Strategic Sourcing in the New Millennium

1. Strategic Sourcing in the New Millennium Financial Executives Institute Presented by: Rusty CarpenterVice President & General ManagerAmerican Express Consulting Services Chicago, Illinois May 25, 2000

2. Topics • Where Procurement is Today • Evolution of Procurement • Effects on the Purchasing Organization

3. Some Questions to Ask... Do you have the best deals possible? Do you have electronic catalogs? How good is compliance to purchasing policies? Have you selected a vendor for e-purchasing? How much do you spend? How much do you know about e-purchasing?

4. Reducing Baseline Costs vs. Increasing Revenues • Cutting expenses is easier than increasing revenues because it is a pro forma exercise where companies can... • Manage it • Prove savings through reporting • Implement faster • Identify results via EPS impact • Realize immediate savings as opposed to projecting increased revenues

5. Forces @Work Several elements affect the decisions pertaining to entering and maintaining a strategic sourcing platform Supply Chain Efficiencies Technology Mergers & Acquisitions Strategic Sourcing Psychology Globalization Organization Market Expectations Financial/ Economic

6. Corporate Restructuring & Technology Applying technical advances to administrative tasks reduces the cost of baselines, alters the composition of an organization and provides the ability to concentrate on strategic initiatives Large Administrative Staff Technology Strategic Sourcing • Check orders • Verify cost centers & approvers • Faxing orders • Repetitive sourcing • Creates reports • Internet access • Digital catalogs • Email approvals • EDI • Dynamic reporting • Contract negotiations • Sourcing better deals • Vendor analysis

7. Technology Adoption Life Cycle Over 200 Fortune 1000 corporations use a pre-packaged e-purchasing application Technology Adoption Life Cycle Chasm Number of Users Time Innovators Laggards Early Majority Early Adopters Late Majority Source: Crossing the Chasm, Geoffrey A. Moore

8. Evolution

9. The Procurement Playing Field has Changed All members of the supply chain are participating in e-commerce thereby providing more sources to procure goods Local Implementers/VARS Wholesaler/ Distributor End User Manufacturer Software Company Computer Company Ingram Micro Computech Customer Printer Company Companies are for illustrative purposes only

10. The Evolution of Sourcing Long cycle times were an obstacle to achieving lower prices Past Present Future Characteristics • Paper based • RFPs • Long-term contracts • Long cycle times Price Market Price Time

11. The Evolution of Sourcing The introduction of “direct to supplier” purchasing and on-line bidding has improved procurement costs and timing Past Present Future Characteristics • Direct to supplier e-purchasing • Improved cycle times to purchase • Increased competition • Alliances • Better-than-market prices • Suppliers “buying the business” Price Market Price Time

12. The Evolution of Sourcing With the emergence of e-commerce, companies must try to realize and lock-in spot market prices Past Present Future Characteristics • Auctioning (Reverse and Forward) • Consortium buying • Faster marketplaces, “spot buying” • Exchanges Price Long-Term Contracts Market Price Spot Market Prices Time

13. Changing Business Models Over the last 12 months, several different electronic procurement business models have evolved Direct to the Supplier Supplier Internet User Supplier Supplier

14. Changing Business Models Over the last 12 months, several different electronic procurement business models have evolved Direct to the Supplier Supplier Internet User Supplier Supplier E-Purchasing Applications User Internet Internal Server Supplier User

15. Changing Business Models Over the last 12 months, several different electronic procurement business models have evolved Direct to the Supplier Supplier Internet User Supplier Supplier E-Purchasing Applications User Internet Internal Server Supplier User Digital Marketplaces 3rd party User Supplier Internet User Supplier User Supplier

16. Sourcing Savings Opportunities As goods become more customized and advanced, greater savings opportunities can be achieved Indirect Commodities Standard Type Goods Custom Components 5%-10% 15%-40% Savings from E-purchasing Factors to Consider • Fragmented supply base • Size and attractiveness of spend • “Real” requirements (supply and demand) • Speed to savings

17. Spending Quadrants HIGH LOW HIGH LOW Selecting the most appropriate and advantageous procurement mediums enable a company to realize the greatest savings and benefits • Capital • Energy • Transportation • Cost of Goods Sold Recommendations Quad I - Utilize preferred supplier relationships and ad hoc searches Quad II - Consortium buying, reverse auction for long term contracts Quad III - Capitalize on excess inventory marketplaces, spot markets Quad IV - Conduct spot market buying; hedge with long term fixed price deals SPECIALTY III STRATEGIC IV Cost of Goods/ Indirect Operating 10% 5% Dollar Size of Purchase • Business Retail • MRO • Services • T&E SUNDRY I STAPLES II 80% 5% Indirect Operating Indirect Operating Frequency of Purchase Source: Center for Advanced Purchasing Study (NAPM) Circles represent percentages of transaction volumes

18. Effects on the Purchasing Organization

19. The Evolution of the Purchasing Organization The success of on-line market procurement is highly contingent upon the strategic development/revamping of the purchasing organization Past Present Future • Focused on transaction processing • Negotiates with suppliers • Begins to act strategically • Purchases one-offs • Become core of strategic purchasing • Lead cross-functional teams across business units • Qualify suppliers and look beyond traditional base

20. The Future of the Purchasing Organization The purchasing organization of the future is faced with new challenges in managing vendor and net marketplace partnerships Challenge Impact • Train buyers in auctioning • Utilize forward auctions to sell excess/distressed inventory • Establish vertical marketplaces • Create and maintain purchasing consortiums • Pre-qualify vendors to participate in auctions • Reduces sourcing and acquisition costs • Allows purchasing organization to reduce inventory holding costs • Allows for the exchange of items relevant to the business • Leverages purchasing power of peers to shift bargaining power • Minimizes total cost of ownership

21. Purchasing at the Lowest Cost In conjunction with e-purchasing technology, a sourcing and supply strategy can ensure the lowest cost possible Sourcing and Supply Strategy • Develop industry expertise • Target commodities and suppliers • Benchmark • Conduct competitive bid process • Review proposals • Negotiate agreements • Select suppliers • Establish metrics • Conduct on-going contract performance management • Drive compliance

22. Purchasing at the Lowest Cost Purchasing organizations need to focus on total cost factors in order to maximize the contribution suppliers bring to their businesses Major Components of Total Cost Payment Terms Life Cycle Pricing Warranty Service

23. The Cost of Procuring Goods and Services Once sourcing practices are established and supplier agreements are finalized, it is necessary to analyze the procurement transaction process Recon. & Data Integration Buying Paying Establishing a baseline cost for the procurement process enables companies to... • Assess which steps are incurring the highest costs • Measure performance and cost savings after a process redesign and/or an implementation of technology

24. The Cost of Procuring Goods and Services By assessing the procurement process, companies can understand the magnitude of process costs per transaction Key Initiatives to Realize Savings • Maintain simple, streamlined processes • Routinely benchmark performance levels • Direct employees towards more value-add, strategic activities Financial Management & Improvement People & Organizational Improvement Integrated Purchasing Management Process Assessment & Innovation Technology Strategies Performance Assessment & Continuous Improvement

25. Knowing the Company Culture Change management is an integral element to the success of a strategic sourcing program What Characterizes Your Company? • Does a mandating or encouraging culture exist? • Do employees resist or embrace change? • Do employees comply with company policies? • How do employees accept technology? • What role does e-commerce play in the company today?