IIA South West Event. A look at key supply chain risks and why contracting is a key step 14 January 2015

Transcription

1 IIA South West Event A look at key supply chain risks and why contracting is a key step 14 January 2015

2 Objectives and agenda Page The contact at KPMG with respect to this presentation is: Iain Prince Director Tel: +44 (0) Supply chain risks 2 The contract life cycle from creation to termination 3 compliance reviews what we found in practice 4 weaknesses leads to millions in lost value 5 Key focus points the 3 lens approach 6 sample and principles 7 Case studies 8 1

3 Supply chain risks 1 Supply Chain risk has never had so much profile... 2 If it is not already, Supply Chain Risk Management should be high on the board agenda Supply Chain Risk Management should be integrated on an organisation wide basis, not just procurement and logistics Supply Chain Risk Management with vendors should be commensurate with the risks, remembering that it is sometimes the smaller vendors or tier 2 vendors that create the largest problems There is no room for second best given the consequences of supply chain risk management failure the KPMG Global procurement benchmarking survey found that 20 per cent.of respondents havent even identified any risks! There is a need for supply chain risk management to be a collegiate exercise with procurement, finance, operations, IT and sales to work together to understand, monitor and manage the risks, internal audit is an ideal starting point... 2

4 The contract life cycle from creation to termination it has risk all over it! management locks in value at each stage on the contract lifecycle. Outlined below are the activities we would expect during each stage of the Lifecycle Plan and create contract Pre-contract planning language & KPIs Mgt plan implementation Termination and transition Exit planning Lifecycle Performance Measurement Review and Terminate contract changes audits Document management Performance Management Benefits tracking Monitor and Manage contract in life 3

5 compliance reviews what we found in practice We undertake 100s of contract reviews on behalf of clients every year and recover in lost value. We consistently see contract compliance / performance against terms declining over the course of the contract. Level of contract compliance Causes of Compliance Degradation Poor operational understanding of contracts. Ambiguous contract terms. Complex pricing. Poor processes and controls. Changes in staff. Reporting weaknesses. Tier 2 supplier rebates. Changes. signing Now 4

6 weaknesses leads to millions in lost value Major Telco Up to x million of marketing funds not tracked management processes absent or unclear Managers unaware contracts include Most Favoured Customer clause Verbal agreements not captured in contracts Pricing Not in line with latest market trends Potential Value leakage millions Fragmented Service Management Supplier performance not measured penalties not collected Additional mark ups charged outside agreed contracts Signed copies of contracts not available Platform setup to manage service performance is not used Supplier s Compliance s with Most Favoured Customer, Cost plus and significant pass through costs not validated 5

7 Key focus points the 3 lens approach ual Lens Operational Lens Cost Control & Financial Lens. Roadmap Review contract structure and framework Review detailed operational schedules and identify key gaps to industry standard Validate the principles behind cost control and transparency of cost in the contract Validate KPI s and Metrics in the contract Validate the contractual audit rights and procurement assessment to ensure a fair-share of savings passed through Validate the gain-share agreements Understand the current network configuration and operation Validate the short / medium / long term operations and overhead allocation cost structure across the warehousing & transport network Understand the capacity challenges and potential cost impacts in the future Validate the operational KPI s and Metrics that are to be defined in the open book agreement Understand the governance of the new KPI s and reporting cycle Identify organisational model to govern the contract Understand the current closed / open book cost breakdown Understand the cost base for dual running / possible exit plans Understand and assess the management fee mechanism Identification of the risk hot-spots Identify cost areas that are inscope/out of scope Understand the billing and invoicing process (inc payment terms) Design the principles for the annual budget process and cost adjustments Understand and develop the transition plan going forward Develop and agree the risk & issue log Define the roles and responsibilities for the open / closed book contract team Robust project management, and interface into current on-going logistics programmes (if required) 6

8 sample and principles The typical components and principles of a contract review are outlined below. The focus of the project is on the operational and cost control aspects, KPMG cannot give legal advice. Key principles of contract negotiations: Clearly defined principles that everyone signs up to A clearly defined legal structure that is separate to the operational schedules A structured and visible transition plan with strict timeline An agreed governance model and escalation procedures Availability of the right resource to govern and manage the contract components Legal structure Commercial & operational schedules with content tailored to the client needs Detail Commercial framework 1. Definitions 2. Pricing 3. Transport service levels Master Service Agreement 4. Warehouse service levels 5. Transition 6. management 7. Change control 8. Employee provisions Schedule 9. Subcontractors and procurement Security 11. Termination assistance Business continuity and disaster recovery Transferring assets and agreements 14. Warehouse services 15. Transport services 16. Software, hardware and IT 17. Gain share 18. Benchmarking 19. Company code of conduct 20. Premises and occupation 7

9 Case studies Over the last 3 years, we have a carried out over 10 similar assignments across the retail and consumer sector, these have ranged from a full UK Logistics contract strategy to a more tactical warehouse and cost reduction initiatives. Global Retailer An open book contract end to end review of the home delivery operation Beauty products retailer 3pl Transport and Warehousing Cost review KPMG s Recent Logistics Experience Challenge Home delivery was a key enabler for planned business growth in the UK but service levels for e-fulfilled orders were below the competition and cost not under control. In 2014 the client was also implementing a new Supply Chain system and required visibility of the current operations Approach KPMG conducted a review of the operational processes and financial performance of the 3pl. This included order to cash and procure to pay and operational walk through tests, this found a number of red flag areas across the cost base, commercial contract, and cost control Outcomes KPMG identified major operational gaps in the contract and brought visibility of the supply chain operation and a plan to bring to industry standard. Challenge Client had outsourced its logistics to a 3PL and moved fulfilment location. Costs were spiralling, service had deteriorated and UK management losing the confidence from global leadership. In addition, operational and contractual relationships with the 3PL were strained. Approach KPMG reviewed the site design and operations, making assessments of the chances of improving the current performance gaps. The 3PL s ways of working were documented and challenged in order to reduce current operating costs. The team physically assessed potential new sites for relocation Outcomes Agreed way forward and treatment of sunk costs between our client and 3PL Project plan for transition from existing 3PL site 8

10 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.