APRIL 23-27, 2018

3er seminario de abastecimiento en minería. Expomin 2018

Future of Procurement: Trends & Innovation

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Global

trends in

Procurement

4

Industry 4.0 (as enabler of value

creation with suppliers)4

Supplier collaboration3

Procurement as value-creator1

Digital Procurement2

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2

1

Procurement is moving from back-office to front-office as a significant value creator

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3

Actionable and quick-

to-deliver results

Tangible value achievable

in 6 to 12 months

Significant and direct

financial impact

Large portion of cost base across

different industries

Healthcare 20-30%

Telecom 30-40%

Average 40%-50% of Revenues

30-40%Services

50-60%

Commoditized industrials

Energy & Utilities 40-50%

50-60%

Non-commoditized industrials

60-70%

Consumer Goods

Source: Industry research, BCG

Procurement holds the potential to create significant value

Procurement is often the largest cost driver

for organizations

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CPOs increasingly feature in the C-Suite

100

75

50

25

0

~80%

2000’s

~60%

Current

% of CPOs reporting to the CEO or n-1 Leading Examples

Source: Industry research, BCG

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Procurement

will continue to

become more

strategic

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New roleTransactional role

The role of category managers and buyers has changed

Source: BCG survey and analysis

% of buyer's time

Additional new activities

Admin

Solving quality

problems

Expediting

information

and parts

delivery

Market testing

via competitive

quotes

Price

negotiations

Cost reduction

engagements and

cost planning

Supplier

measurement and

improvement

Supplier strategies

Demand planning

and Demand

"challenge"

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The category manager will continue to develop as a central node between "business" and "procurement"

Category manager

Sourcing analytics &

smart automation• Supports CM with

advanced analytics

• Automates processes

• Tracks savings

Procurement

Business

Category Manager• Sets category strategy

• Analyzes savings

opportunities

• Incorporates and

challenges BU needs

Supplier ecosystem

development• Identifies and promotes

innovation

• Builds strategic supplier

partnership

Procurement

leadership & CoE• Provides input to

strategy

• Resolves escalated

issues

Cross-functional

working group• Provides technical

input for CM

• Works with CM to

identify improvement

leversSteering Committee

• Reviews and validates

opportunity assessment

• Aligns and validates improvement

targets

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Digital levers are helping procurement organizations make faster and better decisions

2

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Two drivers of innovation and change in Digital in Procurement

Robotic Process Automotion Data Analytics• Automation of standardized

process (PO processing, vendor

onboarding, etc)

• AI assistance in biddings and

auctions

• Integration of real time

procurement data

• Capability to analyze all data –no

need for aggregation on spend

cube

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Starting point: Robotic Process Automation replaces rules-based human actions with software emulation

No consistent automation, as legacy

IT systems are often not easily

adaptable

Traditional & typical processes

Robot replicates (strictly rules-based)

human action at desktop level

Faster, 24/7 & Higher Aim Level

Many routine processes currently require human

involvement

'Robotic' Process Automation removes routine human

involvement

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Inputs transformed and PO workflow automated using RPA

Application of RPA in procurement purchase order process automation

Consolidated

through RPA robot

Vendor selected, purchase request

raised by agent

Purchase request

validated by RPA

Approved PO

forwarded to

vendor

Reports

generated by RPA

Input received

from vendors

Results in overall in FTEs

30–35% reduction

80–90% of workflow automated

1 Robot equivalent

to

3–4 FTEs

Before

150 FTEs

After

100 FTEs

for order collection

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Inputs transformed and PO workflow automated using RPA

Application of RPA in procurement onboarding of new vendors

Interactive pdf

sent to vendor

Digitally signed pdf

Signature verified and

data extracted

Automated contracts

and welcome letters

generated

Welcome Kit

emailed

New vendor

approved

Results in FTEs

25–30% reduction

30–40% of tasks automated

Before

45 FTEs

After

33 FTEs

for vendor management

Reduced onboarding

time for new vendors

Manually scanned pdf

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RPA Video

15

Leading companies are already using advanced digital technologies

Artificial Intelligence based bid evaluation

Consolidates bids and runs scenario analyses

during combinatorial auctions, incorporating

all constraints set by the buyer

AI recommends the best bid based on the greatest

savings and meeting set constraints

Buyers submit bids into the platform

i.e. XX% discount if they

win all of the lots

available for bidding

Artificial intelligence

Real-time monitoring of suppliers & products

Maersk and IBM developed together a supply

chain solution on Blockchain

Reduce trade documentation and processing costs and help

eliminate delays associated with input errors

Suppliers upload information to the Blockchain

Blockchain

Source: Keelvar Conference, New York, June 2017

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Big Data addresses a structural challenge, presentacross most industries and functions

Source: BCG analysis

Value

Model change

Variety

Volume

Velocity

The growth of data

is a structural trend

Big data is an opportunity

to capture insights and value

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Big data: From Spend cube to 100% purchase order view

Aggregated view at cube level

Yearly cycle

80/20 approach - Data focused on 'big

tickets'

Difficult and resource-intense information

reconciliation

Detailed view at purchase order level

"Real-time" information

Full visibility including long tail

Seamless data integration and automated

data manipulation

To 100% purchase order viewFrom Spend Cube

Definition of strategy at high granularity level Instant visualization of complex data sets to

focus on insight creation

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One rich yet easily pivotable

Access table for flexible use

Digital tools drive synthesis of robust, comprehensive,interactive data sets

Data sets provide full transparency on material cost; enable broad range of analyses

Production orders

>15 million records

Predecessors/ successors>1 million records

Actual invoice prices

>250,000 records

Inputs> 40 SAP tables

Calculation> 3,000 operations

Output1 Access table for flexible use

Source: BCG Experience

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Classical procurement analysis can now be applied to complete spend with real-time updates

Change in unit

price (3-year

CAGR %)

Limited savings

potential

High savings

potential

Reality: For

many parts

prices do not

decrease with

volume

Change in volume (3-year CAGR%)>€1Bn analyzed

PVO

Fixed–cost

degression

Price–elasticity analysis

Fixed-cost

degression

Source: BCG experience

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3

Supplier Collaboration is expanding the boundaries of value creation

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Supplier collaboration is a joint effort to achieve cost improvement, innovation and new technologies

Transactional

relationships

Supplier

collaboration

Dimensions Market competition

Selective

competition

Selective

collaboration

Strategic

partnerships

Supply market characteristics

Several capable

suppliers

Product/service

a "commodity"

Concentrated supply

market

Few large and some

small suppliers

Oligopoly supply

market

Scale matters

Proprietary relationships

Source of competitive

advantage

Innovation sharing Rare Opportunistic Significant Systematic

Typical sourcing strategy

Competitive bid to

ensure best cost

Develop alternatives,

build up competitors

Understanding of cost

drivers,

spec rationalization

Establish deep

collaboration,

cost transparency

Example levers

Optimized RfQ

(e-Auction)

Bundling

Best cost country

sourcing

Supplier development

Supply chain

integration

Design to cost

Supplier catalyst

Joint innovation

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Collaboration helps to create value for both buyers and suppliers

Buyer's

benefits

Access to

capacity for

incremental

volume

Access to

technology

Speed of

transfer and

product

launch

Improved

quality and

service levels

Optimized

indirect and

transaction

costs

Supplier's

benefitsAccess to

buyer quality

approach

Access to

technical

resources

Reduced cost

of doing

business

Association

with buyer in

selling to

others

Greater

visibility to

business

(current and

potential)

Creating value from broadening the joint perspective

Cost

optimization

and

transparency

Access to

new business

opportunity

Narrow focus

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Supplier collaboration targets not only driving cost but also value benefits

Question: What are the top goals of your supplier collaboration program?Source: BCG-PLN supplier collaboration survey

Objectives of supplier collaboration

77%

33%

46%

34%

19%

18%

18%

55%

Innovation

Cost savings

Risk mitigation

Resource supply security

Efficiency

Quality

Customer service/delivery

Others

Cost

Value

Others

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HighLow

Optimized

transactions

Consolidate

Rationalize

Development of alt-

ernative suppliers

OutsourcingLow

High

Category share of purchasing volume

Importance of the category

for company competitiveness

Restricted

relationships

"Standard Partner

Program"

E.g., vendor scorecards

Close

relationships

Process (ECR1,

CRP2)

Innovation

Partnership

Routine transactions,

selected cooperation

Process standardization

Factors• Innovation potential

• Importance for end customer

• Importance for product line

• Profit drivers

• Revenue drivers

• Cost leaders

• Products as image boosters

• "Single source"

Not all suppliers should be engaged with Supplier Collaboration…

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…but a range of activities with suppliers can be leveraged

E-procurement

Framework

Agreement (FA)

Supplier

days

Second tier

sourcing

Data

sharing

KPIs in

contractCatalyst approach

Low touch

High touch

Recommended

approach with

strategic

suppliers

Joint

development

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For strategic suppliers identified, joint "catalyst" sessions to be set up to drive value creation

Confirm interest and

build fact base

Tailor value proposition to

specific suppliers

Introduce concept to targeted

suppliers

Explain Strategic Supplier

Collaboration (SSC) concepts and

confirm interest

Conduct internal and external

stakeholder interviews

Convene team to progress SSC

model

Develop meeting

agenda and format

Joint "catalyst" sessions

Relationship

foundation

• Leadership commitment and vision

• Goals and aspirations

• Initial cost reduction opportunities

• Initial business growth opportunities

Opportunity

assessment

• Discuss balanced scorecard approach

• Review cost reduction opportunities

• Discuss targeted consolidation opportunities

• Confirm governance approach

Prioritization &

value sharing

• Endorse cost savings projects

• Endorse balanced score card

• Agree to value sharing and agreement

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Cross FunctionalNeutral Party

FacilitationFact Base External Input

Four critical elements to fully realize benefits of Catalyst approach

CATALYST

Pre-work brings functions

together

Avoids perceptions

Critical to idea generation

“Nowhere to run,

nowhere to hide”

Breaks down silos

Elevates beyond

‘component’ to ‘system’

Addresses entire value

chain

“Never before such a

holistic team setting”

Engages participant

(supplier, customer, field

service)

New insight by looking

through outsider’s eyes

“Now I understand why

they do things the way

they do”

Brings functions together

to generate ideas

Promotes collabo-rative

process

Drive ownership &

accountability

“Ask the questions that

never would have been

asked”

1 2 3 4

A full system view

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4

Industry 4.0 and new technologies are enabling new sources of value creation with suppliers and contractors

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The economic drivers for digital transformation are clear

Enough IP addressesCost of

processing power

over the past ten years

50x

Ubiquitous cloud

infrastructure

cost per MB

over the past ten years

20xCost of sensors

$1.30avg. cost .60over the past ten years

Cost of bandwidth

over the past ten years

40x

IPv6 3.4 x 1038

IP addresses=

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Digital with big impact in supplier – customer relationship dynamics, enabling value creation

Increased productivity and service

profitability

Procurement costs reduction

Higher service level

Improved Service

Delivery

Process digitization

New digital enablers

New revenue streams

Procurement costs reduction

Closer engagement between customer

and service provider

New Services and

Business Models

Asset performance

improvement

New business models

Condition monitoring

& predictive

maintenance

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Example: Würth Group & Automatic replenishmentof goods

Automatic replenishment of goods enabled

by optical ordering system iBinWürth Group

• Full integration and closer relationship with

customers (lock-in of customers)

• Continuous and less volatile sales

Customer:

• Improved inventory management and

production planning

• Less rack and floor space required in

production facilities

Monitoring OrderingQuick

delivery

Solution description Benefits and challenges

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Example: Rolls Royce reduces expensive scrap by additive manufacturing

Production of small

components made of

high-cost

Production of low-volume, high-complexity

parts more cost efficient via additive

manufacturing

Significantly less scrap through additive

manufacturing

Experts estimate that >20% of all additive

manufacturing outputs are final parts today,

growing to 50% by 2020

Aerospace industry uses additive manufacturing/3D

printing to produce tools and final components to

thereby reduce expensive scrap

Production of parts with low volume &

high complexity of assembly via additive

manufacturing

Solution description Benefits and challenges

Traditional manufacturing:

Assembly of 15 different parts

Additive manufacturing: Creation

of the entire moving part as one

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Example: Rolls Royce offers predictive maintenance based on Engine Health Monitoring

Remote monitoring system Engine Health Monitoring (EHM)

(embedded in Rolls Royce aircraft engines) allows live

monitoring and data collection:

• Performance data

• Status data

Data collected is transferred through RR global infrastructure

and analyzed by specialist EHM analysts

When abnormal behavior is detected, deep-dive is conducted

• Most feasible cause of irregular performance

• Options to fix anomaly

• Urgency of intervention

System reduces

• overall operations

• maintenance costs

by reducing

• maintenance time,

• return to service time, &

• time required for fault detection

Minimized downtimes for airlines companies

Enhanced safety of aircraft engines

Solution description Benefits and challenges

Nature of equipment / component

business: Attractive but complex

(due to big data volumes)

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Example: GE RailConnect software provides intelligent analytics to reduce fuel savings of 7-20%

GE's trip optimizer seeks optimal locomotive operation

• System consists of sensors, on-board computing, a software

program with embedded algorithms and broader

communication protocols

• Calculates the most efficient operation by considering cargo,

track and weather conditions

• Automates throttle and brake controls

• Continuously updates leveraging a set of algorithms and GPS

connectivity

Solution description

GE RailConnect is providing analytics to move freight more

intelligently. More than 450 rail corridors in North America rely on

RailConnect to manage daily railroad operations

Benefits and challenges

Via integration of machines and networks, GE

RailConnect enables to optimize freight routes

System yields between 7-20% fuel savings for the

operator (lower fuel costs, emissions)

Operator purchases it as a separate contract

bcg.com