Tricia Schild – August 2008

When Your Customer is the “Purchasing Department”

Some History……….

• In the 7 years prior to 2001, S&P 500 companies struggled to maintain cost improvements over time (as measured by total expense as % of sales).

• Since 2001 cost reductions have sustained. Total expenses (as % of sales) are at a 10-year low, at around 75%.

• Procurement is increasingly shifting cost reduction focus from COGS to SG&A projects.

Why is Procurement becoming involved now?

Corporate Executive Board

Why is Procurement becoming involved now?

• Indirect (expense) spend remains a significant opportunity for S&P 500 firms.

• Average S&P 500 firm leaves $100 Million “on the table” in indirect spend

• These savings can be achieved through increased coverage of previously unaddressed categories and through greater compliance.

Corporate Executive Board Procurement Strategy Council

Why is Procurement becoming involved now?

“Elite” strategic sourcing focused firms deliver greater ROE

All Companies

Elite Cost Cutters

15.0%

16.8%

Average Return on Equity

15.5%

17.0%

14.0%

CFO Executive Research Board

Sourcing savings translate to more profitable firms

2005 Data indicated only a minority of S&P 500 firms were “elite” cost cutters, but cost-cutting focus is growing since then.

Determine the level of strategic sourcing practiced by your “Purchasing” customer

CFO Executive Board Research using 2005 Compustat data

Starting Sample of S&P 500

firms

One Time Cost- Cutter

Between 1994 – 2000 or between 2001 - 2004

Focused Cost Cutting

Either between

1994-2000or between2001 -2004

Elite Cost Cutters

throughout this period

485

412

342

56

85% 70% 12%

Which Indirect Spend Categories Are Being Addressed?

Corporate Executive Board Procurement Strategy Council

So, who are these “Purchasing” folks?

- 71% male

- Age 46 years; 69% are > 40 years

- Tenure: 15 years

- 77% did not start career in Purchasing

- 77% have B.A.

- 17% have C.P.M. accreditation

2007 Purchasing Magazine Survey

Understand what shapes your customer’s perspective

How is “Purchasing” motivated?

• Corporate level employees are more highly compensated than plant level

• 62% of all purchasing staff and 87% of purchasing executives receive bonuses averaging 13% of salary

• Bonuses are tied to hitting aggressive financial targets

• The most highly compensated employees are in fields where they can make the most significant contribution (savings)

• The highest compensation is for services responsibility (example: travel)

Conclusion: You will be working with purchasing staff who are highly motivated to save $$. Success for them will result in career advancement and bonuses.

2007 Purchasing Magazine Survey

Job posting for Vice President - Vendor Procurement Investment Bank, New York

ABOUT THE POSITION: Leads strategic sourcing activities for one or more categories of spend in Professional Services and Human

Resources on a global basis, with the goal of achieving significant initial cost reductions, supplanted with year-over-year productivity improvements of 5 to 10% in the total cost of goods and services procured while maintaining or improving product quality and vendor service levels. This position will initially be responsible for one category of Professional Services (Legal or Marketing) spend, covering €200-300 million in annual spend. The position will report directly to the Category Director.

KEY RESPONSIBILITIES:The primary responsibility is the capture of real savings, including direct savings captured through pooling Company-wide purchasing volume and negotiating TCO contracts with suppliers, and savings captured from other TCO cost reduction initiatives.

(Posted Dec 1, 2007)

Example of Performance Measures

How is “Purchasing” organized?

• Many organizational variations and levels of expertise exist.

• Decentralized purchasing organizations are less focused on cost reductions, more interested in internal customer satisfaction

• Organizations reporting to Finance or Chief Procurement Officer are more highly focused on cost-take-out.

Determine your “Purchasing” customer’s strategic sourcing interest

Definition:

Purchasing (Tactical)

Purchasing is simply executing routine administrative tasks (requesting quotes, placing orders, expediting, etc.) on a reactive basis, outside of the context of an enterprise-wide focus, and without pursuing continuous improvement or contribution to specific senior management goals.

The Difference between Purchasing and Sourcing

Definition:

Sourcing (Strategic)

An organized, systematic, collaborative way to identify competitive suppliers for longer-term agreements to buy materials and services for direct and indirect purposes.

The Difference between Purchasing and Sourcing

Strategic Sourcing is organized

• An ongoing process

• It covers all spend categories

• Strategies are reviewed and approved by executives

• Suppliers are invited to be part of the process by varying degrees

• Senior corporate executives are briefed on key spend categories, and may enter the process when the financial or operating impact is significant.

The Difference between Purchasing and Sourcing

Strategic Sourcing is systematic

• An agreed-upon process

• Supply management employees are trained in this process

• Results are tracked for cost savings as well as performance metrics

• Information from this process is captured, ensuring continuous improvement for future sourcing teams.

The Difference between Purchasing and Sourcing

Strategic Sourcing is collaborative

• With department managers who use the products and services

• With senior executives to provide information for budgeting purposes

• With key suppliers on major opportunities

The Difference between Purchasing and Sourcing

Example: Agency Collaboration on Expense Management

Agency Observation:

Air expenses booked through agency decreased 20% over previous year. The number of tickets issued also decreased by 27%. Leakage has beenIdentified and employees are booking directly with airlines.

Agency Recommendation:

A central bill card for air bookings and Travel Management fees to addressCompliance issue. Establish a stronger corporate travel policy.

Example: Agency Collaboration on Expense Management

Agency Observation:

In 4th quarter, a US Air Shuttle agreement was put in place to replace theDelta shuttle agreement that expired at end of September. 34% of theTickets in the shuttle market continue to be booked on Delta at higher average price.

Agency Recommendation:

Run a traveler detail report to identify travelers utilizing Delta shuttle. Send a communication outlining the benefits of utilizing the preferred vendor, and the savings.

The Difference between Purchasing and Sourcing

Focus:

Price

Specificationcompliance

Spend Consolidation

Tools:

Spreadsheet based

Focus:

Landed costs

Supply baseconsolidation

Cross-functional teams

Tools:

Spend analysis

Focus:

TCO

Standardizationof processes

Strategic supplier alliances

Tools:

Auctions

Focus:

Risk mgmt

Contributes to Customer value

Profitability

Revenue enhancement

Tools:

Measurement systems

Establish your strategy based on where your customer falls on this continuum

Traditional Purchasing Elite Strategic SouringShifting Perspective Strategic Sourcing

Early Purchasing Involvement Saves Significant $$

• Budget review• Project identification• Market assessment

• Supplier identification• RFI/RFQ

• Capabilities assessment• Supplier selection

• Contract negotiations

• Implementation

0%

4%

8%

12%

16%

20%

Pre-supplier selectionsavings of 10 – 17%

Post-supplier selectionsavings of 0 - 5%

Source: Bristol-Meyers Squibb Company

How does Procurement decide where to focus efforts?

How does Purchasing decide where to focus efforts?

Strategies vary by company – some structured approaches:

1. Spend Analysis (Software Packages)

2. Consultants (ex: KPMG, A.T. Kearney)

3. Internal Initiatives (ex: Six Sigma)

Data Sources

Data Preparation

Data ManagementSpend

Analysis Report

Extract

Strategic Procurement

Database

Supp

lierData

Cleanse

Use

r

Categories

Cleansed and Staged

Data

A/P

G/L

Master Files

POs

P-Cards

Others…

Typical Spend Analysis Software

1) Assessment of a company's current spend (what is bought where?) 2) Assessment of the supply market (who offers what)? 3) Development of a sourcing strategy (where to buy what, while minimizing risk and costs)

4) Identification of suitable suppliers 5) Negotiation with suppliers (products, prices)

6) Implementation of new supply structure

7) Track results and restart assessment (continuous cycle). Use the spend information as the basis for an ongoing program of spend control and demand reduction.

Nishiguchi, Toshihiro. Strategic Industrial Sourcing, and A.T. Kearney

Develop category profile

Continuous improvement

Generate supplier portfolio

Develop sourcing strategy

Selectimplementation plan

Negotiate and select suppliers

Implement agreements

A. T. Kearney 7 Steps Process

Team Formation

0

5,000

10,000

15,000

20,000

25,000

30,000

Meetings Rental Cars Air Fare Team Building

Data Gathering & Scoping

Determine the Opportunities

0

5,000

10,000

15,000

20,000

25,000

30,000

Meetings Rental Cars Air Fare Team Building

Ldrs

No

not

le

adin

g

Lack of training

Approval levels

Lack

of a

war

enes

s

Poo

r en

forc

emen

t

Policy Not Followed

Poorly w

ritten policy

Understand Root Cause

Travel & EntertainmentHotels Airfare Meetings

Develop Project Ideas Select ProjectsRank Order the Opportunity

Hotels 3 3 5 5 16 3Airfare 7 7 5 7 26 4Meetings 1 3 3 1 8 1Rental Cars 5 3 3 1 12 2

Select Projects Implement Projects

Measure Progress

Internal Hill-Rom Use Only

ScorecardScorecardTravel & Entertainment Report Out Sponsor: MurrenOct-04 Finance: Keis

Sourcing: Waring

Current Month Year to DateDivision/Function Act V Plan Act V Plan Owner Variance Comment

Care Environment 300 (100) 300 (100) Mcdonough Timing due to Low Cost EffortClinical 600 0 600 0Services 800 0 800 0EMEA 300 0 300 0Global Supply Chain 100 0 100 0Finance/IT 200 0 200 0Strategy 25 0 25 0HR 10 0 10 0Legal 10 0 10 0Other 0 0 0 0

Total 2345 (100) 2345 (100)

Owner Cost Benefit Timing$MM

No Batesville Lunches EMT 0 250 Nov RisksOn-Line Batesville Training Hladio 0 250 Dec etcetc 0 250 etc etcetc 0 250 etc etcetc 0 250 etc etcetc 0 250 etcetc 0 250 etcetc 0 250 etc Opportunitiesetc 0 250 etc etcetc 0 250 etc etc

etcTotal 0 2,500

October 2004 Results

Project Summary Risks & Opportinities to 2005 Plan:

Project Title OwnerCost to

Implement StartedEstimated

CompletionRevised

CompletionAnnual Savings YTD Status

Comments (barriers, issues, help needed, causes for delay, etc.) Key Next Steps & Timing

Challenge first class fares Lew is $0 4-Dec 5-Feb $1M stopped Need special reportNeed M. Murrent to clear through IT by 11/30

Reduce sales meetings by 10% Keis $1M in process need input from sales ldrs Meet w ith leader by Dec 3

Review rental car contract

Enforce Travel Policy

Eliminate team building meetings

Publicize exception report

Stop Amex rebate program

Require overnights at Farm

Travel & Entertainment Bullet Train

Report-Outs

Internal Hill-Rom Use Only

ScorecardScorecardTravel & Entertainment Report Out Sponsor: MurrenOct-04 Finance: Keis

Sourcing: Waring

Current Month Year to DateDivision/Function Act V Plan Act V Plan Owner Variance Comment

Care Environment 300 (100) 300 (100) Mcdonough Timing due to Low Cost EffortClinical 600 0 600 0Services 800 0 800 0EMEA 300 0 300 0Global Supply Chain 100 0 100 0Finance/IT 200 0 200 0Strategy 25 0 25 0HR 10 0 10 0Legal 10 0 10 0Other 0 0 0 0

Total 2345 (100) 2345 (100)

Owner Cost Benefit Timing$MM

No Batesville Lunches EMT 0 250 Nov RisksOn-Line Batesville Training Hladio 0 250 Dec etcetc 0 250 etc etcetc 0 250 etc etcetc 0 250 etc etcetc 0 250 etcetc 0 250 etcetc 0 250 etc Opportunitiesetc 0 250 etc etcetc 0 250 etc etc

etcTotal 0 2,500

October 2004 Results

Project Summary Risks & Opportinities to 2005 Plan:

Reward Successes

• Id Resources Needed• Pull in subject experts•Communication Plan• Metrics• Test for Understanding

Bullet Train Process Overview

• Schedule• Roles• Experts Needed• Goal

Extra Work Best

GoodWaste of Time

Imp

ac

tIm

pa

ct

Ability to ImplementAbility to Implement

Internal Spend Analysis ProjectsA Six Sigma Project - DMAIC

Definition:

Request for Information (RFI) A formal inquiry in the market place for information, typically concerning “expressions of Interest", capacity, capability and availability of suppliers to undertake and bid on work described in the solicitation.

Request for Quotation (RFQ) A document submitted to one or more potential suppliers requesting quotations for a product or service. Typically, an RFQ seeks an itemized list of prices for something that is well-defined and quantifiable.

Request for Proposal (RFP) An invitation to a supplier to submit an offer to a solution to a problem or a need. An RFP is a process in which the supplier's experience, qualifications and proposed solution may take precedence over price.

Think about how Purchasing staff are measured

and how can you help them be successful.

More Examples: Agency Collaboration on Expense Management

Agency Observation:

Online adoption for hotel bookings was 78% this year.

Agency Recommendation:

Hotel compliance has been identified as the largest area of opportunitywithin this travel program. Communication to travelers including informationabout traveler safety and security, as well as a stronger policy would increasetraveler awareness. (Sample communication provided).

More Examples: Agency Collaboration on Expense Management

Agency Observation:

Negotiated rates represent only 23% of all hotel bookings.

Agency Recommendation:

Adding hotels in key markets to the negotiated hotel program would likely result in lowering the average nightly rate in these markets. We recommend reviewing Chicago, Houston, Dallas, Las Vegas and Atlanta, as these were top destinations without negotiated hotels in 2006.

More Examples: Agency Collaboration on Expense Management

Agency Observation:

Avis represents 69% of the total rental car spend. This is $7.37 higher than Budget’s average daily rate.

Agency Recommendation:

As contracts exist for both Avis and Budget, shifting market share from Avis to Budget will result in savings. Budget’s average daily rates is 15% lower than Avis.

• Give him information that will help him excel with his management.

• Explain TCO for your marketplace. Don’t let the customer be naive, or be duped by competitors.

• Provide reporting that nails down the savings or missed opportunities, so he doesn’t spend time creating spreadsheets and analyzing data.

• Work collaboratively to continuously reduce the product / service cost year-over-year. Think in terms of the customer’s financial reporting time lines.

• Alert customer to market trends that will impact cost.

• Use your strategic knowledge of how other customers are attacking costs to educate this client.

Help Your “Purchasing” Customer Succeed

Definition:

Total Cost of Ownership – TCO

How much it actually costs to purchase a product or service. As an example TCO for a laptop computer includes:

- Original cost of the computer and software - Hardware and software upgrades - Maintenance - Technical support - Training

Most estimates place the TCO at about 3 to 4 times the actual purchase cost of the computer.

A Strategic Sourcing allegiance does not necessarily mean lost revenue to you!

How can you help with these objectives?

Chief Procurement Officers Top Goals

Aberdeen Group “The CPO’s Strategic Agenda” 2006

• Enhance Procurement team skills

• Improve supplier development and collaboration

• Rationalize supply base

• Transition to center-led procurement

• Increase automation

• Increase spend under management

Examples of Cost Reduction Projects

• Purchasing takes over responsibility for meeting planning spend

• Leverage regional travel programs to global travel programs

• Negotiate ground transportation programs

• Tighten guidelines for flying business class.

• Use company leverage with airlines to negotiate upgrades for executives.

• Move employees out of 5 star high cost hotels to mid priced hotels.

• Revise travel policy to require employees fuel rental cars before returning them.

• Negotiate corporate rates with for airport parking.

• Establish a per diem for travel expenses

• Require employees to sign an acknowledgement of travel policy

Examples of Cost Reduction Projects (continued)

• Communicate that video meetings or conference calls should be used rather than travel whenever possible, and that employees should not travel in packs.

• Policy that company training programs be conducted by web rather than onsite.

• Policy that when renting cars employees should not purchase liability insurance and / or loss damage waiver, personal accident insurance, satellite radio service, or personal navigation systems.

• Negotiate employee family programs with preferred suppliers to drive more volume through contracts.

• Require manager approval prior to booking airline travel.

• Create a report detailing employees who did not adhere to travel policy that is circulated to their manager.

• Create an internal website that lists preferred / required travel suppliers. Any “upgrades” for air, car, hotel, etc are made at traveler’s own personal expense.

• Loyalty programs that incur a cost to the company are not permitted.