proc cost 1© the delos partnership 2005 procurement masterclass cost, cash and spend management

Proc Cost 1 © The Delos Partnership 2005

Procurement MasterclassProcurement Masterclass

Cost, Cash and Spend Management


Cost & Cash Spend Management Cost & Cash Spend Management

2 Cost, Cash & Spend – Management & Control


Workbook IntroductionWorkbook Introduction

Year 2004 2003 2002 2001 2000 1999 Last 3 Years Ave.

TurnoverProfit (Loss) before Taxation

Profit Margin (%)Cost of SalesVisible SpendEstimated Spend

Identified Savings - MinIdentified Savings - MaxNet Savings - 100% Performance Min Spend

Net Savings - 100% Performance Max Spend

BUSINESS & PROCUREMENT FINANCIAL FOCUS © The Delos Partnership


Cost, Cash & Spend ManagementCost, Cash & Spend Management

1. Cost Leadership

2. Creating a Total Value Plan

3. Getting Organized


Cost Leadership AssumptionCost Leadership Assumption

Low cost producer strategy normally entails : • Non Core competency outsourcing• Efficient capacity • P&L spending control and Balance sheet

optimisation• State of the art equipment• Global Sourcing• Cost minimalisation• Transaction efficiency


Cost Leadership AssumptionCost Leadership Assumption

Procurement is therefore normally focussed on supply side cost

improvement strategies which will allow companies to move towards a lower cost producer status and deliver the

cost improvement goals.

Procurement is therefore normally focussed on supply side cost

improvement strategies which will allow companies to move towards a lower cost producer status and deliver the

cost improvement goals.


Marketplace RealityMarketplace Reality

• Upstream cost increases cannot be influenced (straight cost pass on)

• Customer resistance to your justified price increases refused

• Risk of being the "meat in the sandwich"- powerful upstream suppliers & downstream customers

• Pure cost cutting has damaging effects on business & people

A better approach is to engage Suppliers and generate business wide value gains through streamlining the

supply chain and improving Total Value

A better approach is to engage Suppliers and generate business wide value gains through streamlining the

supply chain and improving Total Value


It is essential to engage the commitment from your suppliers to your company and value improvement projects and have suppliers correctly positioned...

Supplier Partnerships are Critical Supplier Partnerships are Critical

Its a great that we are working together on this project which means we can go faster and at much less cost


Cost and Cash ManagementCost and Cash Management

Creating a Total Value Plan


The Delos Model The Delos Model For Business Integration For Business Integration

InnovationInnovation

VisionVision

StrategyStrategy

PrioritisationPrioritisation

DemandDemand

SupportSupport

SupplySupplyTotal Value PlanTotal Value Plan


Total Value Procurement GoalTotal Value Procurement Goal

“Increase total value by a minimum of 10% in the first year and 20% over

the next 3 years by safeguarding S.H.E. and simultaneously improving Quality, Delivery and Service, Cost & Cash and driving Innovation across the six procurement dimensions”.

“Increase total value by a minimum of 10% in the first year and 20% over

the next 3 years by safeguarding S.H.E. and simultaneously improving Quality, Delivery and Service, Cost & Cash and driving Innovation across the six procurement dimensions”.


Total Value Leadership Total Value Leadership

• Demonstration that all costs are influencable

• Accurate forward demand forecasts• Negotiation power and no fear factor• Cross functional teams• Project Focus & Measurement System• Spending & authority restrictions and

control


Total Value ToolsTotal Value Tools

• Supplier Funding & Supplier Cash Flow

• TOWC Reduction

• Direct Flow – Inventory, Waste & Space Reduction

• Process Improvements

• Simplification and Standardisation


Total Value ToolsTotal Value Tools

• Appropriate Quality and User Requirement Specification

• RFTQ 100% OTIF

• Product Re-engineering

• Supply Demand vigilance & Market knowledge sharing

• Alternative technology


Cost Improvement ExamplesCost Improvement ExamplesCurrent Current

xxx xxx Cost Cost

(£000's) (£000's)

Forecast Cost ImprovementForecast Cost Improvement

£000's s £000's s

6 months 6 months Immediate Immediate

Focus Focus Full Year xxxFull Year xxx

1. Increase leverage across the complete cost & spend map

Add Data

Agree what are short and longer term priorities (Focus) and agree goals

2. Introduce an immediate price freeze Add Data


3. Achieve Direct and Non-Direct supplier price improvement

Add Data


4. Achieve Direct Materials cost improvement Add Data


5. Use E Procurement Add Data


6. Introduce / Reinforce Company Policies

(Procurement Policy, Authorisation Policy, Travel, Expenses, Company Card, Fuel Policy, Overtime Policy)

Add Data


7. Use Consortium BuyingAdd Data


Set Improvement GoalsSet Improvement Goals


Summary - Cost & Cash Summary - Cost & Cash Improvement Improvement Cost & Cash Improvement CategoryCost & Cash Improvement Category Six Months Six Months Medium termMedium term

Direct Materials - Cost & Value Improvement (Top 20)

Direct Materials – Cost & Value Improvement (B&C items)

Indirect Costs – Cost & Value Improvement

All Costs Improvement - Avoidance & Soft Costs (A, B & C)

Quality – Non Compliance Cost Improvement

Balance Sheet – Cash and RONA Improvement

Process, Workflow & Structure – Cost Improvement

TOTAL TOTAL


R Project Name 1 7

A Project Sponsor(s) Project Reviewer 2 8

C "Define" Start Date "Define"Completion Date 3 9

CCost Centre

Owners 4 10

I Business 5 11

6 12

01-J

an

08-J

an

15-J

an

22-J

an

29-J

an

05-F

eb

12-F

eb

19-F

eb

26-F

eb

05-M

ar

12-M

ar

19-M

ar

26-M

ar

02-A

pr

09-A

pr

16-A

pr

23-A

pr

30-A

pr

07-M

ay

1 2 3 4 5 6 7 8 9 10 11"DEFINE STAGE" TOTAL VALUE PROCUREMENT PLAN - STEPS

FROM THE COST BASELINE, DEFINE AND AGREE PROJECTS THAT WILL DELIVER A MINIMUM COST IMPROVEMENT OF £X OVER THE PERIOD FROM XXX TO YYY ACROSS THE COMPLETE COST AND SPEND MAP.

Informed about the project and provides support when required

PROJECT GANTT CHART

Communication required on project goals and progress

PROJECT OWNER PROJECT GOAL

Accountable for the project, supports and performs the project work

Consulted on project goals and progress and / or project sponsor

COST IMPROVEMENT PROJECT - "DEFINE" STAGE

Responsible for the project delivery & performs the project work COST IMPROVEMENT

Use Six Sigma DMAIC Stages

Use Six Sigma DMAIC Stages

Define, M

easure, Analyse, Im

prove, Contro

l

Define, M

easure, Analyse, Im

prove, Contro

l

Create Cost Improvement Projects Create Cost Improvement Projects


ProblemsOpportunities

Risks & Concerns

CustomerCustomerAssessmentEducation

ToolsBenchmarking

Assessment & Definition of Total Value

Improvementtargets

SupplierSupplier

Agreed Value + ProjectsAgreed Value + Projects

Sponsor

Assessment, Education, Projects and Timescales

Defined Value goals

Selection of Tools

Deliverables & Measurement system

Team in place and projects underwayTeam in place and projects underway

Total Value Project ApproachTotal Value Project Approach

ProcurementProcurement


Cost, Cash and Spend ManagementCost, Cash and Spend Management

Get Organised


Ideal Procurement Structure Ideal Procurement Structure

• Covers the complete Customer and Cost, Cash & Spend Map.

• Has clear responsibilities for Customers and Category Management

• Has clear responsibilities for Suppliers and Supplier Management

• Has support resources (R2P Process, Sourcing, Research etc)


Ideal Procurement Structure Ideal Procurement Structure

• Has education & development to promote the "Culture of Procurement Leadership“

• Is project, lean & agile and added value focussed

• Recognises and uses Global and Indirect Leverage.

• Stays up to date with business and market changes & innovations.


Procurement Customer FocusProcurement Customer Focus

Category A

Category B

Category C

Category D

Operations

Finance/HR/IT

Sales/MarketingHeadcount /

Budget /

Spend £?

Headcount / B

udget / S

pend £?

Common VisionLean, Agile,Customer

Focus


Organising - Customer & Organising - Customer & CategoryCategory

• Procurement objective is a complete e-driven spend map by– Procurement Category– Cost Centre– Major Customer

• The Spend Map is the basis of product & service strategies, reporting and project driven procurement.


Matrix Responsibility Matrix Responsibility

PROCUREMENT CATEGORIES

1. Raw Materials/Production Consumables.2. Packaging 3. Logistics (Inbound/Outbound Freight)4. Utilities5. Technical & SHE6. Goods & Services 7. Capital/MRO & Engineering

THE 4P's OF PROCUREMENT

1. People 2. Policies 3. Processes4. Programmes



Each category leader needs to,

1. Complete Customer, Spend & Demand roadmap

2. Review current agreements (verbal and written)

3. Categorise Products, Services & Suppliers

4. Determine the Sourcing strategy

5. Create Business & Customer driven projects

6. Decide the Category Supplier Management strategy


Within the team there needs to be ownership of the 4 P's of Procurement

so that procurement intellectual property is developed, maintained and

cascaded internally.

Within the team there needs to be ownership of the 4 P's of Procurement

so that procurement intellectual property is developed, maintained and

cascaded internally.


proc cost 1© the delos partnership 2005 procurement masterclass cost, cash and spend management

Documents

net current assets

capital x

sales working capitalprofit

spendnet savings

procurement masterclasscost

capital calculation1

annual cost

procurement people costs