Launching an efficient Procurement Spend Optimization project at MOL-Group

MOL-Group Supplier Forum

Budapest, November 18, 2004.

Susan GadóProductivity Centre

AGENDA

Integration within MOL-Group

Importance and aim of launching efficiency improvement initiatives

Examining a company’s purchasing expenditure and selecting subject areas to analyze

Establishing methodology and managing efficient operation of teams

Interpreting results and targeting for future development

1

Regional integration in oil and chemical industry

Major milestones

1991 - Established from National Oil and Gas Trust and enterprises

1995 - MOL was privatized

1999 - New Strategy: regional expansion (prominence, efficiency growth)

2000 - Slownaft became regional strategic partner

2001 - Refinery and petrochemical industry cooperation: TVK

2002 - MOL became the major shareholders of Slovnaft

2003 - MOL aquisited the 25% of INA

2004 - Integrated operation with Slovnaft and TVK

MOL shares are listed on the Budapest and Luxemburg Stock Exchange and

traded on London SEAQ International System

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Regional Strategy 2004

3

MOL IS AN INTEGRATED OIL COMPANY FROM CENTRAL-EASTERN EUROPE

E&P (Hungary and Russia –exploration in other countries)

R&M (Hungary, Slovakia)

Retail (Hungary, Slovakia, Czech Republic, Slovenia, Romania, Croatia)

Lubes (Slovakia, Czech Republic, Hungary, Romania)

Petchem (Hungary, Slovakia, Czech Republic, Germany, Austria)

Maintenance companies (Single Service Companies in Hungary and Slovakia)

Group includes

4

AIM OF LAUNCHING PROCUREMENT SPEND OPTIMIZATION PROJECT PSO

Create spend-transparency across the whole Group

Identify new synergy possibilities withinMOL-Group

Reduce purchasing spend and optimize Total Cost of Ownership (TCO)

Develop system for measuring and tracking savings

Take advantage of Group negotiation

Create common platform for further growth

Offer new possibilities for our suppliers

Major goals

Integration is pretty recent

Strategic overview of integrated purchasing spend hasn’t occurred

Productivity Centre (P.C.) is a new organization within the integrated Corporate Services

Main drivers

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TIMING OF PROCUREMENT SPEND OPTIMIZATION PILOT AND ROLL-OUT WAVES

Preparation

2004

Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2005

Mar Apr May Jun Jul Aug Sep Oct Nov DecJan Feb

Pilot

Wave 1

Wave 2

Wave 3

Summerbreak

Spend analysis for 2004 4 weeks inter-

ruption forsummer break

Christmas/Newyear break

Pilot

Wave 1

Wave 2

Wave 3

9

*

We are hereSuccesfully implemented

PSO PROJECT STRUCTUREScope: MOL, Slovnaft, TVK

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Pilot (4 analysis units)

Wave 1 (8 analysis units)

Wave 2(9 analysis units)

Wave 3(11 analysis units)

(1) Valves, piping anfittings

(2) Production chemicals(3) Technological

construction(4) Environmental protection

services

(5) Civil construction*(6) Additives (EU 2005

brand additives mainly)(7) Electrical material and

service*(8) IT services(9) PR and advertising(10) Process control/

instrumentation(11) Packaging**(12) Electricity

(13) Facility management and site services

(14) Site infrastructure (15) Technical services (16) Mechanical materials*(17) Telecom, mail and

other infrastructure(18) IT, telecom and office

material(19) Pumps, compressors

and chemical process equipment*

(20) HSE(21) Logistics

(22) Travel and passenger transport

(23) Well construction & MRO(24) Deep drilling***(25) Geophysical services***(26) Consulting, financial and

legal services (27) Insurance(28) Natural Gas(29) Water(30) Catalysts and packing(31) Service station

construction and equipment

(32) Petrochemicals and Methanol

Casing and tubingspend is covered during wave 1 in a separate work stream, the rest of well construction (completion) will be covered in wave 3

* 35% of Maintenance by SSC is assumed to be included in baseline.** Timing of packaging analysis unit depends on exact starting date of the new units in Slovnaft and TVK

*** Due to public procurement and long term contracts (until Dec. 2005) it is not recommended to cover it before. The exact spend baseline subject to tender will need to be defined later.

Source: McKinsey

Technical/operational factors

SUCCESSFUL SAVINGS INITIATIVE REQUIRES APPLICATION OF COMMERCIAL, TECHNICAL, ORGANIZATIONAL ACTIONS

Volume bundlingOptimize (skip/substitute/etc) itemOptimize quality expectationsOutside/inside employment

Optimize / reduce technical expectationsSubstitute materialsReconfigure plant/processesReduce variety/create modulesAnalyze value-added of purchased goods

Coordinate participants (roles, organizational configuration)Optimize the process (within the organization and with suppliers)

Procurement volume

Characteristics of purchased goods

Commercial/procurement factors

Optimize duration of contractsMake long-term contractsUse/improve conditions of contractIncorporate interest for cost savings into contracts

Utilize competition of suppliersPurchase more from the same supplierCompare performance of suppliersStrengthen cooperation with suppliers

Supplier strategy

Contracting strategy

Procurement organization

Organizational structure/ process efficiency factors (only if potential cannot be un-locked otherwise)

All levers to be pursued simultaneously for each spend category!

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ALL ESTIMATES USE THE CONCEPT OF TOTAL COST OF OWNERSHIP RATHER THAN THE PURCHASE PRICE ALONE

Purchase cost

Shared supplier/ customer costs

Internal business costs

Components of TCO

Purchase price

Transportation

Usage / maintenance trade-off

Statement processing

Purchasing administration

Support and training

InstallationWaste and discarding of unused, expired material

Transaction costs

Warranty

Specifications

Expediting

Capacity

Financing costs

Purchase price is only the tip of the iceberg!

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Key learnings from the pilot projects

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Strong MOL Top Management support Unique opportunity of entering into relationship with the major companies of MOL-Group

New possibility for building efficient cooperation with MOL-Group

What we can offer: What our supplier can obtain:

Streamlined processes across MOL-Group

Better and quicker communication with all related MOL-Group companies andsuppliers

Undertaking cross-business activities within MOL-Group

Easier communication and information transfer with affected MOL-Group companies andsubsidiaries

Harmonised requirements for each spend categories

Possibility for entering into long term relationship with MOL-Group

Using well-known, well elaborated methodology for reviewing the spend categories

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What is your opinion about us?

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�Have you ever taken part in similar projects?

�Do you feel ready and capable to fulfil our requirements?

�What kind of new ideas do you have to present us?

�Are you satisfied with:

� up to the present co-operation with MOL-Group

� our supplier evaluation system

� the information transfer

�How do you see the MOL’s market position on your field?

Discussion points

•Where we are now?

•How can we improve?

•Questions and answers

Join us to be successful!

Susan GadóMOL, Director of Productivity Centre

E-mail: sgadó@mol.hu