World Class Strategic Sourcing The Deloitte approach to optimise supply and procurement

World Class Strategic Sourcing The Deloitte approach to optimise supply and procurement

Index 1. The new procurement environment 2. Overview of Strategic Sourcing 3. The Strategic Sourcing process 4. Final Words

Procurement has become increasingly sophisticated in order to drive margin improvements • 1st Wave Strategic Sourcing • Centralised negotiations • Fewer suppliers • Competitive bidding process • Demand Management • Standardised specs • Policy/procedures outlined • Some monitoring and tracking • 2ndWave Strategic Sourcing • Abolition of “sacred cows” e.g., Marketing, IT functions, Legal • Cost management imperative • Matrixed procurement function • Procurement shares responsibilities with centers of competence • Responsibilities by the various parts of the organisation clearly defined • Effective “end to end” procurement management • MIS allows unit/price tracking • System allows “policing” of compliance • Disbursement management • Service and quality improvement Relative Efficiency • Procurement function mainly contract administration function • Procurement and contracting decisions highly decentralised • Vendor base fragmented • Vendor relationships “incestuous” Up To Late 80s 90s New Millenium Procurement(“In The Basement”) Sourcing(Easier cost improvement lever) Supply Chain Management(Source of sustainable total cost advantage)

Overview of Strategic Sourcing • Procurement represents a significant opportunity for improving value for money by reducing costs. • Currently procurement activities are executed on an ad-hoc basis with minimal contract coverage • Strategic sourcing will assist us in choosing suppliers, allocating volumes among suppliers, managing supply risk and optimizing the supplier base performance, focusing on total cost of ownership • The primary objective is to develop a number of strategic supplier contracts with preferred suppliers, ensuring that our purchasing power is utilized to the maximum extent • A strategic sourcing review will be conducted on the materials and services making up our annual projected expenditure including a detailed spend analysis, market analysis, strategy development, bid solicitation and evaluation and will result in the implementation of organisation wide supply contracts.

Why Strategic Sourcing? Strategic sourcing will assist us in choosing suppliers, allocating volumes among suppliers, managing supply risk and optimizing the supplier base performance, focusing on total cost of ownership Increase Shareholder Value Operating Margin Revenue Growth Asset Efficiency Expectations Increased client satisfaction due to better service / quality of procured items Improved contracting and negotiating skills of staff Improved relationships with suppliers Increased compliance, compatibility and standardisation Increased emphasis on Supply Chain Management Improved Communication and Coordination with suppliers Increased emphasis on continuous proactive performance management Established culture on operational excellence Improved agility and flexibility of partner Organisations and networks Optimise asset efficiency Improved terms on materials Increased use of supplier managed inventory Consolidated inventory

Spend Savings Process Savings World class procurement organisations must contain the following Strategic sourcing activities provide short-term savings, however a holistic and comprehensive view of Procurement and Compliance must be adopted in order to capture and sustain savings, and minimise cost of non-compliance Organisational Value Value Creation Compliance Procure to Pay Supplier Management Strategic Sourcing InventoryManagement Ongoing Operations Demand Management Procurement Vision and Strategy Preferential Procurement Aligned Supply Chain organisation Integrated Procurement Information ProcurementInfrastructure Change Management/Knowledge Management and Training Integrated Measures, Tracking, Recording & Reporting Infrastructure Top Management Sponsorship Mandate Empowerment Accountability & Incentives

Timelines Schedule of timelines in accordance with the PFMA and MFMA. Strategic Sourcing underpins Demand Management and thus needs to fall into the same types of timelines. MFMA example given

South African Challenges South African Organisations are faced with a number of constraints that need to be addressed when designing and optimising their supply chains • Skills Availability • Limited skilled resources within the Supply Chain area • Retention of limited skills not easy • Requirement to cut costs and at the same time improve current business performance • Need to build capability with current staff and maintain momentum around improvement initiatives • Limited collaboration across the supply chain (internal & external) • Visibility and cooperation across the supply chain • Ability to embed supply chain improvements within the organisation • Adoption of world class technology and systems that are readily available to support process improvement

Purchasing comes down to two activities: Sourcing: includes all activities related to establishing and managing purchasing contracts Procurement: includes all activities related to identifying and fulfilling an actual purchasing need. Supply relationship management: Develop mutually beneficial relationships The Sourcing & Procurement “Hot” topic Strategic Sourcing initiatives have resulted in significant benefits being obtained for organisations by focusing on a total cost of ownership approach to procurement Assess Opportunity Assess Internal Supply Chain Identify Need Create Requisition Assess Supply Market Go to tender and evaluate Award Define Sourcing Strategy Sourcing Create Purchase Order Procurement Execute Sourcing Strategy Shipping Institutionalise Sourcing Strategy Receive Goods/ Services Supplier RelationshipManagement Payment & Settlement Create/Refine Supplier Groups Assess Relationship Initiate Relationship Manage Performance Define Performance Expectations

Wouldn't it be cool if ... Corporate purchasing helped to increase shareholder value I could tell my stakeholders a success story about our purchasing activities Purchasing supported an increase in cash flow I could influence demand and specifications of goods/services that we procure I had qualitative information about our suppliers for contract negotiations I could drive down TCO (Total Cost of Ownership) through purchasing initiatives like strategic sourcing Strategic Sourcing & Procurement Purchasing has been getting a bad reputation due to missed deadlines, failed projects and broken savings promises. However, there are companies that have successfully transformed their purchasing function and created value along the way. • Reality • Profitability declines due to increasing operating costs • No visibility of how or if purchasing contributes to shareholder value • It seems we are investing lots of money in purchasing projects but I have yet to see a positive ROl • Collecting basic spend data takes forever and data is not reliable • NO view on who my most important suppliers are and what my relationships with then should look like Strategic Sourcing

A procurement function needs to work through the defined stages to achieve world class procurement capabilities • Strategy fully supports the corporate goals and driven by corporate consensus • Managing the supply risk while leveraging the competitive strengths • Nurturing supplier relationships • Supplier base share improvement target for cost and innovation added value • Full visibility and trust across the external value chain • Procurement maintains a rationalised supplier network that delivers technology, knowledge, products or service quality superior to competitors Stage V: Pioneering World Class Stage IV: High Performing • Procurement strategy aligned to corporate strategy • Suppliers selected for strategic fit and deliver continuous improvement • Data driven decision making • Full support over purchasing cycle • Risk sharing higher with the organisations co-located and jointly financed • Business planning optimises all commercial aspects, tax, investment, people Alliance • Formal Planning processes • Focus on SRM and sharing business plans • Longer term, bigger value contracts with fewer suppliers • Collaboration on cost improvement, increased levels of risk sharing • Trained and qualified resources supporting all categories of spend • Key Performance Indicators in place. Partnership Stage III: Advancing Level of Added Value Stage II: Developing • Some category strategy creation, but not company wide, and not communicated effectively • Volume leverage through effective use of competition across categories • Track commercial measure of performance, targets for savings • Technology enables i.e. purchase to pay cycle improvement through automation • Selected supplier base consolidation • Training and recognition of skills required Procurement Stage I: Reacting • Needs not anticipated, data not available or not used • No organisation wide procurement strategy, large supplier base • Transactional focus • Procurement provides ad-hoc tactical support • Low skills and resource, little career planning Buying Time Line (potentially 3-5 Years)

Building the Team – Managing the Project A sourcing engagement can affect many parts of an organisation. It is critical to identify and include the key affected groups in the process and develop a project management plan across all stakeholders. Who should you include? Inputs to the Project Management Plan • Demand management or planning shall be a cross-functional exercise that bring the supply chain practitioner closer to the end user • Determine current and future needs • Formulate inputs for: • Preparation of the budget • Annual performance plan (PFMA) • Annual operational plan (PFMA) • Integrated Development Plan (MFMA) • Service Delivery and Budget Implementation Plan (MFMA) • Acquisition Plan • Champions for departmentson process and requirements

Assess Internal Supply Chain The Strategic Sourcing Process Effective strategic sourcing requires a clear and logical approach to provide a transparent and objective analysis of supplier capabilities, thereby ensuring sustainable savings without compromising service. Develop Sourcing Strategy Execute Sourcing Strategy Institutionalise Sourcing Strategy 4 5 6 2 Assess Supply Market 3 Define sourcing categories 1 • Identify potential sources of supply • Evaluate industry(ies) • Identify viable sources of supply • Perform supplier assessments • Perform supplier comparisons • Document spend • Stratify spend • Identify and prioritize spend opportunities • Cross functional team development • Identify demand drivers • Perform specification review, gap analysis & standardisation review • Perform supplier specification review • Identify all related Total Cost activities • Compile opportunities • Brainstorm process enhancement and supply strategies • Assess the feasibility of strategies • Draft an action plan • Communicate strategies • Develop supplier solicitation strategy • Implement supplier solicitation strategy • Conduct supplier negotiation • Develop process enhancement strategy • Obtain final approvals • Award contract • Vendor management • Transition to new process • Develop supplier relationships • Implement operational changes • Establish joint supplier/Enterprise process improvement team • Monitor and report savings • Monitor and report performance

Either a tactical or strategic sourcing approach can be adopted to deliver results There are a number of available sourcing strategies. Not every strategy will suit the same business situation. Depending on the maturity of the category, appropriate strategies should be selected to deliver results. Increase Buying Power Create an Advantage Tactical Strategic • “Traditional sourcing” • Often for commodity items/categories • Those with simple supply market • Typically used if category has not been sourced previously • The key objectives are to achieve the best price and rationalise the supply base • Typically more complex categories – complex supply market and more complex products • Highly detailed and looking at all areas of the supply chain • Typically longer timescales than tactical sourcing • Fewer quick wins • Used when the category is well-advanced, the best price has been achieved Product Specification Improvement Volume Concentration Best Price Evaluation Joint Process Improvement Strategic Sourcing Global Supply Management Relationship Restructuring

The scope of sourcing extends beyond supplier price negotiation and takes into account the total cost of ownership Amount paid to the Supplier Purchase Price Demand Drivers Internal Policies & Procedures Total Acquisition Cost (Actual Opportunity) Factors generate additional costs to an organisation once an item is commissioned and in use Procurement Practices Specifications Internal Processes Inventory Practices Management Systems Operational Practices Decommissioning/ Disposal

World class companies demonstrate excellence across the three key components of a strategically focused procurement organization World Class Procurement Capabilities Organisation Technology • Status and perceived importance of the Procurement Function • Partnerships with key suppliers • Joint improvement teams • Cross-functional sourcing teams • Accountability for savings • Regional and local structure and responsibility • e-Procurement • e-Sourcing • Measurement systems for reporting • Transaction automation • Procurement cards • Project management tools Process, Policies and Procedures • Simple and consistent purchasing process • Clearly defined sourcing process and rules • Authority to drive compliance given to Procurement • Ongoing focus on value analysis • Simple access to quality information • Focus on commodity management and customer service • View of sourcing, ordering, and accounts payable as one process (Source-To-Pay)

Critical Success Factors & Risks The following critical success factors and risks have been identified as key levers to successful Supply Chain Optimisation : • Commitment by top management • Acceptance from the business line leaders e.g. Directors • Commitment of dedicated resources • Allocation of funds (budgetary consideration) • Qualified and motivated personnel • Support from related disciplines • Enabling tools (use of e-technology, ERP / GSS) • Ability to track, capture and measure the benefits • Transparency within the evaluation and adjudication process • Confirm savings targets • Organisation’s reputation in the marketplace may result in supplier resistance • Ability to enable change of behaviour within the organisation • Monitor and reward top performance

The Truth about Strategic Sourcing • Truth 1: It's powerful if you get it right • Truth 2: Cost will always keep creeping back in • Truth 3: It's not rocket science • Truth 4: Money on the Table ≠ Money in the Bank • Truth 5: Direct Purchasing ≠ Indirect Purchasing • Truth 6: It's not just about Price • Truth 7: A Commodity ≠ Commodity ≠ Commodity • Truth 8: Information is all you need • Truth 9: Only measured results are good results • Truth 10: It's not about Technology

If you have questions regarding strategic sourcing: Katherine Levy 082 602 4107 katlevy@deloitte.co.za Riana Bredell 082 578 6338 rbredell@deloitte.co.za Contacts

World Class Strategic Sourcing The Deloitte approach to optimise supply and procurement