Deloittes UK Transformation of Procurement in NZ

Procurement methodology in use in NZ including E-Procurement tools & reverse auctions

By David Middleton B.Sc, M.Sc, MBA (CIPS) Genesis Energy - Contracts and Procurement Team Leader

The Overview
Spend

Analysis
Sourcing

Diagnostics focus on identifying, sizing, categorising, baselining and analysing third-party spend in order to prioritise cost reduction opportunities and quick wins

Data is cleansed, coded and validated

Results compiled for analysis

Function/ Cost Centre

Spend Tree from Spend Cube

Collate initial long list of opportunities

Suppliers

Create Sourcing Wave Plan

Opportunities A list of savings opportunities Mapping opportunities to identify waves of sourcing from Quick Win (1st wave) to longer term (3rd wave)

Assess Value Levers

Increased Improve Competition Customer Satisfaction Restructure Supply Base Restructure Relationships Supply Base Mgt Customer Mgt

Testing Testing theories against benchmarks and Strategy Testing with stakeholders Assessment against a value framework to investigate opportunities in more detail

Generate Revenue Increase Profit

Value Framework
Optimise Total Supply Chain Cost Cost Mgt Reduce / Eliminate Transactions Reduce Total Life Cycle Cost

Consolidate Spend

Purchase Demand Mgt

Reduce Consumption

Improve Specification

This analysis will result in a spend cube that consolidates all available data sources to provide a complete picture of spend to the key stakeholders
Confirmation of Total Spend What we can learn about spend The direct spend The indirect spend Capital expenditure Produce a Spend Cube
Business Unit: Who is doing the buying? Price, Volume, Time Suppliers: From whom are goods/services bought?

Ensure all spend is captured Group spend into categories

Working with data

Filter Compile all: Accounts Payable data Purchase Orders Internal Databases Contract Information Remove: Coding Errors Inaccurate Data Duplicate Entries

Products: What is bought?

Clear workable data format Easy to profile and re-profile categories and sub-categories Tools: MS Access or Excel

A Spend Cube is a clean database of purchases. It will use a multi-levelled spend tree to categorise each transaction
Summary Table Extract of a Spend Cube: showing category, supplier, spend Sitting behind this extract will be a record of every transaction made over the representative time period Annual Spend with supplier count in brackets
Unclassified $1.6m (361)

Client Total Spend $575.2m (3,370) Directs $460.8m (519)

Wood $273.5m (171)
Fibre $252.3m (95) Product For Resale $21.3m (76)

The 80:20 rule should be applied, resulting in some unclassified spend

Out of Scope $11.9 m (307)
EPA/Rates/Utilities $5.1m (57) Employee Costs $3.6m (159) Capital $1.1m (21) Customs Agents $0.7m (17) Sales $0.6m (33) Labour $0.6m (14) Cash $0.2m (6)

Indirects $100.9 m (2,183)

Travel & Fleet $1.3 m (43)
Fleet $1.0m (11) Travel $0.4m (32)

Distribution $72.0m (187)

Logistics $66.3m (147) Couriers $0.6m (34) Warehousing $0.2m (6)

IT & Telecoms $2.8 m (94)

Telecoms $1.7m (32) IT $1.1m (62)

Raw Materials $87.6m (112)

Energy $27.7m (11)

Mobile Plant $9.5 m (55) MRO $61.7m (1,272)

Labour & Services $25.8m (515) Consumables $14.6m (439) Machine Consumables $7.3m (46) OEM Spares $5.4m (71) General Electrical $4.4m (76) Machinery $4.1m (113) Clothing $0.2m (12)

Facilities & Estates $9.2m (360)

Other $4.9m (104) Facilities Management $3.9m (213)

Example Spend or Category Tree (after item categorisation): the taxonomy/structure is agreed prior to data cleansing, but populated with data from the validated cube output

Resin $55.0m (3) Paper $9.3m (13) Packaging & Finishing Treatment $9.3m (41) Materials Other $5.2m (35) $4.9m (38) Wax $4.5m (3) Tongues $1.5m (3) MRO Adhesive $1.4m (5) Maintenance, Treatment Outsourcing Repair and $0.9m (6) Flour $0.3m (3)

Services $7.8m (162)

Insurance $3.5m (16) Consulting $1.6m (69) Marketing $1.5m (38) Print $0.8m (27) Legal $0.3m (12)

Overhaul. This is a complex, fragmented category

Office Supplies $0.4m (40)

Other $3.1m (49)

Human Resources $5.0m (108)

Temporary Labour $3.7 m (2) Education/Training $0.8m (75) Other $0.5m (31)

There will always be out of scope spend which will not be influenced as part of a spend review

Savings are then identified, validated and a pragmatic programme to realise the savings is designed

Disciplines and Tactics

Tactics

Spot
D i s c i p l i n e s
Spend Analysis

Project
Deciphering the spend by commodity and supplier. A formalised excel bases template for all project engineers.

Strategic
Developing data that guides us to focus on our biggest opportunities. A clear roadmap as to which categories will go out for RFP.

Ad Hoc/Maverick spend. Compliance issues Justification form Simple system to go out for quote on ad hoc materials.

Sourcing

A monthly report
Review the Standard T&Cs Reviewing the contract note style arrangement for smaller works. Project close outs completed.

Contract Management

Negotiating better T&Cs Update of current contract templates for goods and services. Buyer Surveys quarterly for key contractors/suppliers on KPI performance
Central recording.

Supplier Performance Management

Day to day issues logged. DIFOT reporting

Tactics
- The spot sourcing process supports the competitive sourcing of one-off goods and services needs of the organisation i.e a three quote RFQ. Project - The project sourcing process supports the competitive sourcing of a series of one-off goods and services needs that are all associated with a single large scale project. The larger scale and greater dollar value require a more comprehensive process than spot sourcing, but due to the one off nature, follows a different process from strategic sourcing. Strategic - The strategic sourcing process takes a long-range view of the goods and services needs of the entire organisation i.e full RFP including a weighted survey and background checks.
Spot

Reconfirming scope is one of the first elements of developing a Sourcing Strategy

To develop the strategy, we need to reconfirm and prioritise the scope by considering the following questions:

Is the scope manageable? Do we have the support & commitment of sponsors and stakeholders? Do we have the right resources?

Are there any insurmountable barriers?

Does the scope allow us to meet objectives? Will we meet all of our customers needs? Is the scope aligned with Corporate and Business Unit goals? Have we addressed all aspects of Total Cost?

SIG Case Study Category strategy engineered parts example

BRACKET

BEARING

HUB

Parts are segmented into sub-categories based on complexity, material type and size
The following process illustrates how all 6786 Engineered parts were categorised. The categories show the number of parts within each and the breakdown of 10.37m of net spend 2011 (i.e. this takes into account stock and frame contracts)
Total Engineered Parts 10.37m, 6788 parts
KEY

Supplier Bundles:
Complex 2.19m 149 parts Large Turning 0.19m 41 parts Large Milling 0.10m 25 parts 1.4057 Stainless Steel 0.26m 181 parts

Bundles

Categorisation
Plastic 0.36m 246 parts Brass 0.02m 48 parts Simple 3.33m 2000 parts Medium Complexity 1.37m 184 parts

Out of Scope

Out of Scope 2.55m 3914 parts

Net Spend 2011 w/o stock & frame contracts (m)

12 10.37m

Out of scope parts include low demand volume and low value class groups

7.82m

0 Total Chipping Chipping Parts out of Parts (Incl scope Undef ined & Out of Scope) Total Chipping Parts in scope Complex Simple Medium complexity 1.4057 Stainless Steel Plastic Large turning Large milling Brass

Supplier Bundles

Benchmarked savings potential and rationale

Each bundle has a TCO savings % based on previous sourcing benchmarks

Supplier Bundle Name Simple Medium complexity 1.4057 Stainless Steel Large turning Large milling Net TCO Savings Percentage Savings Basis Many data points from previous sourcing of this bundle. Higher than Simple bundle to reflect higher labour content. Based on material being imported and previous quotations. Based on quotations and purchased prices. Material cost is higher due to the part size. Quotations received but sample parts are being qualified. Not into full production yet. Based on quotations from 5 parts with common plastic types (POM & PEEK). Reduced low end of savings range to 10% due to other plastic types are not available in China (e.g. U-PE). Assumes existing supplier have the capability and is based on parts that are currently sourced from Asia (e.g. bracket no. 869318020).

24.4%
29.4% 16.9% 29.4% 24.4%

Plastic

24.4%

Complex

29.4%

TCO Assumptions: A weighted average TCO of 9.5% has been applied to the mid-range savings value in order to calculate the net benefits of all supplier bundles within the analysis. 9.5% is a blended rate for TCO cost for Chinese suppliers shipping for Thailand assembly and for Neuss assembly

The Process

E-Procurement Tools
Emptoris

(Full Suite E-procurement tool) Zycus (Full Suite E-procurement tool) Trade Interchange (E-Auctions and E RFx)
All

can theses tools provide the ability to reduce costs by increasing competition, ensure transparency and probity. As well as streamlining the process especially around reducing the time needed and the optimisation of bid results.

E-Reverse Auctions
E-Rfxs such as RFI, RFQ & RFP are used for Strategic sourcing, with reverse auctions being an occasional tool in the toolbox. The common misconceptions are that the buyer has to award to the lowest bidder however that is implied by it being an auction by nature. Reverse auctions are not limited to Commodities and do not have to be stand alone exercises i.e. negotiations can follow.
Mostly

Consider eSourcing if .
Your

cumbersome, manual sourcing process is causing you to leave identified sourcing opportunities off the table. Your sourcing cycle times are longer than desired. Your collaboration with internal and external stakeholders is time consuming and cumbersome. You compromise event outcomes by engaging suboptimal numbers of suppliers. You shy away from electronically sourcing complex spend categories. You fail to create a competitive atmosphere for suppliers. You are unable to leverage work, knowledge and successful outcomes from one sourcing event to the next. You are limited to just few sourcing events but want to do more.

An example of a live auction

Conclusion & Questions

Any Questions? Contact Details: Direct Line 073847225 Mobile 021 671107 Email David.Middleton@genesisenergy.co.nz