Supply Chain Management 101

1. Supply Chain Management 101 Ron Heere 11/15/11 - Afternoon Or Everything You’ve Ever Wanted to Know About “Procurement” including the Kitchen Sink

2. Introduction Afternoon Session

3. Me . . . • Ronald A. Heere (Sr) . . . . Ron • 38+ years in AE/EPC/CM/V Industry • United Engineers / Catalytic / Stearns Roger / Raytheon / Badger / Ebasco / Litwin / Jacobs / Carter Burgess • Energy / Metals / Biotechnical – Pharmaceutical • Corporate • 2+ Years in Medical Devices Mfg Industry • Becton, Dickinson and Company (BD) • Strategic Sourcing Manager • $ 15+B TIC Plants Worldwide • Power (Fossil / Nuclear / Steam), Pharmaceutical • $ 12+B Overhead / Operations Contracts • MBAs • Organizational Behavior • Business Law • Board of Directors, Purchasing Mgmt Assoc of Phila 3

4. Introductions, & A Little Bit About Everyone 1. Personal Info: 2. When this course is over, what do you hope you’ve learned ? • On a Scale of 1 to 10, How would you rate yourself as a “Contracts” person: • 1 = Novice10 = Walks on Water Name Title Couple of expectations 4

5. Housekeeping . . . . • Interactive . . . . Stop me at any time • Please turn off your cell phones • 3 hour course • Bio-breaks Whenever you need them . . . Just get up and go • Participate . . . . • I will Bribe You !! 5

6. Baselining . . . When I say This . . I Mean . . . • Law = English Based vs. Napoleonic Based Why the Differentiation ???? • Services = Materials / Goods / Consulting / Maintenance / Labor • Supplier = Vendor, Seller, Contractor, Subcontractor • Purchase Order = Applies to Materials / Goods / Consulting / Maintenance / Labor • Contracts = Applies to Construction Labor or Master Agreements for Services. Why the Differentiation ???? 3

7. Answers . . . . Law Labor vs. Goods English • Common Law • Recognizes the “Intent” between the parties in forming the Contract • Recognized by the UCC (Uniform Commercial Code) • Valid = 49 States + DC • Not Valid = Louisiana, Puerto Rico & Outside the US Napoleonic (French) • Interpreted based upon written content of Agreement • Does not recognize “Intent” of the parties • Valid in Louisiana & Puerto Rico Contracts for Goods governed by the UCC (Uniform Commercial Code) Don’t have to negotiate Intent between the parties . . . UCC already does that unless the parties want to change it Pure Labor contracts not governed by the UCC Furnish & Install Contracts . . . Vary from state to state . . Grey Area of the UCC 7

8. QUESTION: ???How Do I Get Sales, Marketing, Production, QA, Management, etc. to Notice Procurement ??

9. Answer # 1: Quick Answer . . . Deliver The Money

10. Answer # 2: Quick Answer . . . Mess Up . . . - Up

11. Real Answer . . • Produce a Service / Support Function which they can rely on for its’ professionalism while delivering consistent and value-added outcomes. • Oh yeah . . . And Do it better then they can

12. OK . . . We Done ??? Darn . . .Didn’t think you’d buy that . .. But it was worth a try

13. Negotiations Afternoon Session

14. Negotiation Strategies “If you Can’t Measure It, You Can’t Negotiate It” 14

15. Components of a Good Negotiations Plan The Obvious . . . And for this Overview We’ll Be Fast • Defined Scope & Schedule • Measurable & Agreed Upon Metrics / Deliverables for Success • Reasonable Negotiation Targets • Price • Deliverables • Service Level Agreements • Risk Mitigation • Right Pricing Model for Engagement • Right Terms and Conditions for the Engagement • Team Participation in Negotiations • Utilize Subject Matter Experts when / where needed • Single Team “Voice” • Produce a Formal Negotiations Plan with: • Upper & Lower Limits on all Negotiation Items • Agreed Upon “Gimmies” for Give and Take Negotiations 15

16. Choose the Right Contracting Template • Firm Priced • Cost Plus • Award Fee (Schedule / Price / Man-hour) • Service Level Agreements (SLAs) • Performance • Metrics • Incentives for Success • Incentives for Cost Savings / Sharing • T&C’s • See Attached Schedule of Contracting Types and When to Use 16

17. Why The Detailed Preparation ?? • The more you control and manage the negotiations process, the better your vendor will respond / perform. • Good Agreements don’t just happen, they are planned • Credibility – for your Company and You • The “Vendor Relationship” model is laid during contracts negotiations • Be a Professional and Consistent in your Approach, and the Vendor will Respect and Respond to You • Abuse the Vendor, and you will get Like in Turn 17

18. What Do I Need to Know About the Vendor Company Negotiations Team • Sales Trends (current / past) • Wins / Losses in the Marketplace • Positioning of their Competitors • What’s this Sale mean to them? • Higher Profits • Cover Sunk Costs • New or Old Technology • Recent Promotions / Reassignments • Proven Professional • Young Gun • Bonus • Special Recognition / Award • Personal Issues • Family • Health • Time to Close • Is Everyone At the Table? • Technical • Production • Transportation / Logistics • Legal • Decision Maker Present • Culture (Geographical) 18

19. Vendor Team Members • Get to Know them Before Negotiations Start • Ask for a written “Biography” for each member • Provide a write up for each member of your team • Try to Match up Personalities from Both Sides • Manage / Minimize the “Oil & Water” Pairing • They are People Too . . . Treat Them Accordingly • Team Building / Scheduled Down Time • Make the Negotiations Productive, but Fun 19

20. OK, I’ve Selected:- A Contracting Type - A Contracting Method- I have My Clauses Now What ???

21. Let The Games Begin !! 21

22. Games ???? YOUR BOSS: (Department Goals, Meet his / her Quotas with their boss; promotion, ego) VENDOR – (Increase market Share, Stockholder Value, “Satisfy the Market” YOU: Personal Goals, Promotion, Job Satisfaction YOUR COMPANY – (Increase market Share, Stockholder Value, “Satisfy the Market” SALES PERSON: Ego, Bonus, promotion, quotas, job satisfaction • Yes . . . In a RFQ / Negotiations Process, EVERYONE is playing a Game to get “Something” out of the process 22

23. Did Ya Notice ???? Vendor Your Company You both Want the Same Thing . . . WHY ?? • Company – Increase Market Share, Stockholder Value, “Satisfy the Market” • Salesperson: Ego, Bonus, Promotion, quota, Job Satisfaction Company – Increase Market Share, Stockholder Value, “Satisfy the Market” You: Personal Goals, promotion, quotas, job satisfaction 23

24. Negotiations If you’re not prepared, you can get hurt 2. Flying by the seat of your pants is more than half the fun 24

25. Planning Yields Results • Formalized procedure & plan consistently executed yields reliable results • ISM’s # 1 Key for SM Success: Ability to Plan • Flexible to cover varying engagement models • “Tweak for Success” • Progressively rebuild • Avoid massive “process re-engineering” 25

26. Terms and Conditions . . . Negotiation Strategies 26

27. Warranties (PS – Warranties are NOT Guarantees) What You Want What Seller Wants to Give You BIG 3: Design, materials and workmanship on everything Don’t Go Into Affect Until Goods / Services are Accepted by Buyer Duration is Reasonable Replacement Parts are NEW Replacement Parts have same warranty term as original parts Warranty repairs at NO cost to Buyer Time is of the Essence on Repairs New Parts not returned until Old Parts are Received No to Limited Bold Faced Disclaimers Omitting one of the Big 3 Start When Services Completed Pass thru warranties on 3rd party equipment Separate T&C’s on OEM equipment / software Separate warranty durations on OEM vs. pass-thru equipment “Fuzzy” integration language “Will get there when we can” Replacement Parts Used/Refurnished Parts return paid by Buyer New Parts not returned until Old Parts are Received 27

28. Guarantees (Promises on How Something is Going to Work) What You Want What Seller Wants to Give You Exactly What’s in the PO / Contract Exactly What the Salesman said it would do if > than the PO / Contract Meet or Better the KPI (Key Performance Indicators) or SLAs (Service Level Agreements) If Vendor Fails . . . Grounds for Breach / Termination “Well it came close” . . What’s the problem?? BOLD FACE DISCLAIMER NO Fitness for Purpose or Merchantability “Best Effort” on KPI’s and SLA’s Long and Winding Road to document / validate “Termination for Cause” 28

29. Insurance What You Want What Seller Wants to Give You Remember . . . The Vendor Can Either Give you the proper Insurance, or you can Pay for It !! My Insurance Requirements My Limits Waiver of Subrogation Standard Indemnifications Workman’s Compensation Automobile Coverage Named as an Additional Insured Policy in Effect for Duration of Warranty Lower Limits Standard Policy Limited Indemnifications No Automobile Coverage No Additional “Named Insureds” Policy about to expire 29

30. OK, I’ve Selected:- A Contracting Type - A Contracting Method- I have My Clauses Now What ???

31. What Skills Do I Need ??? Negotiations are for Professionals – I don’t do this too Often

32. What are Negotiations?? “Baby Crying” Negotiating for Feeding or Given Attention “I’m not tired, can’t I stay up a little longer” Negotiating for a later bed time (TV, games) “Dad, can I borrow the car??” You Fill this one in

33. Whether you Realize it or Not . . . You’ve been negotiating since you were born.

34. Why Then Is It Perceived as Difficult? To Date, Most Negotiations Were Not Structured, they were reactive You flew by the seat of your pants, with results that weren’t always consistent with expectations Poor Planning The Stakes are now Higher You’re playing with Someone’s else’s money, profit, livelihood Competition is usually a Professional, Paid to get the better deal at your expense For many, Not Your Core Competency

35. So, Then . . . Why Will I Succeed ??

36. Because . . . . . Everything’s Negotiable If You Are Willing to Play The Game

37. And Like Any Game . . . There are Rules . . .

38. Structured Negotiations Rule 1 – Know the Industry Rule 2 – Know the Product Rule 3 – Know the Players (Competition) Rule 4 – Know the People on the Other Side Rule 5 – Know Your Agenda

39. Rule 1 – Know the Industry Present State of the Economy How does the economy / Wall Street affect the Industry Stimulus, Jobs Bills, Recession . . . Need I say More?? What’s Going on in the Industry New Players Growing / Shrinking Number of Players Global / Domestic Where’s the Profit Come From (Follow the $$$) Equipment Services Support

40. Rule 2 – Know the Product / Service Leading Edge / Not So Leading Edge? Technological Obsolescence – or – on the Verge of a Market Break-Through? What’s the Life Cycle of the Product / Service being considered? Where’s the Product Going 8 Track; Beta VCR; Mini-Van, Pet Rock

41. Rule 3 – Know the Players Who are the Players in the Market? What does the Market say about the Players? Hungry / Conservative / Cautious / Calculative / Bid Score ? Who is in Competition with Whom ? Strategic reasons why the competitors want / need to win Do you think it’s easy to negotiate w/ Toyota Right now ???? What does your account mean to them ? What are their Core Values? Transactional >< Relationship Based Alliance = Relationship Based Acme Widgets

42. Rule 4 – Know the People on the Other Side Where do they fit in their organization Are you dealing with the decision maker? Do they have the authority to close the deal? “I’ll have to check with the office” What is their motivation? Sales Quota; Personal Best Year; Promotion Winning Your Company’s Account Do they have an Agenda (personal / professional)? What are their Core Values?

43. Rule 5 – Know your Agenda Best Price Short Term Best Price Long Term Best Return on Investment Hard Dollars / Soft Dollars Hard (Discounts, rebates, Quick Pay Discounts) Soft Dollars (Paperless Invoices, Free Loaners / Upgrades, Report Generation, etc.) Term, 1 – 2 – 3 years Yearly Options to Renew Master Agreement Items “Damn Yankees Escape Clause” Metrics / Metrics / Metrics If you can’t track it, you can’t manage it What’s my offer worth to the “Other” Side

44. Agreement Type Pricing Spot Deals, Best $$$$, No Soft Dollars, Usually 1 year or Project Specific, Not Relationship Based. Company Wide Agreements Multi Year, Soft & Hard Dollar Savings. Relationship Based Alliances Changes how the Companies do Business Maximizes total cost savings but not Best $$$$ Best in Class for Relationship Based Companies

45. Negotiations Plan Duration (how long to carry out negotiations) Concessions (what can I give to get – value for value) Walk-away Issues (what must I really have for the negotiations to be successful)? Who am “I” playing to? (Vendor, Person, my Company, boss, ego) What’s my Negotiations Team Look Like? Technology Contracts Leads / Support Good Guy / Bad Guy Maximize the Use of your Resources!!

46. Putting the Plan in Play You Put it in Play when and where you want. You set the agenda You set the guidelines Vendor wants to change, use one of your give-away concessions and trade Set the Tone and Maintain It If not going as planned, shut down and reschedule, NO EXPLANATIONS !! Bidders nervous when you shuffle the deck and act out of character

47. Putting the Plan in Play . . . . Stick to the Plan Don’t be afraid to throw out the plan Keep the competition off-guard

48. Thoughts to Remember . . . Negotiations are a Game. Rules are Made to be Broken(to your benefit) “Time-Outs” are allowed (something unexpected?? Don’t wing it unless you feel timing is on your side” Be Fair, but Aggressive (if tables were turned, could you look yourself in the mirror??) Respect – goes both ways in negotiations Plan for life “After the Honeymoon” For those who do it right, it’s FUN. If it isn’t, get Out. If You’re afraid of failure, don’t negotiate. Unless you get it right, there will be failures, and nobody gets it right all the time!!

49. Thoughts to Remember “Win – Win” Works !!!! Vendors Get Even Core Values Really Do Work

50. Liability Structuring / Risk Management Afternoon Session