Strategic Supplier Relationships New Strategies for Changing Times ISM Chemical Group Las Vegas, Nevada 2006.

Strategic Supplier Relationships

New Strategies for Changing Times Strategic Supplier Relationships

New Strategies for Changing Times

ISM Chemical GroupISM Chemical GroupLas Vegas, NevadaLas Vegas, Nevada

20062006

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Agenda

Background– Trends in Strategic Supplier Relationships

– Characteristics of Strategic Supplier Relationships

– Selection Criteria

New Approaches for Strategic Supplier Relationships

Real-Life Management of Strategic Relationships– How This is Different From Other Approaches

– Challenges

Q&A

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Introduction

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About Denali Consulting and SupplyStaff

Management consultancy, formed in 1996 Focus is exclusively in Supply Chain

Management consulting Primary industries include service based

and capital-intensive clients Electric & Gas Utilities Financial Institutions Oil & Gas Mining

Services include Strategic Sourcing & Procurement Improvement Logistics Optimization Supply Chain Strategy & Assessment Organizational Development & Design

Supply Chain Staff Augmentation and Search / Recruiting

Typical positions include: Sourcing & Logistics Analysts Sourcing & Logistics Managers Supply Chain Directors & V.P.’s

Offer temp-to-perm conversions at no extra cost after 6 months

Since Supply Chain Management is our only focus, we are experts at finding the best talent for today’s Supply Chain organizations

Provide payroll, benefits, HR services for all resources

Denali Consulting and Supply Staff are certified as woman-owned businesses by WBENC

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Sample of client engagements that are used to create the basis of this presentation

Lucas Aerospace

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Denali Commodity Expertise Across Many Commodity / Service Categories

• Transformers• Build-Up Trucks• Wire & Cable• Chemicals• Gases• Facility Design & Construction• Vegetation Management/Line Clearing• Meters• Janitorial Services• Turbines & Generators• Automated Metering• MRO• Plant and Facility Maintenance• Travel Related Services• Computers & Desktop Services• Benefits Management• Pipeline Maintenance• Injection Molded Parts• Pole Replacement

• Castings• Drug & Alcohol Testing• Fuel & Lubricants• Drilling Equipment• Rotors• Motors & Generators• Supplemental Personnel• Boilers• Switchgear• Line Hardware• Application Development Services• Engineering Services• Office Products & Furniture• Printing & Reproduction Services• Freight & Logistics• Underground Construction• Packaging• Circuit Breakers• Construction Services

Partial Listing of Commodities & Services Sourced by Denali

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Background

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What Is A Strategic Supplier Relationship?

Strategic Supplier Relationships Definition:

A supply strategy based upon joint opportunities, mutual trust, respect and open & honest

communication between the supplier and the customer.

This strategy is focused on reducing related supply chain costs and improves the quality of goods and services.

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Once Again a Procurement “Best Practice”

Introduction of Strategic Sourcing & Strategic Alliances

Emergence of eSourcing tools & eMarketplaces

Beginning of Volatile Commodities Markets

1990 1995 2000 2005

Per

ceiv

ed I

mp

ort

ance

of

S

trat

egic

Su

pp

lier

Rel

atio

nsh

ips

Low

High

Industry Consolidation Waves

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Why are Strategic Supplier Relationships More Important Now Than Ever?

Volatile Markets

– Price-focused sourcing strategies don’t work in periods of increasing commodity prices

– More sophisticated relationship-based approaches are required to meet utility cost reduction targets

– Based on recent increases in raw material, especially fuel, traditional unit based savings will not generate substantial savings, suppliers must be willing to provide creative solutions to remove costs from how they service or re-engineer the procured materials

Merger & Acquisition Trends

– Larger, national/global presences of utilities require more strategic supplier relationships to support growth and cost synergy targets

Expansion of Supplier Value-Added Services

– Suppliers continue to expand their value-added services offerings, increasing the value of strategic supplier relationships

– Outsourcing

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Strategic Relationship Characteristics

Types of Goods & Services High $ Spend Critical business implications Custom engineered Limited availability or alternatives

e.g. Line Construction Services, Transformers

Buying Considerations Trust is a major issue Cross-functional involvement Highly resource intensive Long range planning required

Competitive Advantage Driven

Supplier Relations Longer Term Agreements Total interaction Close working relationship Aligned objectives and philosophy

Teamwork

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Strategic Relationship Criteria

MANAGEDBUSINESS

RELATIONSHIPS

STRATEGICRELATIONSHIPS

GENERALPROCUREMENT

BULKPRODUCTSOURCING

Potential for impact

Common values

Aligned goals

Proper environment

VALUE / COST

CO

MP

LEX

ITY

/IM

PA

CT

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Elements Of Successful Supplier Relationships

Six critical elements support the development of successful relationships with Key Suppliers:

Focus A common vision for the relationship, with agreedstrategies and activities

Trust Open communication and disclosure of business drivers

Performance Continuous improvement towards agreed targets andKPIs

People Clearly defined roles and responsibilities

Proactive Anticipating business needs and providing creative solutions

Profit at Risk Establishing real metrics to drive behaviour for both parties

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Focus

A Team of representatives from the Buying Company and the Supplier jointlydevelop a Business Plan for the Relationship, addressing:

•Vision and Mission•Drivers and Values•Breakthrough Strategies •Continuous Improvement Strategies•Key Activities for the Period of the Plan•Key Measures of Success

A common vision for the relationship, with agreed strategies and activities

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Trust

Open communication and disclosure of business drivers

•Development of Total Cost of Ownership Model to understand our joint supply chain costs

• ‘Open Book’ arrangement for Contract Cost Drivers and required margins

•More use of incentives to create business drivers for suppliers to provide R&D support…for cost savings or driving new revenue avenues

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Performance

Continuous improvement towards agreed goals

Establish Continuous Improvement Program to Generate and document opportunities for value adding and process improvement Implement ideas Document benefits achieved

Develop KPIs to quantify progress against Key Measure of Success identified in the Business Plan Customer specific measures

Jointly review progress on a regular basis

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Sample KPI ScorecardKP1 DESCRIPTION a

WEIGHTb

TARGETc

ACTUAL(eg)

dFACTOR

c/b

eSCORE

a*d

Cost Savings Must be recorded on IdeaEvaluation Forms and Signed Offby User, Supplier & Supply Dept.Refer section on valuationmethods.

30 10% pacumulative

(ceiling at 10%)

6% 0.6 18.0

DeliveryPerformance

Contract - within 24 hoursNon Contract - as agreed atorder

20 96 98 1.02 20.4

BreakdownResponse

Contract - within 2 hoursNon Contract - as agreed atorder

15 95 100 1.05 15.8

Quality NCR’s receivedNCR’s actioned

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1/mth100%

1.5/mth80%

0.50.8

2.54.0

TechnicalSupport andService

Refer to the section on TechnicalSupport and Service

15 65% 70% 1.1 16.5

BusinessPlanObjectives

Meeting the objectives agreed toin the annual business plan

10 90% 100 1.1 11.0

Total Score 100 90= ranking to

extend contract

93.2= extension of

contract

ExampleExample

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People

Customer

Category Manager/Lead BuyerManages the performance of the contract and supplier across the organization

Customer RepresentativeResponsible for the applicationof contract to a specific customer group

Supplier Development TeamRepresentatives of major customer groups who the determine strategy for the category and monitor supplier performance against KPIs

Supplier

Account ManagerResponsible for provision of goods or services under Terms of Contract/Agreement. Customer Contract Manager and decision maker.

Operations ManagerResponsible for the application of contract and improvement program, working directly with the customer

Clearly defined roles and responsibilities

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Proactive

Customer & Supplier

Quick responsiveness in sharing ideas

Risk taking behaviour rewarded and encouraged

New ideas move through system of approval on fast track

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Profit at Risk

Bottom-Line Impact

Performance to agreed upon targets is expected-not rewarded

Insist that suppliers proactively know their market for raw materials, technological advances, industry best practices

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New Approaches to Strategic Supplier Relationships

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Typical Supplier Development Process

ContractStart-upContractStart-up

Planning andImplementationPlanning andImplementation

SupplierRelationshipManagement

SupplierRelationshipManagement

Contract andPerformanceManagement

Contract andPerformanceManagement

ValueDiscoveryValueDiscovery

Develop DetailedTransition Plan

Develop DetailedTransition Plan

ConductImplementation

ConductImplementation

Plan CompetitivenessAssessment

Plan CompetitivenessAssessment

Review and DefineCategory Strategy

Review and DefineCategory Strategy

Develop SupplierRelationships

Develop SupplierRelationships

Manage StakeholderCommunications

Manage StakeholderCommunications

Develop CommunicationApproach

Develop CommunicationApproach

Perform RelationshipCheck-Ups

Perform RelationshipCheck-Ups

Manage ContractVariations

Manage ContractVariations

Review CategoryPerformance

Review CategoryPerformance

Conduct Internal andExternal AssessmentConduct Internal andExternal Assessment

Develop Options andRecommendations

Develop Options andRecommendations

Obtain StakeholderApproval

Obtain StakeholderApproval

Manage Contract andSupplier PerformanceManage Contract andSupplier Performance

ManageContract End

ManageContract End

Create Total Cost Model (if not already

in place)

Create Total Cost Model (if not already

in place)

Conduct Value Analysis Workshop (s)

Conduct Value Analysis Workshop (s)

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What’s New With Strategic Supplier Relationships

New approaches are being required to deal with new environmental factors in the supply chain

Volatile MarketsVolatile Markets

Broader SupplierOfferings

Broader SupplierOfferings

IndustryConsolidation

IndustryConsolidation

New Approachesto Supplier

Relationships

New Approachesto Supplier

Relationships

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Volatile Markets Require Greater Cost Modelling Sophistication

Volatile markets are tough for both customers and suppliers.

Unless cost transparency is achieved in the relationship and pricing structure, larger

contingencies will be built into prices.

Working closely with your core strategic suppliers is the best means to continue realizing

ongoing savings through volatile markets.

Understand how to approach suppliers’ price increase requests critically but fairly. Share

cost increases with suppliers who do a good job of managing their cost by collaboratively

working with their suppliers and demonstrating good supply chain management.

Better understand the costs of your purchases and what market forces are effecting them.

In times of volatile markets, it’s more important than ever to have an in-depth

understanding of supplier cost structures and total supply chain costs.

Proactively work to ensure that the pricing structure of your contracts are appropriately

motivating suppliers to decrease cost while maintaining or increasing quality and service.

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Total Cost of Ownership

The present value of all costs associated with a product, service, or capital equipment that are incurred throughout the supply chain.

Typically these are broken into 4 categories:

Purchase price

Acquisition costs

Usage costs

End of life costs

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$$Purchase

Price

Procurement Practices Supplier Best Practices

LeverageSupplier R&D Leverage

SpecificationsInventory Practices

Service Measures trackingTransactional Process

Remnant/Obsolete Practices

PerceivedOpportunity

ActualOpportunity

Across a Company’s boundaries:

Where do we get the benefits?

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Identify Need Procurement Distribution Warehousing Disposal

Specification Receiving Application Out-of-Service

“Cradle to Grave” Costing

Total ownership costing of the supply chain

Analysis of the supply chain is done using a concept called Activity Based Costing

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Sourcing Cost Model

ActivitiesCurrent Costs

Supplier #1

Supplier #2

Supplier #3

Cost of Materials $3,650,000 $3,200,000 $3,500,000 $3,700,000

Develop quarterly projections $18,450 $0 $0 $0Maintain vendor files $1,650 $550 $550 $550Supplier selection and contract maintenance $2,600 $600 $600 $600Placing orders with suppliers $1,900 $650 $650 $300Inspecting product $5,150 $5,150 $2,125 $0Transportation to districts $84,000 $84,000 $84,000 $0Accounts payable problem resolution $16,000 $3,500 $3,500 $3,500Warehouse handling costs $16,400 $16,400 $16,400 $0Material handling to sites $19,550 $19,550 $19,550 $0Inventory carrying costs $1,026,000 $380,000 $190,000 $0Transportation to job sites $104,000 $104,000 $104,000 $280,000Backhaul $121,500 $121,500 $0 $0Disposal costs for out of service material $39,500 $39,500 $0 $0Expedite orders $14,750 $7,375 $7,375 $7,375Cost of warehouse space $72,000 $72,000 $72,000 $0Obsolescence and damaged inventory $178,000 $178,000 $178,000 $0Cost to maintain specialized vehicles $62,000 $62,000 $62,000 $0

TOTAL COST $5,433,450 $4,294,775 $4,240,750 $3,992,325

Example

Example of Total Cost Comparisons

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Strategic Supplier Relationships in M&A Environment

As companies continue to consolidate, strategic supplier relationships can play a critical role to support growth and cost

management targets

Broader territories will require stronger, more

strategic relationships

Broader territories will require stronger, more

strategic relationships

Supply chain synergiesare often key elements of M&A business cases

Supply chain synergiesare often key elements of M&A business cases

Strategic suppliers canbe key members ofan M&A joint team

Strategic suppliers canbe key members ofan M&A joint team

Sophisticated cost modelling is required

to understand customerand supplier cost savingsin an M&A environment

Sophisticated cost modelling is required

to understand customerand supplier cost savingsin an M&A environment

(Hot issue - Maintaining supplier diversity goals, while consolidating the supply base)

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Broader Supplier Offerings and Strategic Supplier Relationships

The more value added services provided by a supplier, the more strategic the relationship

Typical Offerings Broader Offerings

As companies continue with the trend toward increased variable costs & outsourcing, strategic supplier relationships, along with broader offerings will become the norm

• Supplier Managed Inventory• Product training• Warranty utilization• Kitting

• Business process outsourcing• Full assembly or category vs. component sourcing• Combination of products and installation

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Strategic Supplier Relationships In Action

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Why Should Strategic Relationships Be Important to You?

Continuity of Supply - Especially During Tough or Volatile Times

A Single, Unbroken Supply Chain - From the Supplier Through to the Customer

Continual Dialogue - When Costs Go Up…and Down

Cost Performance Below Market Indices

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Continuity of SupplyStrategic Supplier Relationships help to ensure continuity of supply for strategic material and service categories. This is especially important:

– During tough times (e.g. the California utility financial crisis)

– During periods of tight supply conditions

– When markets are volatile

– To ensure alignment with strategic priorities

Raw Material Prices Rising: What Does This Mean to Energy Consumers?

Edison Stays in Financial Limbo as Lawmakers Debate Rescue Plans; Energy:

CFO of utility's parent worries that creditors may force bankruptcy if action is stalled in

Legislature

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The Single, Unbroken Supply Chain

The Single Customer/Supplier Supply Chain

Supply Chain should be one single, unbroken chain from the supplier’s processes through the customer’s

Buyers must have the same expectations from themselves and their companies as they have of their suppliers

One weak link can disrupt the entire supply chain

ID NEED PROCUREMENT RECEIVING DISTRIBUTION MAINTENANCE DISPOSAL

SELL RECEIVE ORDER SCHEDULE/PLAN MANUFACTURE SHIP PAYMENT

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Examples of Strategic Relationships in Action

$36M contract awarded based on Total Cost of Ownership in 1994, delivered originally 34% savings.

– Years 1994-2005, delivered an additional 12% TCO savings

– 2006 awarded 5th 3 year extension with 3% annual TCO goals included in the contract

While facing bankruptcy, only 1 of the 24 Strategic Suppliers to a $1.8B spend base changed terms or delivery options

When one Strategic Supplier faced pending bankruptcy, their major customer pre-paid their orders to help them with cash flow

When faced with escalating prices in raw materials, one Strategic Supplier worked with their major customers to secure 1 year of material on their behalf without confirmed orders

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The Importance of Continual Dialogue

Must have continual dialogue with suppliers - not just when prices go up

Continuous improvement to reduce total supply chain costs is expected

Must be willing to look at costs and process for both the buying company as well as the supplier

Strategic Relationships can’t be thought of as

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The Expectation of “Better Than Market” Performance

Strategic Supplier Relationships should deliver performance that is “better than market”

Cost trends should be below market indices

Pricing volatility should be passed onto those customers that buy marginal capacity, not those who have firm, long term commitments

This applies to quality, service and total cost performance

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Why Strategic Supplier Relationships are Important

1. A new supplier commences operations every minute

2. A supplier files bankruptcy every 8 minutes

3. A supplier ceases operations every 3 minutes

4. A judgment is filed against a supplier every 14 seconds

5. A supplier name change happens every 2 minutes

6. A supplier ownership change happens every 4 hours

7. A supplier’s risk profile changes every minute

…world of constant change and challenges (opportunities)

Source: Dun and Bradstreet

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Q&A

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For Further Information

Please contact

Dawn Tiura

President

Denali Consulting

[email protected]

530-448-0000 cell

530-550-5213 office

www.denaliusa.com

www.supplystaff.com