World Class Strategic Sourcing The Deloitte approach to

World Class Strategic Sourcing The Deloitte approach to optimise supply and procurement

Index 1. The new procurement environment 2. Overview of Strategic Sourcing 3. The Strategic Sourcing process 4. Final Words

Procurement has become increasingly sophisticated in order to drive margin improvements 1 st Wave Strategic Sourcing • Centralised negotiations • Fewer suppliers • Competitive bidding process 2 nd Wave Strategic Sourcing • Abolition of “sacred cows” e. g. , Marketing, IT functions, Legal Relative Efficiency Demand Management • Cost management imperative • Standardised specs • Policy/procedures outlined • Some monitoring and tracking Matrixed procurement function • Procurement shares responsibilities with centers of competence mainly contract administration function • Responsibilities by the various parts of the organisation clearly defined • Procurement and contracting decisions highly decentralised Effective “end to end” procurement management • Vendor base fragmented • Vendor relationships • MIS allows unit/price tracking “incestuous” • System allows “policing” of compliance • Disbursement management • Service and quality improvement Up To Late 80 s 90 s Procurement (“In The Basement”) Sourcing (Easier cost improvement lever) New Millenium Supply Chain Management (Source of sustainable total cost advantage)

Index 1. The new procurement environment 2. Overview of Strategic Sourcing 3. The Strategic Sourcing process 4. Final Words

Overview of Strategic Sourcing • Procurement represents a significant opportunity for improving value for money by reducing costs. • Currently procurement activities are executed on an ad-hoc basis with minimal contract coverage • Strategic sourcing will assist us in choosing suppliers, allocating volumes among suppliers, managing supply risk and optimizing the supplier base performance, focusing on total cost of ownership • The primary objective is to develop a number of strategic supplier contracts with preferred suppliers, ensuring that our purchasing power is utilized to the maximum extent • A strategic sourcing review will be conducted on the materials and services making up our annual projected expenditure including a detailed spend analysis, market analysis, strategy development, bid solicitation and evaluation and will result in the implementation of organisation wide supply contracts. 5

Why Strategic Sourcing? Strategic sourcing will assist us in choosing suppliers, allocating volumes among suppliers, managing supply risk and optimizing the supplier base performance, focusing on total cost of ownership Increase Shareholder Value Revenue Growth Operating Margin Increased emphasis on Supply Chain Management Increased client satisfaction due to better service / quality of procured items Improved Communication and Coordination with suppliers Improved contracting and negotiating skills of staff Improved relationships with suppliers Increased compliance, compatibility and standardisation Asset Efficiency Optimise asset efficiency Improved terms on materials Increased use of supplier managed inventory Consolidated inventory Expectations Increased emphasis on continuous proactive performance management Established culture on operational excellence Improved agility and flexibility of partner Organisations and networks

World class procurement organisations must contain the following Strategic sourcing activities provide short-term savings, however a holistic and comprehensive view of Procurement and Compliance must be adopted in order to capture and sustain savings, and minimise cost of non -compliance Organisational Value Creation Aligned Supply Chain organisation Compliance Demand Management Strategic Sourcing Procure to Pay Inventory Supplier Management Ongoing Operations Procurement Vision and Strategy Preferential Procurement Integrated Procurement Information Change Management/Knowledge Management and Training Integrated Measures, Tracking, Recording & Reporting Infrastructure Top Management Sponsorship Mandate Empowerment Accountability & Incentives Procurement Infrastructure

Timelines Schedule of timelines in accordance with the PFMA and MFMA. Strategic Sourcing underpins Demand Management and thus needs to fall into the same types of timelines. MFMA example given Month Municipality Budget Year Mayor and Council/Entity Board Administration – Municipality and Entity July Mayor begins planning for next 3 year budget Senior officials of municipality begin planning for next 3 year budget August Mayor tables in Council a time schedule September Council through IDP process reviews strategic objectives October Demand Planning including strategic sourcing November Demand Planning including strategic sourcing Accounting officer/municipal manager reviews and drafts changes to IDP December Council finalises tariff Consolidate and prepare proposed budget January Approval and Submission of proposed budget for next 3 year budgets Review proposed national and provincial allocations to municipality February Council considers municipal entity proposed budget Submit proposed budget to Mayor March Mayor tables municipality budget Publish tabled budget, plans and proposed budget and plans for next 3 year budgets April Consultation with national and provincial treasuries Revise budget documentation in accordance with consultative processes May Consider approval of budgets Assist Accounting officer in preparing final budget Demand Management June Approval of budgets and SDIP Accounting officer submits to the Mayor and Council Budget offices of municipality determine revenue projections and proposed rate and service charges

South African Challenges South African Organisations are faced with a number of constraints that need to be addressed when designing and optimising their supply chains • Skills Availability – Limited skilled resources within the Supply Chain area – Retention of limited skills not easy • Requirement to cut costs and at the same time improve current business performance – Need to build capability with current staff and maintain momentum around improvement initiatives • Limited collaboration across the supply chain (internal & external) • Visibility and cooperation across the supply chain • Ability to embed supply chain improvements within the organisation • Adoption of world class technology and systems that are readily available to support process improvement

Index 1. The new procurement environment 2. Overview of Strategic Sourcing 3. The Strategic Sourcing process 4. Final Words

The Sourcing & Procurement “Hot” topic Strategic Sourcing initiatives have resulted in significant benefits being obtained for organisations by focusing on a total cost of ownership approach to procurement • Purchasing comes down to two activities: – Sourcing: includes all activities related to establishing and managing purchasing contracts – Procurement: includes all activities related to identifying and fulfilling an actual purchasing need. – Supply relationship management: Develop mutually beneficial relationships Assess Internal Supply Chain Assess Opportunity Identify Need Assess Supply Market Define Sourcing Strategy Create Requisition Go to tender and evaluate Award Sourcing Procurement Execute Sourcing Strategy Create Purchase Order Shipping Institutionalise Sourcing Strategy Create/Refine Supplier Groups Initiate Relationship Supplier Relationship Management Define Performance Expectations Manage Performance Payment & Settlement Assess Relationship Receive Goods/ Services

Strategic Sourcing & Procurement Purchasing has been getting a bad reputation due to missed deadlines, failed projects and broken savings promises. However, there are companies that have successfully transformed their purchasing function and created value along the way. Wouldn't it be cool if. . . Reality • Corporate purchasing helped to increase shareholder value • Profitability declines due to increasing operating costs • I could tell my stakeholders a success story about our purchasing activities • No visibility of how or if purchasing contributes to shareholder value • Purchasing supported an increase in cash flow • I could influence demand specifications of goods/services that we procure • It seems we are investing lots of money in purchasing projects but I have yet to see a positive ROl • Collecting basic spend data takes forever and data is not reliable • I had qualitative information about our suppliers for contract negotiations • I could drive down TCO (Total Cost of Ownership) through purchasing initiatives like strategic sourcing • NO view on who my most important suppliers are and what my relationships with then should look like Strategic Sourcing

A procurement function needs to work through the defined stages to achieve world class procurement capabilities Level of Added Value • • • Strategy fully supports the corporate goals and driven by corporate consensus Managing the supply risk while leveraging the competitive strengths Nurturing supplier relationships Supplier base share improvement target for cost and innovation added value Full visibility and trust across the external value chain Procurement maintains a rationalised supplier network that delivers technology, knowledge, products or service quality superior to competitors Procurement strategy aligned to corporate strategy Suppliers selected for strategic fit and deliver continuous improvement Data driven decision making Full support over purchasing cycle Risk sharing higher with the organisations co-located and jointly financed Business planning optimises all commercial aspects, tax, investment, people Stage III: Advancing Stage II: Developing Stage I: Reacting Buying • • • Procureme nt Partnershi p • • • Stage V: Pioneering World Class Stage IV: High Performing Alliance • • • Formal Planning processes Focus on SRM and sharing business plans Longer term, bigger value contracts with fewer suppliers Collaboration on cost improvement, increased levels of risk sharing Trained and qualified resources supporting all categories of spend Key Performance Indicators in place. Some category strategy creation, but not company wide, and not communicated effectively Volume leverage through effective use of competition across categories Track commercial measure of performance, targets for savings Technology enables i. e. purchase to pay cycle improvement through automation Selected supplier base consolidation Training and recognition of skills required Needs not anticipated, data not available or not used No organisation wide procurement strategy, large supplier base Transactional focus Procurement provides ad-hoc tactical support Low skills and resource, little career planning Time Line (potentially 3 -5 Years)

Building the Team – Managing the Project A sourcing engagement can affect many parts of an organisation. It is critical to identify and include the key affected groups in the process and develop a project management plan across all stakeholders. Who should you include? Inputs to the Project Management Plan • Demand management or planning shall be a crossfunctional exercise that bring the supply chain practitioner closer to the end user • Determine current and future needs • Formulate inputs for: Head of SCMU Programme managers End Users Technical expertise as required Human Resources Cross functional team Disposal manager Financial services • Preparation of the budget • Annual performance plan (PFMA) • Annual operational plan (PFMA) • Integrated Development Plan (MFMA) • Service Delivery and Budget Implementation Plan (MFMA) Logistics manager Demand Manager Acquisition manager • • Acquisition Plan Champions for departments on process and requirements

The Strategic Sourcing Process Effective strategic sourcing requires a clear and logical approach to provide a transparent and objective analysis of supplier capabilities, thereby ensuring sustainable savings without compromising service. Define sourcing categories • Document spend • Stratify spend • Identify and prioritize spend opportunities • Cross functional team development 2 4 3 Assess Internal Supply Chain • Identify demand drivers • Perform specification review, gap analysis & standardisation review • Perform supplier specification review • Identify all related Total Cost activities Assess Supply Market • Identify potential sources of supply • Evaluate industry(ies) • Identify viable sources of supply • Perform supplier assessments • Perform supplier comparisons 6 1 5 Develop Sourcing Strategy • Compile opportunities • Brainstorm process enhancement and supply strategies • Assess the Execute Sourcing Strategy • Develop supplier solicitation strategy • Implement supplier solicitation strategy feasibility of strategies • Conduct supplier • Draft an action • Develop process plan • Communicate strategies negotiation enhancement strategy • Obtain final approvals • Award contract Institutionalise Sourcing Strategy • Vendor management • Transition to new process • Develop supplier relationships • Implement operational changes • Establish joint supplier/Enterprise process improvement team • Monitor and report savings • Monitor and report performance

Either a tactical or strategic sourcing approach can be adopted to deliver results There a number of available sourcing strategies. Not every strategy will suit the same business situation. Depending on the maturity of the category, appropriate strategies should be selected to deliver results. Tactical Increase Buying Power Create an Advantage • “Traditional sourcing” • Often for commodity items/categories Volume Concentration • Those with simple supply market • Typically used if category has not been sourced previously • The key objectives are to achieve the best price and rationalise the supply base Best Price Evaluation Product Specification Improvement Strategic Sourcing Joint Process Improvement Strategic • Typically more complex categories – complex supply market and more complex products • Highly detailed and looking at all areas of the supply chain • Typically longer timescales than tactical sourcing • Fewer quick wins Global Supply Management Relationship Restructuring • Used when the category is welladvanced, the best price has been achieved

The scope of sourcing extends beyond supplier price negotiation and takes into account the total cost of ownership Amount paid to the Supplier Purchase Price Total Acquisition Cost (Actual Opportunity) Demand Drivers Specifications Internal Policies & Procedures Procurement Practices Inventory Practices Management Systems Decommissioning/ Disposal Internal Processes Operational Practices Factors generate additional costs to an organisation once an item is commissioned and in use

World class companies demonstrate excellence across the three key components of a strategically focused procurement organization Organisation ¨ Status and perceived importance of the Procurement Function ¨ Partnerships with key suppliers ¨ Joint improvement teams ¨ Cross-functional sourcing teams ¨ Accountability for savings ¨ Regional and local structure and responsibility World Class Procurement Capabilities Technology Process, Policies and Procedures • e-Procurement • e-Sourcing • Measurement systems for reporting • Transaction automation • Procurement cards • Project management tools • Simple and consistent purchasing process • Clearly defined sourcing process and rules • Authority to drive compliance given to Procurement • Ongoing focus on value analysis • Simple access to quality information • Focus on commodity management and customer service • View of sourcing, ordering, and accounts payable as one process (Source-To-Pay)

Critical Success Factors & Risks The following critical success factors and risks have been identified as key levers to successful Supply Chain Optimisation : ¨ Commitment by top management ¨ Acceptance from the business line leaders e. g. Directors ¨ Commitment of dedicated resources ¨ Allocation of funds (budgetary consideration) ¨ Qualified and motivated personnel ¨ Support from related disciplines ¨ Enabling tools (use of e-technology, ERP / GSS) ¨ Ability to track, capture and measure the benefits ¨ Transparency within the evaluation and adjudication process ¨ Confirm savings targets ¨ Organisation’s reputation in the marketplace may result in supplier resistance ¨ Ability to enable change of behaviour within the organisation ¨ Monitor and reward top performance

Index 1. The new procurement environment 2. Overview of Strategic Sourcing 3. The Strategic Sourcing process 4. Final Words

The Truth about Strategic Sourcing ¨ Truth 1: It's powerful if you get it right ¨ Truth 2: Cost will always keep creeping back in ¨ Truth 3: It's not rocket science ¨ Truth 4: Money on the Table ≠ Money in the Bank ¨ Truth 5: Direct Purchasing ≠ Indirect Purchasing ¨ Truth 6: It's not just about Price ¨ Truth 7: A Commodity ≠ Commodity ¨ Truth 8: Information is all you need ¨ Truth 9: Only measured results are good results ¨ Truth 10: It's not about Technology

Contacts If you have questions regarding strategic sourcing: Katherine Levy 082 602 4107 katlevy@deloitte. co. za Riana Bredell 082 578 6338 rbredell@deloitte. co. za