Deloittes UK “Transformation of Procurement in NZ”

Procurement methodology in use in NZ including E-Procurement tools & reverse auctions

By David Middleton B.Sc, M.Sc, MBA (CIPS)Genesis Energy - Contracts and Procurement Team Leader

The Overview

Spend Analysis

Sourcing

Diagnostics focus on identifying, sizing, categorising, base-lining and analysing third-party spend in order to prioritise cost reduction opportunities and quick wins

Spend Tree from Spend Cube Collate initial long list of opportunities

Opportunities• A list of savings

opportunities • Mapping opportunities to

identify waves of sourcing from Quick Win (1st wave) to longer term (3rd wave)

Data is cleansed, coded and validated

Results compiled for analysis

Function/ Cost Centre

Pro

du

cts

Suppliers

Testing

• Testing theories against benchmarks and Strategy Testing with stakeholders

• Assessment against a value framework to investigate opportunities in more detail

Assess Value LeversCreate Sourcing Wave Plan

I mproveCustomerSatisfaction

GenerateRevenue

I ncreaseProfit

RestructureSupplyBase

I ncreasedCompetition

RestructureRelationships

Reduce / Eliminate

Transactions

ReduceTotal Life

Cycle Cost

OptimiseSupply Chain

Cost

ConsolidateSpend

I mproveSpecification

ReduceConsumption

Supply BaseMgt

TotalCost

Mgt

Purchase Demand

Mgt

CustomerMgt

Value Value FrameworkFramework

I mproveCustomerSatisfaction

GenerateRevenue

I ncreaseProfit

RestructureSupplyBase

I ncreasedCompetition

RestructureRelationships

Reduce / Eliminate

Transactions

ReduceTotal Life

Cycle Cost

OptimiseSupply Chain

Cost

ConsolidateSpend

I mproveSpecification

ReduceConsumption

Supply BaseMgt

TotalCost

Mgt

Purchase Demand

Mgt

CustomerMgt

Value Value FrameworkFramework

This analysis will result in a ‘spend cube’ that consolidates all available data sources to provide a complete picture of spend to the key stakeholders

Working with data

Compile all:

• Accounts Payable data

• Purchase Orders

• Internal Databases

• Contract Information

Remove:

• Coding Errors

• Inaccurate Data

• Duplicate Entries

• Ensure all spend is captured • Group spend into categories

Confirmation of Total Spend

• The direct spend

• The indirect spend

• Capital expenditure

What we can learn about spend

• Clear workable data format

• Easy to profile and re-profile

categories and sub-categories

• Tools: MS Access or Excel

Produce a “Spend Cube”

Filter

Products:What isbought?

Business Unit:Who is doing the buying?

Suppliers:From whom are goods/services bought?

Price, Volume,

Time

A Spend Cube is a clean database of purchases. It will use a multi-levelled spend tree to categorise each transaction

Summary Table Extract of a Spend Cube: showing category, supplier, spendSitting behind this extract will be a record of every transaction made over the representative time period

Example Spend or Category Tree (after item categorisation): the

taxonomy/structure is agreed prior to data cleansing, but populated with

data from the validated cube output

• Fibre $252.3m (95)• Product For Resale

$21.3m (76)

• Resin $55.0m (3)• Paper $9.3m (13)• Treatment $9.3m (41)• Other $5.2m (35)• Wax $4.5m (3)• Tongues $1.5m (3)• Adhesive $1.4m (5)• Treatment Outsourcing

$0.9m (6)• Flour $0.3m (3)

• Logistics $66.3m (147)• Couriers $0.6m (34)• Warehousing $0.2m (6)

• Fleet $1.0m (11)• Travel $0.4m (32)

• Labour & Services $25.8m (515)

• Consumables $14.6m (439)• Machine Consumables

$7.3m (46)• OEM Spares $5.4m (71)• General Electrical $4.4m (76)• Machinery $4.1m (113)• Clothing $0.2m (12)

• Telecoms $1.7m (32)• IT $1.1m (62)

• Other $4.9m (104)• Facilities Management

$3.9m (213)

• Temporary Labour $3.7 m (2)• Education/Training $0.8m (75)• Other $0.5m (31)

Wood $273.5m (171)

Client Total Spend$575.2m (3,370)

Directs$460.8m (519)

Out of Scope$11.9 m (307)

Raw Materials$87.6m (112)

Distribution$72.0m (187)

Energy$27.7m (11)

Packaging & Finishing Materials $4.9m (38)

Travel & Fleet$1.3 m (43)

Mobile Plant$9.5 m (55)

MRO$61.7m (1,272)

Facilities & Estates$9.2m (360)

IT & Telecoms$2.8 m (94)

Services$7.8m (162)

Office Supplies$0.4m (40)

Human Resources$5.0m (108)

Indirects$100.9 m (2,183)

• Insurance $3.5m (16)• Consulting $1.6m (69)• Marketing $1.5m (38)• Print $0.8m (27)• Legal $0.3m (12)

• EPA/Rates/Utilities $5.1m (57)

• Employee Costs $3.6m (159)

• Capital $1.1m (21)• Customs Agents

$0.7m (17)• Sales $0.6m (33)• Labour $0.6m (14)• Cash $0.2m (6)

Other$3.1m (49)

Unclassified$1.6m (361)

Annual Spend with supplier count in brackets

The 80:20 rule should be applied, resulting in some unclassified spend

There will always be out of scope spend which will not be influenced as part of a spend review

MRO – Maintenance, Repair and Overhaul. This is a complex, fragmented category

Savings are then identified, validated and a pragmatic programme to realise the savings is designed

Disciplines and Tactics

Spot

•Ad Hoc/Maverick spend.

•Compliance issues

•Justification form

Supplier Performance Management

Spend Analysis

Disciplines

Sourcing

Contract Management

Project Strategic

Tactics

•Day to day issues logged.

•DIFOT reporting

•Review the Standard T&C’s

•Simple system to go out for quote on ad hoc materials.

•A formalised excel bases template for all project engineers.

•A monthly report

•Reviewing the contract note style arrangement for smaller works.

•Update of current contract templates for goods and services.

•A clear roadmap as to which categories will go out for RFP.

•Negotiating better T&C’s

•Deciphering the spend by commodity and supplier.

•Developing data that guides us to focus on our biggest opportunities.

•Buyer Surveys quarterly for key contractors/suppliers on KPI performance

•Central recording.

•Project close outs completed.

Tactics

Spot - The spot sourcing process supports the competitive sourcing of one-off goods and services needs of the organisation i.e a three quote RFQ.

Project - The project sourcing process supports the competitive sourcing of a series of one-off goods and services needs that are all associated with a single large scale project. The larger scale and greater dollar value require a more comprehensive process than spot sourcing, but due to the one off nature, follows a different process from strategic sourcing.

Strategic - The strategic sourcing process takes a long-range view of the goods and services needs of the entire organisation i.e full RFP including a weighted survey and background checks.

Reconfirming scope is one of the first elements of developing a Sourcing Strategy

¢ Is the scope manageable?

¢ Do we have the support & commitment of sponsors and stakeholders?

¢ Do we have the right resources?

¢ Are there any insurmountable barriers?

¢ Does the scope allow us to meet objectives?

¢ Will we meet all of our customers’ needs?

¢ Is the scope aligned with Corporate and Business Unit goals?

¢ Have we addressed all aspects of Total Cost?

To develop the strategy, we need to reconfirm and prioritise the scope by considering the following questions:

SIG Case Study – Category strategy engineered parts example

BEARING

HUB

BRACKET

Parts are segmented into sub-categories based on complexity, material type and size

The following process illustrates how all 6786 Engineered parts were categorised. The categories show the number of parts within each and the breakdown of € 10.37m of net spend 2011 (i.e. this takes into account stock and frame contracts)

€ 0

€ 3

€ 6

€ 9

€ 12

TotalChippingParts (Incl

Undefined &Out ofScope)

ChippingParts out of

scope

TotalChippingParts inscope

Complex Simple Mediumcomplexity

1.4057Stainless

Steel

Plastic Largeturning

Large milling Brass

Supplier Bundles

Net

Sp

en

d 2

011 w

/o s

tock &

fra

me

co

ntr

acts

(€m

)

Supplier Bundles:

KEY

€ Bundles € Out of Scope

Total Engineered Parts€ 10.37m, 6788 parts

Categorisation

Complex€ 2.19m149 parts

Large Turning€ 0.19m41 parts

1.4057 Stainless

Steel€ 0.26m

181 parts

Plastic€ 0.36m

246 parts

Brass€ 0.02m48 parts

Medium Complexity

€ 1.37m184 parts

Simple€ 3.33m

2000 parts

Large Milling€ 0.10m25 parts

Out of Scope€ 2.55m

3914 parts

Out of scope parts include low demand volume and low value

class groups

€7.82m

€10.37m

Benchmarked savings potential and rationale

Supplier Bundle Name

Net TCO Savings Percentage

Savings Basis

Simple 24.4% Many data points from previous sourcing of this bundle.

Medium complexity 29.4% Higher than ‘Simple’ bundle to reflect higher labour content.

1.4057 Stainless Steel

16.9%Based on material being imported and previous quotations.

Large turning 29.4% Based on quotations and purchased prices.

Large milling 24.4%Material cost is higher due to the part size. Quotations received but sample parts are being qualified. Not into full production yet.

Plastic 24.4%Based on quotations from 5 parts with common plastic types (POM & PEEK). Reduced low end of savings range to 10% due to other plastic types are not available in China (e.g. U-PE).

Complex 29.4%Assumes existing supplier have the capability and is based on parts that are currently sourced from Asia (e.g. bracket no. 869318020).

TCO Assumptions:• A weighted average TCO of 9.5% has been applied to the mid-range savings value in order to calculate the net benefits of all

supplier bundles within the analysis. 9.5% is a blended rate for TCO cost for Chinese suppliers shipping for Thailand assembly and for Neuss assembly

Each bundle has a TCO savings % based on previous sourcing benchmarks

The Process

E-Procurement Tools

Emptoris (Full Suite E-procurement tool)Zycus (Full Suite E-procurement tool)Trade Interchange (E-Auctions and E RFx)

All can theses tools provide the ability to reduce costs by increasing competition, ensure transparency and probity. As well as streamlining the process especially around reducing the time needed and the optimisation of bid results.

E-Reverse Auctions

Mostly E-Rfx’s such as RFI, RFQ & RFP are used for Strategic sourcing, with reverse auctions being an occasional tool in the toolbox.

The common misconceptions are that the buyer has to award to the lowest bidder however that is implied by it being an auction by nature.

Reverse auctions are not limited to Commodities and do not have to be stand alone exercises i.e. negotiations can follow.

Consider eSourcing if ….

Your cumbersome, manual sourcing process is causing you to leave identified sourcing opportunities off the table.

Your sourcing cycle times are longer than desired. Your collaboration with internal and external stakeholders

is time consuming and cumbersome. You compromise event outcomes by engaging suboptimal

numbers of suppliers. You shy away from electronically sourcing complex spend

categories. You fail to create a competitive atmosphere for suppliers. You are unable to leverage work, knowledge and

successful outcomes from one sourcing event to the next. You are limited to just few sourcing events but want to do

more.

An example of a live auction

Conclusion & Questions

Any Questions?

Contact Details:

Direct Line 073847225

Mobile 021 671107

Email David.Middleton@genesisenergy.co.nz