2004 Northeast Supply Chain Conference Development of Channel

2004 Northeast Supply Chain Conference Development of Channel Partners “Critical Supplier Issues. Moving Toward Enterprise Spend Management” All Rights Reserved - Sarmento Silva, C. P. M. September 21, 2004

Supply Chain People, Process & Technology “What’s Missing” Purchasing Professionals Suppliers • • • Strategic Commodities Sourcing the Best Suppliers Building Relationships Understanding Contracting Transition through Enterprise Spend Management (ESM)

STRATEGIC COMMODITIES – Perform high-level spend analysis – Identify strategic sourcing opportunity areas – Define scope of each initiative – Lay out preliminary cost savings ideas – Generate, validate and prioritize potential cost savings ideas – Develop implementation plan around agreed upon ideas and syndicate with relevant stakeholders – Develop Strategic Sourcing Initiatives – Develop tracking and reporting mechanisms – Build hard savings estimates into budgets – Estimate savings potential • Conduct spend diagnostic • Validate Commodities • Drive opportunity capture initiatives

STRATEGIC COMMODITIES Consumer advertising High Consulting Direct Materials CSOs Meetings Journal ads Travel Professional promotions Contractors HR Low Potential savings* CROs Investigator payments Fleet Computer hardware Legal services Freight MRO Maintenance and repair Line Equipment Electric Easy Hard Ease of capture** Sample Commodity Charting Special media

Supply Chain People, Process & Technology “What’s Missing” Purchasing Professionals Suppliers • • • Strategic Commodities Sourcing the Best Suppliers Building Relationships Understanding Contracting Transition through Enterprise Spend Management (ESM)

STRATEGIC SOURCING INITIATIVES ORGANIZATIONAL DESIGN 1. Create a Strategic Sourcing Team within the Purchasing Organization to facilitate and lead 2. Utilize cross functional teams to create “Buy In” 3. Approve additional Purchasing staff to maintain organization’s ability to maintain infrastructure support while working to drive other on-going cost savings efforts 4. Allow budget dollars for team initiative needs such as contractors, market consultants, temp labor, etc.

STRATEGIC SOURCING INITIATIVES PROCESS PRINCIPLES • Maintain manageable number of high impact teams at any one time • Allow time for initiative planning • Drive identified opportunities • Continue to drive other on-going efforts around smaller opportunities in parallel to major initiatives • Focus on identifying and capturing quick hits first • Provide periodic status reports to executive management

STRATEGIC SOURCING INITIATIVES Phase 1 Define analysis/scope Phase 2 Establish team Phase 3 Conduct initial analysis Phase 4 Develop cost saving action plans Phase 5 Develop cost tracking/ reporting system 6– 8 weeks • Define specific categories (segments) for analysis (within defined scope) • Define basic team structure, objectives and responsibilities • Identify specific team members • Generate potential cost saving ideas • Identify and secure potential additional resources • Establish baseline spend and savings targets SAMPLE WORKPLAN • Identify initial data requirements and collect initial data • Substantiate cost saving ideas and savings estimates • Prioritize ideas • Gather additional data to resolve issues • Develop implementation plans around agreed upon ideas as well as contingency plans • Develop procedure for measuring actual savings vs. baseline over time • Establish formal system to report actual savings vs. target

STRATEGIC SOURCING INITIATIVES Objectives • Identify and realize significant savings for individual spend category • Train broad cross-section of internal customers in bestpractice purchasing methodology Milestones • 6 -8 weeks per team for cost savings idea identification • Several weeks/months thereafter for implementation and realization Approach • Teams facilitated by full time experienced staff from purchasing organization Resources • Typically 4 - 6 part time members per category team (coaches, internal customers, finance) Role of teams • Generate, analyze, and commit to cost savings opportunities Role of internal customers • Identify team members for each initiative • Provide access to data, opportunity identification, and sequence GUIDING PRINCIPALS

STRATEGIC SOURCING INITIATIVES KEYS TO SUCCESS • Sufficient participation and buy-in from internal customers • Senior management support to promote idea generation, drive implementation, and capture budget savings • Appropriate timing and sequencing of initiatives to reinforce sense of urgency • Early syndication of strategic sourcing team mandate • Savings not at the expense of quality of service • “Outside the box” idea generation • Emphasis on achieving compliance

Supply Chain People, Process & Technology “What’s Missing” Purchasing Professionals Suppliers • • • Strategic Commodities Sourcing the Best Suppliers Building Relationships Understanding Contracting Transition through Enterprise Spend Management (ESM)

Building Relations Building a strong relationship with critical suppliers is the greatest challenge for Supply Chain professionals. Suppliers need to be handled with the same “care and feeding” you give to customers …

Building Relations … but suppliers need to understand that the Pharmaceutical Industry has changed and that today we all face ‘shark infested waters. ’

Building Relations Because suppliers faces similar challenges in technology and process changes, Supply Chain staff should help suppliers understand the benefits and impacts of being the “Best of the Best” through. . . Aligned Objectives Teamwork

Building Relations Pharmaceuticals faces the challenge of slowing “top line” sales. In the past top line sales drove revenue and profit but now these market pressures has driven the industry… Revenue Profit Spend … to focus on controlling the bottom line.

FM I I W Building Relations Supply Chain Professionals must focus suppliers attentions on the Benefits of working together. Benefits for Suppliers: ü Increased sales and establishment of strategic relationship due to leveraged volume spending ü Improved customer satisfaction due to improved product and process visibility ü Improved market share within customer’s organization due to reduction in maverick spending ü Process efficiencies through use of electronic transactions

Building Relations The bottom line is that suppliers want to perform beyond our expectations because they understand the benefits of working to become a valued partner in our individual supply chains.

Supply Chain People, Process & Technology “What’s Missing” Purchasing Professionals Suppliers • • • Strategic Commodities Sourcing the Best Suppliers Building Relationships Understanding Contracting Transition through Enterprise Spend Management (ESM)

Understanding Contracts A critical piece of the puzzle is building the contracts that organize, define and clarify how we will do business with our suppliers. Teamwork

Understanding Contracts Good contracts are more than words on a piece of paper … …more than drawings, diagrams, and legal terms … … more than prices or signatures. True Supply Chain Contracts define the working relationship between us and our suppliers. They should also define the relationship of our suppliers with their suppliers. … and so on.

Understanding Contracts Good contracts mean all parts … Strategic Master Agreements Statements of Work Outline Agreements Intellectual Property Tactical Specifications Terms and conditions Pricing Logistics and Inventory Transactional Deliverables Service Levels Warranties and Guaranties Remediation or Termination … going in the same direction

Understanding Contracts Cross Functional Review A critical component of contracting is thorough cross functional review especially utilizing: üFinance üLegal üSafety, Health & Environment üQuality Management üEngineering üManufacturing üInformation Services

Understanding Contracts Good contracting saves time … … and time is money

Supply Chain People, Process & Technology “What’s Missing” Purchasing Professionals Suppliers • • • Strategic Commodities Sourcing the Best Suppliers Building Relationships Understanding Contracting Transition through Enterprise Spend Management (ESM)

“Enterprise Spend Management” Business Challenges “Spend data is too time consuming to compile, and often there isn’t enough data or available data is not accurate. ” “The sourcing process takes too long to complete…I am swamped with paper forms and spreadsheets, and analyzing vendor responses is like comparing apples to oranges. ” “Everyone does his/her own purchasing… no one knows we have preferred suppliers and negotiated contracts. ” “The requisition transaction is complicated and not everyone has access to the ERP system. ” “Invoices are sent to the requesters who keep them for weeks, even months. Our suppliers are upset that they are not getting paid on time and the AP department has no visibility to the outstanding payables. ”

“Enterprise Spend Management” Aligned Strategy • Strategic Supplier Partnerships • Global Leverage • Business Strategy Development Measured Results • Balanced Scorecard • Total Cost of Ownership Measurement • Transaction Volume Metrics • Strategic Sourcing Process • Process Efficiency • Supplier Process Linkage Aligned Strategy Measured Results Coordinated Processes Optimized Organization Enabling Technology • ERP Leverage • Efficient Data Exchange • Data Collection and Analysis Coordinated Processes Enabling Technology Optimized Organization • Continuous Learning • Cross-Functional Involvement • Global Organization

“Enterprise Spend Management” The objective of spend management is to focus on spend for sustainable savings: Spend Management Solutions include: ü Data Warehousing & Analysis Solution ü Electronic Sourcing Solution • “Spend-centric" focus — systematically aligning the organization's mission, resources, ü Electronic Procurement Solutions including: e. Buying, e. Contracts, and processes around effectively managing and e. Invoicing platforms spend • Implement closed-loop management processes that deliver continuous feedback by capturing spend data and supporting best practice spend management strategies • Enable companies to constantly measure and improve their results — so they can find the savings, get the savings, and keep the savings on an ongoing basis

“Enterprise Spend Management” A Key Priority Pharmaceutical organizations must recognize the opportunity to drive business value and process efficiencies in its procurement operations. Commit to achieve expense reduction goals in delivering value through spend management. Spend management becomes a key priority. Drive initiatives with targeted benefits. Develop projects to drive value through spend management processes, tools and techniques.

“Enterprise Spend Management” Traditional Purchasing: • Time intensive, paper based transactions • Transaction processing, tactical focus • Limited time & focus on supplier management • Limited competitive landscape • Lack of visibility to negotiated contracts and preferred suppliers • Maverick spending • Lack of spend data, limited spend analysis Spend Management: • • Electronic transactions, intuitive user interfaces Reduced purchasing intervention Reduced cycle time in sourcing activities Increased time and focus on spend and supplier management Full visibility to contracts and preferred suppliers Reduction of maverick spending Improved spend data capture and reporting capabilities Improved spend leverage Improved process effectiveness Increased purchasing savings

“Enterprise Spend Management” Lessons Learned • To be successful in spend management, an organization must recognize the change impacts to various groups of stakeholders. • Two groups of stakeholders that will experience significant changes in the area of spend management are suppliers and purchasing professionals. Benefits for Suppliers: ü Increased sales and establishment of strategic relationship due to leveraged volume spending ü Improved customer satisfaction due to improved product and process visibility ü Improved market share within customer’s organization due to reduction in maverick spending ü Process efficiencies through use of electronic transactions Potential Impacts to Suppliers: q Technical requirements to participate and support new technology q Adoption of new processes to support new technology q Training of personnel to perform new roles and responsibilities q Less competitive, non-strategic suppliers may not retain/gain business with existing customers

“Enterprise Spend Management” Purchasing professionals face a number of challenges to achieving spend management capabilities. New Processes • Early and active involvement in design of to-be processes • Communication and training of process changes • Establishment of supportive policies New Technology • Training on the use of new technology enablers • Technical support to ensure uptake • Monitor usage and performance to ensure successful implementation New Roles & Responsibilities • Clear role and responsibility definition • Communication and training of new activities and tasks • Supportive structure to ensure smooth transition

“Enterprise Spend Management” Enterprise Spend Management creates greater business visibility and speeds reaction time by creating a centralized data model and rapid enablement of best practices across a corporation.

“Enterprise Spend Management” For the next generation of Supply Chain excellence, ‘Managing Spend’ is not optional; deciding how intelligently you will do it is the only issue at hand. Executives must create a culture of fiscal discipline and back that up with an enterprise spending management system that enables every employee to participate in keeping their own companies competitive. Do this and you create a legacy of increasing value in the long term while providing solid and impressive results in the short term.

About our Speaker Sarmento Silva, C. P. M. , is a 25 -year career Purchasing Professional, currently serving Astra. Zeneca Pharmaceuticals as Director, Purchasing System Development and Re-engineering on assignment as Leader for their current my. SAP ERP and Ariba Buyer implementation project. Astra. Zeneca is a Global leader in the Pharmaceuticals industry whose 2002 sales totaled more than $8 Billion in the US. Prior to coming to Astra. Zeneca, Mr. Silva was Global Manager of Packaging and Printing for Rubbermaid© Corporation. He is a Life Certified Purchasing Manager carrying the certification since 1984. He has been an active member of the Institute for Supply Management (formerly NAPM) since 1980 and has served at every level of the organization including National Vice Chairman for Membership Activities. He currently serves on the Editorial Review Board for “Inside Supply Management” ISM’s signature Magazine. He has a BA in Communications and a MBA in Marketing. In 1993 he was awarded the Distinguished Service Award from the Western New England Purchasing Management Association, Massachusetts House and Senate and received a citation from the Governor’s office for statewide excellence.