Global Procurement and Supply Chain Management for the Oil and Gas Industry conference in Barcelona, September 2013 Business process outsourcing in procurement: opportunities, challenges and methods
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Global Procurement and Supply Chain Management for the
Oil and Gas Industry conference in Barcelona, September 2013
Business process outsourcing in
procurement: opportunities,
challenges and methods
Agenda
2
Bright Group / Credentials
Why outsource?
What can you outsource in
procurement?
How to do?
We start with a short introduction of ourselves and what
lead us to the topic of BPO…
…then do a short overview of outsourcing benefits…
…and stop in more detail on how can you outsource
procurement, what are benefits and challenges, to figure
out feasible options.
…and wrap up with an overview of the approach we
developed properly manage a project of transferring
procurement to the outsource.
How to decide? As you will see, there is far more then one option. So we
talk a bit about an analytical tool we developed to support
decision with proper analysis…
Pavel Goryachev, senior manager
Gleb Skrypin, manager
Speakers:
Ivan Marchenko, manager
Materials
Management,
Data analysis
Simulations and
modeling
Category
management
Process and
organisation
enginering
Regulation
Bright group
3
► Bright Group is a leader in procurement
advisory services on Russian market
► Key services:
► Procurement and SCM advisory
► Strategic advisory
► IT solutions
► Bright Group is the trusted business
advisor that contributes most to the
success of its people and clients by
creating value and confidence
► Bright Group helps its clients to search for
new approaches and strategies to
achieve their potential - from globalization
to technological innovation
Strategic
Advisory
Business
consulting
IT consulting Outsourcing
► Established in 2010 by a team of like-minded professionals in
SCM and management
► Our more than 100 professionals are the foundation of our success
Credentials
4
Our clients:
Our partners:
TNK-BP, Royal Dutch Shell
and Russian TNK joint
venture, major Russian oil
and gas producer
Sakhalin Energy, joint venture (shareholders
include Shell and Gazprom), leading energy
supplier in Asia Pacific, the only LNG in
Russia, one of the largest complex oil&gas
projects in the world
Gazprom Neft, major Russian
oil producer, Gazprom oil
producing subsidiary
Rosneft, major oil
producer in Russia
and in the world
…and multiple other local and
international companies in
oil&gas, energy, petrochemicals
and other industries
What lead us to look into the topic of BPO (1/2)
5
Sakhalin Krasnoyars
k
Hanty-Mantsiskiy
Tyumen
Moscow
Saint-Petersburg
Murmansk
Irkutsk
Samara
Yamalo-Nenetskiy
Boston
USA
USA
RUSSIA
Birmingham
EUROPE
Melbourne
AUSTRALIA
Bright has implemented more than 25 SCM projects
for large international companies:
Demand planning
Category management
Contract and obligation management
Supplier management
Inventory management
Materials movement management
Inbound logistics
Large investment projects supply
Bright has partners all over the
world, accumulating world best
practices.
6
What lead us to look into the topic of BPO (2/2)
The majority of BPO providers start their activity in 2000 year. The volume of BPO shows significant volume
growth from year to year.
In 2012, the volume growth is
estimated in 33% due to new
customers coming.
Barriers for BPO development in
Russia:
Large part of “shadow”
company’s activity
Assuming exclusivity of certain
sectors of the economyLack of
vendor management skills in
Russia
High mental tolerance
Low trust level
Managing different time zones
with different legal
requirements
Data integrity issues
BPO service structure
Why companies outsource?
7
• Pressure to reduce operating costs and improve bottom-line performance
• Access to specialist skills not available internally
• Release of cash from the transfer of assets
• Access to leading-edge technology without capital investment
• Ability to transfer risk to the service provider
• Desire for flexible and scalable solutions that support growth or divestitures
• Drive to focus more on core processes and business activities
• Delivery of continuous improvements in process effectiveness and efficiency
What can be outsourced?
8
…
Finance Accounts payable/receivables
Expenses reporting
Payroll accounting
Cash management
Foreign exchange
Fixed assets
Procurement Requirements creation and approval
Order processing
Service desk support
Claims management
Supplier additions/updates
Indirect procurement
Real estate Facilities planning
Property usage
Least management
Portfolio optimisation
Project management
Asset management
HR processes HR administration processing
Training
Recruitment
Expatriate programmes
Payroll processing
Compensation benefits
Business
process
outsourcing
services
Why outsource procurement and SCM
9
Accuracy of planning
Reduction of lead times
Complete and timely satisfaction of
needs
Reduction of administration costs
Solutions for standardization and
unification of production equipment
Decrease in unclaimed high liquid
positions
Increase in stock turnover
Reduction of unfinished construction
due to supply storage
Increasing the transparency of
procurement processes
Significantly improved reporting and
controls to manage the business
Access to enabling technologies and
3rd party experience and expertise
at a lower cost
ADVANTAGES CONCERNS
Improving
reliability of
production
Cost
reduction
Capital
optimization
Function
improvement
Organizational change issues
Electronic system modifications
May require new skills set to
manage service provider
performance
Requires investment of time for
existing indirect staff
11
What can be outsourced in procurement and SCM
Goods
Processes
Structure Goods/services:
• Wells,
• Rotating Equipment,
• Energy
• IT Infrastructure
• Valves, etc
Organisational Scope:
• Entire organisation
• Specific Business Units
• Specific Subsidiaries
• Specific Assets
Business process scope:
• Demand management
• Strategic procurement management
• Sourcing & Award
• Contract Management
• Supplier Management
• Inventory Management
• Materials Movement Management
• Warehousing
• Logistics
BPO
BOX
What answers will you need to take a conscious decision
11
Scope:
Which processes?
Which materials/services?
Which organisations/subsidiaries?
Organisation:
What will you need to change inside and how do you do it?
How do you organise interaction with the outsourcer? How do you control?
Analytics:
What will it give? What’s the effect?
What should be requirements to the outsourcer?
Levels in the SLA?
12
Holistic approach to assess opportunities of BPO
Our integrated solutions
are designed on a client
by client basis
Step 1 Step 2 Step 3 Step 4 Step 5
Benchmarking, gap analysis, and opportunity development
Define scope
and vision Current state
assessment
Improvement
portfolio
Scenario
analysis
Future state
model Agreement on
indicators Implementation
Step 6 Step 7
Bright’s Spend Analyzer
Supply Chain Network Modeling
Data procurement
process and spend
KPI’s
‘As Is’ model and
‘To Be’ options
‘To Be’ models
validation
What to outsource;
Where to spend;
How to track
Key challenges and trends
13
How could organisations
respond from BPO
prospective?
Supply Chain Network Design is an integrated process focused on quantifying,
designing and improving the physical supply chain with focus on cost and
leadtime reduction and service level improvement
The business environment today is characterized by
long and complex supply chains, growing cost pressures
and customer expectations, high levels of Merger and
Acquisition activity and development of new and
emerging markets
What are the key trends impacting Supply
Chains today?
Significant pressure on companies’ margins, increasing
working capital, a lack of Supply Chain rationalisation
and an increased focus on route to market design.
Therefore, many organisations have no choice but to
embark on the journey to critically analyse Supply Chain
Network performance and design
How do these affect organizations?
► Lack of data in company’s information environments makes tactical decision making a challenging task
► There exists a tendency to estimate the efficiency of tactical decisions only with financial model. Such
models are often high-level and do not concern operational aspects of the business. Although such
operational impacts are very important in many industries
► On strategic level, there are often a lot of interdepending factors that need to be considered
simultaneously
Bright’s Spend Analyzer reports will provide significant insight
into Company’s expanding spend
14
Before Supply Chain Network Design we starts with Bright’s Spend Analyzer can provide a
view into a number of important procurement process and spend KPI’s, including:
Supplier/contract
management
Benchmarking
Contract / project monitoring
Key performance
measurement
Performance reporting
Continuous productivity
improvement
Supplier selection
Certification
Negotiations
Contract development and
issuance
Pre-qualification
Enquiry
Expenditure
profiling
Spend analysis
Item categorization
Strategic sourcing
plans
Transaction processing
Requisition receipt
Contract / supplier identification
Order placement
Invoice / receipt processing
Payment
preparation/documentation
Administrative
Development of
policy, procedure,
processes
Vendor management
Training, reporting
Strategy development
Establish policy and procedure
Procurement vision / mission development
Develop savings targets and multi year plans
Source planning
Supply base
reconfiguration
Commodity management
Supply/demand market
analysis
Aggregate spend
Identify areas of
opportunity
Staff and process
Re-engineering
people and
processes
Develop organization
profile
Develop process
maps and best in
class processes
Strategy
Business process
management
Strategic spend
analysis
Transaction management
Bright’s Spend Analyzer reports will provide significant insight
into Company’s expanding spend
15
Bright’s Spend Analyzer can provide a view into
a number of important procurement process
and spend KPI’s, including:
►Total spend ($ volume) by the organization
►Total number of transactions by the organization
►Total spend ($ volume) by vendor
►Total spend ($ volume) by GL (General Ledger) account
►Spend by type (channel) — PO, p-card, other
►Spend by business unit
►Spend by region / geography of business unit
►Spend by region / geography of vendor
►Spend by category
►Spend by category + sub-category
►Spend by category + vendor
►Spend by category + sub-category + vendor
►Average transaction amount by vendor
►Number of transactions
►By FTE requestor
►Spend trend analysis / pattern analysis
►Transactions by category
►Transactions by threshold
►Duplicated item analysis
…that allows for additional customized analysis by using
Supply Chain Network Modelling
Data driven approach supported by Supply Chain Network
Design (SCND)
16
Supply Chain Network Design permits the evaluation of operating performance prior to the implementation of a
system:
► It enables to perform powerful what-if analyses leading to the most efficient decisions
► It permits the comparison of various operational alternatives without interrupting the real system; it permits
time compression so that timely policy decisions can be made
Service level analysis Quantify market coverage and reaction time based on time and distance analysis
Inventory Modeling Quantify and define appropriate stocking levels throughout the Supply Chain
Centre of Gravity Find the ideal locations for DCs, crossdocks or satellite facilities in order to minimise time,
distance and overall cost to serve
Network Optimisation Apply advanced mathematical optimisation models to evaluate all facility, transport,
leadtime and service options in a single, integrated model
Simulation ► Use simulation to understand pressure points and to quantify potential risks
► Supply Chain Networks, warehouse flow, production lines etc
Network Flow
► Quantify and optimise flow across the Supply Chain Network
► Understand the impact of cross border trading, import/export regulations and trade
compliance
Geographical Display Create geographical maps of the Supply Chain Network enabling effective communication
and visual problem solving
Supply Chain Network Design steps case study
17
Modeling steps illustrated
Step 4 – Sensitivity Analysis is conducted to
determine the effect of changes in key input
variables on the overall cost/service output. These
can be plotted if needed to illustrate the most
important factors.
Step 2-3 – A number of alternative ‘to-be’ models are
created (agreed in the original scope) from blue sky to
constrained models. These are evaluated with the client
to demonstrate the cost/service options.
Step 5 – This sensitivity analysis is repeated
against the preferred to be model to determine key
factors and build sensible contingency into the to
be network design.
Step 1 – The as-is network cost breakdown is
gathered and used to create and baseline the
as-is network model.
Flex input variables
up and down to
determine variable
sensitivity
Flex input variables up
and down to determine
variable sensitivity and
contingency
Warehousing costs example
1 Labor $1,199,191
2 Management salaries $456,648
3 Warehousing system costs $234,554
4 Insurance $76,739
5 Fuel surcharges $5,567
6 Transportation $365,536
7 Customs and duties $6,657
8 Tax $33,456
9 Inventory $1,908,987
10 Rental equipment $33,456
Total $4,320,791
Cost service trade off curve
50 60 70 80 90 100
High cost
Low cost
Low service High service
1,000
900
800
700
600
500
Blue Sky
Option 2
Option 4
Option 1
As-Is
Option 3
Option 5
% of volume within target lead time
Service
To
tal n
etw
ork
co
st
Sensitivity Level
Low High Base
Volume
Fuel
Labor
Co
sts
Network cost breakdown – region 1
Sensitivity graph
50 60 70 80 90 100
High cost
Low cost
Low service High service
1,000
900
800
700
600
500
% of volume within target lead time
Service
To
tal n
etw
ork
co
st
As-Is
Option 3
BSA + SCND benefits
18
1. What categories
to outsource
3. What processes to
outsource
2. Where to spend
and allocate
4. How to optimize
5. How to track
We can leverage expert’s view and assumptions to create a model of the system being managed…
…evaluate the impact of planned changes on operations in production, logistics, retail and other
industries…
…and we also have a useful tool to support strategic decisions. Creating simulation model is a good
way to formalize all the things and put them together into a single decision support tool
Scenario analysis of material management policies
case study
Definition of problem and formulation of modeling task
Development of simulation model
concept
Development of simulation model
Testing and validation of model
Scenarios planning and data
preparation Scenario analysis
Expert evaluation of scenario
analysis results
Повторное использовани
е имитационной
модели
Повторное использовани
е имитационной
модели
Re-use of simulation
model
Description of problem
and proof of simulation
approach to its
solution
Simulation model concept
containing description of
model and means of its
usage
Simulation
model in
simulation
environment
Ready-to-
use validated
simulation
model
Scenario analysis plan,
data prepared for
scenario analysis
Scenario analysis
results
Scenario analysis report
including recommendations
based on modeling data
Most common tasks solved with simulation differ by model
complexity and number of considered parameters
20
Tactical level Mid-term
management level
Strategic
level
Compare logistic
network development
options at a high level
using macro indicators
Determine the connection between
costs and service level depending on
forecasting accuracy
Determine replenishment
policies for SKU groups
Model siz
e, num
be
r of
consid
ere
d p
ara
mete
rs
• Allocation of warehouses, consumption points, plants, etc… • Stock distribution between warehouses • Logistic characteristics of product types • Transportation and warehousing tariffs
• Transportation load building policies • Trucks and containers properties • Orders aggregation and processing algorithms and
parameters
• Parameters of goods reservation policies at warehouses
• Consideration of various demand profiles for SKU groups
Functional blocks of
simulation model can be
re-used from previous
stages
Task:
Task: Task:
Complexity of model algorithms
Simulation models allow to determine dependency between
service level and logistic costs for certain network configuration
21
• Replenishment
• Modeling of manual
interventions into ordering and
replenishment processes
• Transportations
• Warehouse operations
Forecasting
accuracy
Target
service level
50% … 95%
80% … 99%
Simulation model
Costs
Requirements
to logistic
infrastructure
The model iterates over
pairs «Forecasting
accuracy – Target
service level». For
example, for interval from
80% to 99% for service
level with step 1% and
forecasting accuracy
from 50% to 95% with
step 5%, 20x10=200
iterations will be
performed. If necessary
each iteration can be split
into 10-50 launces to
perform Monte-Carlo
experiment for each
iteration.
Simulation model will allow to
determine requirements to
warehouse and transportation
capacities considering
seasonality, forecasting
accuracy and logistic network
configuration
The model will not give
mathematically optimal solution
but, on the other hand, it will be
able to consider random
demand changes and manual
interventions into ERP systems
material management
processes
The model will provide
sound and verified
knowledge about
dependency between
service level,
forecasting accuracy
and logistic costs.
This knowledge might
be used by experts
when taking decision
about supply chain
management
Simulation models also allow to estimate effect of changing
replenishment algorithms into the entire supply chain
22
Alternative algorithm N
Alternative algorithm 1
Existing replenishment algorithm Order
placement Delivery Demand plan
Lead time
Reorder point level
Safety stock
Current unrestricted stock
Simulation model allows to
estimate the effect of changing
replenishment algorithms into the
entire supply chain
Service
level
Logistic costs
Modeling of the entire supply chain will provide a holistic view into effect of
selected replenishment policies which, in its turn, will help experts determine a
optimal balance between service level, stock volume and logistic costs
Stock
volume
How do you decide, which processes and which
materials/services to outsource: sample
23
High Value/
High Complexity
Low Value/
Low Complexity
HSSE IAE Engineering & Maintenance Services MRO/PVFF Offshore Installation Oil Sands Mining Equipment Rigs Rotating Equipment Static Equipment Subsea Equipment & Umbilicals Trading Wells Installed Equipment
Industrial Gases Logistics Metals & Alumina Technology Wells Services & Suppliers
Engineering & Project Management Services Fabrication Geophysics IT Infrastructure Professional Services Purchased Chemicals Real Estate Retail Software Apps Technical Resources Travel
Supplier Engagement
Supplier Transition
Demand Management
Category Management
Supplier Management
Collaborative Planning
Issue Resolution
Supplier Detail Maintenance
Catalogue and Content Management
Originate and Process Requisitions
Originate and Process Purchase Orders
Tracking and maintenance of order
Fulfilment
Resolving Disputes and Enquiries
Ongoing Compliance and Monitoring
Ongoing Compliance and Monitoring
Sourcing Strategy
Understand Market Trends
Understand Business Needs /
Requirements
Category Sourcing Strategy
Market Engagement
Contract Negotiations
CATEGORIES PROCESSES
HARD
EASY
MED
How do you estimate the effect
24
Quantitative
• Less procurement and SCM costs
• Better deals (prices, quality)
• Risk transfer to the outsourcer
• Less “request to delivery” time
Key effects:
Qualitative
How do you estimate:
• Use process mapping to identify
possible workforce reduction
• Use simulation to find the optimal
option given your situation
• Contact possible providers to find out
their deal details
• Use experts to identify risks
• Request SLA parameters from
possible providers
• Use other’s experience – learn on
other’s mistakes
How do you organise the interaction
25
Employees
Procurement
Delivery &
Returns
Contract Mgmt
Accounts
Payable
Buy Desk
Help Desk
Category
Management
Suppliers {CLIENT} Procurement Outsourcer
•Deliver
goods/service
•Manage returns
•RFP/RFI responses
•Contract negotiations
•Pricing
information/updates
•Manage relationship
•Approve sourcing
strategy
•Approve strategic
suppliers and
contracts
•Create and approve
requisitions
•Receive/return of
goods and services
Invoice approval
•Strategic Sourcing
•Category Management
•Tactical Buying Support
•Inquiry Support
•Employee / Supplier inquiry
management
•Escalation to 2nd level
support
Create Non-catalog POs
Manage Catalog
Inquiries
•Requisition and PO
Management
•Compliance / Policy /
Approval Management
•Tactical Buying
•Claims Management
•2nd level inquiry support
P2P Tool
Requisitions
Supplier ERP
{CLIENT} SAP
There are multiple ways to organise procurement outsourcing. Here is a sample option
How do you control
26
Client
(control dep.)
Service
provider Client Service
provider 3rd party
This model assumes creating of control department of outsourcing
activity.
This model assumes drawing a 3rd party, responsible for reviewing
outsourcer’s activity.
Technical
Monitoring
Close Interaction
Risk assessment
Demand
Finance
Commercial
Receipt
Reporting
Non-compliance to technical requirements and HSE standards
Failure to achieve production goals
Production downtime and untimely execution of works
Non-receipt of a target commercial effect
Inefficient accommodation needs in the market
Incomplete and untimely receipt of materials
Distortion of financial data untimely formation and presentation of financial results
Inefficient use of budget resources
Control
department/
3rd party
RISKS
MODEL 1 MODEL 2
Control instruments Service Level Agreement
KPIs
Function development plan
How do you change (1/2)
27
PREPARE:
Align
objectives
with service
Provider
CREATE:
Define and
optimize
processes
IMPLEMENT:
Secure
internal
support and
Adoption
2 3 4 5
6
Sa
vin
g p
ote
ntia
l
1
5 year and more 1 year
TRANSITION:
Establish strong
governance
TRANSFORM:
Assure provider
innovation
PERFORM:
Gaining savings
2 year
Short term Medium term
Savin
g s
ourc
es
Long term
Cutting down on engaging
external consultants
Cutting down on trainings
and learnings
Stopping projects
System optimization
Optimization and
standartization of
processes
Outsourcing of parts of the organization
Integration, mergers and concentration
How do you change (2/2): fail reasons and how-tos
28
Be realistic about your capabilities and skills
Use what you have, hire what you need
Careful and thorough planning of migration/transition
Monitor impact of project on control of day-to-day business
Not understanding legacy or cultural issues
Not understanding the detail
Detailed mapping of current processes, systems and organisation:
why are things done the way they are?
Lack of robust or well articulated Business Case
Lack of forward planning
Invest in creating a robust Business Case
Invest in planning now to save later
Change overload (e.g. integration program) Identify current change load
Don’t duck the issues - stop initiatives if necessary
Insufficient senior sponsorship
Lack of buy-in from Business Units
No assessment of business readiness for change
Conflict over centralisation versus decentralisation
Strong, visible, sustained sponsorship
Carry out ‘readiness for change’ review at the start
Ensure buy-in from businesses
Make the case for centralisation versus decentralisation
Why Projects Fail How to manage
Inappropriate migration strategy
Poor transition management
Skills mismatch
Underestimation of complexity
and implementation time
Detailed project planning, partitioning in different project
stages with clear and realistic goals
Wrap up
29
• You can outsource in Procurement and SCM…
• …and it’s not about just transactional processes.
• There is a lot of complex analysis to do to decide…
• …which can be done properly, and there are proper tools.
• Outsourcing project in Procurement and SCM is not easy…
• …and is mainly about change management and proper control…
• …but can be done.
• If you think someone experience could be of some help – Bright is always there
BRIGHT is a successful Russian company which provides consulting services and expertise in the field of supply chain management, planning and control, project management, development and implementation & operation of integrated business processes based on ERP-systems.
Our services are aimed at achieving global standards in business processes and control mechanisms in the Russian market. © 2013 BRIGHT Group. All rights reserved .
Gleb Skrypin, manager
+7 (903) 550 60 20
Ivan Marchenko, manager
+7 (926) 111 20 45
Pavel Goryachev, manager
+7 (984) 181 19 54
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