DLA HQ November 2008

Transcription

1 Strategic Sourcing Workshop DLA HQ November 2008

2 Table of Contents Strategic Procurement Framework Global Strategic Procurement Trends Common Procurement Business Challenges Spend Analytics Strategic Sourcing Contracts Management Transaction Execution Leading Practices Category Portfolio Assessment Monitoring Compliance and Savings Supplier Relationship Management Technology utilization Procurement Maturity Assessment 21 st Century Sourcing Professional 2008 BearingPoint, Inc. 2

3 Strategic Procurement Framework: Elevating Procurement to a Strategic Business Function Our Strategic Procurement framework is used to assess the procurement function in order to identify areas for improvement and design new initiatives to increase enterprise value. Governance PROCUREMENT VISION/MISSION/OBJECTIVES STRATEGY THE PLAN OF ACTION TO ACHIEVE VISION ORGANIZATION AND STRUCTURE TO IMPLEMENT STRATEGY DEFINE SPEND STRATEGY SOURCE PRODUCT PURCHASE PRODUCT Process Define business purpose and strategy Define demand management components Create requirements to fulfill strategy and demand Develop Baseline Create Sourcing Strategy Design/Craft/Issue RFx Respond to RFx Evaluate Proposals Negotiate Contract/Sign Agreements Place Orders Fulfill Orders Conduct Billing Process Payments Evaluate Performance Facilitating Activities PORTFOLIO AND CATEGORY MANAGEMENT SUPPLIER RELATIONSHIP MANAGEMENT PERFORMANCE MANAGEMENT TECHNOLOGY INTEGRATION ONGOING CHANGE MANAGEMENT 2008 BearingPoint, Inc. 3

4 Elevating Procurement to a Strategic Business Function cont d One strategy that aligns Organizational Objectives, Business Processes and Technology Process Technology Organization 5 1 Strategic User Sourcing esourcing Contract Management Requisition Receiving Decision Support eprocurement 3 Purchase Order Vendor Manage ment Payment CEO / COO / CFO Supplier Sourcing Strategies and Services Global Sourcing & Procurement Services Global Technology Infrastructure Corporate Technology 4 Ship Goods Vendor Management Contract Governance Software Governance Procurement Process Solutions Commodity Sourcing Performance Management Seamless support will require a combination of technologies 2008 BearingPoint, Inc. 4

5 Elevating Procurement to a Strategic Business Function cont d Procurement strategy that focuses on: Alignment in vision and objectives of all functional and technology groups involved in executing the Procurement Function Seamless, cross functional business processes that facilitates dynamic flow of information and provides visibility into activities A fully integrated technology solution that supports efficient execution of the business process by providing functionality, workflow and controls 2008 BearingPoint, Inc. 5

6 Elevating Procurement to a Strategic Business Function Strategic Sourcing Methodology DEFINE OBJECTIVES & SCOPE Define Objectives and identify critical success factors. Align operational goals with business strategies and begin developing plan. IDENTIFY INTERNAL REQUIREMENTS Identify specific commodity requirements, standardization opportunities, product specs, operational requirements, terms and conditions DEVELOP STRATEGY Develop commodity strategies using total cost model, target cost, bundling, risk assessment, supplier relationship strategy ANALYSIS & NEGOTIATION Follow up with suppliers, clarify supplier questions, receive quotes, analyze quotes using quote analysis template, select lowest total cost approach CONTRACT MANAGEMENT Develop and award contract, track compliance, communicate supplier performance Define Objectives & Scope Collect Cleanse & Analyze Data Identify Internal Requremnts Understand Supply Market Develop Strategy & Quote Process RFx Event Analysis & Negotiation Award & Contract Management Supplier Relationship Management DEVELOPING THE STRATEGY EXECUTION COLLECT CLEANSE & ANALYZE DATA Clean up data, perform spend analysis, supplier & product consolidation, rank opportunities UNDERSTAND SUPPLY MARKET Evaluate market trends, new suppliers and supplier consolidation; conduct market surveys; develop RFI attributes, template and distribute; review impact of current LTAs; ID possible value added services RFP/e-SOURCING EVENTs ID commodity specific terms; develop RFP attributes, template and distribute; establish evaluation criteria and evaluation template SUPPLIER RELATIONSHIP MGT Monitor supplier metrics performance, take corrective action, establish penalties & rewards. Content/catalog management, electronic purchase order systems 2008 BearingPoint, Inc. 6

7 Global Strategic Procurement Trends

8 Global Strategic Procurement Trends Today, in Procurement, leading organizations are improving overall operational excellence in the following areas: Area DESCRIPTION DETAILS Example Data Data serves as the basis to begin understanding how the organization utilizes the planned budget Clean, Accessible Granular, Enterprise Intel Touchless Procurement Minimal buyer involvement, fully utilizing Reduced hand error all investments in technology implemented Increased cycle efficiency Rohm & Haas Supplier Management & Collaboration Developing the supplier relationship and integrating suppliers in a strategic manner creates better leveraged buying opportunities Enterprise spend under management Supplier managed category maintenance/updates Toro Supplier Portals Suppliers have a single interface for gathering demand signals in addition to all the functions of the supplier network Collaboration and visibility Inventory and production schedule Tesoro BCBS Michigan Supplier Networks Enabling the interaction between a buying organization and its suppliers. Buyers and Suppliers have a single interface RFx/Auctions Contracts Procurement shared PO documents Chevron 2008 BearingPoint, Inc. 8

9 Global Strategic Procurement Trends cont d Identification of a few strategic suppliers willing to forge a close relationship with integrated processes Utilizing technology to manage enterprise supplier relationships Leveraging buying to achieve significant savings over time Providing easy-to-use tools while instituting the necessary corporate controls Continued focus on eliminating maverick buying through improved responsiveness and reduced cycle times Move to a paperless process incorporating workflow and requisition originating with the end user/requestor Using data warehousing/data mining to collect data and leverage it into meaningful information for procurement personnel 2008 BearingPoint, Inc. 9

10 Global Strategic Procurement Trends cont d New role for Buyers and for the procurement organization facilitating the supplier relationship and the user access to the buyer Supplier management and measurement processes facilitating supplier retention Consolidation of regional purchasing functions to leverage buying to achieve significant savings over time Commodity management groups within the procurement organization Continued focus on lowering the costs of materials and services in the procurement process Leveraging existing technologies to standardize global spend processes Managed services for functional and technical procurement environments 2008 BearingPoint, Inc. 10

11 Common Procurement Business Challenges

12 Common Procurement Business Challenges Spend Analytics Business Challenges Leading Practices Few enterprises know what they spend, on which products, or with which suppliers. Issues include: Same suppliers with different names Multiple business entities that are business units of the same company Distributor or reseller purchases, with corporate agreements with the product manufacturer Most enterprises lack sufficient, accurate and timely insight into corporate spending information Spend data is generally located in multiple systems across the enterprise including AP, GL, PO, ERP, other legacy systems Accurate spend data is critical for strategic sourcing and enterprise purchasing leverage, however, data is also necessary for compliance monitoring and supplier management Most companies lack tools and technology for spend analysis and do not have the organizational knowledge to complete analysis in an efficient manner C-Level support within the organization for spend analysis, including CFO, CIO, CPO and CEO Utilize standard spend data cleansing and classification procedures across the enterprise Spend analyses applied to all spend and suppliers, accessing all spend data sources within the company. Classified at the item level and enhanced with contract, supplier and part information Highly automated spend data extraction, cleansing and classification, that is efficient and repeatable. Data Classification at the source (point of requisition or sourcing request) 85+% of data is aggregated, classified and analyzed regularly Analytics pinpoint immediate opportunities by identifying volume leverage across business units and fragmented spend by category 2008 BearingPoint, Inc. 12

13 Common Procurement Business Challenges Strategic Sourcing Business Challenges Leading Practices Fragmented processes across the enterprise create barriers for consistent treatment of commodities and suppliers Limited spend and market intelligence shift leverage to suppliers during negotiation Labor intensive and time consuming activities reduce organizational capacity for sourcing activities Inconsistent sourcing skills create inconsistent results across the company Collaboration between business units is not encouraged and reliant upon personal relationships, rather than organizational structure and discipline Standard document management capabilities, enabling exchange, modification and version control, rarely exist Organizational knowledge of key success factors is infrequently shared across the enterprise in manner that can be leveraged Analytical tools/templates for spend analysis, bidding and cost modeling are dependent upon individual experience and do not capture best practices Modify and validate procurement processes prior to implementing a sourcing technology platform Develop supporting processes and enabling technology to make spend analysis efficient and repeatable Understand market dynamics, supplier capabilities and define sourcing strategy prior to supplier negotiations Clearly define requirements and expectations to internal stakeholders and external suppliers Communicate sourcing strategies to all relevant stakeholders Adopt procedures and systems to measure internal performance and supplier performance Define protocols for evaluating proper negotiation tools & techniques by category. Obtain executive and key stakeholder consensus on objectives and strategies for implementation 2008 BearingPoint, Inc. 13

14 Common Procurement Business Challenges Contract Management Business Challenges Leading Practices Contract data is maintained in a static database environment with no capabilities for tracking supplier performance and other historical data There is no consistent approach and process in place for awarding, managing or terminating contracts Monitoring of contract terms, conditions, and requirements is performed manually by reviewing invoices, department notification letters, and issuance of contract PO releases End users directly initiate many contracts without procurement involvement Contracts are initiated & executed without adequate contract planning Contracts are negotiated, reviewed & approved without procurement input Contract management responsibilities are not well defined No standardized contract terms generally accepted across the enterprise and approved by legal counsel Best practice terms and conditions, based on industry practices and lessons learned, have not been incorporated into a contracts library accessible by individuals negotiating contracts The key components of an effective contract management function will incorporate standard terms, accelerate the negotiation process and drive compliance with negotiated terms Process encompasses the planning and forming of contract through to its active management and close out. The process can be divided into five key steps, which includes the Preparatory Phase, Contract Planning, Contract Award, Contract Management and completing, extending, and renewing or closing a contract Central Repository of Contracts: Create and maintain a central repository for all vendor contracts Provide Visibility of Contracts to all interested parties: Provide professionals across the company from procurement and operations, to legal and finance, with instant access and visibility into every contract through a repository and contract library Report maverick buys and root cause of offcontracting buying: Enforce compliance by tracking and monitoring maverick and offcontracting buying. They alert managers when non-compliant transactions occur 2008 BearingPoint, Inc. 14

15 Common Procurement Business Challenges Transaction Execution Business Challenges Leading Practices Work done on paper rather than on-line (e.g. requisitioning to P.O. process) Transfers from paper to system (or reverse) Off-line calculations, look-ups, or phone calls Awkward navigation within system to find relevant information Black-box system determination of recommendations P.O.s are manually generated Lack of ability to track contract usage and compliance Too little (or too much) time spent reviewing key buying decisions Purchasing authority and authorization are not well defined or documented Other functions may be placing too much administrative workload on purchasing (e.g., invoice discrepancies) Other functions may be spending too much time performing purchasing related activities (e.g., seeking specification or warranty information, expediting orders, etc.) Electronic workflow approval process for requisitioning, P.O. assignment and invoice payment integrated into one system Web, GUI interface, and on-line system enable efficient access for corporate and remote users System workflow, algorithms and other on-line calculations are documented and wellunderstood Auto-P.O.s are created based on actual/ forecasted demand Process and system established that directs users to contracted suppliers and prevents maverick spending through approval and payment controls Purchasing controls in place that dictate authorization levels and identifies personnel with purchasing authority On-line views (invoice payment, approvals, status of receipt, etc.) available for user and supplier community s and ability to perform updates electronically Documented purchasing processes establishing interfaces to key functions including accounting and supply chain 2008 BearingPoint, Inc. 15

16 Leading Practices

17 1. Category Portfolio Assessment The core objective behind a Category Portfolio Assessment is to create an overarching portfolio strategy that: Aligns contracting categories to the supply market Applies the appropriate sourcing process for each category to maximize the value from the supply market Identifies key performance metrics for the different sourcing processes Sample considerations: Supply Market Number of suppliers and breadth of products lines High End User Preference Interchangeability of products across different suppliers 2008 BearingPoint, Inc. 17

18 1. Category Portfolio Assessment cont d Fundamentally products and services fall into two basic sourcing strategies. The criteria used for each are: Competitive Items from various suppliers that have same form, fit, and function Minimum three or more major suppliers in the marketplace Low switching costs between suppliers Buying organization has sufficient knowledge to define product or Service Sourcing outcomes: Collaborative Short- to mid-term relationships Confrontational approach Information is tightly controlled to maximize competitive tension Focus on acquisition price reduction Highly complex products or services where the buying organization can not define specifications and therefore rely on the supplier to define the specifications Typically service-related needs that require very specific expertise Typically few suppliers Sourcing outcomes: Long-term relationships Success is based on sharing information and data Focus on total cost reduction and value creation Reverse Auction erfq Negotiated Agreements High End-User Preference Agreements New Technology Made-to-Order 2008 BearingPoint, Inc. 18

19 2. Monitoring Compliance and Savings Create Monitoring Capability Establishing the appropriate measuring and monitoring processes and systems is essential to ensuring ongoing savings realization. Procurement monitoring systems can be leveraged to maintain compliance and create efficiencies. TYPICAL STRATEGIC SOURCING SAVINGS OVER TIME 100 % UTILIZING MONITORING CAPABILITY High Strategic Sourcing Cost Reduction Target Strategic Sourcing Potential Expense Creep C AE Vendor Noncompliance Vendor Negotiations Consolidate Volume/ Centralize Purchasing New Sourcing Target Demand Management 75 % 6-18 month Sourcing Initiative Operationalizing Strategic Sourcing time Low Low User Noncompliance High C AE Implications of Monitoring Compliance: Procurement monitoring systems can limit non-compliance purchasing of both vendors and internal purchasing agents through rigorous enforcement of negotiated purchasing terms to reduce expense creep Additional Efficiencies: Procurement monitoring systems can lead to additional operating efficiencies through increased business intelligence, improved inventory control and cycle time, and lowered transaction costs Benefits of Monitoring Measuring & Monitoring provides the most up to date insight on the actual implementation of current contracts Measuring & Monitoring also highlights emerging sourcing opportunities based on vendor and user noncompliance 2008 BearingPoint, Inc. 19

20 2. Monitoring Compliance and Savings Manage Monitoring Capability The implementation of internal sourcing and monitoring capabilities requires the implementation of a dedicated category management team to conduct extensive procurement reporting and analysis on an ongoing basis. SOURCING AND MONITORING ORGANIZATIONAL BLUEPRINT AND PROCESSES Organization Vendor Category Sourcing Team Procurement Category Management Team Senior Managers CFO/Controller s Business Lines/Cost Centers Procurement Category Management Measuring & Monitoring Services Process Procurement Reporting Exception Resolution Activities Data Acquisition Provide detailed specification of all data needed Gather AP, PO, vendor and purchasing card data Data Synthesis Consolidate all data sources into a procurement database Build Cubes Category Summary Reporting Publish routine compliance reports at summary level Publish noncompliance category report at detail level Exception Analysis Investigate noncompliance and provide solid data to identify vendor/user problem Scoring and Recommendation s Measure procurement achievement Score and rank results Recommend enforcement for noncompliance 2008 BearingPoint, Inc. 20

21 2. Monitoring Compliance and Savings Business Challenges Leading Practices Negotiated savings from strategic sourcing activities do not directly correlate with implemented or actual savings Up to 25% of negotiated savings remain unrealized due to limited compliance Lack of clear responsibilities, procedures and controls for ensuring spend and performance compliance Limited involvement of internal stakeholders in requirements development, market research and supplier selection, resulting in lack of consensus on final decisions Insufficient infrastructure to communicate negotiated terms to all stakeholders No executive mandate for compliance with negotiated agreements Limited exception reporting capabilities to determine off-contract spend across the enterprise Business units are not help accountable for cost savings goals or spend compliance Obtain involvement and input of key stakeholders early in the process, including requirements definition, supplier evaluation and bid evaluation Align goals and incentives with total cost compliance, by adjusting department budgets by negotiated spend reductions Use technology solutions to communicate negotiated terms to key stakeholders in quantifiable terms, e.g., EPS, share price, EVA, etc. Provide access to a central and searchable contract repository to enable stakeholders to identify and make purchases from preferred suppliers Standard, risk-assessed contract templates and terms established and enforced for all practical contract categories Establish consequences for non-compliance. Establish rewards for high levels of compliance 2008 BearingPoint, Inc. 21

22 3. Supplier Relationship Management Global Issues and Challenges As supply chains become more global and volatile, the challenges and risks increase significantly Strong Global Demand Commodity Inflation Material Shortages Commodity Price Volatility Weakening Dollar Increased Market Velocity Demand- Driven Markets Transportation Networks Stretched Natural Disasters Quality Increased Lead-Times Supplier Reliability Regulatory Compliance Labor/Political Strife in Supply Markets According to the Aberdeen Group, in response to these pressures on supply chain operations, the primary role of a procurement function in strategic business initiatives has begun to shift in recent times from a singular focus on cost savings & avoidance to the broader management of supply availability and risk while still maintaining cost competitiveness. BearingPoint views Supplier Relationship Management as a competitive differentiator to proactively address these challenges & risks Sources: AMR Research, Aberdeen Group, and BearingPoint 2008 BearingPoint, Inc. 22

23 3. Supplier Relationship Management Defined Definitions of SRM vary, causing confusion in the marketplace SRM is a broad term ranging from the strategic to tactical aspects of a Buyer-Supplier relationship, as well as technology applications. SRM is a formal process of actively and continuously managing suppliers strategically to achieve a competitive advantage across the enterprise. The Corporate Executive Board categorizes supplier management into three different forms: Not-So-Benign Neglect: Majority of sourcing savings dissipate Supplier Performance Management: Focused on achieving contracted gains and driving continuous improvement Supplier Collaboration: Designed to identify and drive new value beyond agreed terms Supplier Collaboration Contract Signed Value Supplier Performance Management Without rigorous supplier mgmt, 75% of sourcing savings can disappear within 18 months Strategic Sourcing Not-So-Benign Neglect Time Source: Procurement Strategy Council (Supplier Management) 2008 BearingPoint, Inc. 23

24 3. Supplier Relationship Management Performance Metrics & Monitoring Relative effort required to collect supplier performance information should be considered when developing the SRM program. The following matrix assists in evaluating the applicability of metrics BearingPoint, Inc. 24

25 3. Supplier Relationship Management Common Challenges for Large Multi-National Corporations Many multi-national companies experience similar challenges around supplier relationship management. The solutions tied to the SRM Framework address these challenges in a manner which optimizes and sustains results. Challenge/Pitfall Supplier relationships are typically categorized/prioritized based on size of spend Lack of clear SRM strategy and guidelines (procedures, roles & responsibilities) for managing suppliers results in fragmented, inconsistent approach across enterprise Supplier performance gaps and improvement opportunities are identified but execution falters Resistance to sharing resources (information/data, people, processes, technology) with suppliers Despite an awareness of supply risks, companies are still largely reactive to supply chain disruptions Disparate data sources result in poor supplier visibility and inefficiencies Companies tend to only look at supplier s past performance and focus less on future requirements/capabilities Difficulties in quantifying hard benefits of SRM initiatives Solution(s) Supplier Segmentation, Risk Management, Collaboration Governance, Business Process Management Supplier Performance Management Collaboration, Supplier Performance Management Risk Management Technology Supplier Segmentation, Supplier Performance, Management, Risk Management, Collaboration Governance 2008 BearingPoint, Inc. 25

26 3. Supplier Relationship Management Business Challenges Leading Practices Approximately 50% of large US companies do not have a formal supplier performance measurement program Objective criteria for evaluating supplier relationships has not been developed Cross-functional consensus does not exist on the appropriate supplier measurements. Data collection for performance metrics is manual, delaying timely dissemination of information to key stakeholders Supplier meetings to define criteria and objectives are not completed in a timely manner. As a result, suppliers do not understand the criteria for measurement and are not aware of any metrics Many companies do not understand the total cost of supplier relationships, including quality, on-time delivery, working capital financing, accurate invoicing, paper-based transactions Challenging supplier relationships are not identified or addressed in a timely manner Jointly developed performance metrics with key suppliers, shared metrics on a timely basis with joint solutions developed to resolve problems Message-based, machine-to-machine integration over networks with the supplier for purchase orders, advanced shipment orders and invoices Supplier performance requirements are built into service level agreements with automated performance measurement and scorecarding Supplier relationship categories developed with specific criteria and performance targets. Benefits associated with more strategic classifications High performance suppliers recognized. For example, recognition in marketing materials, CEO letter, trade journals, company award with internal staff recognition Poor performing supplier relationships are phased out and terminated 2008 BearingPoint, Inc. 26

27 4. Technology Utilization World class organizations have reduced manual activity in their Procurement processes by leveraging technology and ensuring relevant data is shared between the required applications. Sourcing Contract Management Procurement Receiving Invoicing Inventory & Asset Management Spend Analysis Authoring Item Master & Catalogs Auto Matching (3-Way) Demand Planning Strategic Sourcing Retention Workflow Central ERS Negotiation Compliance Order Management Desktop EIPP Depreciation Supplier Portal/Network 2008 BearingPoint, Inc. 27

28 4. Technology Utilization esourcing Delivers Process Savings esourcing provides a way to streamline and institutionalize the sourcing process, with significant reductions in work effort! Traditional Offline Sourcing esourcing Professional Buyer Effort Required For Sourcing Process* Buyer Activities* ❶ Spend Mgt ❷ Supplier Discovery ❸ Managing Preferred Suppliers ❹ Creating & Managing RFx Response/Receipt ❺ Screening / Sorting Proposals ❻ Contract Negotiation & Management *Source Aberdeen Group %+ Less Effort 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Total Effort as % of Traditional Process Benefits: System enabled enterprise-wide processes Centralized supplier and bid mgt for quick and easy access Automation of low value administrative tasks i.e., negotiation Reusable templates and processes Buyers have more time for strategic supplier activities 2008 BearingPoint, Inc. 28

29 4. Technology Utilization esourcing Delivers Cycle Time Reductions ROI driven by time-to-benefit improvements more sourcing events in less time! Days * Source - Aberdeen Group Offline and Online Sourcing Cycle Times 0 Offline Sourcing* Traditional Methods ~110 Days esourcing* ~35 days Contract Negotiation Proposal Screening RFQ Response RFQ Development Managing Pref. Splrs Supplier Search Benefits: Accelerate supplier qualification & selection - $$$ Accelerate time to complete sourcing events - $$$ Time to market improvements - $$$ More spend under management - $$$ 2008 BearingPoint, Inc. 29

30 4. Technology Utilization esourcing Delivers Purchase Cost Savings esourcing delivers purchase price or TCO reductions averaging 5% to 15% 13% $$ Savings Reductions in the cost of goods sold (COGS) go straight to bottom line Bottom line dollar increases have a huge impact on EPS Previous Pricing *Source Aberdeen, Goldman Sachs After esourcing Benefits: Repeatable and standard process drives down TCO Objective methods to measure & select suppliers drives down TCO More spend under management drives down TCO Open and live bidding environments drives down TCO 2008 BearingPoint, Inc. 30

31 4. Technology Utilization Benefits Are Tangible and Non-Tangible 1. Fast ROI and lower total cost of ownership. Optimization-based decision support creates new savings opportunities (5%-15%) not possible with spreadsheets or ranking systems. The secret? Optimization is the only technology that can simultaneously evaluate all bids from all suppliers - including complex pricing options, non-price factors and purchasing policies - and present the best recommendation in seconds. 2. Drastically reduced cycle time. Automated and streamlined supplier qualification, sourcing quote construction, supplier selection, bid response, bid award analysis and auditable award justification significantly shorten sourcing cycles, as well as provide efficiency savings and lower inventory carrying costs. 3. Improved sourcing productivity and best practice adoption. Automated development of quotes, instant RFP/RFQ/RFI templates, centralized supplier and bid data management, and rapid award analysis all add up to less time spent on administrative tasks and more time spent on strategic decision-making and relationship-building. 4. Better supplier relationships. Online conferencing and messaging facilitates more efficient communications. Flexible bidding options allow suppliers to compete for more of your sourcing dollars. Multi-parameter bidding allows suppliers to compete on more than just price. Multi-phase threaded, negotiations foster increased collaboration. 5. Better quality. Since suppliers are providing more of the "value" that goes into your end product, you have a more efficient and effective way to evaluate and collaborate with strategic suppliers to deliver the highest quality products at the lowest total cost possible. Supplier performance is monitored to insure consistent quality. 6. Smarter management. Scenario management and "what-if" analysis help you better understand how and why your decisions are the optimal ones. And bid award justification gives buyers an objective basis for feedback to suppliers BearingPoint, Inc. 31

32 5. Procurement Maturity Assessment Stages of Maturity The objective of the Procurement Maturity Model is to provide a framework for analyzing the condition, nature, operating effectiveness and cost effectiveness of the Procurement function, to include organization, processes and technology. PROCUREMENT MATURITY CONTINUUM No cost reduction focus (order takers) One time cost reduction gains. Business unit and TCO focus. Enterprise focus with system integration. Sustainable year over year reductions. Reactive Not sustainable Efficient Standardized Institutionalized Relative Value Added BASIC (Unfocused) E&P EMERGING (Transactional) INTERMEDIATE (Scaled) ADVANCED (Technology Enabled) INDUSTRY LEADING (Category Value Chain Management) Procurement maturity level and adoption of best practices by an industry can be influenced by market factors like concentration, demand-supply power balance, segments served and customer market maturity BearingPoint, Inc. 32

33 Strengths Weakness and Implication Evidence of Weakness Opportunity Threat/Risk Risk Mitigation Business and functional UFA is resource PMO and BU staff are resource Conduct project Internal resource and Contract third party to (support) units encompasses constrained in constrained prioritization capability constraints to conduct the study strong subject matter supporting new conduct the study Conduct resource leadership initiatives allocation and Role and responsibility resource descriptions are documented management for most of the organizational study units The organization is gaining Key competency gaps Lack of project management Recruit strong Project managers may Align project managers exists experience: PMO, Farm, project managers not have the business to BU experts alignment and motivated in Construction externally expertise pursuing identified growth Projects / initiatives Goal & Objectives Implementation and Timeline platforms are managed less Lack of fit for purpose market Develop a efficiently Implementation and of Accountable research Governance functional UFA employees possess execution Implementation is delayed of Accountable Governance rotational program respect and passion in day to Lack of financial or Structures Structures flawed - Improve - Improve UFA UFA operational operational accountability accountability Week Ending 6/1 6/8 6/15 6/22 6/29 7/6 7/13 7/20 7/27 8/3 through: within UFA day activities reducing through: knowledge/understanding Assessment of level 2 attrition and supporting Develop cross-business unit governance structure Develop cross-business unit governance structure governance processes in informal coordination of BUs to be leveraged Create relevant and realistic policies and activities Unclear Create roles relevant and and Roles realistic and responsibilities policies and are Review job Job descriptions may be Job descriptions should procedures Design stop-gap responsibilities procedures not followed or enforced descriptions on solutions file outdated to meet short be reviewed on a Develop performance/progress measures and with HR to assure term needs regular basis and should Develop performance/progress measures and reporting position needs Change and management & reflect the current needs reporting employee communications Key Resources/Ease the organization Create accountability review checkpoints Key Resources/Ease to of Implementation of Implementation Create accountability review checkpoints expectations are prepare in and align organization for Two phased approach: line Two phased approach: impending changes 1. Develop interim governance solutions for the Develop governance 1. Develop interim governance solutions for the current current state state model and implementation strategy Assess Assess how how to to meet meet governance governance needs needs in in the the Initiate and maintain a future state operating model feedback mechanism for future state operating model continual improvement Impact & Benefits Enterprise Impact: Medium (Score: 2.5 out of 5) Enterprise Impact: Medium (Score: 2.5 out of 5) Benefits: Operational Excellence Benefits: Operational Excellence Governance structure specifies the distribution of Governance rights and responsibilities structure specifies among the UFA distribution of rights and responsibilities among UFA stakeholders. stakeholders. Provides structure through which objectives are Provides structure through which objectives are set, and the means of attaining those objectives set, and and monitoring the means performance of attaining those objectives and monitoring performance * Denotes that this is out of scope for current project Required Effort and Ease to Implement Required Resources: Required Resources: CEO, Corporate Affairs, BU and Support Unit leaders, BearingPoint* CEO, Corporate Affairs, BU and Support Unit leaders, BearingPoint* Ease of Implementation: Ease of Implementation: 1 Least Favourable Most Favourable = SBI Dependency MDM Specialty Company Integration Low-Cost Country Sourcing *Note: Size of Circle Reflects Estimated Cost Magnitude Negotiations Market Intelligence Supplier Performance Management Supplier Portal Contract Sales OpCo Portal Transfer Pricing Tool Impact Analysis Tool esourcing Item Registration Supplier Registration Category Selection Tool 7 5. Procurement Maturity Assessment Building a Roadmap to Effect Relevant Change The maturity assessment analyzes the current state and industry benchmarks to help organizations set improvement goals and develop a roadmap to their desired future state. INPUT CURRENT STATE ANALYSIS Quick Win #1: Governance Business Process Improvement ANALYSIS GAP ANALYSIS SPEND ANALYSIS OUTPUT ROADMAP & HIGH-LEVEL IMPLEMENTATION PLAN PEER ANALYSIS OF OPERATIONS PERFORMANCE PRIORITIZATION OF OPPORTUNITIES Recommendations: Prioritization Matrix Business Impact Low Medium High FY10 Low Medium High Organizational Readiness 4Q08 FY09 FUTURE STATE DEFINITION Year 1 Year 2 Year 3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Phase 1 : Review current state processes, organization and capabilities; complete internal & external benchmark study to set Inventory performance targets; build quantitiative analysis tool; Identify leading practices to close gaps; Initiate Quick Wins and finalize Mgmt Effort roadmap Transform ational Lead-time Reduction Processes Quick Wins & Foundational Prc Quick Wins: Typical Quick wins include resetting of inventory targets from the quantitative model, rationalizing the product Reset Targets offering and raw material portfolio and the review and disposition excess and obsolete inventory. Of these, resetting targets and ordering parameters can often be completed in weeks or months, though it may take 6-12 months for updated production Portfolio Rationalization and purchasing plans to impact the balance sheet. Excess/Obsolete Lead-time Reduction Initiative Sales & Operations Planning Foundational Processes: If necessary, basic inventory management processes such as inventory counting, warehouse management and sales and operations planning should be created or improved; These processes are required to enable further process and systems Warehouse Mgmt transformation Inventory Counting Supplier Hub Strategy & Collaboration Demand Planning & Customer Collaboration Transformational Processes: Processes to restructure the supply base, improvement forecasts, reduce supply chain costs and shorten the product lifecycle are often dependent Cost-to-Serve Reduction upon foundational initiatives and technology enablers that require a longer lead-time to plan and implement. Product Lifecycle Management Reach competitive End State Target TBD Quick wins begin to deliver benefits median (~$143MM) 50% of BIC=$475, Best-in-Class=$711MM) BENCHMARK DATA 2008 BearingPoint, Inc. 33

34 5. Procurement Maturity Assessment Building a Roadmap to Effect Relevant Change Output from the Procurement Maturity Assessment is used to determine both the current state and the target level of maturity for the future state based on leading practices and the ability of the organization to achieve a higher level of performance. 1: Basic 2: Emerging 3: Intermediate 4: Advanced 5: Leading Reactive Metrics not aligned. Transaction focused. Inconsistent One-time reductions. Variability in process and results. Efficient Business Unit and TCO focused Standardized Enterprise focused with systems integration Collaborative Sustainable with YOY improvements with supply base Spend Strategy As-Is To-Be Bidding & Contracting As-Is To-Be Sourcing As-Is To-Be Supplier Management As-Is To-Be 2008 BearingPoint, Inc. 34

35 21st Century Sourcing Professional* The successful sourcing professional must also be multi-dimensional. Along with the sourcing-related activities, he or she must have the ability to: Manage project teams effectively Guide the development of strategies relating to decisions concerning sourcing (including "make or buy") Lead strategic change in suppliers and be competent in improvement methodologies Formulate innovative business strategies incorporating the opportunities available through supply management and building value networks * Supply Demand Chain Executive- Cyndi Joiner 2008 BearingPoint, Inc. 35

36 Appendix

37 Best Practices - Reference Base BEST PROCUREMENT AND PURCHASING PRACTICES 1. Investigate supplier markets and analyze durability of sources and maintenance 2. Anticipate investment needs and related costs and risks over time 3. Perform re-use, buy, lease, outsource or make analysis 4. Consolidate group requirements to set up global agreements 5. Perform critical analysis of requirements 6. Perform competitive tendering and benchmarking (A. RFP+RFQ; B. RFP Only) 7. Negotiate on the basis of pre-defined objectives and tactics 8. Apply and control the purchasing process systematically 9. Optimize the administrative process through task automation 10. Optimize logistics and interfaces 11. Monitor and optimize usage 12. Certify suppliers 13. Monitor continuously supplier performance 14. Perform supplier contract management 15. Continuously monitor internal performance at each level (including compliance) RELATED ACTIVITIES Upstream Activities (See N 1 in Procurement and Purchasing Cycle) Requirements Analysis and Definition (see N 2) Supplier Selection and Negotiation (see N 3) Administration and Purchasing (see N 4) Supplier and Contract Management (see N 5) Internal and Management Activities (Not in Cycle) 2008 BearingPoint, Inc. 37

38 Best Practices - Reference Base 1 - Investigate supplier markets and analyze durability of sources and maintenance Carry out formal and regular reviews (systematic updating in the case of fast changing markets and technologies, check services provided) Know all potential suppliers. Identify new suppliers and perform SWOT analyses. It can be done through Request For Information (RFI) Determine supplier market characteristics (market size and stability, level of competition, market and price trends, suppliers capabilities ) Monitor prospective information about innovations on supplier markets in order to suggest new opportunities to IT and Telecom experts (example of sources : press articles, supplier documents, visits to suppliers'...). Identify alternative technologies and services enabling to meet current and future requirements (with Architecture Department when possible) Ensure suppliers are able to deliver their product/service and related maintenance and spare parts for a length of time at least as long as the existence of the requirement Perform in depth analysis of their financial health Estimate the risks of bankruptcy, acquisition by a competitor Take into account product life cycle When launching an important project, analyze risks related to the availability of technologies and to the technical capabilities of prospective suppliers (with Architecture Department when possible 2008 BearingPoint, Inc. 38

39 Best Practices - Reference Base 2 - Anticipate investment needs and related costs and risks over time (multi-years) Align the procurement decision with the global business strategy Identify future needs in equipment and/or projects Define which technologies could be used (with Architecture Department when possible) Forecast quantitative and qualitative requirements and evaluate the answer brought by each technology Analyze the position of competing technologies on their life curve, their availability and the evolution of costs according to the level of requirements Plan and budget them (in collaboration with Financial Department): Forecast related spend in order to prepare annual budgets and be able to provide suppliers with planned volumes/activities Determine a target cost and decompose it according to the different functions to be achieved in order to then be able to analyze the value of the proposed solutions Identify risks related to the requirements and to supplier markets, perform feasibility studies and define the proper purchasing policy 2008 BearingPoint, Inc. 39

40 Best Practices - Reference Base 3 - Perform re-use, buy, lease, outsource or make analysis For any new type of purchase or project, compare the following options (with Service Delivery Transformation Department when possible) "Re-use" : use what has already been purchased or done by other companies "Buy" : purchase the product "Lease" : pay a "rent" for the product/service instead of buying it "Outsource" : purchase the services and delegate the entire responsibility of the activity management (package delegation) "Make" : produce in house /perform the activity yourself Study the consequences of each option Compare internal capabilities and costs to that of the supplier market Value the cost of maintaining a competitive level and define the technology acquisition policy (internal, codevelopment, purchases based on functional specifications, sub-contracting, etc.) Analyze related risks Take into account human aspects and distribute responsibilities Examples: Choose between performing training in house or subcontracting it Analyze IT solutions implemented by other group companies before choosing and implementing yours : benefit from their experience Compare AXA's capability and cost to develop software in house to that of suppliers : evaluate how mastering a technology contributes to the competitiveness of AXA on its customer markets Compare the cost of buying equipment and performing the maintenance in house to a leasing solution where AXA pays equipment and related services altogether 2008 BearingPoint, Inc. 40

41 Best Practices - Reference Base 4 - Consolidate group requirements to set up global agreements Group the maximum volume of requirements over time and from several AXA companies with Architecture Department and Service (with Architecture Department and Service Delivery Transformation Department when possible) in order to Identify forecast commitments with higher probability Make the purchase more attractive for suppliers (volume discount) Exploit potential synergies Benefit from experience acquired by other companies Ensure that a supplier market structure is geographically compatible with the demand (the grouping may be possible at different levels : local/country, regional or global) Set up group/umbrella agreements Consolidate forecast on the different AXA companies requirements Adapt the level of quantity commitments according to the degree attractiveness of the deal (firm commitment on volume and/or on duration, ) Do not forget protection against volatility of exchange rates NOTE : This practice requires to have a homogeneous demand, which implies standardization of similar requirements (the ideal is to define a company-wide governance IT and Telecom model) 2008 BearingPoint, Inc. 41

42 Best Practices - Reference Base 5 - Perform critical analysis of requirements Clarify and identify real needs with Architecture and Service delivery and Business Departments Define the right level of quality, support and maintenance Take into account the product life cycle Check that product specifications correspond to user s needs Examples : What type of printers is needed by type of user : personal or network? color or black and white? What size of screen should be chosen? Do we need the same level of maintenance on all machines? Use functional specifications (instead of a technical solution description) in order to be able to identify and compare alternative solutions/offers Identify main functions and constraints (due to environment and interfaces) "Alternative solutions" may be a different product/service or a different way of buying (see Best Practice N 3 - Perform re-use, buy, lease, outsource or make analysis) Define selection criteria (such as quality, costs (price & additional costs), delivery time, service level, etc ) for each function (with some leeway for flexibility) 2008 BearingPoint, Inc. 42

43 Best Practices - Reference Base 6 - Perform competitive tendering and benchmarking 6.1 Request For Proposal (RFP) and Request For Quotation (RFQ) On the basis of criteria for selecting suppliers, identify those that may be included in the panel and with whom close relationships are possible in the future Be sure of the equity of competitive bidding, meaning that no supplier should be in a privileged situation (for example because of his involvement in the definition of requirements) or penalized (incomplete or out of date information on the last changes, penalizing deadlines,...) Ensure the credibility of competition : Credibility of commitment : ensure the seriousness of the information provided to suppliers Manage the communication process with the vendors Note : Have several suppliers competing (it does not necessarily mean to regularly change suppliers, but to regularly compare the current supplier to competitors in order to check technical and economic performance) A competitive supplier market with limited barriers to change will make the implementation of this practice all the more easier (check the reality of competition on the market : existence of trusts, monopolistic situation...) 6.2 Request For Proposal (RFP) only Ensure the credibility of competition : Credibility of alternatives : make sure that alternatives are real ones, that it is indeed possible to change suppliers Credibility of the risk : make sure AXA represents a real opportunity for the supplier (the purchase is interesting in terms of volume or it enables to build a reference in the business) Send to the vendors the selection criteria Note: Competitive tendering must be the general rule ; the only exceptions being when the requirements are of no interest for the supplier market, when a long term contract has been negotiated including a price decrease clause and of course when there is absolutely no competition on the supplier market. Competitive tendering requires open definition of needs (avoid too precise specifications) and making the purchase as attractive as possible in order to motivate a maximum of suppliers and enable them to propose creative solutions. At AXA, RFP are done in the cases that the deal concern is a big deal (>USD ) and RFQ in other case when you know exactly what you want 2008 BearingPoint, Inc. 43