PROCUREMENT EXCELLENCE:

PROCUREMENT EXCELLENCE: How World-Class Procurement Optimizes Global Performance Chris Sawchuk Principal, Global Procurement Advisory Practice Leader The Hackett Group

Setting the stage

Many supply markets have returned to pre-recession levels, but stability has not. Easy savings are dissipating. 3.6% 3.90% 4.00%? 3.1% 2.5% 2.6% 2.4% Annual Spend Cost Savings (Hackett Procurement Benchmark) Source: International Monetary Fund Commodity Database, 2012 2012 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. Best Practices Conference 3

Higher purchase prices are now accompanied by equally high price volatility and high supply risk Average annual level of variance relative to baseline budget assumptions 29% 30% 22% 18% 16% 15% 15% 12% Demand votality Votality of market prices of our outputs Votality of prices of our inputs: raw materials, resources (incl. energy) Exchange rate votality Source: The Hackett Group 2012 Key Issues Study Current Year (2011) Next 2 years 2012 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. Best Practices Conference 4

Supply risk is broader than just price risk Risk/Agility dominates 2012 Supply Chain Agenda Improving supply chain flexibility/agility 92% Improving Cross-Organization Collaboration - Improve planning, forcasting and visibility with customers and suppliers Mitigating supply chain risks (e.g. supply disruption, severe quality problems, severe technical failures) Mitigating rising/votalite raw materials or component costs Risk / 80% Agility issues dominate 77% 77% Natural disaster risk (e.g., Thailand flooding) Brand risk (e.g., Apple / Foxconn) Geopolitical risk (e.g., Middle East conflict: $200 / bbl oil?) Regulatory risk (e.g., Frank Dodd Act) Industry-specific Source: 2012 Hackett Supply Chain Key Issues 2012 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. Best Practices Conference 5

Procurement is certainly helping improve profitability 70% Total negotiated savings as a percent of net income (includes cost reduction and cost avoidance) 60% 50% 40% Top Quartile 30% 20% 10% Median 3 rd Quartile 0% -10% Consumer Goods Energy Financials Health Care Industrials Information Technology Material Telecom / Utilities Source: The Hackett Group Procurement Benchmark Database; Capital IQ 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2011 Best Practices Conference Enterprise Presentation 6

and world-class procurement organizations outperform their peers across traditional procurement measures 100% 95% 90% 85% 80% Procurement Spend Influence 99% 95% 90% 85% 80% Annual Spend Savings (year-on-year savings as % of spend) 75% 70% 65% 63% 60% 55% 50% Direct Materials Indirect Materials Indirect Services Peer Group World Class Cost reduction (Direct) Cost avoidance (Direct) Cost reduction (Indirect) Cost avoidance (Indirect) Suppliers per $B Spend Procurement ROI (savings / cost of Proc.) Peer Group World Class Peer Group World Class 12.53 4.72 Direct Indirect Source: 2012 Procurement Benchmark Database "Procurement ROI" (Spend savings divided by the cost of procurement) 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2011 Best Practices Conference Enterprise Presentation 7

Savings Globalization, Growth but are we worried about the wrong problem? Procurement Original thought caption: Dang! Why do I always have to sit next to some weirdo?

The enterprise wants global growth Apple Corp: Q211 APAC revenues was 51% of Americas. Q212: 77% (now >Europe) 1. Striving for profitable growth amidst uncertainty A. Emerging markets revenue growth continues, a more targeted approach required in domestic markets. B. Volatility has become business as usual C. Resulting in greater caution in Europe and overall, a renewed focus on productivity 2. Achieving global operational excellence and enabling decision making agility A. Globalization is no longer a question of whether to do it, it s how well you globally execute it. B. Leaders recognize they will thrive or die on information quality, access, and speed. 2012 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. Best Practices Conference 9

Are we aligned? Procurement 2012 key issues (performance) (% of respondents citing the issue as major or critical ) REDUCE AND AVOID PURCHASED COSTS to take out costs and mitigate price inflation EXPAND PURCHASING'S SCOPE/INFLUENCE -support new catagories, new value drivers, etc. DEEPEN INFLUENCE ON COMPLEX INDIRECT SPEND categories, drive value beyond sourcing Most Procurement organizations still doing this 72% 53% 51% INNOVATION and Product/Service support (e.g. tap supplier innovation, early procurement phase-gate REDUCE SUPPLY RISK (e.g, supplier risk, regulatory compliance, CSR/ERM support etc. FREE UP CASH (e.g. working capital improvements, fixed cost variabilization, etc.) but less are doing this 44% 42% 40% GROWTH ENABLEMENT BEYOND INNOVATION via M&A support JVS, new market entry, demand generation REDUCE COST OF PROCUREMENT operating expense - via improved process efficiences even less here 25% 32% 0% 20% 40% 60% 80% Q: What is the strategic priority of the following performance-related key issues on the procurement agenda for 2012? Source: The Hackett Group 2012 Key Issues Study 2012 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. Best Practices Conference 10

Procurement s response

Enterprise Supply Base Procurement excellence starts with alignment Procurement Value Procurement Value: Redefine Supply Global Growth Profitable Agile Service Value What do we aspire to be? which becomes What to execute? Governance & Organization Information Service Placement Value Spend Requirements (and investments) Skills & Talent Performance: Recalibrate Service Execution What is the level of performance for both efficiency and effectiveness? Enabling Technology Service Delivery Process Design Process Sourcing Capability: Redevelop Service Capability What capabilities do we have today or need to acquire to change? 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2011 Best Practices Conference Enterprise Presentation 12

Enterprise Objectives Procurement must align and develop its major capabilities Enabling Capabilities Productivity Improvement Global Procurement SDM Category Management Core Capabilities SRM Revenue /Growth Enablement Global Growth Profitability Agility 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2011 Best Practices Conference Enterprise Presentation 13

The good news is that we re aligned in many areas STRATEGIC SOURCING to increase spend influence, aggregate spend, establish preferred contracts, and reduce purchased costs 71% CATEGORY MANAGEMENT to drive more value out of existing categories than sourcing alone (e.g., consumption management, specification changes, SRM linkages, etc.) SRM programs and processes to drive more value from existing key suppliers VALUE CONTRIBUTION VISIBILITY via savings tracking, compliance, metrics monitoring, etc. 53% 52% 58% UPGRADE OF TALENT/SKILLS through traditional talent management (e.g., hiring, training) CONTINUOUS IMPROVEMENT programs and techniques (e.g., Lean, Six Sigma) internally and/or at key suppliers SUPPLY MARKET INTELLIGENCE capability upgrade (processes, resources, tools) UPGRADING TECHNOLOGY tools (e.g., SAP SRM, Oracle isupplier, Ariba, niche applications, etc.) PROCUREMENT SHARED SERVICES / COEs / BPO / GLOBALIZATION for globalizing and transforming the Procurement Service Delivery Model (SDM) KNOWLEDGE MANAGEMENT to acquire/re-use knowledge outside of hiring FTEs. Includes BPO, on-demand knowledge service, 'virtual shared services' / COEs, social networking, KM systems. 43% 38% 34% 32% 26% 23% Source: The Hackett Group 2012 Key Issues Study Q: UPGRADING What is the INFORMATION strategic priority capabilities of the via emerging following information-based capability-related key issues 19% on the Procurement agenda for 2012? solutions for intelligence and analytics PROCESS SOURCING/PLACEMENT' Support enterprise outsourcing, offshoring, and shared services / COEs 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2011 Best Practices Conference Enterprise Presentation 14 17%

But to really make this transformation, procurement must change its fundamental role in the organization 15% 63% 7% 46% 54% Valued Business Partner Negotiations / Sourcing Expert Gatekeeper Old Role Steward to purchased cost savings Procurement process executor Stock picker and trader New Role Steward to a balanced supply scorecard Business process enabler Money manager (i.e., risk manager, not risk owner) 15% Peer Group World Class Administrator Supply gate keeper Siloed function owner Supply gate opener to supply market innovation Coordinator of crossfunctional supplier interactions Sourcing methodology zealot Solutions assembler (agnostic to the toolset) 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2011 Best Practices Conference Enterprise Presentation 15

If procurement s role is changing, so will the skills and knowledge Finding this talent is going to get even harder Mapping procurement business skills demand and supply trends Strategic thinking and analysis R E D Extreme difficulty Attracting/retaining Project/program management Change management and process improvement Business acumen Z O N E Difficulty attracting/retaining Vendor/outsourc ing management Data analysis and modeling Relationship management Problem solving Minor difficulty Attracting/retaining Low demand (Replace turnover) Significant demand (Growing need) Very strong demand (Critical Skill) CORE COMPETENCE NICHE COMPETENCE SKILLS DEFICIENCY RED ZONE Source: Skills and Talent Management Performance Study, The Hackett Group, 2012 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2011 Best Practices Conference Enterprise Presentation 16

Solidifying our foundation strategic sourcing You still need to do it, but you need to go deeper Spend savings as % of spend vs. investment (process cost) per RFx Spend savings as % of spend vs. investment (process cost) per Contract 3.30% 3.40% 3.94% 2.91% 3.58% 4.26% <$260 >$260 to <=$1900 >$1900 Process cost per RFx <=$550 >$550 to <=$1450 >$1450 Process cost per Contract Source: Hackett Procurement Benchmark Database, 2012 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2011 Best Practices Conference Enterprise Presentation 17

Solidifying our Foundation Tune the operating model to extract maximum value (e.g., tactical sourcing) Strategy & Opportunity Development Source & Negotiate Implementation Develop Buy and Sourcing Strategy Execute Buy and Sourcing Strategy Conduct Negotiations and Develop Agreements PO Execution Category Cards Creation - RFx Strategy RFx requirements, thresholds, engagement criteria AVL strategy The middle zone between sourcing/p2p 4.3% savings and >3.5X ROI* is better than 0! Not bogging down category managers Vendor identification and selection Bid execution and negotiations Award recommendation and notification SmartBuy Reverse auction SOW and contract execution Requisition and PO processing Buy Center Category Managers *Source: Hackett Research Tactical Sourcing: Non-Strategic Sourcing is Important, Too, November, 2011 Real value. Real results.

Productivity improvement Efficiency enables reallocation of resources Cost of Procurement Procurement cost (labor, outsourcing, technology, other) as a percent of spend Budgets are flat (only increasing 1% 2011-2012). 1996 1998 2000 2002 2004 2005 2006 2007 2008 2009 2010 2011 2012 Non World Class World Class The Hackett Group Procurement Benchmark-2012 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2011 Best Practices Conference Enterprise Presentation 19

Procurement Performance Score Productivity improvement Funds procurement effectiveness Hackett Benchmark Procurement Performance 2000-2011 Efficiency improvements are easier than effectiveness. and also fund effectiveness improvements Effectiveness Efficiency % of Supplier invoice inquiries performed via self-service supplier portal Extreme Supplier Self-Service 15% 5X 74% % of direct 2000 2001 2002 2003 2004 2005 2006 2007 2008 materials/services 2009 2010 2011 suppliers transacting with no manual intervention Hands-free / No Touch 3% 22X 66% Procurement must FINALLY get out of the transactions business! % of indirect materials/services suppliers transacting with no manual intervention (post-requisition) World-Class Guided Buying 1% 40X 40% 0% 20% 40% 60% 80% Peer Group 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2011 Best Practices Conference Enterprise Presentation 20

Globalization Procurement needs to get global like the rest of the business Current In 2-3 Years Management of product and/or service lines 4% 22% 26% 11% 28% 39% Supply Chain 6% 16% 22% 13% 24% 37% Direct Business Services 3% 10% 13% 3X 11% 23% 34% Indirect Maximum global level achievable (over 80% global) Predominantly global (51%-80% global) 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2011 Best Practices Conference Enterprise Presentation 21

Globalization: More than just a global supply base % of companies that have globalized the majority of their procurement processes People Process Technology 53% 52% 51% 47% 43% 38% 40% 40% 40% 41% 30% 28% Procurement COEs or transactional processing centers Management of procurement talent Procurement process design and build Procurement policy/strategy standards Technology platform supporting procurement Procurement master data Current state 2-3 years from now Source: The Hackett Group 2012 Key Issues Study 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2011 Best Practices Conference Enterprise Presentation 22

Globalization You need to evolve your global procurement operating model 3 Stage Global Model Stage 3 Global Operations Stage 2 Multinational Operations Procurement Attributes Global Procurement with some local resources Global processes Integrated procurement systems Global standardization and resource leverage Regional procurement organizations and systems Process coordination across regions Procurement standardization and resource leverage across units Procurement FTEs currently globalized in a low-cost geography 16% 25% Stage 1 International Presence Country specific procurement organizations Highly fragmented process and procurement systems Little or no procurement standardization or resource leverage Currently (Year-end 2011) Projected in 2 years' time (Year-end 2013) 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2011 Best Practices Conference Enterprise Presentation 23

Globalization More specifically Strategic Sourcing 3 Stage Global Model Stage 3 Global Operations Stage 2 Multinational Operations Strategic Sourcing Attributes Globally coordinated IPOs and COEs Global category management with end-to-end sourcing and SRM capabilities - virtually located Flex capacity Mass-customized global design for processes, tools, and standards to scale and meet local needs Regional IPOs supported by corporate-run COEs Category management and sourcing processes tailored to regional needs Tools and data standards available to support local requirements for most regions Stage 1 International Presence Regional & local sourcing groups operating ad hoc Opportunistic use of LCCS and offshoring Few truly globally managed suppliers Corporate-centric policies, tools, and processes with inconsistent international implementation 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2011 Best Practices Conference Enterprise Presentation 24

Category management Broader than strategic sourcing Goal STRATEGIC SOURCING Reduce purchased costs for a given commodity, most often by selecting lower-cost suppliers through demand aggregation, competitive bidding and negotiation. CATEGORY MANAGEMENT Maximize realized category value to the organization, including total cost of ownership (TCO), risk, operational performance, innovation, etc. Frequency Approach Results Periodic and project-based. Triggered over one or more years in the course of managing a commodity. Conducted via an n-step sourcing methodology culminating in transition to a new supplier contract. Reduced contract pricing translating to actual realized savings hitting the bottom line. Ongoing, day-to-day process. Triggers project-based activities and other operational improvements as needed. Develops a category strategy and applies appropriate value levers and supporting techniques/tools as needed to meet value objectives (e.g., strategic sourcing, SRM, value engineering, process reengineering, demand and compliance management). Category value is targeted, including validated savings and broader value measurement. Source: Category Management: Beyond the Strategic in Strategic Sourcing, The Hackett Group, July, 2011 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2011 Best Practices Conference Enterprise Presentation 25

Category management Go broader and deeper for more value Category value objectives link to stakeholder objectives Reduce TCO Increase revenue Support other goals Reduce purchased costs Improve cost quality Improve marketing effectiveness Improve flexibility/ responsiveness/delivery Reduce cost of risk Reduce working capital Alternate new product development Variabilize asset structure Reduce internal process costs Improve delivery performance Enter new markets Support sustainability goals Reduce fixed costs Reshape consumption Enable new business capabilities Strengthen the brand Category strategies pull multiple value levers Category sourcing Product/service Process Supply base Overall Strategic sourcing Value engineering Compliance management SRM Risk management Low-cost country sourcing Design for supply Demand management Supplier stratification and governance Performance management Outsourcing/ make vs. buy Purchase-to-pay support Supplier collaboration and development Value chain network reconfiguration Waste elimination Tier 2 supply base management Source: Category Management: Beyond the Strategic in Strategic Sourcing, The Hackett Group, July, 2011 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2011 Best Practices Conference Enterprise Presentation 26

Category management Sample value lever: demand management Total Indirect Spend Savings as a % of [Total or Influenced] Indirect Spend 5.913% 4.983% 4.932% 3.78% 3.26% 3.23% Design / Specification (Demand Mgmt.) Supplier Identification Negotiation & Contracting Stage when Procurement is first involved: Total Spend Influenced Spend Source: The Hackett Group Procurement Benchmark, 2011 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2011 Best Practices Conference Enterprise Presentation 27

Supplier relationship management The SRM inflection point As global sourcing finance head, I monitor the financial performance impact of global sourcing on top and bottom line. Of the overall benefit pie, we are now starting to see shift toward higher cost avoidance contributions compared to P&L savings. We are just kicking off a more centrally driven SRM program. I think that not only will a robust SRM program drive the next wave of savings. $13B information services firm, quoted from Hackett World Class Procurement LinkedIn Group 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2011 Best Practices Conference Enterprise Presentation 28

Supplier relationship management Multiple value streams to harness when you go deep What dimensions of SRM performance for key suppliers would you like to improve? (% of responses multiple responses allowed) Innovation 60% 85% Supply Assurance and Risk Mitigation 40% 67% Growth Agility as antidote to Risk Flexibility Quality Cost /price reduction 35% 60% 60% 62% 60% 50% Compliance focused Reliability 50% 46% New business generation / revenue uplift (non-innovation related) Regulatory compliance Top Performer 30% 30% 35% Peer 50% 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2011 Best Practices Conference Enterprise Presentation 29

Supplier Relationship Management The inflection point: SRM top performers will have higher value contribution from SRM than sourcing in 3 years Total monetary value delivered from SRM (and non-srm growth benefits) processes as a percentage of total spend 0.57% 0.95% 0.13% 1.14% 0.70% 1.16% SRM ROI > 20X! Growth-related benefits (Non- SRM) 0.06% 0.53% 1.20% 2.48% 1.93% 2.90% Growth-related benefits (SRM) Cost savings/avoidance from SRM Peer Group Top Performer Peer Group Top Performer Currently Three Years Sourcing Savings: 5.00% 4.13% 3.60% 3.37% 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2011 Best Practices Conference Enterprise Presentation 30

Revenue/growth enablement Takes many forms not just via SRM 30 different ways to support growth spelled out in Hackett Revenue/Growth Enablement Study closing next week What growth-related initiatives will you focus on in 2012? (% of respondents - multiple answers allowed) Product/service development (including lower-priced value offerings) SRM efforts to tap suppliers for revenue uplift ideas 58% 56% Building supplier capacity and capabilities to execute growth plans M&A activity (e.g., merger integration; identifying supplier targets, etc.) Improving sales and marketing programs (e.g., campaign effectiveness) 38% 44% 48% Other 8% 3 biggest gaps between enterprise revenue/growth importance and procurement support effectiveness are: Finding new target industries/channels Penetrating emerging markets Pursuing truly game-changing innovation / technology 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. Source: 2011 Best The Practices Hackett Conference Group Enterprise 2012 Key Presentation Issues Study 31

Revenue/growth enablement Top implemented enablers Top Process Enablers 1. Formal early supplier involvement (ESI) in product/service development 2. Sharing best practices internally/externally 3. Procurement focus on process enablement rather than process control 4. SRM programs/processes to tap suppliers for growth ideas/support (e.g., supplier, "innovation days, councils, surveys, etc.) Top Organizational Enablers 1. Training/hiring of Procurement staff who can help enable growth (e.g., sales/marketing backgrounds) 2. Formal procurement-stakeholder metric/goal alignment 3. Executive Council/Committee to align senior stakeholders 4. A top-down mandate for procurement involvement in growthrelated processes 5. Procurement getting formally measured and credited for revenue/ growth uplift 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2011 Best Practices Conference Enterprise Presentation 32

Revenue/growth enablement The dilemma: How to measure? Stakeholder satisfaction' or similar internal alignment question 13% 39% 35% 13% Revenue/Profit Uplift from internal efforts (procurement, crossfunctional team, trading unit, etc.) 48% 17% 9% 26% Revenue protection (e.g.,decreasing the Revenue at Risk due to Supply Risk 48% 22% 13% 17% Process-related causal metrics (e.g., % of products/projects/processes using compliant process and procurement involvement - e.g., phase-gate development) 48% 26% 13% 13% Revenue/Profit Uplift from suppliers (procurement-led or enabled) 61% 17% 9% 13% New product/service development related: time-to-launch, time-to-ramp/profit, on-time, on-budget, etc. 70% 13% 4% 13% Number of new supplier ideas or % of new products/services from early/better supplier involvement 70% 22% 9% 0% Not tracked; N/A Procurement individually measured on it Tracked internally within Procurement Procurement measured as part of cross-functional group 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2011 Best Practices Conference Enterprise Presentation 33

Summary

Summary Align and build capabilities to broader global growth agenda. Extreme efficiency is helping to fund the capability building for effectiveness. Category Management SRM Innovation Growth Building a truly global service delivery capability is a multi-pronged effort and procurement can t do it alone. A professional services orientation is critical especially for indirect spend. A formal Service Delivery Model (SDM) is critical to ensure this: Align to GBS (Global Business Services) model, not organization Accelerate selective outsourcing on supply side while going deeper on demand side (quality of spend influence) indirect. Increase your COEs: SMI, tactical sourcing, etc. 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. 2011 Best Practices Conference Enterprise Presentation 35

Questions?