Manage Your Supply Chain to a Competitive Advantage

Manage Your Supply Chain to a Competitive Advantage How and Why to Negotiate on Total Cost of Ownership MyPurchasingCenter.com Web Cast April 10 th 2013 Presented by: Todd Snelgrove Global Manager, Value SKF Group Todd.c.snelgrove@skf.com

To equip the world with SKF knowledge. Making our customers the most profitable SKF Group Slide 2 10 April 2013

Price Costs Ceteris Paribus 2013-04-10 SKF Slide 3 [Code] SKF [Organisation] SKF Group Slide 3 10 April 2013

The Priceberg PRICE Total cost of ownership Product Performance Warehousing Administration Obsolesence Insurance Inventory HIDDEN COST OF OWNERSHIP Plant Downtime Maintenance Product Quality Finance Charges Scrap Waste 2013-04-10 SKF Slide 4 [Code] SKF [Organisation] SKF Group Slide 4 10 April 2013

Price vs. Total Cost It s about measuring all the factors $87.25 TCO Increased Lubrication $30.25 VALUE Increased Energy Increased Inventory Longer Installation Less Uptime Lower Reliability TCO Less Lubrication Less Energy Less Inventory Faster Installation Longer Uptime Higher Reliability $57.00 Price $10.00 Price $15.00 SKF Group Slide 5 10 April 2013 $5.00 Investment Creates $30.25 in Increased Customer Value

Total Cost of Ownership updated 2012 Design Robustness Ease of manufacture Tolerances Design costs Sales costs Customer TCO Acquisition Inventory amounts Payment terms Contract management Supplier consolidation Finance charges Obsolescence Receiving Unit Price Operation Energy & lubrication Product life Auxiliary repair costs Production amounts Production quality Machine reliability Cost to install Warranty costs Disposal Dismantle Shipping Disposal costs Recycling costs Treatment costs Government fees Sustainability issues SKF Group Slide 6 10 April 2013

Accenture s Asset Lifecycle Total Cost of Ownership 10 April 2013 SKF Group Slide 7

Understanding Total Cost Of Ownership 300% 250% 200% 150% Cost to Dispose? Cost of Use Acquisition Cost Purchase Price 100% 50% 0% Discrete Flat rolled Semi- steel conductors Plastic connectors Office supplies Fabrication equipment Photocopiers Acquisition and life cycle costs will vary by item MaguireIzatt LLP 2012

Why and Best Practices for Companies to Procure on TCO SKF Group Slide 9 10 April 2013

Total Cost of Ownership Responses Segmented by TCO Methodology The below table shows responses to key questions based on whether or not the respondent has a methodology to define TCO when buying equipment, supplies, or repair parts. Companies with a TCO methodology are twice as likely to enter into pay-forperformance agreements with suppliers, nearly twice as likely to realize 90% or more of savings promised by a supplier, and more than seven times as likely to receive supplier offers with a TCO component. They also have a higher average net operating margin 35% higher (11.92% vs. 8.82%). Companies using a TCO methodology Companies not using a TCO methodology Usually or sometimes enter into pay-for-performance agreements with suppliers 52% 26% Have never had a supplier offer a TCO arrangement before 13% 40% 50% or more of supplier offers include a TCO component 22% 3% Usually or always ask in RFP for an analysis to show how a supplier will reduce TCO 35% 8% Realize 90-100% of savings promised by supplier 59% 33% Operating margin (calculated for public companies only) 11.92% 8.82% Source: MAPI * This column includes responses from the 28% of members who have no intentions of developing a methodology to define a TCO Methodology when purchasing equipment, supplies, or parts.

Total Cost of Ownership Product Lifecycle Metrics - Responses Segmented by TCO Methodology Companies with a TCO methodology were more likely to gather data on almost every single metric we asked about. Some of the differences were dramatic: this group is four times as likely to collect data on warranty costs, and three times as likely to collect data on operating costs. Companies using a TCO methodology that measure this Companies not using a TCO methodology that measure this * Payment terms 100% 83% Finance charges 32% 22% Unit price 88% 100% Operating costs (e.g. energy) 100% 33% Product life 80% 44% Repair costs 76% 28% Production amounts 60% 33% Production quality 80% 78% Machine reliability 64% 44% Cost to install 80% 44% Warranty costs 84% 22% Disposal costs 36% 0% Recycling costs 28% 0% Source: MAPI * This column includes responses from the 28% of members who have no intentions of developing a methodology to define a TCO methodology when purchasing equipment, supplies, or parts.

Focusing on activities vs. results. SKF Group Slide 12 10 April 2013

Top 10 starting drivers of good TCO procurement companies Do Align company culture management and cross functional. Understand your TCO drivers. Define corporate TCO benchmark numbers. Communicate these drivers and values to suppliers. Reward / Penalize suppliers on Cost reductions. Reward all company on Cost Reductions / Profit (EVA). Review and communicate in pipeline projects, and results. Do Not Take cash out of departmental budgets. Accept similar product / lower price substitutions. Accept non quantified obvious or trust us results. SKF Group Slide 13 10 April 2013

SKF Group Slide 14 10 April 2013 Methodologies

Consumer TCO Calculations.. Define if a need exists. Converting Implicit Value to Explicit Value. Providing customers with justification to buy premium. 10 April 2013 SKF Group Slide 15

Interesting Value Measured using DSP 2012 39,770 Number of Accepted / Verified cases since inception 25 Industry End User and OEM Segments 120 of Sub Segments to learn best practices from 3.57 Billion USD of accepted or verified cost savings 172 Number of Solutions in DSP 24 Bearing 48 Services 7 Lube 7 Mechatronic 4 Seals 9 Application Improvements 8 Process Improvements 6 languages 52 currencies can be converted 14 energy and sustainability calculations and can convert KW saved to C02 reduction 10 April 2013 SKF Group Slide 16

Final Thoughts SKF Group Slide 17 10 April 2013

SKF Group Slide 18 10 April 2013

10 signs to look for in a value supplier A process to find cost-saving opportunities A team able to implement programs to achieve promised savings A tool that measures expected / actual cost-saving initiatives A corporate culture that embraces value initiatives Willingness to enter into agreements paid on value created Ongoing pipeline of innovative, problem-solving solutions Well recognized for best practices by industry A log of applied solutions with resulting and financial impact A proven record of buying on TCO as opposed to price Value propositions with hard dollar impact, not soft benefits October 30, 2007 SKF Group Slide 19 SKF Group Slide 19 10 April 2013

SKF Group Demand Chain Developing a tool and methodology to enable all our suppliers to measure, replicate, and reduce our total cost of ownership. SKF Group Slide 20 10 April 2013

Companies and Governments who buy and sell on Total Cost of Ownership make and save more money Associations Academia Procurement Government Consultants SKF Group Slide 21 10 April 2013

SKF Group Slide 22 10 April 2013 It is not a Zero Sum Game Negotiate and implement programs focused on the Lowest Total Cost of Ownership

Supply Chain Strategy Issues Price Value Added Performance Objective Attainment Risk Mitigation Strategic Business Solutions

Many experts estimate that 20% to 30% cost reductions exist in the supply chain. This opportunity is not available through price alone. And the opportunity varies by spend. MRO-P Services Capital Assets Direct Materials Strategic Business Solutions

MRO Ownership costs Operational Services Number of transactions MRO-P Services Capital Assets Direct Materials Strategic Business Solutions

Strategic Business Solutions

Solution Calculators.45 1.50 1,000-1 2,000 10.00 8,000 1,000 25 100 250 16.06 Questionnaires for simply/easily measuring Value Strategic Business Solutions

That document the savings

in an auditable format with detailed explanations for how the savings were measured.

Each Spend Area impacts costs, the strategic objectives, risk and performance issues differently. Development Assembly Quality & Warranty Costs MRO-P Services Capital Assets Direct Materials Strategic Business Solutions

What are the operational costs in manufacturing products? Labor 15% Burden 30% Material 50% Design 5% 70% of the costs are set by design Strategic Business Solutions

Project Re-engineering Situation: Needed to add additional lines. FERC refused to allow the existing lines to be shut down. Job had to be done hot. Hired engineering company to determine how. They specified specific methods. Solution: Contractor did not have the crews to do the job, but walked the line and determined how to do it with change in methods. Results: Improved Safety. Cut the cost to perform the work. ITC s requirements stayed the same. Strategic Business Solutions

Project Re-engineering (Shared credit: only half of the savings are displayed)

Each Spend Area needs to be looked at in how it impacts costs, the strategic objectives, risk and performance issues throughout the organization. MRO-P Services Capital Assets Direct Materials Strategic Business Solutions

If you can t measure it, you can t control it Deming This is an issues faced by many companies today. They want to drive innovation and reduce costs through their supply chains, but have no way to measure and compare suppliers on a Total Cost basis. Strategic Business Solutions

Profit & Loss Statement Less Revenues Expenses Money Coming In Money Going Out Balance Sheet Assets = Liabilities & Equity Dollars Invested Strategic Business Solutions Source of Investment

Inventory Carrying Costs Equipment, Storage, Handling Shrinkage/Spoilage/Obsolescence Insurance Property Tax Cost of money Strategic Business Solutions

TCO Categories Revenues Primary TCO Components Impacted Downtime Value Added Opportunity Vendor Managed Inventory Assets Expenditures Inventory Storage Fac Storage Eq Freight Service Fee Strategic Business Solutions Processes Receiving Ordering Invoicing

Value Added Opportunity Storeroom Mgmt TCO Categories Revenues Primary TCO Components Impacted Reduced Downtime Worksheet Revenue Impact: Reduced Downtime * ( - ) = Annual Unit Unit Value Increased Costs Profit Impact (Selling Price) (COGS) Improvement Material Cost Savings: Strategic Business Solutions ( - ) * = Current Price New Price Annual Usage Annual Material (or 0 if no change) (or quantities reduced) Cost Savings

Worksheet Revenue Impact: Material Cost Savings: Material Cost Savings: Material Cost Savings: * ( - ) = Annual Unit Unit Value Increased Costs Profit Impact (Selling Price) (COGS) Improvement ( - ) * = Current Price New Price Annual Usage Annual Material (or 0 if no change) (or quantities reduced) Cost Savings ( - ) * = Current Price New Price Annual Usage Annual Material (or 0 if no change) (or quantities reduced) Cost Savings ( - ) * = Current Price New Price Annual Usage Annual Material (or 0 if no change) (or quantities reduced) Cost Savings Process Savings: Process Savings: ( * ) ( * ) = Past Past New New Annual Process Cost Frequency Cost Frequency Savings ( * ) ( * ) = Past Past New New Annual Process Cost Frequency Cost Frequency Savings Inventory Savings: ( * ) = Amount ($) Reduced Carrying Cost (%) Annual Inventory Savings Other Savings: $ Total Savings: Strategic Business Solutions

Revenue Impact * ( - ) = Annual Unit Unit Value Increased Costs Profit Impact (Selling Price) (COGS) Improvement Total Savings: Strategic Business Solutions

Definitions - Revenues (A) Annual Unit Improvement How many additional products (services) can the customer make and sell? (B) Unit Value What is the price the customer sells a single unit for (or the transfer value)? (C) Increased Cost What are the costs for raw materials, or direct components, for producing a single unit? Strategic Business Solutions

Revenue Impact * ( - ) = Annual Unit Unit Value Increased Costs Profit Impact (Selling Price) (COGS) Improvement Total Savings: Strategic Business Solutions

Definitions - Assets (A) Amount ($) Reduced How much inventory dollars were reduced? (B) Possession Cost The cost of owning an asset, for example, what is the carrying cost for inventory? Strategic Business Solutions

Process Savings: Inventory Savings: Past Cost Past Frequenc ( * ) ( * ) = Past Past New New Annual Process Cost Inventory Frequency Savings: Cost Frequency Savings ( * Amount ($) Reduced ( * ) = Amount ($) Reduced Carrying Cost (%) Annual Inventory Savings Other Savings: Other Savings: $ $ Total Savings: Total Sav Strategic Business Solutions

Definitions - Processes (A) Past Process Costs What did it cost to perform the task prior to the change? (B) Frequency of Past Use How often was the task performed? (C) Current Process Costs What does / will it cost to perform the task after the change? (D) Frequency of Current Use How often will the new task be performed? Strategic Business Solutions

( - ) * = Current Price New Price Annual Usage Annual Material (or 0 if no change) (or quantities reduced) Cost Savings Process Savings ( * ) ( * ) = Past Past New New Annual Process Cost Frequency Cost Frequency Savings ( * ) ( * ) = Past Past New New Annual Process Cost Frequency Cost Frequency Savings ( * ) ( * ) = Past Past New New Annual Process Cost Frequency Cost Frequency Savings Strategic Business Solutions Inventory Savings

Definitions - Expenditures (A) Annual Quantities Impacted How many items were reduced, or impacted by the change you made? (B) Price Differences What is the change is the price paid for the items, or what if there is no change, what does the item sell for? Strategic Business Solutions

Worksheet Material Cost Savings ( - ) * = Current Price New Price Annual Usage Annual Material (or 0 if no change) (or quantities reduced) Cost Savings Process Savings ( * ) ( * ) = Past Past New New Annual Process Cost Frequency Cost Frequency Savings ( * ) ( * ) = Past Past New New Annual Process Cost Frequency Cost Frequency Savings ( * ) ( * ) = Strategic Business Solutions Past Past New New Annual Process

Business Reviews Objective: Strengthen and build the relationship Who: Primary managers impacted What: What has been accomplished Problems: both companies Additional opportunities Projects coming up When: Key suppliers: 2 to 4 times a year Strategic Business Solutions

Sample: Storeroom Management Case Event Details Need/Solution/Benefits Dollar Impact Strategic Business Solutions

Business Reviews Contract Renewals Price Negotiations Trade for Additional Business Strategic Business Solutions

Strategic Business Solutions

Strategic Business Solutions ROI and Payback

Questions & Comments SKF, Inc. Todd Snelgrove Todd.C.Snelgrove@skf.com 248-802-1704 Strategic Business Solutions Tim Underhill Tim.underhill@sbs4me.com 918-494-8085 Feel free to contact either Todd or Tim after the webinar if you have a specific question we did not answer or if you would like to work through a specific savings opportunity.