Fortum Procurement. Mika Lahti Vice President, Procurement & Real Estate 7.9.2015

Fortum Procurement Mika Lahti Vice President, Procurement & Real Estate 7.9.2015

Topics Fortum today Procurement Development Program New Category Based Management Model What Is Good Procurement Management? Questions and answers 2 7.1.2015 Procurement & Real Estate / Mika Lahti

Introduction Mika Lahti Fortum 2011- Vice President, Procurement & Real Estate, Fortum 12/2013 - Head of Category Management & Strategic Purchasing Nokia Siemens Networks 2007-2010 Head of 3rd Party Management, Business Solutions Head of Product Line Management, Messaging & Browsing Nokia 1999-2007 Director, IT&IP Systems Sourcing, Nokia Networks Head of Supply Partner Integration, Nokia Business Infrastructure Concept Integrator, E-business with Suppliers, Nokia Mobile Phones Helsinki Institute of Physics (HIP), CERN, Switzerland 1997-1999 Project Leader, Process & Quality Control TAI Research Centre, Helsinki University of Technology 1994-1997 Project Manager & Scientific Researcher Education Master of Science, Industrial Engineering, Helsinki University of Technology Publications Jahnukainen, J., Lahti, M. & Luhtala, M. LOGIPRO - Towards World Class Make-to-Order Supply Chains. Helsinki University of Technology, Espoo 1995. Jahnukainen, J., Lahti, M. & Virtanen, T. LOGINET: Supplier collaboration in make-to-order supply chains (In Finnish) Helsinki 1997, Metalliteollisuuden kustannus Meklin, J., Lahti, M., Kovanen, V., Arenius, M. & Artto, K. FIT-PRO - A Product-oriented Approach to Industrial Project Management. Helsinki 1999, Project Management Association Finland. ~15 articles in international journals and research seminars 3

Fortum s Mission and Strategy Mission Fortum s purpose is to create energy that improves life for present and future generations. We provide sustainable solutions for society and deliver excellent value to our shareholders. Strategy Build on the strong Nordic core Create solid earnings growth in Russia Build a platform for future growth Strong competence in CO 2 -free hydro and nuclear, efficient CHP production and energy markets 4

Our current geographical presence Power generation Heat Electricity sales Nordic countries Power generation* Heat sales* Electricity customers 49.2 TWh 10.9 TWh 1.3 million Key figures 2014 Sales EUR 4.1 bn Comparable operating profit EUR 1.1 bn Balance sheet EUR 21 bn Personnel 8,200 Russia* OAO Fortum Power generation Heat sales 23.3 TWh 26.0 TWh * Including Fortum s associated company Fortum Värme; power generation 1.2 TWh and heat sales 7.6 TWh. * In addition, Fortum has a 29.5% share in TGC-1 Poland Power generation 0.7 TWh Heat sales 3.4 TWh Baltic countries Power generation Heat sales 0.7 TWh 1.2 TWh India Power generation 9 GWh 5

DEI RWE Drax SSE CEZ E.ON Vattenfall EDP Enel Edipower EnBW Gas Natural Fenosa GDF SUEZ Dong Energy Fortum total Iberdrola PVO EDF Verbund Fortum EU Statkraft Fortum's carbon exposure among the lowest in Europe g CO 2 /kwh electricity, 2013 1 200 1 000 800 600 400 2014 64% of Fortum's total power generation CO 2 -free 94% of Fortum s power generation in the EU CO 2 -free Close to 100% of the ongoing investment programme in the EU CO 2 -free Average 328 g/kwh 200 0 200 64 Note: : Fortum s specific emissions of the power generation in 2014 in the EU were 39 g/kwh and in total 177 g/kwh. Only European generation except Fortum total which includes Russia. Source: PWC & Enerpresse, December 2014 Climate Change and Electricity, Fortum 6

Low Efficiency High Efficiency Towards Solar Economy Solar Economy Solar based production with high overall system efficiency Hydro Sun Oil Traditional energy production Exhaustible fuels that burden the environment Coal Gas CHP Advanced energy production Energy efficient and/or low-emission production CCS Geothermal Nuclear tomorrow Nuclear today Bio Ocean Storage Demand Response Wind Active Consumer Smart applications Interconnectors High Emissions Emission free 7 Copyright Fortum Corporation All rights reserved by Fortum Corporation and shall be deemed the sole property of Fortum Corporation and nothing in this slide or otherwise shall be construed as granting or conferring any rights, in particular any intellectual property rights

Fortum Procurement Spend Fuels Other OPEX CAPEX Fortum annual purchasing spend varies between 2 and 3 M /year depending on investment level Purchasing spend is ~ 5 x annual employee benefits Other countries 9

Targets of the development program launched 2010 2012-13 Strategic purchasing pull from the rest of the organization to create value 2010 Basic building blocks in place New purchasing concepts introduced lead buying and global sourcing Effective organization strong cooperation across divisions and functions Capability building and talent development exciting function to be in Achievement of set goals 10

Category strategy Purchasing focus was on operational purchasing Core purchasing processes Purchasing strategy Prepare creation Analyse Facts & Generate Ideas Operational purchasing Define need Plan purchase Execute purchase Follow up purchase Receive material/ service Handle invoice Evaluate purchase Step 1 Step 2 Step 3 Prepare Analyse Facts & Generate Ideas Develop Strategy Supplier Relationship Management Development Management Phase-In Supplier portfolio Supplier management and development Supporting processes processes (business (business intelligence, process process development, ) ) 11

What is Strategic Procurement? Strategic purchasing goes below the surface Transactional focus Order process Quality Specifications Make-orbuy Purchase price Inventories Delivery time Life cycle costs Transport Innovation Sustainability Strategic purchasing is a systematic and collaborative process for determining supply requirements, identifying external and internal improvements, selecting the most competitive suppliers, and managing supplier performance to buy commodities and services at the lowest total cost of ownership and the highest value to our business Strategic need Internal demand 12

Cornerstones of the Development Program Value creation Systematic, methodological approach Collaborative, cross-functional approach Total cost of ownership (TCO) approach 5 steps Team Price Specs Usage/ demand Process/ admin Strategic purchasing 13

Systematic Approach Was Developed Step 1 Step 2 Step 3 Step 4 Step 5 Prepare Analyse Facts & Generate Ideas Develop Strategy Implement Strategy Monitor and Improve Identify crossfunctional team and stakeholders Develop project plan Review highlevel spend Identify initial opportunities Organize team kick-off Perform current state analysis Develop TCO model Define business requirements Carry out market research Generate improvement ideas Develop improvement ideas Identify savings potential Develop strategy options and scenarios Assess constraints Review strategy Depending on strategy: Carry out sourcing process Collaborate with existing suppliers Implement internal changes Insource / outsource Follow up implementation progress Measure and improve supplier performance Measure and improve savings capture 14

Chosen apprach: pilots and waves Strategic purchasing + capability building Pilot categories New strategic purchasing process introduced and tested Capability building Pilot categories Implementation and savings capture Wave 2 categories Wave 2 implementation and savings capture Wave 3 categories Wave 3 implementation and savings capture Wave 5 categories Operating model Review and refine organization & processes Implement changes Integrate into normal operations 2011 2012 15

2011 2012 we carried out 17 PUMA projects District heating networks Turbines and generators 1 Real estate & facility management Civil and dam works Boilers Biofuels Distribution network materials * Cars and vehicles Electrification and automation systems in Renewables Technical consulting Automation II Civil Works Oil Coal Distribution network and field services ( Radisson ) Service & maintenance works (prestudy in Finland) Solar J F M A M J J A S O N D J F M A M J J A S * Handed over to Radisson 16 2011 2012 O N D

2012: Transition from Program to Category Management PUMA program Category Management 2011 2012 2013 17

Purchasing Organisation 2010 CEO CFO Corporate center Other ESD ESD Power Heat Russia Distribution Corporate purchasing Distribution purchasing Power purchasing Heat purchasing Russia purchasing 18

2014 New Category Based Procurement Organisation CEO CFO Distribution Corporate Center Power Segment: NTP & HTP HESS Russia Distribution Corporate purchasing Procurement Russia purchasing Purchasing in our largest spend categories led by category managers, BA Purchasing teams resp. for BA specific needs 19

Category Based Procurement Management A category refers to an area of spend, for example, a type of equipment, service, fuel or material (e.g., boilers, travel, oil or spare parts). Often a category consists of several related sub-categories with similar characteristics and/or similar supply markets. Typical category management activities: Developing category strategy to optimize the Total Cost of Ownership (TCO) for the category Implementing the category strategy Leading / supporting main negotiations in the category Coordinating supplier relationship management activities Following actively the supply market; sharing market knowledge Measuring category performance and maintaining the TCO model Preparing input for the business plan regarding own category Category management optimizes the Total Cost of Ownership (TCO) Transactional focus Order process Quality Specifications Make-orbuy Strategic need Purchase price Inventories Delivery time Life cycle costs Transport Innovation Sustainability Internal demand 21

The initial category setup Category Home unit Categories with dedicated Category Managers Other purchasing areas managed as categories Turbines & Generators Automation Service & Maintenance District Heating Networks Boilers and Auxiliary Equipment Distribution Network Services Electrical Materials* Construction & Civil Works Consulting Consulting Fuels IT Real Estate and Facility Management Cars & Vehicles, Travel, Work Wear Power Heat ESD Corporate Purchasing Power, Heat Corporate Purchasing 22

Benefits of the new model Use our internal competences and purchase volumes better to improve profitability Make strategic purchasing to be part of our normal purchasing activities Make operational purchasing process more effective Clarify roles and responsibilities related to our main purchasing categories Enable further development in supplier relationship management Support regional sourcing activities in different countries (e.g., Poland, Russia, India) by sharing effectively best practices and common supplier information Support new business growth initiatives 23

Job Profile of a Category Manager General Full-time role dedicated to category management (there can be several categories per manager) Must have commitment and encouragement from the home organization to support all units involved in the category work Recruiting decisions to be jointly approved by the home organization and Corporate Purchasing Required profile Leadership skills (ability to lead a cross-functional team) Collaboration across organization Project management skills Problem solving and analytical skills Ability and willingness to challenge established way of working (internally & externally) Negotiation skills Relevant commercial and technical experience in own categories 24

and it good to remeber that people matter IMPORTANCE OF DRIVERS FOR OVERALL PURCHASING PERFORMANCE Percent Strategic alignment and posture 17 Capabilities and culture Structure and systems 37 21 25 Category management and execution Source: McKinsey & Company and European Business School research 25

Who truly leads Procurement in a company? 27

Business is done between people Supplier Selection & Negotiations Supplier Relationship Management Supplier Phase In Supplier Business Management & Development Supplier Phase Out Fact Based Management Contract Management Monitoring & Performance Management Supplier Portfolio Management Facts & Figures Ethics Personal Relationships Trust Handshakes Loyalty Feelings & Emotions Business is done between people Favours 28