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Fortum Procurement Mika Lahti
Vice President, Procurement & Real Estate
7.9.2015
7.1.2015 2
Topics
• Fortum today
• Procurement Development Program
• New Category Based Management Model
• What Is Good Procurement Management?
• Questions and answers
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 7.1.2015 Procurement & Real Estate / Mika Lahti
Fortum’s Mission and Strategy
4
Strategy
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.
Mission
Build on the strong
Nordic core
Create solid earnings
growth in Russia
Build a platform for
future growth
Strong competence in CO2-free hydro and nuclear, efficient CHP production and
energy markets
Our current geographical presence
5
Nordic countries
Power generation* 49.2 TWh
Heat sales* 10.9 TWh
Electricity customers 1.3 million
Power
generation
Electricity
sales
Heat
Poland Power generation 0.7 TWh
Heat sales 3.4 TWh
Baltic countries Power generation 0.7 TWh
Heat sales 1.2 TWh
India Power generation 9 GWh
Key figures 2014 Sales EUR 4.1 bn
Comparable operating profit EUR 1.1 bn
Balance sheet EUR 21 bn
Personnel 8,200
* In addition, Fortum has a 29.5% share in TGC-1 * Including Fortum’s associated company Fortum Värme;
power generation 1.2 TWh and heat sales 7.6 TWh.
OAO Fortum
Power generation 23.3 TWh
Heat sales 26.0 TWh
Russia*
0
200
400
600
800
1 000
1 200
DE
I
RW
E
Dra
x
SS
E
CE
Z
E.O
N
Vatt
en
fall
ED
P
Enel
Edip
ow
er
EnB
W
Gas N
atu
ral F
enosa
GD
F S
UE
Z
Do
ng
En
erg
y
Fo
rtu
m to
tal
Iberd
rola
PV
O
ED
F
Verb
und
Fort
um
EU
Sta
tkra
ft
64
g CO2/kWh electricity, 2013
2014
64% of Fortum's total power generation CO2-free
94% of Fortum’s power generation in the EU CO2-free
Close to 100% of the ongoing investment programme
in the EU CO2-free
Average 328 g/kWh
200
Fortum's carbon exposure among the lowest in Europe
6
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
Lo
w
Eff
icie
ncy
Hig
h E
ffic
iency
High Emissions Emission free
Solar Economy Solar based production with
high overall system efficiency
Traditional
energy production Exhaustible fuels that
burden the environment
Coal Gas
Oil
Advanced
energy production Energy efficient and/or
low-emission production
Nuclear
today
Nuclear
tomorrow
CHP
CCS
Geothermal
Hydro
Wind
Sun
Ocean
Bio
Storage
Active
Consumer Demand
Response
Interconnectors
Smart
applications
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
Towards Solar Economy
7.1.2015 8
Topics
• Fortum today
• Procurement Development Program
• New Category Based Management Model
• What Is Good Procurement Management?
• Questions and answers
Procurement & Real Estate / Mika Lahti
Fortum Procurement Spend
Fuels
Other OPEX
CAPEX
9
Other countries
Purchasing spend is ~ 5 x annual
employee benefits
7.1.2015 Procurement & Real Estate / Mika Lahti
Fortum annual purchasing spend
varies between 2 and 3 M€/year
depending on investment level
Targets of the development program launched 2010
2010
2012-13
• Basic building blocks in place
• New purchasing concepts
introduced – lead buying and
global sourcing
• Achievement of set goals
• Strategic purchasing – pull from the rest
of the organization to create value
• Effective organization – strong
cooperation across divisions and
functions
• Capability building and talent
development – exciting function to be in
10 7.1.2015 Procurement & Real Estate / Mika Lahti
11
Purchasing focus was on operational purchasing
Core purchasing processes
Prepare
Analyse Facts
& Generate
Ideas
Operational purchasing
Supplier Relationship Management
Supporting processes (business intelligence, process development, …)
Purchasing strategy
creation
Cate
go
ry
str
ate
gy
Evaluate
purchase
Handle
invoice
Receive
material/
service
Receive
material/
service
Execute
purchase
Execute
purchase
Plan
purchase
Plan
purchase
Define
need
Define
need
Follow up
purchase
Supplier portfolio
Development
Management
Phase-In
Supplier management
and development
Develop Strategy
Step 3
Analyse Facts & Generate Ideas
Step 2
Prepare
Step 1
Supporting processes (business intelligence, process development, …)
7.1.2015 Procurement & Real Estate / Mika Lahti
12
What is Strategic Procurement?
“Strategic purchasing is a systematic
and collaborative process for
to buy commodities and services at
the lowest total cost of ownership and
the highest value to our business”
• determining supply requirements,
• identifying external and internal
improvements,
• selecting the most competitive
suppliers, and
• managing supplier performance
Quality
Purchase
price
Strategic purchasing goes below
the surface…
Specifications
Strategic
need
Make-or-
buy Innovation
Delivery time
Order
process Transport
Inventories
Internal demand
Life cycle
costs
Transactional
focus
Sustainability
7.1.2015 Procurement & Real Estate / Mika Lahti
13
Collaborative,
cross-functional
approach
Total cost of
ownership (TCO)
approach
Systematic,
methodological
approach
Strategic purchasing
Value creation
5 steps Specs Price
Process/
admin
Usage/
demand
Team
7.1.2015 Procurement & Real Estate / Mika Lahti
Cornerstones of the Development Program
14
Systematic Approach Was Developed
Monitor and Improve
Step 5
Implement Strategy
Step 4
Develop Strategy
Step 3
Analyse Facts & Generate Ideas
Step 2
Prepare
Step 1
• Follow up
implementation
progress
• Measure and
improve
supplier
performance
• Measure and
improve
savings capture
• Carry out
sourcing process
• Collaborate with
existing
suppliers
• Implement
internal changes
• Insource /
outsource
• Develop
improvement
ideas
• Identify savings
potential
• Develop
strategy options
and scenarios
• Assess
constraints
• Review strategy
• Perform current
state analysis
• Develop TCO
model
• Define business
requirements
• Carry out
market research
• Generate
improvement
ideas
• Identify cross-
functional team
and stakeholders
• Develop project
plan
• Review high-
level spend
• Identify initial
opportunities
• Organize team
kick-off
Depending on
strategy:
7.1.2015 Procurement & Real Estate / Mika Lahti
15
2011
Pilot categories
• Implementation and savings capture
Wave 2
categories
Wave 2 implementation and
savings capture
Implement
changes
Strategic
purchasing
+ capability
building
Operating
model
Wave 3
categories
Wave 3 implementation
and savings capture
Wave 5
categories
Integrate
into normal
operations
2012
…
Chosen apprach: pilots and waves
Review and refine
organization &
processes
Pilot categories
• New strategic
purchasing process
introduced and
tested
• Capability building
7.1.2015 Procurement & Real Estate / Mika Lahti
16
2011 – 2012 we carried out 17 “PUMA projects”
2011 2012
Cars and
vehicles
Distribution
network
materials *
Civil and dam
works
District heating
networks
Distribution network
and field services
(‘Radisson’)
Oil
Boilers
Technical
consulting
Biofuels
Coal
Civil Works
J F M A M J J A S O N D J F M A M J J A S
Turbines and
generators 1
Electrification and
automation systems
in Renewables
Automation II
Real estate &
facility management
Service & mainte-
nance works (pre-
study in Finland)
* Handed over to Radisson
Solar
O N D
7.1.2015 Procurement & Real Estate / Mika Lahti
17
Category Management
2011 2012
2012: Transition from Program to Category Management
PUMA
program
2013
7.1.2015 Procurement & Real Estate / Mika Lahti
Purchasing Organisation 2010
CEO
CFO
Corporate
purchasing
Power
purchasing
Heat
purchasing
Russia
purchasing
18
ESD Power Heat Russia
Distribution
purchasing
Distribution Other ESD Corporate
center
7.1.2015 Procurement & Real Estate / Mika Lahti
2014 New Category Based Procurement Organisation
CEO
CFO
Corporate
purchasing Procurement
Russia
purchasing
19
ESD
Distribution
purchasing
Purchasing in our largest spend categories led by category
managers, BA Purchasing teams resp. for BA specific needs
Power Segment:
NTP & HTP
HESS Russia Corporate
Center
Distribution
7.1.2015 Procurement & Real Estate / Mika Lahti
7.1.2015 20
Topics
• Fortum today
• Procurement Development Program
• New Category Based Management Model
• What Is Good Procurement Management?
• Questions and answers
Procurement & Real Estate / Mika Lahti
21
Category Based Procurement Management
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
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.
Category management optimizes the
Total Cost of Ownership (TCO)
Quality
Purchase
price
Specifications
Strategic
need
Make-or-
buy Innovation
Delivery time
Order
process Transport
Inventories
Internal demand
Life cycle
costs
Transactional
focus
Sustainability
7.1.2015 Procurement & Real Estate / Mika Lahti
22
Other purchasing areas managed
as categories
Categories with dedicated
Category Managers
The initial category setup
District Heating Networks
Boilers and Auxiliary Equipment
Turbines & Generators
Construction & Civil Works
Automation
Consulting
Distribution Network Services
Service & Maintenance
Power
Heat
ESD
Corporate
Purchasing
Home
unit
Category
Electrical Materials*
Fuels
IT
Cars & Vehicles, Travel, Work Wear…
Real Estate and Facility Management
Consulting
Corporate
Purchasing
Power, Heat
7.1.2015 Procurement & Real Estate / Mika Lahti
23
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
7.1.2015 Procurement & Real Estate / Mika Lahti
24
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
7.1.2015 Procurement & Real Estate / Mika Lahti
25
25
21
17
37
Capabilities and
culture
Category management
and execution
Structure and systems
Strategic alignment
and posture
IMPORTANCE OF DRIVERS FOR OVERALL PURCHASING PERFORMANCE
Percent
Source: McKinsey & Company and European Business School research
7.1.2015 Procurement & Real Estate / Mika Lahti
…and it good to remeber that people matter
7.1.2015 26
Topics
• Fortum today
• Procurement Development Program
• New Category Based Management Model
• What Is Good Procurement Management?
• Questions and answers
Procurement & Real Estate / Mika Lahti
Who truly leads Procurement in a company?
27 7.1.2015 Procurement & Real Estate / Mika Lahti
Personal
Relationships
Favours
Trust Loyalty
Handshakes
Ethics ”Business is
done
between
people”
Supplier Relationship Management
Supplier Phase Out
Supplier Business
Management & Development
Supplier Phase In
Supplier
Selection &
Negotiations
Contract Management
Monitoring & Performance Management
Supplier Portfolio Management
Fact Based
Management
Facts & Figures
Feelings & Emotions
28
”Business is done between people”
7.1.2015 Procurement & Real Estate / Mika Lahti
7.1.2015 29
Topics
• Fortum today
• Procurement Development Program
• New Category Based Management Model
• What Is Good Procurement Management?
• Questions and answers
Procurement & Real Estate / Mika Lahti
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