> Detecon Executive Briefing

Michael Hanke Jens Rese

Michael.Hanke@detecon.com Jens.Rese@detecon.com

How to create financial value

in times of financial crisis
Strategic Sourcing
Number one on almost all management agendas is how to assure
revenues, cut costs and mitigate enterprise risks. Strategic sourcing is
a core competitive advantage for the realization of savings and
management of supply risks. But the implementation of strategic
sourcing only works if a globally integrated and high performance
procurement function is in place.

While leaders in the manufacturing industry have already implemented

high performance global procurement organizations many
telecommunication carriers are lagging behind to a greater or lesser
extent. Now the pressure is on their executives to transform their
procurement organizations into globally performing business
functions. But they do not have to reinvent the wheel. Companies like
Volkswagen, Daimler and Siemens and even leading telecom-
munication carriers have already accomplished the mission. The
challenge for the followers is to learn quickly and to implement fast,
which may even be the bigger issue. But today’s markets are tough
and an alternative simply does not exist.

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 Strategic Sourcing
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Initial Situation
The worldwide economic downswing is confronting all companies with enormous challenges
in their markets. Even though the business of telecommunication carriers is relatively
resistant to crisis, investment projects have already been being cancelled, postponed or
scaled down. But now Q1 reports of blue chip telecommunication carriers show that the
financial crisis has arrived in the telecommunication market. Eroding revenues are hitting the
bottom line directly and making rigid cost cutting necessary.

What does Strategic Sourcing mean?

Strategic sourcing is a systematic and top management driven procurement strategy
which aims to achieve a maximum value contribution from the company’s enterprise
spend. Typically the focus is on
Q group-wide demand bundling and demand optimization,
Q establishment of group-wide strategic supplier relations while consolidating the
supply base and minimizing supply risks and
Q group-wide optimization of efficiency, quality and compliance in procurement.

But strategic sourcing typically only works if a high performance and global procurement
function is in place.

Challenge
Build a high performance global procurement function

In recent years big multi-national telecommunication groups have grown their businesses
through international acquisitions or start-ups, but in many cases a group-wide integration of
business functions has not taken place. Procurement is still managed within local companies
at national level. Demand bundling between these local companies only rarely takes place
and synergies of scale are not realized – in other words, money is lost every day. In order to
access the potential savings, most international telecommunication carriers still have to
implement a globally integrated and managed procurement function.

This is an even bigger issue because global network infrastructure vendors such as Cisco,
Ericsson and Nokia, or even the Chinese challengers like Huawei, have set-up their go-to-
market strategies globally: local marketing and sales teams are globally well-aligned and
pursue optimized market-by-market pricing. Without global procurement management telco
carriers are not able to defend their stakes and will not get the lowest possible prices.

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 Strategic Sourcing
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Alongside the various other issues, the heterogeneous shareholder structures of local
companies are also a critical hurdle on the path to a group-wide procurement function, and
the consolidation of varying local interests will make things even more complex.

Global Procurement Function leads to increases in savings, efficiency,

quality, and spend control

To take full advantage of expanding group structures, procurement functions have to achieve
group-wide synergies in terms of spend optimization and efficiency:
Q Minimized purchasing spend to achieve full leverage on group bottom line
Q Effective relationships with key suppliers for added value
Q Efficient utilization of procurement resources
Q Timely provision of material in accordance with required quality and terms of delivery
Q Targeted and effective allocation of financial resources to prevent possible misuse

An enterprise-wide best-in-class procurement function will deliver substantial performance

improvement and additional value contribution. Benchmarking against best-in-class
performance shows that the potential for improvements in procurement’s value contribution
as a result of the transformation of the Global Procurement Function varies between 8 and
15 percent (in relation to total order volume).

Expected improvements Possible financial impact

Increased savings and

Before After Reduced manual effort
KPI value contribution
transmission transmission
bn. €

Value
contribution (% 5-8% 10-15%
of order value)
Reduced in
work effort
% Top 50 Saving
20-50% 50-60% potential
Suppliers bn. €
10-30%
10-15%
Procurement
3-5% <1%
bypass

PO positions
12-15 20-25
per buyer p.d.

Warehouse
stock level 0-50 4-8 Total Address- Savings Work Reduction
Spend able effort of
(in weeks) Spend buyers

Figure 1: Expected improvements and possible financial impact

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 Strategic Sourcing
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Learn from industry leaders – think global, act local

Leaders in the manufacturing industry have already implemented high performance global
procurement functions. Daimler, Siemens and Volkswagen, for example, have accepted the
challenges of global thinking and acting locally and are continuously adapting their strategic
sourcing to suit their developing market environments.

Key elements to ensure the achievement of defined procurement objectives are:

Q Strategy: Group-wide consistent sourcing and supplier strategies for strategically
important supply categories lead to spend optimization through full leverage of group
bargaining power.
Q Governance and Policies: Fully integrated working model of global procurement functions
and local business units to optimize central and local value activities, facilitate optimized
procurement compliance, and control to prevent possible misuse.
Q Organization and Human Resources: Bundling of resources, along with the best people
to achieve maximum efficiency and quality, ensure optimization of required resources for
procurement tasks.
Q Processes and Applications: Fully integrated and best-in-class procurement processes
across all business units enable full volume bundling and utilization of frame contracts.

Detecon International GmbH z 06/2009 4 www.detecon.com

 Recommendation
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Recommendations
From our experience with industrial and telecommunication companies we have identified
the following key success factors for the group-wide transformation of procurement
organizations:
Q Lay the foundations
O Ensure full board level support: Commitment from top management is the key
element to ensure corporate implementation and governance.
O Convince shareholders: Generate transparency by developing a compelling
business case to convince the shareholder community.
O Create success stories: Identify quick savings, e.g. from global sourcing initiatives,
supplier consolidation, and leverage of global bargaining power.
O Plan the transformation aggressively: Leverage quick wins and set up a stringent,
milestone-based implementation plan.

Q Ensure fast success

O Introduce a commodity-specific approach: Install global sourcing responsibility for
global commodities and regional sourcing responsibility for local commodities.
O Regionally phased rollout: Start with local organizations which have a highly
developed infrastructure to achieve a stable basis.
O Identify lighthouse projects: Especially well known and prominent projects should
deliver early success stories.
O Highlight benefits: Transparency on achieved financial results and value contribution
highlights proof-of-concept.

Q Commitment to full implementation

O Assign clear responsibilities: Set up global rollout as part of line responsibility and
introduce escalation procedures.
O Define incentive relevant targets: Integrate key performance indicators for fast and
successful rollout into personal incentive target systems.
O Monitor closely: Continuously monitor performance and progress to ensure
compliance with stringent rollout planning.
O Report benefits continuously: Permanent reporting of financial benefits and value
contribution facilitates project’s contribution.

Detecon International GmbH z 06/2009 5 www.detecon.com

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Summary

Strategic sourcing bears huge potential for cost reduction and supply risk mitigation, as has
been proven by many global industry leaders. But it will only work if the transformation of
procurement into a fully enabled Global Procurement Function is accomplished successfully.
The challenge for the followers is to learn quickly and to implement fast, the latter being
maybe even the bigger issue. But today’s markets are tough and an alternative simply does
not exist.

Detecon International GmbH z 06/2009 6 www.detecon.com