Procurement

Driving Supply Chain Integrity with Critical Services Providers

Rob Halsall

Executive Manager, Group Category Management

The Commonwealth Bank of Australia

Commonwealth Bank

Group Procurement

Driving Supply Chain Integrity with critical services suppliers

Lessons from the Commonwealth Bank

June 2013

AGENDA

• Define Value, Integrity and Value Proposition ?

• Category Management Strategy & Opportunity Identification

• Case Study – External Consulting e2e

• Lessons Learned

Define ‘Value’, ‘Integrity’ and your ‘Value

Proposition’

5

Category Management ‘Value’ Wordle

Value is about what you do and performance is about how well you do it….therefore procurement value is about getting more out of supplier expenditures – Hackett Group 2010

Supply chain integrity must encompass both operational and reputational dimensions. Operational …the ability of supply chain to meet objectives for quality,

productivity, and financial performance. Reputational integrity …the ability to protect and enhance the brand, respond to customer and investor concerns, and

comply with the growing burden of legislation. PwC - 2009

6

Define ‘Value’ & ‘Value Proposition’ - Essential to drive

engagement

(Business Dictionary)

Value Proposition: This is the single most important question. If you can’t

explain, in 3 jargon free sentences or less, why customers need your

product (or service), you do not have a value proposition.

Supply Chain Integrity

Very often external suppliers are held to unrealistic standards with internal

supply chains not bound by the same standards. This could easily lead to

integrity issues if there is a double standard that suppliers are held to

versus internal counterparts. – My view

Things Done Well by World-Class Procurement Organisations (The

Hackett Group, 2009)

Creates a very clear value proposition and “brand” that can be understood,

articulated, and championed by the spend owners themselves. Performs

“customer management” processes to ensure that they’re getting most value

from not just suppliers, but Procurement itself too.

Creating a value proposition is part of business strategy

“Strategy is based on a differentiated customer value proposition. Satisfying

customers is the source of sustainable value creation”.

(Kaplan, Robert; Norton, David. Strategy Maps, HBS Press, 2004). Founders of

the Balanced Scorecard

Recent CPO Agenda article referred to excellence as ‘function having value-creation target that

includes KPI’s with cost, risk, innovation, process improvement and, where appropriate,

revenue enhancement’.

7

Define Value Proposition – is it visible and measurable?

Category Management Strategy &

Opportunity Identification

9

1

2

3 Internal

Stakeholders

Category

Overview

Executive

Summary

4

5

6 Market

Analysis

Process

Analysis

Spend

Analysis

Category Management Strategy Attributes ?

• Category Overview

• Contract Status / Spend Analysis

• Needs / Requirements Analysis

• Industry / Market Analysis

• Opportunities / Risks

• Recommendations & Implementation

• Category Description

• Contract Status Overview

• Category & Supplier Segmentation

• Are we a customer of choice?

• Identify / Map Category Stakeholders

• Stakeholder Communication Plan

• Socialise Approach

• Total Spend

• Spend by BU/Supplier / Contracted Vs.

Non-contracted

• TCO Analysis

• Revenue / reciprocity analysis

• Internal Processes – P2P, ordering method,

dispute resolution, reviews, compliance

• External Processes – Supplier E2E,

logistics, stakeholder management

• Innovation opportunity – BPR, what is best

practice?

• Market performance, growth, capacity,

competitiveness,

• Technology trends, impacts, future state

• Porters 5 forces, SWOT/PESTLE

10

7

8

Risk

Management

Sustainability

Service

Specifications

10

11

12 Manage

Recommendations &

Implementation

Opportunities

9

Category Management Strategy Attributes (contd.)

• What are the business requirements ?

.i.e. Functional / Technical / Quality/ Delivery

Process / Pricing/ Demand /KPI/SLA

• Data collection methods

• How do they link to future strategy?

• Which supplier processes support

Group sustainability?

• People, Customers, Community,

Governance, Environment

• What are mandatory risk assessments?

Materiality, Data Security, Supplier, Country

Technology, Operational, Contract

• What are risk assessment costs?

• Linking analysis and business

requirements

• Understand Groups core

commercial drivers and Suppliers

economic drivers

• Category Value Opportunity

Assessment - create opportunity

matrix – suitability, feasibility and

acceptability

• What are the actions / opportunities,

timing, resource requirements, costs and

benefits and how do we track?

• Gain approval from PSG / business

• Transition to BAU

• SRM/SPM, Contract & Compliance

Management, Risk Management

• Benefits tracking

• Continuous improvement

• Avoid estoppel!!!

11

1-3

4-5

Sp

en

d A

naly

sis

Opportunity Identification – Holistic Analysis

• Level 1 – Spend Overview - Spend by BU /

Department with main suppliers

• Level 2 – High Level Cost Drivers -

Transaction level detail from GL, supplier

reporting, invoices etc.

• Level 3 – Detailed spend / supplier &

category cost drivers & High level

opportunity identification – transaction level

detail from GL, supplier reporting, invoices,

understand supplier / industry pricing

• Level 4 – Cost Component Drivers and Cost

Save Ideas – Detailed cost driver composition,

ideas to influence spend / generate benefits,

socialise with BU’s through workshop. RFI if

necessary to obtain more detail. TIME

CONSUMING BUT NECESSARY

• Level 5 – Ideas Opportunity Summary –

evaluate ideas and opportunities. Quantify

benefits, prioritise opportunities (Ease of

implementation / Customer Impact). Socialise

with BU’s and sponsors / PSG – TIME

CONSUMING BUT NECESSARY

12 12

Category Strategy Considerations

Buyer / Supplier Power Considerations

♦ Are we a customer of choice? How do suppliers view us? (Growth Vs. Revenue – Rockets, Dogs, Stars, Cash Cows)

Definition - ‘A company that consistently receives competitive preference for scare resources across a critical mass of suppliers’

Discover our true standing with suppliers

♦ Benefits – Secure better pricing, performance, and resources

♦ Challenge – Gaining visibility into suppliers’ decision-making process and knowing how to act upon the insights

Harnessing Suppliers Self-Interest for Mutual Gain

♦ Benefit - Identifying potential sources of value to current suppliers

♦ Challenge – Uncovering and aligning suppliers’ strategic priorities to our business objectives

♦ Align our needs with supplier needs to increase mutually valuable relationships

♦ Move beyond price and volume when developing critical supplier relationships (.e.g. expertise, information, infrastructure)

Commonwealth Bank of Australia / Presentation Title / Confidential

Case Study

External Consulting e2e process

Demonstrate Value – benefits reporting and effective change management

14

External Consulting Evidence Based Approach – Data is Oxygen !!

• FY baseline established through a RFI to top 66 suppliers to gain detailed project and resource level information

• Top 10 consulting companies accounted for 72% of FY total spend. Panel compliance not as high as we would like with large tai l of suppliers

New panel structure determined following thorough RFP process and Group Executive consultation

• RFP issued to 50 Consulting firms to select suppliers to enter a Master Consulting Services Agreement (MCSA)

• Final negotiations completed with 10 successful suppliers across 5 sub-panels totalling 13 engagement types

Revised engagement process increasing visibility of spend and supporting deeper partnerships being developed

• Compliance to panel and engagement process now tracked and reported to BU CFO and ExCo on frequent basis

• New panel and engagement process now available on intranet and ERP system

Establish Baseline

Spend and Pre-

Qualify Firms

RFP Review &

Feedback

Issue RFP to Pre-

Qualified Firms

Final Panel

Selection

Implement &

Monitor Supplier

Relationship

An External Consulting panel was appointed with revised engagement process

to support business users in their utilisation of External Consultants

Jul to Aug Year 0 May Year 1 Sept to Oct Year 0 Nov to Dec 11 Year 0 Jan to April Year 1

External Consulting - RFP Evaluation Process

15

Structured process completed by Group Procurement

External Consulting - RFP Evaluation Process

1. RFP Execution

Complete final negotiations with

short-listed Suppliers

Recommendations

endorsed by Executive

Committee

50 Suppliers

invited to RFP

RFP process

10 Suppliers

recommended for

Panel Resu

lt

3. Negotiations 2. RFP Evaluation

23 suppliers

shortlisted for

negotiations 36 Submissions

• Detailed RFP designed to capture

both capability and a transparent

pricing structure

• Identification of suppliers invited to

respond to the RFP (based on

incumbent suppliers and additional

suppliers identified in the market

analysis)

• Qualitative analysis of RFP responses

– Comprehensive team of evaluators

from across the business

• Quantitative analysis of RFP responses

based on comparative baseline costs

(Procurement)

• Presentations to Group Executives with

the results from qualitative and

quantitative assessment to agree on final

supplier shortlist based on capability

Acti

vit

y

16

Low High

Hig

h

(co

mp

eti

tive)

Qualitative Score

Uncompetitive pricing

Competitive pricing

EXAMPLE ONLY

Lo

w

(un

co

mp

eti

tive) Q

ua

nti

tati

ve

Sc

ore

Excluded from shortlist based

on qualitative assessment

Approved Evaluation Criteria:

• Qualitative: %

‒ Capability

‒ Capacity

‒ Experience

‒ Account Management

‒ Value Add

‒ Compliance

• Quantitative: %

‒ Rates

‒ Discounts

‒ Historical data

Supplier Short-listing

Methodology

Current

Recommendation

Quadrant 3

Quadrant 4 Quadrant 2

Quadrant 1

Supplier Ranking:

• Strategy

• General

• Finance

• HR

• Technology Advice

5 sub panels

grouping 13

Engagement Types Supplier 12

Supplier 11

Supplier 10

Supplier 9

Supplier 8

Supplier 7

Supplier 6

Supplier 5

Supplier 4 Supplier 3

Supplier 2

Supplier 1

Evaluation short-listing – external consulting

A qualitative and quantitative assessment was completed by engagement type to select the preferred suppliers

17

Competency Area Opportunity Rationale Addressable

Spend

Savings Range2

Low High

Commercial

• Source a revised panel to effectively meet CBA's

broad range of requirements

• Existing panel contracts are expiring in

? and are being extended to ?

$M $M

(%)

$M

(%)

• Establish a rate card by role type for each area of

expertise

• There is currently a large variation in rates between

suppliers performing similar services

• Negotiate secondment discounts for engagements

where CBA has the responsibility of the project

• Current agreements do not include secondment

discounts

• Negotiate volume discounts for project size and

duration and annual volume with panel suppliers

• Current agreements do not include project size and

duration discounts

Compliance

• Increase compliance to preferred consulting panel,

with use of niche suppliers on an exceptions basis

• There is currently a low compliance to the existing

supplier panel (?%)

• Benefits assume ?% compliance $M

$M

(%)

$M

(%)

• Include competitive bidding amongst panel

members for high value projects

• Current engagement process does not leverage the

Procurement team to tender high value projects $M

$M

(%)

$M

(%) • Measure supplier performance and direct

assignments to higher performing suppliers

• Improve competition amongst panel members to

improve quality and cost

• Review and improve current engagement process • There is low compliance to the existing engagement

process (?% of spend have no PO attached)

Demand

• Set a target resource mix by service type and

ensure compliance from panel suppliers

• Current resource mix has a heavy weight on senior

resources compared to benchmarks $M

$M

()

$M

()

• Leverage in-house capabilities • Current engagement process does not ensure internal

capability is leveraged TBC TBC TBC

Category Strategy - Value levers – Consulting example

18

Implementation often requires extensive change management:

• Implementation Announcement

• “How to” guides & FAQs

• Training

• Regular ongoing communications

Quarterly communications:

• Panel changes

• “How to” use the new process & “How to” raise a purchase order in Ariba

• FAQs

• Benefits achieved to date

Demonstrate Value – requires effective change management

19

Demonstrate Value – Requires effective reporting

• Are you clear on what sources of information are required for reporting purposes?

• Have you determined the strategic critical suppliers that you want to invest reporting resource in?

20 Commonwealth Bank of Australia / GCS Benefits Methodology

Demonstrate Value - Benefits methodology & reporting

Benefits realisation relates to the implementation of an initiative which provides a quantifiable benefit

• Hard benefits (further broken down into “P&L Impact” and “Capex” benefits”

• Soft benefits

Benefits are classified into two key types:

• Inner year benefits or

• Outer year benefits

The two benefit types are recognised as either

• Annualised and

• Incremental

The two methods of reporting benefits are

Lessons Learned

Sustainable procurement value

Value / integrity enablers

22

How procurement

transformation can drive

sustainable benefits

1

2

3

Va

lue

Time

Maverick buying and lack of

contract management quickly

erode value (–10-50%)

Contractual compliance and

continuous improvement

Break through performance

improvement

Demand and

Sourcing

(5-15%)

Supplier

collaboration

(2-5%)

Efficiency benefits

Strategic sourcing Compliance and supplier

relationship management

Contract award

1

2

2

3

3

Benefits generated and maintained

through E2E Category Management:

Demand management – change, frequency,

type and volume of goods and services

acquired

Strategic sourcing – demand aggregation,

supplier rationalisation, market dynamics and

negotiation

Standard processes and technology –

consistent, reliable effective and efficient

contract compliance monitoring. Create

transparency with strategic critical suppliers

Supplier relationship management –savings

through continuous improvement, develop

synergies align organisational and supplier

strategies Category / Sourcing capability

P2P processes and systems

Procurement operating model Research demonstrates that without an end to

end operating model between 10-50% of value

will be eroded through poor compliance and

ineffective supplier management.

Sustainable procurement value throughout E2E process

23

• What’s the value proposition to the

business and the suppliers?

• Engage the right level and number of

key stakeholders

• Embed realistic timelines based on

complexity of project and environment

(never underestimate how long

negotiations will take)

• Data is oxygen – ensure you understand

your baseline

• Identify process excellence & innovation

opportunities throughout the journey

• Remove procurement lexicon where

possible

• Less is more for senior executive buy-in

– Specificity and what’s the hook?

• Be flexible, there is no one right way of

achieving your goal

• Build a robust exemption process into

your procurement strategy

• Use the process as an opportunity to

change the perception of procurement

value (internal & external)

• Hold internal users accountable as well

as external suppliers

• Outputs drive outcomes – continuous

communication, don’t go stale

Lessons Learned – value / integrity enablers

Commonwealth Bank of Australia / Presentation Title / Confidential