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© British Telecommunications plc
CIPS BT Procurement Masterclass 16th May 2011
Masterclass - Key Areas
BT – Key Procurement Facts
Importance of Procurement to Company Performance
Best Practice Processes
Strategic Sourcing & Consolidation of Category Spend
Cost Transformation
Risk Management
Approach to Market – Reaching the Optimal Deal
BT Key Facts BT spend with external suppliers > £11 billion / year
333 BT Licensed Buyers
Delivery to BT Group a net reduction in costs of > £1bn FY10/11
10 BT Licensed Buyers in Ireland
Licensed Buyers in BT Procurement :
Operate with the Authority for all buying activity in BT
Aim to maximise global leverage of BT's spend
Manage and aim to simplify the supplier interface
Up-front involvement in the bid process in order to understand and manage supply
risks and to manage supplier selection
Continued engagement throughout the contract life cycle to drive profit improvement
and benefit delivery
Why is Effective Procurement Important?
Manage /
Mitigate Risk
Deliver
Savings
Governance
& Control
Reach
Optimum
Deal
Manage
Suppliers
Global
Leverage Get Things
Right First
Time
To make a significant, valued and measurable contribution towards an
organisation’s performance
Integral to business strategy – support corporate goals - understand what
the business is trying to deliver
Security
of supply Process
Efficiency
Impact of Procurement Activities on Company
Profitability……..
The value of purchased goods and services is usually a high % of an organisation’s revenue
Cutting costs with third parties, services and capital items, can make a dramatic improvement to the organisation’s bottom line.
= The Leverage Effect
Every £ saved in purchased materials increases pre-tax profit by a £
As lower prices are required to compete, reduction in purchasing costs = lower prices without losing profit margin
Example for:
• 6.5% return on sales
• 40% purchasing spend share in total product price
5
10
15
20
25
30
35
40
10 20 30 40 50
Turnover Increase %
Share of purchasing spend in %
Purchasing cost reduction 4.5%
Purchasing cost reduction 2%
• 2% purchasing cost reduction has same impact on profit as 12% turnover increase
• 4.5% purchasing cost reduction has same impact on profit as 28% turnover increase
Purchasing cost reduction has much higher impact
on profit than turnover increase
World Class Procurement and Best Practices
What is World Class Procurement?.....
Attributes Integral to business strategy – supports the drive for corporate goals
Buy-in at Board level
Investment in enabling technology e.g. eTools – allow buyers to focus on the strategic agenda
Simplifying Processes
Engagement with internal stakeholders – selling the strategy
Upskilling of procurement people
Procurement passion and enthusiasm
Outputs Improvement of Business profitability
Developing supplier relationships – innovation & insight
Delivery of change / process improvement / collaboration
Delivering advantage to the business, relative to competitors
Sustainability & Corporate and Social Responsibility
Deliver more for less
It’s a journey of continuous improvement !
Supplier price Logistics costs Lifecycle costs Administrative
costs
Costs not directly
related to the
procurement of
goods/services
Total costs
It is critical to assess total cost of ownership as lifecycle and
internal costs may represent larger savings opportunities than the
supplier price
• Transport
• Insurance
• Duties
• Stock
• Capital
charges
• Service and
maintenance
• Spare parts
• Testing
• Warranty
• Waste
• Write offs
• Time to
request
product/serv
ice via
supplier
• Other direct
administrativ
e costs
• System
costs
• Indirect
salaries
• Other OH
costs
• …
Total Cost of Ownership…….
Best Practice summary…….
Understand what the organisation is buying
Categorise the spend
Understand Total Cost not just Price
Identify key suppliers / segment
Understand the Risk
Ensure Purchasing strategies are aligned with business objectives
Understand how much of your spend is fully managed
Support Procurement people development – add value
Strategic Sourcing and Consolidation of Category Spend
Strategic Sourcing & Consolidation of Category
spend
Some fundamental questions….
How much do we spend on goods and services ?
Where & with whom ?
What are we buying ? Categorise
Through what process ?
Who in the organisation buys the goods / services ?
Why are we buying them ?
Strategic Sourcing
Leverage total purchasing £ across each product category to those strategic suppliers that offer best overall value
Procurement is integral to Change Management
BT Procurement Strategic Sourcing
5 Stage Programme
Stage 1: Understand the spend
- Agree on a common set of spend descriptors
Stage 2 : Conduct Global Spend Analysis
- Consolidation of data from multiple finance platforms
Stage 3 : Develop Sourcing Waves
- Supply market dynamics and criticality to business
Stage 4 : Opportunity Assessment
- Identify addressable spend
Stage 5 : Drive the strategic sourcing
Cost Transformation
Cost Transformation - Objectives
Change behaviours within the organisation - focus on cost, waste and
profitability
Work with internal stakeholders to analyse and understand operational
cost drivers & identify opportunities for purchase optimisation
Improving Processes
Increasing Efficiency
Establishing Best Practice
Measurement:
YOY profitability impacting benefits: unit price reductions, volume
discounts, rebates, more efficient processes
Cost Avoidance: New deals, Bid work, elimination of liabilities &
exposures
Cash Flow: Capex deferrals / leasing etc.
Some Cost Transformation examples BT NI
11 Programmes completed 10/11 including:
‘Crush Costs’ – elimination of waste
Revenue Generation
Capex Programme
Marketing Events
Energy Programme
Risk Management & Supplier Watch
Every purchase from a third party = potential risk
Uncertain economic times – must be vigilant against potential supplier failures
& subsequent impact on your organisation
Protect Supply
Protect Brand
Protect Customers
How ?
Review supply chain to assess areas of high impact
Identify any suppliers at risk of financial failure
Systematic & detailed review of critical supply chain
Factors to consider:
– Single source of supply
– Difficulty in changing supplier
– Criticality to end customer / revenue
– Supplier dependency on revenue with single source
Risk Management & Supplier Watch……
Regularly review financial stability of key suppliers
Review quarterly results
Maintain watch on press coverage
Maintain effective supplier contacts
Assessment of ‘key indicators’
Risk should be an adjudication factor when selecting a supplier
Process should be BAU – Proactive monitoring
Introduction of Generic Standards
Supplier Risk Assessment tools
Financial Review – D&B, Moody’s, Accounts
Supplier key areas of risk model
Supplier Capability Questionnaires / Assessments
Supplier Key Areas of Risk • The Supplier Key Areas of Risk (SKAR)
Finance Product
Does the supplier have sufficient financial resources to
meet its obligations?
Does the product meet technical specification; comply
with all legal requirements without infringement of
intellectual property?
Capacity Capability
Does the Supplier have sufficient capacity to make
required number of goods or deliver the required
amount of service?
Does the supplier have Intellectual capacity to meets
its obligations under the contract i.e. to deliver
product or services, design products or services etc?
Knowledge, Skill and Competence
Quality Performance
Does the supplier have an adequate Quality
Management System to consistently deliver the required
quality?
Can the supplier meet the performance requirements
in the contract? Is there a track record of good
performance?
Company Direction and Ownership
Does the supplier have any policies or company changes to their organisation that impact
on their ability to work with BT.
Are you aware of the parent and child relationships?
Corporate Social Responsibility Supply Chain
Result of risk assessment of suppliers GS13
Environmental Impact standard
Result of risk assessment of suppliers GS18 Sourcing
with Human dignity Standard
Result of risk assessment of suppliers GS19 Product
Stewardship
Climate change questionnaire
Does the supplier have control over its supply chain
to manage risk and
ensure continuity of supply and to meet BT’s
obligations
The risk rating shall be determined by the buyer on a case by case basis having considered the
supplier segmentation and strategic importance of the supplier/product to BT
Supplier Segmentation
Reaching the Optimal Deal
Reaching the Optimal Deal
1. Identification of Need
•Liaise with stakeholder
•Produce specification
•Technical analysis e.g. generation of
alternative solutions
•Demand Challenge i.e. deferred,
diminish or delete
•Complexity reduction e.g.
standardisation etc.
•Determine the budget
•Project set-up
2. Procurement Plan
·Pull together cross functional team as
Appropriate. Ensure Stakeholder sign-
on
·Determine make or buy decision
3. Marketplace Solicitation /
Development
·Produce appropriate bid documentation
e.g. ITT or RFQ RFI
· Identify suppliers
· Increase suppliers’ focus on buyer
· Create markets/reverse marketing if
appropriate
· Contact suppliers
· Invite offers e.g. e tendering
· Encouragement of suppliers to enter
new markets
4. Evaluate/Select Suppliers
·Check company profile
·Evaluate financial standing
·Determine capacity
·Assess quality procedures
·Evaluate track record and
references
·Evaluate risk
·Evaluate their policies
5. Receive/Evaluate Offers
· Evaluation teams
· Use of weighted and ranked criteria
· Cost analysis/modelling
· Risk analysis
· Clarification and PTN (as
appropriate)
· BFO, e auctions
· Whole life costing
6. Create the
Contract/Relationship
· Negotiate terms and conditions of
contract
· Agree service levels, descriptions
and schedules
· Award contract, including exit
clauses
· Debrief unsuccessful suppliers
· Retain records
In Summary……..
Importance of Procurement and potential contribution to business
profitability
Procurement strategy must be an integrated part of business strategy
Best Practices – strive for ‘World Class’
Strategic Sourcing & Consolidation of Category Spend
Cost Transformation
Risk Management - Continuity & Contingency
Approach to Market & Optimising the Deal
Skilled and motivated Procurement resources required
Thank you & any questions ?
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