© British Telecommunications plc

CIPS BT Procurement Masterclass 16th May 2011

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

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

Why is Effective Procurement Important?

Manage /

Mitigate Risk

Deliver

Savings

Governance

& Control

Reach

Optimum

Deal

Manage

Suppliers

Global

Leverage Get Things

Right First

Time

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

Security

of supply Process

Efficiency

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

Example for:

• 6.5% return on sales

• 40% purchasing spend share in total product price

5

10

15

20

25

30

35

40

10 20 30 40 50

Turnover Increase %

Share of purchasing spend in %

Purchasing cost reduction 4.5%

Purchasing cost reduction 2%

• 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 has much higher impact

on profit than turnover increase

World Class Procurement and Best Practices

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 !

Supplier price Logistics costs Lifecycle costs Administrative

costs

Costs not directly

related to the

procurement of

goods/services

Total costs

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

• …

Total Cost of Ownership…….

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

Strategic Sourcing and Consolidation of Category Spend

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

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

Cost Transformation

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.

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

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

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

Supplier Key Areas of Risk • The Supplier Key Areas of Risk (SKAR)

Finance Product

Does the supplier have sufficient financial resources to

meet its obligations?

Does the product meet technical specification; comply

with all legal requirements without infringement of

intellectual property?

Capacity Capability

Does the Supplier have sufficient capacity to make

required number of goods or deliver the required

amount of service?

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

Quality Performance

Does the supplier have an adequate Quality

Management System to consistently deliver the required

quality?

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 Supply Chain

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

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

Supplier Segmentation

Reaching the Optimal Deal

Reaching the Optimal Deal

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 sign-

on

·Determine make or buy decision

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

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

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

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

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

Thank you & any questions ?