Procurement. 8 March Copyright silverbacklogistics.com. All rights reserved The place to go for free supply chain advice

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1 Procurement 1

2 Contents Slide Topic Seven steps The changing face of the customer Category management overview Vested outsourcing Learnings 3PL view of procurement process Celesio case study Approaches Risk factors Critical success factors 2

3 The Seven Steps Step 1: Know what you are buying 3

4 The Seven Steps Step 2: Understand and prioritise Pareto Spend analysis For whom? Which suppliers? Product/service volumes and cost drivers? What are the existing relationships and how do they perform? How critical is this to my business? 4

5 Complexity / uniqueness The Seven Steps Step 3: Market categorisation High Bottleneck Critical Secure service Challenge special requirements Reduce complexity Routine Partnership approach Long term relationships Sharing risk & reward Cost modelling Open book or hybrid contracts Leverage Low Minimise effort Blanket contracts Group deals Volume discount Tariff based contracts Short contracts Market knowledge & analysis E-auctions Re-tendering Low Relative spend or savings potential High Richards,

6 Attractiveness The Seven Steps Step 4: Supplier categorisation High Develop Some specialist transport Some market distribution Some pallet supplies Search for alternatives Contracts minimize risk Nuisance Full vehicle transport Normal pallet supplies Core National Distribution Centre Evaluate potential suppliers very carefully Set up long term arrangements Explore mutual cost reduction Exploit Global sea freight Global air freight Low Annual contracts Look for local suppliers Vendor-managed inventory Low Relative spend Group items together and negotiate with several suppliers month contracts High Richards,

7 The Seven Steps Step 5: PESTLE P E S T L E olitical conomic ocial echnological egal nvironment 7

8 The Seven Steps Step 6: SWOT Strengths Opportunities Weaknesses Threats 8

9 The Seven Steps Step 7: Action plans Category management needs to be a shared or agreed activity. Action plans should flow from categorization. Have I secured supply for higher risk (Bottleneck and Strategic) purchases? Where can we simplify specifications to increase choice? How can we reduce effort on routine areas? Where do I need market knowledge? What support do I need for my critical contracts? What role should operations play? How do you increase our company s attractiveness to key suppliers? 9

10 The changing face of the customer Logistics Quality Flexibility Cost Efficiency Process Innovation Good solutions do not stand out Good logistics creates opportunities Good logistics need not cost a fortune Good logistics continuously improve from the inside out 10

11 Category Management Overview Application Case Study The buyer s point of view 11

12 Aligning the strategy 12

13 Key pillar: logistics service centres International Logistics Service Centre(s) managing marine and air movements Circa 25 Logistics Service Centres (LSCs) managing all logistics, supporting the markets Why consolidate activities into logistics service centres? Natural teams focusing on logistics management, improved service Network coordination (inbound/outbound) Increased scale, cover all materials (including raw materials) How many logistics service centres? Driven by local business requirements and dynamics 13

14 Model design characteristics Clear distinction in unlocking the value between lift and shift of processes to external providers and transform and shift where there is structured re-engineering both prior to the contract and then throughout its lifecycle. Moves from how much can we save? to how do we transform processes, productivity and cost structures in a way which supports both business growth and financial performance? Paying more attention to structured outsourcing processes. The roll-out involves a well-led outsourcing team, analytical evaluation of the supply market, detailed investigation of supplier capabilities and rigorous examination of transparent cost structures. Having a full understanding of the risks of lock-in and dependency, and clarity on exit strategies. The basis of the exit strategy will also give due consideration to, and protection of, intellectual property The relationship will be monitored together with ongoing performance improvement, measurement, supplier development and breakthrough thinking, particularly in the process of re-engineering. 14

15 Considerations for commercial construct How to get the balance between risk and reward How to drive the right behaviours Minimising barriers of entry enabling high adoption by region / end markets Do once standardised commercial construct that drives consistency and compliance Establishing the appropriate level of legal protection and exit costs New methodology to calculating savings (data normalisation) 15

16 Potential value to the organisation Vested outsourcing decision matrix High Vested outsourcing approach Core company activity don t outsource Conventional outsourcing To be driven primarily by financial considerations Low Low Organisational Expertise High 16

17 Vested outsourcing: Five golden rules 17

18 Vested outsourcing 1 Focus on OUTCOMES, not TRANSACTIONS The service provider is paid based on its ability to achieve mutually agreed desired outcomes. The value that comes from the outcomes-based approach depends on transformation through innovations i.e. new value creation that a service provider can bring to the table. 2 Focus on the WHAT, not the HOW Performance partnerships let each party do what it does best. Unless the company that is outsourcing has the skills and the resources to keep up with the latest innovations in the service it is outsourcing, it should leave the details to the experts 3 Agree on clearly defined and measurable outcomes All parties must be explicit in defining the outcomes they want. These outcomes are expressed in terms of a limited set of ideally, no more than five high-level metrics 4 Governance structure should provide insight, not merely oversight A properly designed governance structure should establish good insight, not provide layers of supervisory oversight 5 Optimise pricing model incentives The pricing model must balance risk and reward for the organisations. The agreement should specify that the service provider will deliver solutions, not just activities 18

19 Optimise price model: risk and reward The vested agreement should be structured to ensure that the outsource provider assumes risk only for decisions within its control Aim to provide incentives to the service provider to solve the customer s problems. The better the service provider is at solving those problems, the more profits the outsourcing company can make Inherent in the business model is a reward for the service provider to make investments in process, service or associated product that will generate returns in excess of contract requirements Stepped vested reward model avoids the temptation for the outsource provider to sandbag savings and drives them to deliver quicker and faster 19

20 Commercial construct and governance Commercial construct Management fee (based on people and system costs). KPI Bonus (maximum of management fee target performance & default level matrix) Gain share (only payable for 12 months; recurring savings for BAT) Implementation costs recovered before gain share is paid Commercial terms based on cost neutral approach for LLP Governance Monthly regional project board Quarterly LSC regional board Gain share tracked monthly Regional/local finance approval 20

21 Throughput Operational costs (3PLs) Reduced Throughput Operational costs (3PLs) Indicative LLP commercial structure As Is Total Spend Operating margin Service KPI Vested Share To Be Admin/ Mgmt 5-10% x% of mgmt costs x% of mgmt costs Cx% net savings for BAT LLP makes % on it s direct costs and the same against Service KPIs The LLP s management cost replaces BAT s costs and is at a fundamentally lower cost base due to IT synergies & shared services One-off Gain-Share Service Margin Ops Margin Reduced Mgmt Lower mgmt cost than BAT 90-95% 0% 0% x% x% of savings within calendar year LLP s fee is NOT linked to 3PL spend Once the saving stream dries up, the gain-share will be replaced increasing the Service KPI to Y% The more the LLP earns, the less BAT pays Multiple local 3PL providers without a mark-up 21

22 Learnings Don t underestimate (minimise) the task!! Major organisation change needs support with appropriate resources and structure (RAA) Seek out pioneers & incorporate their learnings Many rabbit holes could have been avoided by receiving external insight Don t re-invent the wheel when not necessary Similar legal frameworks in other categories / regions available as reference Lock down specification before commencing contract negotiations Contractual legal framework evolved in tandem with functional requirements 22

23 Learnings Clearly define functional contract construct responsibilities Define dependency between functional leadership and commercial interests Be aware of functional engagement that could impact commercial construct Align commercial negotiations so as not to impede success/progress of supplier engagement Align with all functions who will need to support / benefit Critical resource to deliver change / communication management Complex model design requiring iterative communication / explanation / clarity 23

24 A 3PL view of the procurement process The supplier s point of view 24

25 Celesio the healthcare group Pharmacy Solutions Patient and Consumer Solutions Manufacturer Solutions A leading international pharmaceutical trading and service company European market leader in pharmaceutical wholesaling European key player in pharmacy business European specialist in healthcare services to the manufacturer EUR 23 bn Turnover (2010) Operations in 27 countries 47,000 employees 15 countries 130 branches Partner for over 65,000 pharmacies More than 100,000 deliveries per day 9 countries 2,300 pharmacies Over 600,000 customers daily Dispensing of over 160 m scripts a year 13 Countries Home Delivery Services W & D Sales/Nurse teams Movianto - Dedicated to healthcare logistics 25

26 Overview of the 3PL Specialist pharmaceutical supply chain solutions Medicines and healthcare regulatory authority 3PL services Warehousing and distribution Transport only Full order to cash management 4PL services Pan European road freight Global freight services 26

27 Procurement interaction Start-up companies Virtual companies No volumetrics Poorly understood supply chain in local market European solutions central hub Integrated local market solutions Transport services Transactional Major pharmaceutical clients Strong supply chain and procurement teams More data than information Department of health/hospitals Procedural Value range - 40 k to 3M 27

28 Approaches Procurement approaches Complete range Verbal brief E-auction Full brief Free text Predefined boxes Highly structured and contractual Buyer s requirement Price-only: transactional Supplier relationship: KPI penalties Partnership Risk share Innovation Investment Long term contract Drive outcomes not transaction Supplier perspective Trends Responsibility transfer from logistics to procurement Removal of all human contact On-line applications Tick-box only responses E-auctions KPI penalties but no rewards Move to outcomes focus Process transparency Contract upfront Clear and scored criteria 28

29 The view from Scandinavia Brief sent Friday afternoon questions back by Monday 2M contract 6 pages Incorrect data On holiday Document with appendices Further documents embedded in text Response in 5 days High on transactional detail/low on outcomes 29

30 Best in class example Pre meeting Understand scope Explore options Understand objectives and outcomes Submit tender Engagement rather than presentation Tender documents Clear list of attachments Operational meeting Clarify points Validation of thinking Discuss incentives for cost/service trade-off Engagement Understand outcomes Appropriate resourcing and response Drive solution design Map as is or create to be Deliver right service at right price 30

31 Risk factors supplier management Product management / new product development To what extent could rapid market change or new product development increase the chance of supply disruption? Supplier selection management To what extent are supply risks assessed as part of the sourcing strategy and supplier selection processes? Supplier management (financial strength) How well managed are financial risks in the supply chain? Supply chain performance How closely monitored and managed is the performance of the supply chain? 31

32 Critical success factors S U P E R I O R Supplier Analysis - Know the supplier, their financial position, competitors, customers, SWOT analysis etc. Understanding the Relationship - supplier mapping. Is the relationship strategic?. How does each party view the other? 360 feedback Performance Monitoring - Set SMART objectives & agree credible criteria to measure performance against them Empowerment - Make the supplier work. Give them appropriate responsibility for improving compliance, handling complaints etc. Regular Reviews - Plan regular reviews as appropriate with agendas to cover performance and development Innovation - Encourage innovation with supplier. Don t leave it to chance, set development objectives and stretch targets Open Communication - Develop a planned communication strategy with both the suppliers and the business Review & Re-visit Annually - Conduct a formal review every year to confirm value added and set new objectives 32

33 Good behaviours in this environment The client has A strategy or roadmap describing the supply chain of the future and how it supports the core competencies of the business A clearly defined set of objectives, balanced with the needs of safety, health and environment A high level of familiarity of the cost of the supply chain The capacity to model supply chain costs, perhaps supported by a data warehouse style model Balcony view The customer will exhibit a high degree of control The customer will have a clearly defined set of targets for any LSP involved in their supply chain The customer may be using outsourcing alongside decentralization and rationalization to achieve supply chain targets The customer is willing to share their metrics with others to endorse their best in class approach A clear understanding of where the competitive edge lies in the business. A clear service level management policy 33

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