A CFO s Perspective on How Supply Chain and Finance can Collaborate to Deliver Value Joselito Diga CFO, Unilab

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1 A CFO s Perspective on How Supply Chain and Finance can Collaborate to Deliver Value by Joselito Diga CFO, Unilab SUPPLYLINK 2012 CONFERENCE Philippines Institute of Supply Management April 2012

2 New Normal makes business even more challenging We need to operate with Fewer people Less infrastructure Lower costs structures Higher volatility & risks Success requires More agility Variable & flexible operating models Greater responsiveness and collaboration across your value chain The enterprise focus on efficiency and cash is clearly seen in the planned cross-functional strategies for Source: The Hackett Group, 2010 Procurement Key Issues. December 2009 In Volatile Times, Agility Rules Flexible capacity and worker skills are essential, but in a context of strategic clarity. Source: BusinessWeek, OUTSIDE SHOT. September % of CEOs plan to place greater focus on external partnerships and collaboration that extends beyond the traditional walls of the enterprise. Source: IBM Global CEO Study 2008; n = 1106

2010. Source: The Hackett Group, 2010 Procurement Key Issues. December 2009 In Volatile Times, Agility Rules Flexible capacity and worker skills are essential, but in a context of strategic clarity.

3 What CFO s are looking for Need to reduce operating expenses 75% Need to optimize working capital 50% Need to increase profits 39% Need to mitigate risk 31% Source: Aberdeen, December 2009

4 Reduce Operating Expense Need to reduce operating expenses 75% Need to optimize working capital 50% Need to increase profits 39% Need to mitigate risk 31%

5 Savings Potential ($ MM) Supply Managers & Finance need to work together to identify & implement cost savings.. A structured fact based assessment process... Step 1: Review Spend Data Step 2: Assess Business Impact Step 3: Determine Supply Industry Competitiveness Step 4: Estimate Savings Potential Step 5: Identify Implementation Challenges to uncover specific areas of opportunity to reduce costs via on-line bidding High Strategic Leverage Category Prioritisation Chart Category Category Business Impact Wave 3 Wave 2 Category Category Category Wave Category Category Low Reduce Risk Transactions Low High Supply Industry Competitiveness 0.3 Category Category Low Relative Simplicity of Implementing Sourcing Strategy C O N F I D E N T I A L

specific areas of opportunity to reduce costs via on-line bidding High Strategic Leverage 2.3 2.0 Category Prioritisation Chart Category Category Business Impact 1.8 1.5 1.3 1.

Vendor Invoice Processing Manual Process Supplier LEGEND 80,000 70,000 800K invoices processed in shared services per year 85% paper / 15% 60,000 EDI 50,000 40,000 <1% (2K) have a data entry errors

6 Vendor Invoice Processing Manual Process Supplier LEGEND 80,000 70, K invoices processed in shared services per year 85% paper / 15% 60,000 EDI 50,000 40,000 <1% (2K) have a data entry errors 30,000 20,000 15% (122K) have data or business rule exceptions 10, % (64K) have inbound supplier inquiries Shared Services AP Accrue 2K data entry errors Inquiries 64K inquiries Inquiries Buyer Mailroom Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Manual Auto Supplier ERP / Payables Matching Data Entry Sort & Allocate Forward Rubber stamp Segregate & Open Paper Invoices Schedule Payment Approval Routing & Exception Handling Back out, Void Print & Mail VAN EDI Invoices Billing & Receivables 122K business errors BU / Buyers Paper Invoice with Exception Letter Supplier Mailroom Segregate & Send to AR Resolve Exceptions

Mailroom Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Manual Auto Supplier ERP / Payables Matching Data Entry Sort & Allocate Forward Rubber stamp Segregate & Open Paper Invoices Schedule Payment

7 Process efficiency through E-Invoice automation E-Invoicing/ERS vs. Process vs. Process Cost Cost Per Invoice Per E-Invoicing/ERS vs. First vs. Pass First Match Pass Match Rate Invoice Rate 80% 80% 53% $ % 87% 53% $ % $ % 12% 12% $2.40 0% 0% 1st Q 2nd Q 3rd Q 4th Q E-Invoicing/ERS vs. vs. Invoices per per FTE FTE 80% 16,571 53% 12,273 9,523 12% 5,795 0% 1st Q 2nd Q 3rd Q 4th Q 1st Q 2nd Q 3rd Q 4th Q E-Invoicing/ERS vs. Early vs. Pay Early Discounts Pay Discounts 80% 0.025% 0.026% 53% 0.023% 12% 0.009% 0% 1st Q 2nd Q 3rd Q 4th Q Source: The Hackett Group, Benchmark Report 2009

40 0% 0% 1st Q 2nd Q 3rd Q 4th Q E-Invoicing/ERS vs.

8 Optimize Working Capital Need to reduce operating expenses 75% Need to optimize working capital 50% Need to increase profits 39% Need to mitigate risk 31%

9 Working Capital Working Capital is cash needed to run your operations Working Capital = Current Assets Current Liabilities DWC = DSO + DIO DPO (Goal -- Minimize Days Working Capital)

Corporate Working Capital Challenges Inventory Approaches to Working Capital Goals Minimize Inventory Cost Deliver Quality Standards Ensure Supply Stability Approaches EOQ/ MOQ MRP/ MRP II Planning

10 Corporate Working Capital Challenges Inventory Approaches to Working Capital Goals Minimize Inventory Cost Deliver Quality Standards Ensure Supply Stability Approaches EOQ/ MOQ MRP/ MRP II Planning Target stock cover/ ECR Clear quality specifications Continuous quality reviews Cross-functional alliances & partnerships Long-term vendor partnerships Supplier development Logistics optimization Limitations and Challenges Demand & supply volatility Patchy demand data Commodity cost pressures Limited vendor choices Customer niches & segments Technologies and Alliances Can offer New solutions Force majeure Increasing logistics costs Lack of viable alternate vendor Flexibility and adaptability are required

Supplier development Logistics optimization Limitations and Challenges Demand & supply volatility Patchy demand data Commodity cost pressures Limited vendor choices Customer

11 Meeting Working Capital Challenges - Inventory Supply Chain Managers and Finance Managers Need to Partner 1. Financial Supply Chain Planning Quantify life cycle cost of inventory Category expertise and dynamic hedging strategies month rolling financial forecast 2. Quality Optimization Value Analysis/ Value engineering Life cycle costing 3. Supply Continuity Assessment Cost of disruptions Alternate supplier development Supply network planning Supply arrangements and alliances

12-18 month rolling financial forecast 2. Quality Optimization Value Analysis/ Value engineering Life cycle costing 3.

12 Corporate Working Capital Challenges Payments Traditional Approaches to Working Capital Goals Maximize Return on Excess Cash Capture Full Vendor Discount Potential Optimize DPO Approaches Money Market Funds Contract Negotiations Extend DPO Commercial Paper Early payment discounts Push Terms Out T-Bills/ T-Bonds Transactional nego with Suppliers Pay Suppliers Late Limitations and Challenges Low rates = 0.5% - 6% Inflation: 4%-5% Avg. < 10% spend 50% + Discounts Missed Introduces Liquidity Risk Difficult to Implement Inefficient Paper Invoice Process Precludes Value Capture Thankfully, there are innovative ways to meet Working Capital challenges

Transactional nego with Suppliers Pay Suppliers Late Limitations and Challenges Low rates = 0.5% - 6% Inflation: 4%-5% Avg.

13 Meeting Working Capital Challenges Supply Chain Managers and Finance Managers Need to Partner 1. Dynamic Discounting Deploying Cash & Achieving Discounts Use your company s cash to pay early Monetize, optimize and capitalize on early pay discount opportunities Maximize discount potential Control cash and supplier use 2. 3rd Party Supply Chain Finance Extend DPO and reduce risk Supplier discounts at low rate for early payment from 3 rd party Buyer pays 3 rd party at normal invoice term Key to unlock working capital

on early pay discount opportunities Maximize discount potential Control cash and supplier use 2.

Discount Rate Paper Invoice Approvals e-invoice Approvals Invoice Approval Efficiency Discount Capture Innovation e-invoicing Supplier Recruitment Prorated Terms Dynamic

14 Discount Rate Paper Invoice Approvals e-invoice Approvals Invoice Approval Efficiency Discount Capture Innovation e-invoicing Supplier Recruitment Prorated Terms Dynamic Discounting 3% Reduce your invoice approval cycle and Avoid late payment fees Maintain strong vendor relations Capture prenegotiaed discount savings 2% Reduce Cycle Time 1% Days

Discounting 3% Reduce your invoice approval cycle and Avoid late payment fees Maintain

15 Increase Profits Need to reduce operating expenses 75% Need to optimize working capital 50% Need to increase profits 39% Need to mitigate risk 31%

Process Efficiency Drives Compliance Effectiveness Compliance to Indirect Preferred Supplier Contract Lost Savings per $ Billion of Indirect Spend due to Contract

16 Process Efficiency Drives Compliance Effectiveness Compliance to Indirect Preferred Supplier Contract Lost Savings per $ Billion of Indirect Spend due to Contract Non-Compliance Increasing compliance rates by 10% can drive over $9 million in value per $ billion in spend Source: Hackett Group Contract Management Survey, 2009

Contract Non-Compliance Increasing compliance rates by 10% can drive over $9

Driving Procurement Compliance Suppliers send back acknowledgements and/or Advanced Ship Notices Global Supplier Community XML POs routed to suppliers via the Network Suppliers create electronic

17 Driving Procurement Compliance Suppliers send back acknowledgements and/or Advanced Ship Notices Global Supplier Community XML POs routed to suppliers via the Network Suppliers create electronic invoices which are routed via the Network EDI Supplier Supplier System generates POs from approved reqs -OR- ACH payment made via the Network AS2 Supplier P2P tool OK-To-Pay sent to ERP and Suppliers are paid via ERP Accounts Payable system ERP End User Portal Supplier Approvals are routed to managers and/or purchasing agents based on business rules 2, 3, and/or 4-way invoice matching and reconciliation is done using POs, receipts, and contracts - payment is approved by Accounts Payable dept OK-To-Pay Goods are shipped / Services are performed by the supplier Fax Supplier Supplier User User User End-users create requisitions for goods & services from electronic catalogs Central and/or end user receiving is performed sign off on services performed CSV

are paid via ERP Accounts Payable system ERP End User Portal Supplier Approvals are routed to managers and/or purchasing agents based on business rules 2, 3, and/or 4-way invoice matching and

18 Need to Mitigate Risk Need to reduce operating expenses 75% Need to optimize working capital 50% Need to increase profits 39% Need to mitigate risk 31%

19 Improving Internal Controls Increase Compliance Mitigate Risk Deal with Regulations

20 Compliance Standard PO and non-po handling Contractual terms are captured in the system Amounts and timing Discount rates Conditions Programmed approval matrix Payments through partner banks C O N F I D E N T I A L

Discount rates Conditions Programmed approval matrix

21 Risk Mitigation Supplier search and accreditation/ quality reviews E-auctions increase transparency of bidding Amounts and timing Discount rates Conditions Programmed approval matrix System user authorization and continuous audit C O N F I D E N T I A L

22 Legal & Regulatory 3 rd party contracts Internal governance rules Internal control reporting/ Sarbanes- Oxley Tax reporting Environmental obligations (GHG emissions; energy; waste & disposal) C O N F I D E N T I A L

23 Summary Supply Chain and Finance Management partnership is essential Working capital and cash management are intersections of interest between the two Cooperation delivers tangible value through productivity gains and increased effectiveness

Daryl Fullerton. Oil & Gas Industry Principal

Daryl Fullerton. Oil & Gas Industry Principal Daryl Fullerton Oil & Gas Industry Principal How increased visibility into e-invoicing & other P2P KPI Metrics speeds up Invoice Payment while also improving Operator / Supplier Relations PIDX EU Conference