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Price- Cost-Value
For SA Govt Procurement Forum
May 2015
Craig Lardner FCIPS
Procurement Advisory Services Pty Ltd v1
• An iPod • An ATM • 15 kgs of margarine • Hand cleaner dispenser • 17 planets
Procurement Advisory Services Pty Ltd
What do these everyday devices have in common?
Where did these game-breaker products come from?
What drove the success…Relationship or Technology?
Who made their corporate fortune?
Procurement Advisory Services Pty Ltd
Delivering and measuring added value through clever procurement
Pop quiz…The Trifecta
2 real examples to prove there is life on far-away planets
Procurement Advisory Services Pty Ltd
Believe that price and cost are inside Value Believe that cost and value are inside Price?
PRICE COST VALUE
VALUE COST PRICE
A pop-quiz…The Trifecta…who wins?
Procurement Advisory Services Pty Ltd
Hand Soap Dispensers
Make or Buy?
A block of margarine
A core competency?
2 real life examples where price takes a back seat…
….and value wins the day
Procurement Advisory Services Pty Ltd
• $500,000 spend
• 30,000 units p.a-give away 100 units per day
• Not our design
• was a ‘me-too’ design
• Price is climbing [ a you-need-to-buy-from-me supplier]
• It’s their IP
• $250,000 spend
• same volume
• Our design…with their help
• Is a unique design
• price term fixed and changes capped
• Its our IP
•New models
•Liquid soap to foam
•Direct to our states not via our DC
•Pre fill pouch at dispenser factory
Procurement Advisory Services Pty Ltd
• $4M spend
• Bricks
• 15kg boxes
• 500 per day…170,000 pa
• Price is climbing [commodity markets driven]
• It’s our Capex and machine investment
• No ‘in use’ IP
• $3.4M spend
• To liquid
• NIL kg boxes
• NIL per day…NIL pa
• $600 k cost benefit by reducing suppliers cost
• It’s their Capex and machine investment
• It’s our ‘in use’ IP in our sector
Procurement Advisory Services Pty Ltd
Price…Cost …Value…
are basically the same thing…or are they… What are their distinguishing features?
What were they 5 years ago…what are they today…what will they be in 5 years time?
The 17 planets of 'value'
This new universe, explained.
Procurement Advisory Services Pty Ltd
Why bother with broadening our value-add through advanced procurement
…surely scoring the ‘best Price’ is enough
…..from here on known as the “P” word
And customised for public sector goals
New horizon procurement comes with a new thought….
(and a new definition of value)
Procurement Advisory Services Pty Ltd
Lets see how small, scoring ‘the best price’ is, in the whole universe of what modern procurement can and does ( in some places) do.
There is 1 universe …lets call it ‘SRB …Supplier Related Benefits’. There are 2 Galaxies…called ……….‘Cost management’ and ‘Other Value’ There are 4 Solar systems….called…. Cost reduction, Cost Avoidance, Process Improvers , Revenue Builders
and…then 17 planets, each called…..
This is too hard…I need a picture
Economy Grower
Supplier related
Benefits
Cost
management
Other
value
Process Improvers
Revenue builders
Cost reduction
Cost avoidance
The 2 galaxies are The 4 solar systems are
Cost management Benefits Activities that bring outcomes which are more
easily expressed in financial terms. The
tangibility varies from direct price cut to a
possible price rise being deflected.
Other value Benefits Activities that bring outcomes that every
business would cherish and welcome. Not easy
to see a financial gain but the work of our
government procurement has generated a
positive impact on the economy…even just a
local community economy.
The universe is
Economy grower
Procurement Advisory Services Pty Ltd
Cost
management
Cost
Reduction
Cost
Avoidance
Waived fees
Price Increase Avoidance
No purchase history cost
avoidance
Unit Price Reduction
Working Capital
Product Substitution
Demand Reduction
2 of the 4 solar systems 7 of the 17 planets
Cost Reduction Benefits
Activities that can be directly linked
to a financial statement
(P&L, Balance Sheet or Cash Flow )
and deliver tangible benefits to the
business.
Sometimes called ‘Hard’
Cost Avoidance Benefits
Activities that cannot be directly linked to a
financial statement (P&L, Balance Sheet or
Cash Flow ), however they still deliver a
benefit to the business - even if they make
something NOT happen (damages, rework).
Sometimes called ‘Soft’
1 of the 2 galaxies
Procurement Advisory Services Pty Ltd
Supplier related
Benefits
Cost
management
Other
value
Process Improvers
Cost reduction
Cost avoidance
The 2 galaxies are The 4 solar systems are
Cost management Benefits Activities that bring outcomes which are more
easily expressed in financial terms. The
tangibility varies from direct price cut to a
possible price rise being deflected.
Other value Benefits Activities that bring outcomes that every
business would cherish and welcome. Not easy
to see a financial gain but the work of our
government procurement has generated a
positive impact on the economy…even just a
local community economy.
The universe is
Revenue builders
Economy grower
Procurement Advisory Services Pty Ltd
‘other
value’ Benefits
Process
improvers
Economy
grower
Exclusivity
Competitive advantage
New customer
New product developed
Agency Brand
builder
Enviro helper
Risk reducer
Margin improver
(not revenue related)
2 of 4 solar systems 10 of 17 planets
Process improver Benefits
Activities that can change a process and put
us in a better business position than
previously. They are difficult to quantify but
the business wants the improvement even
though a direct and immediate cost change is
not discernable.
Economy grower Benefits
Activities that bring additional economic energy
and stimuli. These are only where the suppliers
role in the activity was instrumental in the
outcome. The supplier could have opted not to
assist us. These are expressed in terms of the
economic lift…local and wider
Innovation improver
Safety giver
1 of the 2 galaxies
Service lifter
Promise keeper
Tax efficiency
Community builder
Procurement Advisory Services Pty Ltd
So what?
If you stop at the point of getting the ‘best price’ and don’t milk the ensuing Supplier relationship to the fullest…..
then you can’t play on all planets.
‘Best price’ gets you on 5 of the 17 planets and only in 2 solar systems.
Procurement Advisory Services Pty Ltd
Cost
management
Cost
Reduction
Cost
Avoidance
Waived fees
Price Increase Avoidance
No purchase history cost
avoidance
Unit Price Reduction
Working Capital
Product Substitution
Demand Reduction
2 of the 4 solar systems 7 of the 17 planets
Cost Reduction Benefits
Activities that can be directly linked
to a financial statement
(P&L, Balance Sheet or Cash Flow )
and deliver tangible benefits to the
business.
Sometimes called ‘Hard’
Cost Avoidance Benefits
Activities that cannot be directly linked to a
financial statement (P&L, Balance Sheet or
Cash Flow ), however they still deliver a
benefit to the business - even if they make
something NOT happen (damages, rework).
Sometimes called ‘Soft’
1 of the 2 galaxies
P
P
P
P
P
Procurement Advisory Services Pty Ltd
‘other
value’ Benefits
Process
improvers
Economy
grower
Exclusivity
New customer
New product developed
Agency Brand
builder
Enviro helper
Risk reducer
Margin improver
(not revenue related)
2 of 4 solar systems 10 of 17 planets
Process improver Benefits
Activities that can change a process and put
us in a better business position than
previously. They are difficult to quantify but
the business wants the improvement even
though a direct and immediate cost change is
not discernable. Innovation improver
Safety giver
1 of the 2 galaxies
Service lifter
Promise keeper
Tax efficiency
No P’s here!
Economy grower Benefits
Activities that bring additional economic energy
and stimuli. These are only where the suppliers
role in the activity was instrumental in the
outcome. The supplier could have opted not to
assist us. These are expressed in terms of the
economic lift…local and wider
Competitive advantage Community builder
Procurement Advisory Services Pty Ltd
Price…Cost …Value…
Are not the same.
What were they 5 years ago……just buying
The 17 planets of 'value' …way beyond just buying
This new universe, explained. …what universe are you in?
Procurement Advisory Services Pty Ltd
Ideas of new value creation …created by you
The earlier note to you about this session said…
Your attention is required as there will be a test!
To ensure opportunities for value creation for your agency are explored, Craig will challenge
you to provide your ideas to your Head of Procurement following the forum.
A selection of ideas submitted will be used in a roundtable discussion group facilitated by
Craig later this afternoon
Write down one idea that would create value from our work with suppliers.
Show which planet it relates to.
one more idea
Show which planet it relates to.
Procurement Advisory Services Pty Ltd
Giving ideas is like giving a gift
Go and give your ‘gift’ to your boss.
he/she needs them for 3 pm session to day (remember to explain the planets)
Procurement Advisory Services Pty Ltd
1994 Director of Procurement Australia and New Zealand for BOC
1997 CPO Chief Procurement Officer [Global] The BOC Group, based in London
Next 5 years in FMCG...George Weston Foods as Director of Procurement
Spent $5,000 per minute non stop for 20 Years
2011 formed Procurement Advisory Services
2012 Commissioned to NSW Government as advisor
Fellow of CIPS …the Chartered Institute of Purchasing and Supply
Sits on the global CIPS Congress …members choice, 3 year term
2013 Interim Managing Director of CIPS Australasia
2014 Global President CIPS
2015 Returned to Congress
Guest Speaker – Craig Lardner FCIPS
Craig Lardner FCIPS Procurement Advisory Services Pty Ltd
[email protected] +61 (0) 2 9523 3704 +61 (0)406 429 668
