Olympic Dam. Calculating Procurement Savings Peter Morichovitis Manager Supply

Transcription

1 Olympic Dam Calculating Procurement Savings Peter Morichovitis Manager Supply

2 Introduction Calculating Procurement Savings.. One of the major objectives a Procurement function is tasked with is generating Procurement Savings. However, the process of quantifying and calculating Procurement Savings, legitimising them with internal stakeholders, and subsequently tracking them to the bottom line is often one of the Procurement department's greatest challenges

3 Topics Introduction Procurement Savings What s the problem? The solution: Procurement Savings Protocol Savings Definitions Tracking and hardwiring Savings to the Bottom Line 3 years later Procurement Price Index

4 Introduction Olympic Dam A world class resource Discovered in 1975 Fully integrated processing facility from ore to concentrate to metal Poly metallic orebody with 7.855Bt resource Copper, uranium, gold, silver Workforce of 3,200, majority residential in Roxby Downs World s 4 th largest copper deposit, largest uranium deposit, 5 th largest gold deposit Olympic Dam Roxby Downs

5 Introduction Olympic Dam Procurement 30 Procurement Staff, 26 Supply Chain Staff $1,400M annual spend on goods and services (FY08) 1,500 vendors 40% of Spend with South Australian vendors 300 contractual arrangements with vendors 130,000 Purchase Orders p.a 140,000 invoice payments p.a Procurement Savings: FY08: $16.7M FY07: $18.5M FY06: $28.0M

6 Topics Introduction Procurement Savings What s the problem? The solution: Procurement Savings Protocol Savings Definitions Tracking and hardwiring Savings to the Bottom Line 3 years later Procurement Price Index

7 What's the problem?... the business imperative.. Must be able to demonstrate to stakeholders that Procurement is adding value and continuously improving Generating Procurement savings is seen as Procurement s greatest value-add? Procurement Savings calculations need to be viewed as real - real money, real savings Procurement Savings are difficult to track to the bottom-line? And how do you lock them in so they are not spent elsewhere? It s not Procurement s budget anyway? What about cost mitigations, balance sheet improvements? These are other ways Procurement adds value? Are they savings? Its not as simple as just Price decreases, what about Volume? Who is responsible for volume changes? There needs to be alignment between Procurement, operations and Finance in evaluating, and reporting benefits Transparent data kept in a single system and key learning's shared with others How do you then embed the changes into the operation?

8 Topics Introduction Procurement Savings What s the problem? The solution: Procurement Savings Protocol Savings Definitions Tracking and hardwiring Savings to the Bottom Line 3 years later Procurement Price Index

9 The solution Procurement Savings Protocol Procurement Savings reported consistently, validated by Finance, approved by operations, in line with agreed Protocol and captured and shared in a transparent System Protocol approved by senior management. All Stakeholders trained in the Protocol. Institutionalised! Each Sourcing initiative viewed as an end-to-end process (and Project ) with tollgates and stakeholder approval 3 months

10 Topics Introduction Procurement Savings What s the problem? The solution: Procurement Savings Protocol Savings Definitions Tracking and hardwiring Savings to the Bottom Line 3 years later Procurement Price Index

11 Savings Definitions: Procurement Savings Types 1. Year-on-year Savings decrease in the total cost of the good or service resulting from Procurement activity compared to baseline 2. Mitigation of Cost Increases The avoidance of a cost increase which would have occurred, as a result of a Procurement initiative 3. Balance Sheet Savings: reduction in Capital expenditure or Inventory 4. Revenue: resulting from a Procurement activity

12 Savings Definitions: 1. Year-on-year Procurement Savings The consequence of actions taken during a Procurement Activity* which result in a change in Total Cost** of a good or service compared to a Cost Baseline*** Where *Procurement Activity includes: Strategic Sourcing Purchasing activity, or Contract Management ** Total Cost is: Unit Cost multiplied by annual actual or forecast usage *** Cost Baseline is The last unit price paid multiplied by annual/forecast usage, or The Market Value of Purchases (a published MV or lowest initial price in a complying tender)

13 Savings Definitions: 2. Mitigation of Cost Increases The avoidance of a cost increase which would have been incurred, but as a result of a Procurement initiative has been reduced or removed Avoidance/reduction of a proposed price increase by negotiation A negotiated reduction in the price of an item which increases on a set contracted pre-determined basis A negotiated reduction over the lowest conforming bid in a tender/rfp

14 Savings Definitions: 3. Balance Sheet Savings As Balance Sheet savings don t directly effect EBIT, they are treated separately Generally comprise: Decreases in capital expenditure through Procurement activity Reductions in inventory/working capital

15 Savings Definitions: 4. Revenue Revenue generated through a Procurement activity eg. Selling off obsolete stock, plant Generally One-off activities

16 Savings Definitions: Other criteria within the Procurement Savings Protocol Savings Include but are not limited to: reductions in Unit Cost improved specification or product substitution reducing consumption improved product application practices reducing consumption Improvements in the P2P Process reducing cost Savings may result from an action initiated by the: Procurement department Supplier the Customer Savings > $10,000 included First 12 months of the savings only claimable Usage: forecast volumes or historical (previous 12 months)

17 Savings Definitions: Other criteria within the Procurement Savings Protocol Costs of Implementation Costs of implementation are deducted from savings to give a net result Examples: Expenditure to reconfigure plant and equipment Inventory expense either to increase holdings or write off redundant stock Installation labour Consulting costs Exclusions: Foreign exchange movements Taxes and other statutory charges Non negotiable indices. Eg Platts, LME Intercompany purchases

18 Savings Examples 1. Reduced Operating Price Base spend; 100,000 $10 = $1,000,000 pa Unit price reduction of 5% negotiated New Price = $9.50/unit Savings; 100,000 $0.50 = $50, Reduced Usage Base spend; 100,000 $10 = $1,000,000 pa Usage reduced by 5% due to waste control New usage = 95,000 units Saving; 5,000 $10 = $50,000

19 Savings Examples 3. Increased price offset by reduced usage Base spend; 100,000 $10 = $1,000,000 pa New product price is 10% above old price New Price = $11 Substitution will reduce usage by 20% New Usage = 80,000 units Cost to change is $100,000 Savings = Reduced Total Cost = Original Spend less New Spend less Cost to Change = $1,000,000 ($11@ 80,000 units) -$100,000 = $1,000,000 -$880, ,000 = $20,000

20 Topics Introduction Procurement Savings What s the problem? The solution: Procurement Savings Protocol Savings Definitions Tracking and hardwiring Savings to the Bottom Line 3 years later Procurement Price Index

21 Tracking and Hardwiring the Savings to the Bottom Line Not easy, but possible! Requires Management support 3 months Utilise 3 Month Control Period to prove Savings Hardwire Savings by getting Finance to decrease area budget by savings amount promptly Budget

22 Topics Introduction Procurement Savings What s the problem? The solution: Procurement Savings Protocol Savings Definitions Tracking and hardwiring Savings to the Bottom Line 3 years later Procurement Price Index

23 3 Years later $$$ Savings Procurement Savings Banked under the Procurement Savings Protocol ($M) Year-on-Year Mitigating Balance Sheet TOTAL ($M) FY06 FY07 FY08 $ 15.9 $ 12.3 $ 12.5 $ 9.5 $ 5.6 $ 4.0 $ 2.6 $ 0.6 $ 0.2 $ 28.0 $ 18.5 $ 16.7

24 3 Years later The verdict on Procurement Savings Protocol Has provided greater transparency of Procurement Savings Has provided credibility to Procurement Savings (Particularly when the distinction and separate quantification between Year-on-Year savings and Mitigated savings is understood) More Procurement Savings have reached the bottom-line More Procurement Savings hardwired in budgets Greater collaboration with operations regarding savings initiatives Its simply Business Improvement What about Price Increases? Next Steps: Procurement Price Index

25 Topics Introduction Procurement Savings What s the problem? The solution: Procurement Savings Protocol Savings Definitions Tracking and hardwiring Savings to the Bottom Line 3 years later Procurement Price Index

26 Procurement Price Index (PPI) The next level Tool and standard framework used for capturing Procurement data PPI methodology used is similar to that used to build a Consumer Price Index (CPI) for a country PPI includes algorithms that use unit cost and spend data inputs to calculate price changes over time Changes tracked on a quarterly basis for a basket of goods and services Basket is customised and weighted to be representative of spend for the individual operation e.g. Unit price data e.g. Spend weighting data ILLUSTRATIVE e.g. PPI Movement 30 Labour Utilities Fuel Q1 Q2 Q3 Q4 Labour USD 1,070 M Utilities USD 1,660 M Fuel USD 1,265 M Q1 Q2 Q3 Q4

27 PPI example The PPI tool will provide a link between the budgeting process and actual purchase price movements for an Operation ILLUSTRATIVE FOR AUSTRALIAN ASSET Operation index developed from weighted category data 2. Relevant market indicator selected 3. Bands or targets selected for an operation, incorporated into budget setting and KPIs ILLUSTRATIVE

28 Thank you and Questions?