with all legal requirements without infringement of intellectual property? Capability Does the supplier have Intellectual capacity to meets its obligations under the contract i.e. to deliver product or services, design products or services etc? Knowledge, Skill and Competence Performance Can the supplier meet the performance requirements in the contract? Is there a track record of good performance? Company Direction and Ownership Does the supplier have any policies or company changes to their organisation that impact on their ability to work with BT. Are you aware of the parent and child relationships? Corporate Social Responsibility Result of risk assessment of suppliers GS13 Environmental Impact standard Result of risk assessment of suppliers GS18 Sourcing with Human dignity Standard Result of risk assessment of suppliers GS19 Product Stewardship Climate change questionnaire Supply Chain Does the supplier have control over its supply chain to manage risk and ensure continuity of supply and to meet BT s obligations The risk rating shall be determined by the buyer on a case by case basis having considered the supplier segmentation and strategic importance of the supplier/product to BT

20 Supplier Segmentation

21 Reaching the Optimal Deal

22 Reaching the Optimal Deal 6. Create the Contract/Relationship Negotiate terms and conditions of contract Agree service levels, descriptions and schedules Award contract, including exit clauses Debrief unsuccessful suppliers Retain records 1. Identification of Need Liaise with stakeholder Produce specification Technical analysis e.g. generation of alternative solutions Demand Challenge i.e. deferred, diminish or delete Complexity reduction e.g. standardisation etc. Determine the budget Project set-up 2. Procurement Plan Pull together cross functional team as Appropriate. Ensure Stakeholder signon Determine make or buy decision 5. Receive/Evaluate Offers Evaluation teams Use of weighted and ranked criteria Cost analysis/modelling Risk analysis Clarification and PTN (as appropriate) BFO, e auctions Whole life costing 4. Evaluate/Select Suppliers Check company profile Evaluate financial standing Determine capacity Assess quality procedures Evaluate track record and references Evaluate risk Evaluate their policies 3. Marketplace Solicitation / Development Produce appropriate bid documentation e.g. ITT or RFQ RFI Identify suppliers Increase suppliers focus on buyer Create markets/reverse marketing if appropriate Contact suppliers Invite offers e.g. e tendering Encouragement of suppliers to enter new markets

23 In Summary.. Importance of Procurement and potential contribution to business profitability Procurement strategy must be an integrated part of business strategy Best Practices strive for World Class Strategic Sourcing & Consolidation of Category Spend Cost Transformation Risk Management - Continuity & Contingency Approach to Market & Optimising the Deal Skilled and motivated Procurement resources required

24 Thank you & any questions?

CIPS Purchasing & Supply Management (P&SM) Model

CIPS Purchasing & Supply Management (P&SM) Model CIPS Purchasing & Supply (P&SM) Model This illustrates the generic P&SM processes and how they contribute to any organisation EXTERNAL FACTORS & IMPACTS Economic Environment Technology Changes Social Environment/