Procurement Driving Supply Chain Integrity with Critical Services Providers

Rob Halsall Executive Manager, Group Category Management The Commonwealth Bank of Australia

Commonwealth Bank Group Procurement Driving Supply Chain Integrity with critical services suppliers Lessons from the Commonwealth Bank June 2013

AGENDA •

Define Value, Integrity and Value Proposition ?

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Category Management Strategy & Opportunity Identification

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Case Study – External Consulting e2e

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Lessons Learned

Define ‘Value’, ‘Integrity’ and your ‘Value Proposition’

Category Management ‘Value’ Wordle

Value is about what you do and performance is about how well you do it….therefore procurement value is about getting more out of supplier expenditures – Hackett Group 2010 Supply chain integrity must encompass both operational and reputational dimensions. Operational …the ability of supply chain to meet objectives for quality, productivity, and financial performance. Reputational integrity …the ability to protect and enhance the brand, respond to customer and investor concerns, and comply with the growing burden of legislation. PwC - 2009 5

Define ‘Value’ & ‘Value Proposition’ - Essential to drive engagement Recent CPO Agenda article referred to excellence as ‘function having value-creation target that includes KPI’s with cost, risk, innovation, process improvement and, where appropriate, revenue enhancement’. Things Done Well by World-Class Procurement Organisations (The Hackett Group, 2009) Creates a very clear value proposition and “brand” that can be understood, articulated, and championed by the spend owners themselves. Performs “customer management” processes to ensure that they’re getting most value from not just suppliers, but Procurement itself too.

(Business Dictionary) Value Proposition: This is the single most important question. If you can’t explain, in 3 jargon free sentences or less, why customers need your product (or service), you do not have a value proposition.

Supply Chain Integrity Creating a value proposition is part of business strategy “Strategy is based on a differentiated customer value proposition. Satisfying customers is the source of sustainable value creation”. (Kaplan, Robert; Norton, David. Strategy Maps, HBS Press, 2004). Founders of the Balanced Scorecard

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Very often external suppliers are held to unrealistic standards with internal supply chains not bound by the same standards. This could easily lead to integrity issues if there is a double standard that suppliers are held to versus internal counterparts. – My view

Define Value Proposition – is it visible and measurable?

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Category Management Strategy & Opportunity Identification

Category Management Strategy Attributes ?

1

Executive Summary

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Category Overview

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Total Spend

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Contract Status / Spend Analysis

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Spend by BU/Supplier / Contracted Vs.

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Needs / Requirements Analysis

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Industry / Market Analysis

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Opportunities / Risks

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Recommendations & Implementation

4

Spend Analysis

Non-contracted •

TCO Analysis

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Revenue / reciprocity analysis

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Internal Processes – P2P, ordering method, dispute resolution, reviews, compliance

2

Category Overview

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Category Description

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Contract Status Overview

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Category & Supplier Segmentation

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Are we a customer of choice?

5

Process Analysis

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External Processes – Supplier E2E, logistics, stakeholder management

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Innovation opportunity – BPR, what is best practice?

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Market performance, growth, capacity, competitiveness,

3

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Internal • Stakeholders

Identify / Map Category Stakeholders

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Stakeholder Communication Plan

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Socialise Approach

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Market Analysis

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Technology trends, impacts, future state

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Porters 5 forces, SWOT/PESTLE

Category Management Strategy Attributes (contd.) •

What are the business requirements ?

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Linking analysis and business requirements

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Understand Groups core commercial drivers and Suppliers economic drivers

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Category Value Opportunity Assessment - create opportunity matrix – suitability, feasibility and acceptability

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What are the actions / opportunities,

.i.e. Functional / Technical / Quality/ Delivery

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Service Process / Pricing/ Demand /KPI/SLA Specifications

Sustainability

8

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Data collection methods

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How do they link to future strategy?

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Which supplier processes support

Opportunities

10

Group sustainability? •

People, Customers, Community,

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Recommendations & Implementation timing, resource requirements, costs and

benefits and how do we track?

Governance, Environment

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Risk Management

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10

What are mandatory risk assessments?

Materiality, Data Security, Supplier, Country Technology, Operational, Contract •

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What are risk assessment costs?

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Manage

Gain approval from PSG / business

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Transition to BAU

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SRM/SPM, Contract & Compliance

Management, Risk Management •

Benefits tracking

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Continuous improvement

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Avoid estoppel!!!

Opportunity Identification – Holistic Analysis

4-5

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Spend Analysis

1-3

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Level 1 – Spend Overview - Spend by BU / Department with main suppliers

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Level 2 – High Level Cost Drivers Transaction level detail from GL, supplier reporting, invoices etc.

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Level 3 – Detailed spend / supplier & category cost drivers & High level opportunity identification – transaction level detail from GL, supplier reporting, invoices, understand supplier / industry pricing

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Level 4 – Cost Component Drivers and Cost Save Ideas – Detailed cost driver composition, ideas to influence spend / generate benefits, socialise with BU’s through workshop. RFI if necessary to obtain more detail. TIME CONSUMING BUT NECESSARY

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Level 5 – Ideas Opportunity Summary – evaluate ideas and opportunities. Quantify benefits, prioritise opportunities (Ease of implementation / Customer Impact). Socialise with BU’s and sponsors / PSG – TIME CONSUMING BUT NECESSARY

Category Strategy Considerations Buyer / Supplier Power Considerations ♦ Are we a customer of choice? How do suppliers view us? (Growth Vs. Revenue – Rockets, Dogs, Stars, Cash Cows)

Harnessing Suppliers Self-Interest for Mutual Gain ♦ Benefit - Identifying potential sources of value to current suppliers

Definition - ‘A company that consistently receives competitive preference for scare resources across a critical mass of suppliers’

♦ Challenge – Uncovering and aligning suppliers’ strategic priorities to our business objectives

Discover our true standing with suppliers

♦ Align our needs with supplier needs to increase mutually valuable relationships

♦ Benefits – Secure better pricing, performance, and resources

♦ Challenge – Gaining visibility into suppliers’ decision-making process and knowing how to act upon the insights

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Commonwealth Bank of Australia / Presentation Title / Confidential

♦ Move beyond price and volume when developing critical supplier relationships (.e.g. expertise, information, infrastructure)

Case Study External Consulting e2e process

Demonstrate Value – benefits reporting and effective change management

External Consulting - RFP Evaluation Process An External Consulting panel was appointed with revised engagement process to support business users in their utilisation of External Consultants Establish Baseline Spend and PreQualify Firms Jul to Aug Year 0

Issue RFP to PreQualified Firms Sept to Oct Year 0

RFP Review & Feedback Nov to Dec 11 Year 0

Final Panel Selection

Implement & Monitor Supplier Relationship

Jan to April Year 1

External Consulting Evidence Based Approach – Data is Oxygen !! •

FY baseline established through a RFI to top 66 suppliers to gain detailed project and resource level information

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Top 10 consulting companies accounted for 72% of FY total spend. Panel compliance not as high as we would like with large tail of suppliers

New panel structure determined following thorough RFP process and Group Executive consultation •

RFP issued to 50 Consulting firms to select suppliers to enter a Master Consulting Services Agreement (MCSA)

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Final negotiations completed with 10 successful suppliers across 5 sub-panels totalling 13 engagement types

Revised engagement process increasing visibility of spend and supporting deeper partnerships being developed •

Compliance to panel and engagement process now tracked and reported to BU CFO and ExCo on frequent basis

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New panel and engagement process now available on intranet and ERP system

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May Year 1

External Consulting - RFP Evaluation Process Structured process completed by Group Procurement

Result

RFP process

50 Suppliers invited to RFP

3. Negotiations

2. RFP Evaluation

1. RFP Execution

36 Submissions

23 suppliers shortlisted for negotiations

10 Suppliers recommended for Panel Complete final negotiations with short-listed Suppliers

Activity

• Qualitative analysis of RFP responses

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• Detailed RFP designed to capture both capability and a transparent pricing structure • Identification of suppliers invited to respond to the RFP (based on incumbent suppliers and additional suppliers identified in the market analysis)

– Comprehensive team of evaluators from across the business

• Quantitative analysis of RFP responses based on comparative baseline costs (Procurement) • Presentations to Group Executives with the results from qualitative and quantitative assessment to agree on final supplier shortlist based on capability

Recommendations endorsed by Executive Committee

Evaluation short-listing – external consulting

• Quantitative: % ‒ Rates ‒ Discounts ‒ Historical data 16

Quantitative Score High

• Qualitative: % ‒ Capability ‒ Capacity ‒ Experience ‒ Account Management ‒ Value Add ‒ Compliance

Low

Approved Evaluation Criteria:

EXAMPLE ONLY

Supplier 11

Supplier 8 Supplier 3

Supplier 12 Supplier 4

5 sub panels grouping 13 Engagement Types

Supplier 9

Supplier Ranking: Quadrant 3

Quadrant 1 Supplier 2

• Finance

Supplier 7 Supplier 6

Quadrant 4 Low

• Strategy • General

Supplier 1

Supplier 5

(uncompetitive)

Supplier Short-listing Methodology

(competitive)

A qualitative and quantitative assessment was completed by engagement type to select the preferred suppliers

• HR Quadrant 2 Supplier 10

Qualitative Score

Excluded from shortlist based on qualitative assessment Uncompetitive pricing

High

Competitive pricing Current Recommendation

• Technology Advice

Category Strategy - Value levers – Consulting example Competency Area

Commercial

Compliance

Opportunity • Source a revised panel to effectively meet CBA's broad range of requirements

• Existing panel contracts are expiring in ? and are being extended to ?

• Establish a rate card by role type for each area of expertise

• There is currently a large variation in rates between suppliers performing similar services

• Negotiate secondment discounts for engagements where CBA has the responsibility of the project

• Current agreements do not include secondment discounts

• Negotiate volume discounts for project size and duration and annual volume with panel suppliers

• Current agreements do not include project size and duration discounts

• Increase compliance to preferred consulting panel, with use of niche suppliers on an exceptions basis

• There is currently a low compliance to the existing supplier panel (?%) • Benefits assume ?% compliance

• Include competitive bidding amongst panel members for high value projects

• Current engagement process does not leverage the Procurement team to tender high value projects

• Measure supplier performance and direct assignments to higher performing suppliers

• Improve competition amongst panel members to improve quality and cost

• Review and improve current engagement process

• There is low compliance to the existing engagement process (?% of spend have no PO attached)

• Set a target resource mix by service type and ensure compliance from panel suppliers

• Current resource mix has a heavy weight on senior resources compared to benchmarks

• Leverage in-house capabilities

• Current engagement process does not ensure internal capability is leveraged

Demand

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Rationale

Addressable Spend

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Savings Range2 Low

High

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TBC

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Demonstrate Value – requires effective change management Implementation often requires extensive change management: • Implementation Announcement • “How to” guides & FAQs • Training • Regular ongoing communications

Quarterly communications: • Panel changes • “How to” use the new process & “How to” raise a purchase order in Ariba • FAQs • Benefits achieved to date 18

Demonstrate Value – Requires effective reporting •

Are you clear on what sources of information are required for reporting purposes?

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Have you determined the strategic critical suppliers that you want to invest reporting resource in?

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Demonstrate Value - Benefits methodology & reporting Benefits realisation relates to the implementation of an initiative which provides a quantifiable benefit Benefits are classified into two key types: • Hard benefits (further broken down into “P&L Impact” and “Capex” benefits” • Soft benefits

The two benefit types are recognised as either • Inner year benefits or • Outer year benefits

The two methods of reporting benefits are • Annualised and • Incremental

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Commonwealth Bank of Australia / GCS Benefits Methodology

Lessons Learned Sustainable procurement value

Value / integrity enablers

Sustainable procurement value throughout E2E process Benefits generated and maintained through E2E Category Management:

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Strategic sourcing – demand aggregation, supplier rationalisation, market dynamics and negotiation Standard processes and technology – consistent, reliable effective and efficient contract compliance monitoring. Create transparency with strategic critical suppliers

Supplier relationship management –savings through continuous improvement, develop synergies align organisational and supplier strategies Research demonstrates that without an end to end operating model between 10-50% of value will be eroded through poor compliance and ineffective supplier management.

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Break through performance improvement

Demand management – change, frequency, type and volume of goods and services acquired

Supplier collaboration (2-5%)

Contract award Value



Compliance and supplier relationship management

Strategic sourcing

Demand and Sourcing (5-15%)

Contractual compliance and continuous improvement Maverick buying and lack of contract management quickly erode value (–10-50%)

1 Efficiency benefits

3 3 2

2 Time

How procurement transformation can drive sustainable benefits

1

Category / Sourcing capability

2

P2P processes and systems

3

Procurement operating model

Lessons Learned – value / integrity enablers •

What’s the value proposition to the business and the suppliers?

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Less is more for senior executive buy-in – Specificity and what’s the hook?

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Engage the right level and number of key stakeholders

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Be flexible, there is no one right way of achieving your goal

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Embed realistic timelines based on complexity of project and environment (never underestimate how long negotiations will take)

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Build a robust exemption process into your procurement strategy

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Use the process as an opportunity to change the perception of procurement value (internal & external)

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Hold internal users accountable as well as external suppliers

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Outputs drive outcomes – continuous communication, don’t go stale

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Data is oxygen – ensure you understand your baseline Identify process excellence & innovation opportunities throughout the journey

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Remove procurement lexicon where possible

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Commonwealth Bank of Australia / Presentation Title / Confidential