Finding Strategic Balance in P2P ProcessFast, Adaptable and Integrated Approach to Outsourcing that Leads to Optimization of Working Capital and Cash Flow

Practical strategies that un-lock value from procurement in the globalization era

Dr. Tony DonofrioChief Operating Officer201-602-4972tdonofrio@usmanagementservices.comtdonofriophd@gmail.comtonydon@hotmail.com

Copyright 2009

Agenda

• Setting the stage

• Understanding Your Procurement Goals

• Outsourcing...Benefits, Challenges, and Risk Mitigation

• Case Study: Global Supply Chain Services Outsourcing

• Non-Core Cost Applications

• Aligning P2P Process with Outsourcing Strategy to Optimize Capital

• Summary

Changing Landscape: Globalization and Commoditization

In 2000, 30% of the world’s GDP was sold across international borders, in 2020, McKinsey estimates it will jump to 80%. In 1980 it was 11%.

In 2000, 30% of the world’s GDP was sold across international borders, in 2020, McKinsey estimates it will jump to 80%. In 1980 it was 11%.

History is full of giants and ideologies that failed to adapt !History is full of giants and ideologies that failed to adapt !

Globalization

Intense competition

Increasing Capital

Market Return Expectations

Short product life cycles

Deregulation

Environmental focus

Staffing challenges

Evolution of Global Business

Market Drivers Impact

Elongated, more complex supply chains

Reduced Global Finished Goods Inventories

Procurement as a competitive advantage

Need for automated sustainable processes

Constantly shifting sourcing options

Need for Exception Management

Consolidation among global providers

Outsourcing of non-core functions

44% of Fortune 1000 firms, and most of mid-cap companies are outsourcing key supply chain elements……to increase profit, quality and service to customers

44% of Fortune 1000 firms, and most of mid-cap companies are outsourcing key supply chain elements……to increase profit, quality and service to customers

Suppliers are in it to “win” … and they win when you winSuppliers are in it to “win” … and they win when you win

Outsourcing – Procurement Advantages

… increased intellectual capital and access to broad expertise

… greater geographic coverage and scalability

… process optimization and operational benchmarking

… budget control and monitoring

… a powerful relationship with multiple providers

… opportunity to focus internal efforts and resources on strategic areas

… reduced working capital by leveraging shared infrastructure

including facilities, technology, and employees

Avoiding Outsourcing Risk

When outsourcing, you must develop …

… a clear pre-nuptial agreement! You need to know what it costs to get out before you get in

… rock solid service expectations with fully defined metrics

… complete organizational alignment of value expectation

… reasonable cost expectations

… dedicated and accountable management on both sides

…clear method for management to hold parties accountable

… understanding that no one is perfect: “feedback is NECESSARY”

Net: Outsourcing can yield significant benefits while Smart Risk Mitigation eases the challenges of the global procurement model. Net: Outsourcing can yield significant benefits while Smart Risk Mitigation eases the challenges of the global procurement model.

Outsource: Outperform Competitors for Market Leadership

The ability to execute better than all competitors will lead to dominant performance

The “best” outperform the “average” two to one …

The top Quartile :

Outsource most non-core services to focus resources on the critical few…their core competency

Leverage 3rd party specialist to optimize “root cost “

Utilize volume of outsourced procurement companies

Integrated Supply Chain Model: The uncertainty of supply & demand …Integrated Supply Chain Model: The uncertainty of supply & demand …

… requires flexible infrastructure that delivers flawless execution… requires flexible infrastructure that delivers flawless execution

Supply Chain Execution Management (SCE)

Production Planning

Supply Chain Planning (SCP)

DemandPlanning

Material & TransportRequirement Planning

FulfillmentTime

Fulfillment Execution

13PL3PL

3PL

Inventory Modeling

Fulfillment Planning & Business Optimization

Demand ModelingFulfillmentLevel

Case Study: Global Supply Chain Services Outsourcing

Supply Demand

Traditional – Linear Push Model Future – Circular Self Renewing Model

Supply

Dependent demandSupply

SellMoveMakeBuyPlan

• Supply Driven• Limits Ability to Improve Margin• Subject to ‘Bullwhip’ Constraints

Evolution

Supply push

Demand

• Service and Cost Shaping Demand• Procurement Innovation Creating Margin• Reduction in Lead Time and Inventories

The Evolving Demand Chain

Service

The sourcing challenge becomes more complex as requirements for cost and service are incorporated into the demand chain

The sourcing challenge becomes more complex as requirements for cost and service are incorporated into the demand chain

Cost

Global Supply Chain Procurement

Ocean Freight

Air Freight

Customs Brokerage

Vendor Managed Inventory (VMI)

Shared /Multi-client

Dedicated /Contract

Value-add ServicesFreight Audit & Pay

All-Modes Freight Management

Carrier and FuelProcurement

Critical Service LogisticsReverse Logistics

Value ModelValue Model

TSM

Freight Freight ForwardingForwarding

SupplySupply LogisticsLogistics WarehousingWarehousing TransportationTransportation AftermarketAftermarket

ServicesServices

SourceSource MakeMake DeliverDeliver ReturnReturnPlanPlan

Time Cost Quality Service

Utilities & WasteManagement

Contract audit \compliance

Understand Your Objectives Before Outsourcing

Industry Average Supply Chain CostsIndustry Average Supply Chain Costs

Understanding root cost is required to get to world class procurement practicesUnderstanding root cost is required to get to world class procurement practices

• Set Goals / Strategy• Benchmark• Build Sourcing Intelligence• Gain Alignment• Root cost breakdown structure • Establish partnerships• Manage Execution• Track Performance

Outsource Strategy: Transform Though Resource Allocation

True organizational transformation begins when procurement can source partners with high expertise and have ascended the learning curve

True organizational transformation begins when procurement can source partners with high expertise and have ascended the learning curve

Work on “Core Competence” where you can deliver either higher service level at a competitive cost or far lower cost at competitive service levels

Work on “Core Competence” where you can deliver either higher service level at a competitive cost or far lower cost at competitive service levels

Opportunity Assessment

10

11

12

13

14

15

16

17

18

19

20

2004 Plan Contingency 20'Containers

Mixed - FMI 96.5%Utilization

100%Utilization

OwnerEconomics

Ideal

Land

ed C

ost (

$MM

/yr)

Opportunity Assessment

• Can we ship only dedicated boxes?

• Can we consolidate all shipments in 40’ containers?

• Can we negotiate better pricing on 40’ High and 45’ containers?

• Can we negotiate better rates from fewer, larger carriers?

• Can we achieve owner economics?

• Can we meet target utilization?

• Can we order only container quantities?

• Can we top off every container?

• Can we avoid price increases from carriers?

• Can we avoid booking fast, expensive carriers unnecessarily?

• Can we always book low cost carrier?

• Can we avoid demurrage & detention costs?

A world class international transportation company will enable its partner to challenge the status quo and think through key questions…

A world class international transportation company will enable its partner to challenge the status quo and think through key questions…

…origin VAS and inland transportation have as much as 150% and 500% margin respectively built in. You have lost much of your procurement opportunity before

the freight gets on the ship.

…origin VAS and inland transportation have as much as 150% and 500% margin respectively built in. You have lost much of your procurement opportunity before

the freight gets on the ship.

Ocean Transport Cost

In a perfect world carriers would provide access to all container sizes from all origins and shippers would be able to optimize container capacity …

In a perfect world carriers would provide access to all container sizes from all origins and shippers would be able to optimize container capacity …

… however the financial penalties that come with limited equipment and inability to load effectively are quite severe

… however the financial penalties that come with limited equipment and inability to load effectively are quite severe

Transport Cost vs Container Utilization by Container Size

50

60

70

80

90

100

110

120

20 25 30 35 40 45 50 55 60 65 70

Cubic Meters Transported

Car

rier T

rans

port

Cos

t ($/

Cub

ic M

eter

)

45' High Container

40' High Container

40' Container

20' Container

Operational Execution

CustomerInbound TransportationSuppliers Distribution

OperationsOutboundTransportation

MoveBuyPlan & Manage Sell

Operational PlanningStrategic Planning

International

Domestic

System CapabilityIT Strategy

Total Delivered cost Reduction

In Source / Outsource strategy

Reduced Total CostsFuelUtilities

Improved Planning & Supplier IntegrationBenchmarkingAlignmentDashboard

14

2

3

Work Simplification & FlexibilityOutsource audit/compliance10% productivity improvement

Increase Asset ProductivityIncrease inventory turnsEmployee utilization

Minimize Waste & RedundancyWaste ManagementTime

5 6

7

98% On Time Cleared < ArrivalD.O. Pickup < 24hr

1 Day Backlog

85% VendorReliability Equip Utilization

One Touch

Fixed Delivery 98% on Time

98% On Time Pickup

Introduction

Product Life-CycleInitialFocus

ExitPeakInitialFocus Post-PeakPre-Peak

InitialFocusIntroduction

Product Life-CycleInitialFocus

ExitPeakInitialFocus Post-PeakPre-Peak

InitialFocus

ProductLife Cycle

High Degree of Cost Containment: Root Cost Procurement Required

EARLY WARNING FOR UNLOCKING STRATEGIC VALUE FROM SUPPLY CHAIN

Integrated Supply Chain Model: Visibility and Exception Management

Distribution Center

Distribution Center

DeconsolidationDeconsolidation

Domestic Load-Build Center

(In-house Dispatch Management)

Domestic Load-Build Center

(In-house Dispatch Management)

ShipmentReadiness

ShipmentReadiness

PO Acknowledge

PO AcknowledgePO CreationPO Creation Ocean

Transport

Ocean Transport

Vessel Selected

Vessel Selected

Route Plan / Carrier SchedulingRoute Plan / Carrier Scheduling

Request for

Vessel

Request for

Vessel

Transport toDistributionCenter

INTERNATIONAL

DOMESTIC

Pickup

New PO created/ changed with lead time < feasible

PO NOT codedw/styles in the AD/ Seasonal/ Special Event

PO w/ NO allocation @ ASN receipt

PO NOT acknowledged by Supplier within “X” days

No routinginfo from Carrier within “X” days prior to cancel

Carrier fails to pickup from Supplier “X” days from scheduled appointment

Supplier has NOT sent ASN within “x” days of TMS confirmed pick-up

Supplier sends ASN for partial PO fill

SUPPLIERS

Import Supplier shipment readiness not received “x” days before shipping window (portal)

Import Container BookingRequest NOT received “x” days before FOB date

Import ETA to miss in DC date based on Import Carrier update

Import documentsNOT available “x” days

prior to vessel ETA

IMPORT CARRIERS

NO Pre- clearance of

import merchandise

“x” days prior to vessel ETA

Pick up from Supplier but

not delivered to DC within “x” days of

ETA

Carrier Store Delivery “x” days outside of appointment window

Store Delivery Transfer not appointed “x” days after transfer note creation date

Transportto Store

Transportto Store

Store Transfer not confirmed in receiving system when delivery confirmed by carrier.

DC (YMS, WMS) Store

Shipment Notification

Shipment Notification Customs

Clearance

Customs Clearance

WORKFORCE

International / Domestic TransportationOrder Management Platform)

Import shipment DO issued but NO TMS routing confirmed in “x” days

Store/Dealer

Network

Store/Dealer

Network

Int’l Consolidation

Replenishment, Allocation, Buyers, Analysts, Supplier Management, Merchants, EDI, Order Tracking

Order Tracking, Supplier Management, Import Department, Transportation, Distribution

Distribution, Transportation, Inventory Management

Store Ops,

Finance

CONFIDENTIAL

1

2

3

5

9

10

11

12

18

19

2021 13

22

15

14

16

17

PO is coded w/NOstyles in the AD/ Seasonal/ Special Event

4

7

PO w/ NO allocation @ TMS routing

6

PO w/ NO allocation @ YMS receipt

8

NO PO createdfor styles in the AD/ Seasonal/ Special Event

DOMESTIC CARRIERSWeb-based Supply Chain

Collaboration Portal

Case study results

All 23 supply chain nodes were benchmarked, measured, and invoiced on a single document and complexity of work was dramatically simplified

All 23 supply chain nodes were benchmarked, measured, and invoiced on a single document and complexity of work was dramatically simplified

In Net: The total value chain was significantly improved (Cost ,Quality, Service, and Time ) through targeted outsourcing and “root cost” reduction

In Net: The total value chain was significantly improved (Cost ,Quality, Service, and Time ) through targeted outsourcing and “root cost” reduction

• On time delivery improved 12%

• Customer service calls down 7%

• Total landed cost decreased 16%

• Cycle time cut 28%

• In Stock improved to 98.4%

• Headcount reduced/redeployed 11%

Cash flow +18%

Working capital -22%

EBITDA +16%

Keys To Success

• Flawless Execution• Flexibility• Capabilities and Knowledge• Ability to react to ever changing

marketplace• “Real Value” Add• Regulatory Excellence • Strategic Approach with a Wide

Portfolio of Solutions

• Continuing declining cost• Support growth • Change Management• Satisfy customers• Stay competitive• Continuous Process Improvement• Strategic “Flex” Capabilities• Working Capital Reduction• “Root Cost” Reduction Strategy

Customer Need Defined Expectations

…Drove compound savings to the bottom line and reduced operational complexity while improving working capital and service

…Drove compound savings to the bottom line and reduced operational complexity while improving working capital and service

Second level procurement of services such as fuel, utilities, insurance, waste mgt., communication and auditing with our partners…

Second level procurement of services such as fuel, utilities, insurance, waste mgt., communication and auditing with our partners…

Outsourcing Challenges and Remedies

Challenges:• Reluctance to release

operational control• Narrow scope can result in low

ROI• Balance between service level

and cost• Underestimation of IT

integration complexity• Incomplete or inaccurate data • Unclear performance or value • Contractual inability to

respond to market changes

Remedies:

• Executive level support

• Partnership approach

• Well defined, agreed success criteria

• Reasonable implementation schedules

• High data integrity

• Specific performance metrics

• Regular performance reviews

Applying Outsourcing Strategies to Non-Core Services

Strategically procuring non-core services including “root cost” such as fuel, waste and distribution combined with contract compliance ...

Strategically procuring non-core services including “root cost” such as fuel, waste and distribution combined with contract compliance ...

… enabled a .97 operating index by building in incentives to drive continually declining cost and continuous improvement

… enabled a .97 operating index by building in incentives to drive continually declining cost and continuous improvement

• Contract Compliance

• Accounts Payable

• Commercial Lease

• Supply Chain Management

• Waste Management

• Freight / Transportation Spend Management

• Utilities - Gas / Electric

• Fuel

• Telecommunications / Data

• Employee Benefits / Insurance

• Sales & Use Taxes

• Limited Resources• Poor Timing • Time Consumption

Contract Compliance and Bill Auditing

• Contract Competitiveness• Independent / SOX• Benefit Sharing Fee Structure / Alternative Pricing Models• Better Supplier Visibility / Relationship

Identifies value, contract billing inaccuracies, prospective cost reduction opportunities and sustainable process improvements Identifies value, contract billing inaccuracies, prospective cost reduction opportunities and sustainable process improvements

Billing errors and non-competitive contracts cost corporations millions of dollars every year

Billing errors and non-competitive contracts cost corporations millions of dollars every year

• Sensitivity to Findings• Existing Service Provider• NO BUDGET for Services

CHALLENGES

BENEFITS• Permanent Error Removal• Cost Reduction Strategies• Revenue Recovery• Future Contract Compliance

Service Percentages

Contract Compliance 3% - 10%Telecommunications 3% - 15%Sales & Use Tax 5% - 8%Property Tax 10% - 20%Supply Chain Management 7% - 30%Accounts Payable 0.1% - 1%Freight 3% - 10%Lease Audit 3% - 10%Utilities 3% - 8%Waste Management 5% - 18%

It also drives both the short and long term business process re- engineering and revenue generation

It also drives both the short and long term business process re- engineering and revenue generation

Cost Recovery & Reduction Benefits

Internal time constraints and pressures leave internal personnel with little or

no time to properly compare bills to contracts

Internal time constraints and pressures leave internal personnel with little or

no time to properly compare bills to contracts

Metrics-Driven Approach

Data Warehouse

• Normalized Data

• All Transportation

KPIs

Alerts

• Pro-active notifications

• Manage by exception

Advanced Analytics

• Root cause analysis

Programs are available to monitor over 75 transportation audit points in real time providing actionable data to eliminate / control root cost.

Programs are available to monitor over 75 transportation audit points in real time providing actionable data to eliminate / control root cost.

40% of total parcel cost are accessorial40% of total parcel cost are accessorial

Challenges• Cost Containment

• Employment Law

• Compliance Changes

• Employee Lawsuits

• Benefit Competitiveness

• Aging Workforce

Employee Benefits and Insurance

Benefits• Do more with less

• Renewal Negotiation Leverage

• Claim and Utilization data

• Benchmarking/ Plan Marketing

• Contract competitiveness

• HR outsourcing

Maximize Returns on Your Employee Benefit Dollars by about $1,000 per employee and provide sustainable service improvements …

Maximize Returns on Your Employee Benefit Dollars by about $1,000 per employee and provide sustainable service improvements …

…while flexing to Updates on Legislation, Market Trends & Regulatory Requirements in near real time.

…while flexing to Updates on Legislation, Market Trends & Regulatory Requirements in near real time.

An independent expert waste management and procurement firm can provide services and aggregate volume driving cost down by up to 40% An independent expert waste management and procurement firm can An independent expert waste management and procurement firm can provide services and aggregate volume driving cost down by up toprovide services and aggregate volume driving cost down by up to 40%40%

Knowing the “Tricks of the Trade” from and insiders perspectives enables negotiating, bidding and contract mgt. at an unparalled level Knowing the Knowing the ““Tricks of the TradeTricks of the Trade”” from and insiders perspectives from and insiders perspectives

enables negotiating, bidding and contract mgt. at an enables negotiating, bidding and contract mgt. at an unparalledunparalled level level

•• Complete waste auditComplete waste audit

•• Critical Service Evaluation and optimization of servicesCritical Service Evaluation and optimization of services

•• Regulatory Compliance, and Cost AvoidanceRegulatory Compliance, and Cost Avoidance

•• Right sizing services based on needs and volumeRight sizing services based on needs and volume

•• Expert RFP for services are negotiated and awardedExpert RFP for services are negotiated and awarded

•• Consolidation of services/call center and invoicingConsolidation of services/call center and invoicing

•• Vendor Implementation & ManagementVendor Implementation & Management

Waste Management Procurement

Fuel and energy procurement firms aggregate volume which is not available to a single company

Fuel and energy procurement firms aggregate volume which is not Fuel and energy procurement firms aggregate volume which is not available to a single companyavailable to a single company

Today market is very competitive, so pricing is volatile. Real-time knowledge of the most up-to-date price offerings is critical

Today market is very competitive, so pricing is volatile. RealToday market is very competitive, so pricing is volatile. Real--time time knowledge of the most upknowledge of the most up--toto--date price offerings is critical date price offerings is critical

•• Service Evaluation and Optimization Service Evaluation and Optimization

•• Eliminate Transaction FeesEliminate Transaction Fees

•• Cut supplier feesCut supplier fees

•• Vendor Discounts ManagementVendor Discounts Management

•• Optimized route Management/GPS controlsOptimized route Management/GPS controls

•• Six levels of Margin ReductionSix levels of Margin Reduction

•• Reduced assessorialReduced assessorial

•• Billions of Gallons/ KW leverage Billions of Gallons/ KW leverage

Fuel and Energy Procurement

Audits of companies show incremental savings opportunities were found on top of internal fuel procurement strategies...

Audits of companies show incremental savings opportunities were Audits of companies show incremental savings opportunities were found on top of internal fuel procurement strategies...found on top of internal fuel procurement strategies...

…additionally as fuel and energy pricing spike and plunge real time shifts in procurement terms further optimize cost

……additionally as fuel and energy pricing spike and plunge real tiadditionally as fuel and energy pricing spike and plunge real time me shifts in procurement terms further optimize costshifts in procurement terms further optimize cost

Fuel and Energy Cost Reduction

• Forms of payment 1.00% - 4.75%

• Theft 1.00% - 3.00%

• Products 2.00% - 4.25%

• Inflated wholesale costs 1.75% - 6.00%

• Optimization 6.00% - 10.75%

• Fueling discounts 1.00% - 4.00%

• Compliance 3.25% - 7.25%

Telecommunication procurement firms aggregate volume which is not available to a single company

Telecommunication procurement firms aggregate volume which Telecommunication procurement firms aggregate volume which is not available to a single companyis not available to a single company

The market is very competitive and pricing is volatile. Real-time knowledge of price offerings from all carriers is critical

The market is very competitive and pricing is volatile. RealThe market is very competitive and pricing is volatile. Real--time time knowledge of price offerings from all carriers is critical knowledge of price offerings from all carriers is critical

•• Service Evaluation and Optimization Service Evaluation and Optimization

•• Telecommunications Expense Management Telecommunications Expense Management

•• Business RelocationBusiness Relocation

•• Vendor Implementation & ManagementVendor Implementation & Management

•• Data Network Implementation & ManagementData Network Implementation & Management

•• Disaster Recovery & PlanningDisaster Recovery & Planning

•• Rapidly Changing Technology CompatibilityRapidly Changing Technology Compatibility

•• IP TelephonyIP Telephony

Communication Procurement

Summary- The performance gap is striking

The “best” outperform the “average” two to one …

To be the best :

• Align the organization

• Outsource non-core services

• Focus resources on the critical few

• Leverage 3rd party specialist to optimize “root cost “

• Utilize volume of outsourced procurement companies