ACA Supply Chain Cost Challenge2014 – 2015 Overview

21st January 2016Stephen Appleby, BAE Systems Supply Chain DirectorRoss Elliott, PwC Director

PROTECT COMMERCIAL

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The Problem

As part of a contract re-baselining, in October 2013 the ACA and MoD agreed a significantreduction to forecast outturn costs

The primary objective of the cost challenge project was to save the programme £86m (the Supply Chain part of the larger challenge) from an addressable supply chain budget of c£800m, with c.85% already committed in supplier contracts.

The target was based on 4 savings groups…

‘Baked-In’ Opportunities Escalation New Savings

Savings which have been incorporated

within the baseline but without a delivery plan

Delivery of a number of cost reduction ideas

Mitigate and renegotiate terms for

cost escalation

Identify a number of new savings that are

needed to achieve the target

The Approach

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• What is your reconciliation process & capability?• When did the last reconciliation take place?• How many payment requests are declined?

• Should cost model?• What was the result?• What was the negotiation process;

team experience & skills?

• Was the contract competed?• How mature is the procurement strategy?• Make vs Buy assessment?

• Escalation factor being applied? Rationale?

• Challenge the supplier?• Commodity price estimating?

• Supplier health?• Cross BAE Systems perspective?• % revenue for supplier? Importance to their

business? Profitability?

• Influence of the MoD?• Cross Enterprise perspective?• Cost comparisons?

• Contract motivation & incentive?• Supplier performance and

maturity? • Operating model (i.e. spend per

FTE, suppliers, spend type, distribution , cash health etc)

• Opportunity register? Aligned incentives?• Performance/cost improvement?• Cost comparisons?

Team was formed comprising senior internal supply chain staff supported by PwCThe team identified a number of cost reduction levers from which savings might be achieved

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# Opportunity Group Individual Opportunity Title SCCC Owner Short description of the saving and its basis SCCC WorkstreamUnfactored Savings Size

£k

Factored Savings Size £k

Confidence In Unfactored Saving 

Size (%)

Maturity StageI, Q, S, R

e Ch

171 171c Steel and Temp steel Multi sourcing Ronnie Mann

Multi sourcing‐ Qualifying other primes and benchmarking, renegotiation with incumbents exploit Type 26

Naval Ships Procurement

 £                       900   £                       675  75% Secure 2 09/05/14 02/07/14 30/09/14 31/10/14

171 171d Steel and Temp steel Substitution of redundant material Ronnie MannSubstitution on Redundant Material/Regrading Plates Naval Ships 

Procurement £                       562   £                       562  100% Secure 2 09/05/14 02/07/14 30/09/14 31/10/14

158 158a Cable Review of saving opportunities for Cable Tom Reid

1) review of surplus cable and identify re‐use/ resale opportunities2) Category management and alignment with other Maritime projects

Naval Ships Procurement

 £                       650   £                       488  75% Secure 1 09/05/14 02/07/14 31/03/15 31/03/15

172 172b NS Valves Buy back of existing stock for valves Tom Reid

Score Marine have offered to purchase surplus valves back at 25% of the original purchase price; or sell to other project or cannibalise

Naval Ships Procurement

 £                       400   £                       400  100% Secure 1 09/05/14 02/07/14 15/10/14 29/10/14

67 67a First FixingsSubstitution of Hilti cold fired studs for welded stud type ‐ Ship 02

Tom Reid

Opportunity 3801 ‐ to be realised but need to understand Rosyth implications

Naval Ships Procurement

 £                       600   £                       300  50% Secure 1 30/04/14 31/05/14 15/10/14 29/10/14

171 171e Steel and Temp steel Bespoke plate sizes Ronnie MannMove to purchase bespoke plate sizes for plates >20mm in thickness (13m to 10.5m)

Naval Ships Procurement

 £                       300   £                       225  75% Secure 2 09/05/14 02/07/14 30/09/14 31/10/14

171 171f Steel and Temp steel Relofting, renesting and utilising Ronnie MannUse Babcock/PNB best practice ref relofting, renesting and utilising remants across yards

Naval Ships Procurement

 £                       300   £                       225  75% Secure 2 09/05/14 02/07/14 30/09/14 31/10/14

171 171g Steel and Temp steel 18 week lookahead Ronnie Mann

Provision of 18 week lookahead for all build yards (not just call off ship1 and therefore lose benefits of X nesting)

Naval Ships Procurement

 £                       400   £                       200  50% Secure 2 09/05/14 02/07/14 30/09/14 31/10/14

Savings Description and OwnershipRealise Stage Complete

Secure Stage Complete

Qualification Stage Complete

Idea Stage Complete

Savings Details

Cost Reduction Levers

Addressable Spend Areas

Savings Potential

What are the priority/addressable areas of spend?

Register ~200 discrete opportunities

Major Sub-Contracts

Naval Ships

Babcock

Mission Systems

Alliance Management

Thales

Integration

PrioritisationPotential vs Ease of Implementation

Heat map Levers vs Areas

£% savings based on lever maturity and benchmarks

The Approach

Governance

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Defined savings maturity gates…• Idea

• Qualify

• Secure

• Realise

Measure progress against plan

Robust decision making roles and boards

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The Outcome

A wide range of savings were delivered across a large number of areas. The project has so far achieved savings of £139m from 67 separate activities including

2014 & 2015

£86m…the original Target

£116m …realised during 2014£139m …realised to date

Sir Peter Gershon…“This is one of the best 

projects on supply chain cost reduction I have come across. 

Well done!”

Key Savings Achieved…• Re-negotiation of long running incentivised

contracts using leverage and ‘Should Cost’ models (£42m)

• Escalation savings by, for example, moving from fixed to firm contracts (£34m)

• Identification of engineering or operational change and demand challenges to reduce cost (£30m)

• Make v Buy activity across a range of activities including electrical installation and ship joins (£12m)

• Reconciliation of long running contracts to claw back costs and leverage negotiations (£9m)

• Revision of procurement plans for commodities such as IT, spares and temporary labour (£8m)

• Warehousing negotiated cost savings (£4m)

Find and deliver the ‘quick wins’ to build momentum

Good comms and engagement withstakeholders

Follow  a robust process and governance (activity, approvals, budget reductions)

Clear targets and visible measurement of achievement

Mixture of team members with clear internal ownership

Clear Board Sponsorship and review of achievements

Lessons Learned

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Drive performancethrough daily, weekly, monthly targets and leading indicators

Embed savings through reduced budgets