Procurementsilverbacklogistics.com/wp-content/uploads/2018/03/Procurement-Mar... · Step 6: SWOT 8 March 2018 ... •Gain share (only payable for 12 months; recurring savings for

Procurement

8 March 2018©Copyright silverbacklogistics.com. All rights reserved

The place to go for free supply chain advice1

ContentsSlide

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Topic

Seven steps

The changing face of the customer

Category management overview

Vested outsourcing

Learnings

3PL view of procurement process

Celesio case study

Approaches

Risk factors

Critical success factors



The Seven StepsStep 1: Know what you are buying



The Seven StepsStep 2: Understand and prioritise•Pareto

•Spend analysis

•For whom?

•Which suppliers?

•Product/service volumes and cost drivers?

•What are the existing relationships and how do they perform?

•How critical is this to my business?





The Seven StepsStep 3: Market categorisation

▪ Partnership approach▪ Long term relationships▪ Sharing risk & reward▪ Cost modelling ▪ Open book or hybrid contracts

Bottleneck Critical

Routine Leverage

▪ Secure service ▪ Challenge special requirements▪ Reduce complexity

▪ Minimise effort▪ Blanket contracts▪ Group deals▪ Volume discount ▪ Tariff based contracts

▪ Short contracts▪ Market knowledge & analysis▪ E-auctions▪ Re-tendering

Co

mp

lexi

ty /

un

iqu

enes

s

High

Low

Relative spend or savings potentialLow HighRichards, 2013

The Seven StepsStep 4: Supplier categorisation



Develop Core

Nuisance Exploit

Relative spend

Att

ract

iven

ess

Low High

High

Low

▪ Some specialist transport▪ Some market distribution▪ Some pallet supplies

▪ Search for alternatives▪ Contracts minimize risk

▪ National Distribution Centre

▪ Evaluate potential suppliers very carefully

▪ Set up long term arrangements▪ Explore mutual cost reduction

▪ Global sea freight▪ Global air freight

▪ Group items together and negotiate with several suppliers

▪ 12-24 month contracts

▪ Full vehicle transport▪ Normal pallet supplies

▪ Annual contracts▪ Look for local suppliers▪ Vendor-managed inventory

Richards, 2013

The Seven StepsStep 5: PESTLE



oliticalP

conomicE

ocialS

echnologicalT

egalL

nvironmentE

The Seven StepsStep 6: SWOT



Strengths Opportunities

Weaknesses Threats

The Seven StepsStep 7: Action plans •Category management needs to be a shared or agreed activity.

•Action plans should flow from categorization.

•Have I secured supply for higher risk (Bottleneck and Strategic) purchases?

•Where can we simplify specifications to increase choice?

•How can we reduce effort on routine areas?

•Where do I need market knowledge?

•What support do I need for my critical contracts?

•What role should operations play?

•How do you increase our company’s attractiveness to key suppliers?



The changing face of the customer



Good solutions do not stand outLogistics Quality

Good logistics creates opportunitiesFlexibility

Good logistics need not cost a fortuneCost Efficiency

Good logistics continuously improve from the inside outProcess Innovation


The place to go for free supply chain advice 11

Category Management Overview

Application Case Study

The buyer’s point of view

Aligning the strategy



Key pillar: logistics service centres

•Why consolidate activities into logistics service centres?

• Natural teams focusing on logistics management, improved service

• Network coordination (inbound/outbound)

• Increased scale, cover all materials (including raw materials)

•How many logistics service centres?

• Driven by local business requirements and dynamics



International Logistics

Service Centre(s)

managing marine and air

movements

International Logistics

Service Centre(s)

managing marine and air

movements

Circa 25 Logistics

Service Centres (LSCs)

managing all logistics,

supporting the markets

Model design characteristics•Clear distinction in unlocking the value between “lift and shift” of processes to external providers and “transform and shift” where there is structured re-engineering both prior to the contract and then throughout its lifecycle.

•Moves from “how much can we save?” to “how do we transform processes, productivity and cost structures in a way which supports both business growth and financial performance?”

•Paying more attention to structured outsourcing processes. The roll-out involves a well-led outsourcing team, analytical evaluation of the supply market, detailed investigation of supplier capabilities and rigorous examination of transparent cost structures.

•Having a full understanding of the risks of lock-in and dependency, and clarity on exit strategies. The basis of the exit strategy will also give due consideration to, and protection of, intellectual property

•The relationship will be monitored together with ongoing performance improvement, measurement, supplier development and breakthrough thinking, particularly in the process of re-engineering.



Considerations for commercial construct•How to get the balance between risk and reward

•How to drive the right behaviours

•Minimising ‘barriers of entry’ enabling high adoption by region / end markets

•‘Do once’ standardised commercial construct that drives consistency and compliance

•Establishing the appropriate level of legal protection and exit costs

•New methodology to calculating savings (data normalisation)



Vested outsourcing decision matrix



Vested outsourcingapproach

Core company activitydon’t outsource

Conventionaloutsourcing

To be driven primarily byfinancial considerations

Organisational Expertise

Pote

nti

al v

alu

e to

the

org

anis

atio

n

Low High

High

Low

Vested outsourcing: Five golden rules



Vested outsourcing1 Focus on OUTCOMES, not TRANSACTIONS

The service provider is paid based on its ability to achieve mutually agreed desired outcomes.

The value that comes from the outcomes-based approach depends on transformation through innovations i.e. new value creation that a service provider can bring to the table.

2 Focus on the WHAT, not the HOW

•Performance partnerships let each party do what it does best. Unless the company that is outsourcing has the skills and the resources to keep up with the latest innovations in the service it is outsourcing, it should leave the details to the experts

3 Agree on clearly defined and measurable outcomes

All parties must be explicit in defining the outcomes they want. These outcomes are expressed in terms of a limited set of — ideally, no more than five — high-level metrics

4 Governance structure should provide insight, not merely oversight

A properly designed governance structure should establish good insight, not provide layers of supervisory oversight

5 Optimise pricing model incentives

The pricing model must balance risk and reward for the organisations.

The agreement should specify that the service provider will deliver solutions, not just activities



Optimise price model: risk and reward•The vested agreement should be structured to ensure that the outsource provider assumes risk only for decisions within its control

•Aim to provide incentives to the service provider to solve the customer’s problems. The better the service provider is at solving those problems, the more profits the outsourcing company can make

•Inherent in the business model is a reward for the service provider to make investments in process, service or associated product that will generate returns in excess of contract requirements

•Stepped vested reward model avoids the temptation for the outsource provider to ‘sandbag savings’ and drives them to deliver quicker and faster



Commercial construct and governance•Commercial construct• Management fee (based on people and system costs).

• KPI Bonus (maximum of management fee – target performance & default level matrix)

• Gain share (only payable for 12 months; recurring savings for BAT)

• Implementation costs recovered before gain share is paid

• Commercial terms based on cost neutral approach for LLP

•Governance• Monthly regional project board

• Quarterly LSC regional board

• Gain share tracked monthly

• Regional/local finance approval





Indicative LLP commercial structure

The more the LLP earns, the less BAT paysMultiple local 3PL providers without a mark-up

“Th

rou

ghp

ut”

Op

erat

ion

al c

ost

s (3

PLs

)

Admin/Mgmt

5-10%

90-95%

TotalSpend

Operatingmargin

x%of mgmt costs

0%

ServiceKPI

0%

x%of mgmt costs

LLP’s fee is NOT linked to 3PL spend

LLP makes % on it’s direct costs and the same against Service KPIs

VestedShare

x%x%

of savings within calendar year

As Is

Once the saving stream dries up, the gain-share will be replaced increasing the Service KPI to Y%

“Red

uce

d T

hro

ugh

pu

t”O

per

atio

nal

co

sts

(3P

Ls)

ReducedMgmt

Ops Margin

Service Margin

One-offGain-Share

Cx% net savingsfor BAT

To Be

Lower mgmtcost than BAT

The LLP’s management cost replaces BAT’s costs and is at a fundamentally lower cost base due to IT synergies & shared services

Learnings•Don’t underestimate (minimise) the task!!• Major organisation change needs support with appropriate resources and structure (RAA)

•Seek out pioneers & incorporate their learnings• Many ‘rabbit holes’ could have been avoided by receiving external insight

•Don’t ‘re-invent the wheel’ when not necessary• Similar legal frameworks in other categories / regions available as reference

•Lock down specification before commencing contract negotiations• Contractual legal framework evolved in tandem with functional requirements



Learnings•Clearly define functional contract construct responsibilities

• Define dependency between functional leadership and commercial interests

•Be aware of functional engagement that could impact commercial construct

• Align commercial negotiations so as not to impede success/progress of supplier engagement

•Align with all functions who will need to support / benefit

•Critical resource to deliver change / communication management

• Complex model design requiring iterative communication / explanation / clarity





A 3PL view of the procurement process

The supplier’s point of view



Celesio – the healthcare group

Patient and Consumer Solutions

European key player in pharmacy business

▪ 9 countries

▪ 2,300 pharmacies

▪ Over 600,000 customers daily

▪ Dispensing of over 160 m scripts a year

Pharmacy Solutions

European market leader in pharmaceutical wholesaling

▪ 15 countries

▪ 130 branches

▪ Partner for over

65,000 pharmacies

▪ More than 100,000 deliveries per day

Manufacturer Solutions

European specialist in healthcare services to the manufacturer

▪ 13 Countries

▪ Home Delivery Services

▪ W & D

▪ Sales/Nurse teams

▪ EUR 23 bn Turnover (2010)

▪ Operations in 27 countries

▪ 47,000 employees

A leading international pharmaceutical trading and service company

Movianto - Dedicated to healthcare logistics

Overview of the 3PL •Specialist pharmaceutical supply chain solutions• Medicines and healthcare regulatory authority

•3PL services• Warehousing and distribution

• Transport only

•Full “order to cash” management

•4PL services• Pan – European road freight

• Global freight services



Procurement interaction•Start-up companies

• Virtual companies

• No volumetrics

• Poorly understood supply chain in local market

• European solutions central hub

• Integrated local market solutions

•Transport services

• Transactional

•Major pharmaceutical clients

• Strong supply chain and procurement teams

• More data than information

•Department of health/hospitals

• Procedural

•Value range - £40 k to £3M



Approaches



Procurement approaches

• Complete range• Verbal brief• E-auction• Full brief

• Free text• Predefined boxes

• Highly structured and contractual

Buyer’s requirement

• Price-only: transactional• Supplier relationship: KPI

penalties• Partnership

• Risk share• Innovation• Investment• Long term contract• Drive outcomes not

transaction

Supplier perspective

• Trends• Responsibility transfer from

logistics to procurement• Removal of all human contact• On-line applications• Tick-box only responses• E-auctions• KPI penalties but no rewards• Move to outcomes focus• Process transparency• Contract upfront• Clear and scored criteria

The view from Scandinavia•Brief sent Friday afternoon – questions back by Monday

•£2M contract • 6 pages

• Incorrect data

• On holiday

•Document with appendices• Further documents embedded in text

•Response in 5 days

•High on transactional detail/low on outcomes



Best in class example•Pre meeting• Understand scope

• Explore options

• Understand objectives and outcomes

•Tender documents• Clear list of attachments

•Operational meeting• Clarify points

• Validation of thinking

• Discuss incentives for cost/service trade-off

•Submit tender

•Engagement rather than presentation

•Engagement• Understand outcomes

• Appropriate resourcing and response

• Drive solution design

• Map “as is” or create “to be”

• Deliver right service at right price



Risk factors – supplier management•Product management / new product development • To what extent could rapid market change or new product development increase the chance of

supply disruption?

•Supplier selection management• To what extent are supply risks assessed as part of the sourcing strategy and supplier selection

processes?

•Supplier management (financial strength)• How well managed are financial risks in the supply chain?

•Supply chain performance• How closely monitored and managed is the performance of the supply chain?





Critical success factors

Supplier Analysis - Know the supplier, their financial position, competitors, customers, SWOT analysis etc.SUnderstanding the Relationship - supplier mapping. Is the relationship strategic?. How does each party view the other? 360 feedbackUPerformance Monitoring - Set SMART objectives & agree credible criteria to measure performance against themPEmpowerment - Make the supplier work. Give them appropriate responsibility for improving compliance, handling complaints etc.ERegular Reviews - Plan regular reviews as appropriate with agendas to cover performance and developmentRInnovation - Encourage innovation with supplier. Don’t leave it to chance, set development objectives and stretch targetsIOpen Communication - Develop a planned communication strategy with both the suppliers and the businessOReview & Re-visit Annually - Conduct a formal review every year to confirm value added and set new objectivesR

Good behaviours in this environment

•A strategy or roadmap describing the supply chain of the future and how it supports the core competencies of the business

•A clearly defined set of objectives, balanced with the needs of safety, health and environment

•A high level of familiarity of the cost of the supply chain

•The capacity to model supply chain costs, perhaps supported by a data warehouse style model

•A clear understanding of where the competitive edge lies in the business.

•A clear service level management policy

•The customer will exhibit a high degree of control

•The customer will have a clearly defined set of targets for any LSP involved in their supply chain

•The customer may be using outsourcing alongside decentralization and rationalization to achieve supply chain targets

•The customer is willing to share their metrics with others to endorse their ‘best in class’ approach



The client has… Balcony view



For more details on any of these topics, please contact us at: [email protected]

Documents

Procurementsilverbacklogistics.com/wp-content/uploads/2018/03/Procurement-Mar... · Step 6: SWOT 8 March 2018 ... •Gain share (only payable for 12 months; recurring savings for