Some thought on Corporate Contracting Policy…

1. Some thought on Corporate Contracting Policy… • Obtain the best possible value for money. • Contract out those services that are either not part of core business activity or for which there is a fluctuating requirement in terms of skills or equipment, or where open market provides a more efficient and commercial alternative.

2. Procurement/Contract Cycle upstream starts Identification of Need Vendor rating/review of performance Approval of the business case Payment Defining the specification Monitor Performance Analyzing the market upstream ends Contract award Defining the Contractual terms Negotiating value for money Supplier Appraisal Analyzing quotes/tenders Select bidders Inviting quotes/tenders

3. Best Practice Profile - Strategic Procurement • Use of techniques • Market intelligence • Strategy creation • Strategy appropriateness & ambition • Depth • Organization buy in • Execution • Negotiation • Creativity • Benefits

4. Positioning for Supply Contract Management People 1. Procurement Strategy Vision/mission Core values Operating Model Category planning 4. Supplier Mamgt Supplier Performance Contract mgmnt Supplier integration Supplier development 5. Internal Stakeholder Management High Performance Procurement 2. Sourcing & Category Mgmt Strategic sourcing 3. Requisition to pay Transaction Processing Master data management Technology Organization

5. Building Blocks Of Purchasing Strategy Contributing & influencing Purchasing & Audit framework Organization Relationships internal & external Processes Staffing & Training

6. Enabling foundation • Clear mission for function • Corporate commitment • Empowered buyers • Ethical behaviour • Real-time information • High quality staff • Cross-functional teams

7. Unproductive & inhibiting activities • Isolation of purchasing from main stream • Lack of client-buyer cooperation • Fragmented approach to market • Uncompetitive specifications • Unsafe or insecure contracts • Poor supplier relationships

8. Business needs • Goal: to fully understand the real business needs of the key stakeholders which should: • Drive the selection and development of the preferred procurement strategy • The selection of suppliers and… • The nature of supplier relationships • But often, perceived business needs are not the real business needs • It is essential to understand what stakeholders want the procurement strategy to deliver for them

9. Determining the real Business needs • Identify the stakeholders – a stakeholder map. • Get into their shoes to find out what they really need. • Capture all the identified business needs of every stakeholder • Verify these business needs with the respective stakeholders face to face. • Identify and prioritise the 10-12 key business needs

11. Category (Portfolio) Snapshot Purchasing amount by segment Non classified 627 M NGN 7% Global Purchasing amount 2003 8000M NGN Transport Services 276 M NGN 3% Intra coy 310 M NGN 4% Plants & equipments 460 M NGN 6% Utilities 3 033 M NGN 37% Raw Materials 626 M NGN 7% Industrial Services 645 M NGN 8% General Supplies & Services 1 297 M NGN 16% Industrial Products & Consumables 1 059 M NGN 13% Suppliers’ 80/20 Analysis- Pareto Analysis Main suppliers Rank Supplier Amount (MNGN) % of global Purchasing amount 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Nigerian Gas Company Ltd. National Electric Power Author MOS Engineering Services Ltd. Dys Trocca Valsesia & Co. Ltd. Zenon Petroleum & Gas Ltd. Mahrat Limited Litzkuhn Niederwipper GMBH Gri Tractor And Equipment Drury Industries Limited Nigerian Foundries Ltd. Abol Ventures Nig. Ltd. Mobil Oil Nigeria Plc Refratechnick GMBH Panalpina World Transport Explo-Tech Nigeria Limited 1 636 1 266 716 309 148 131 129 128 125 121 96 87 78 77 71 20,4% 15,8% 8,9% 3,8% 1,8% 1,6% 1,6% 1,6% 1,6% 1,5% 1,2% 1,1% 1,0% 1,0% 0,9% 100% 80% 60% 40% 20% 0% 54 Nb of suppliers 54 suppliers represents 80% of the global purchasing amount (NB : Supplier base contents 1 560 suppliers actives during 2003) (*) Source : Account Payable

12. External Purchase Amount • In 2003, the External Purchasing Amount is of 8 000 MNGN, i.e. 67 % of the sales turnover :Building Materials Company, EPA for 2003 (MNGN) 988 833 1 176 3 095 2 780 677 910 5 369 8 000 Sales Turnover EBIT (Before interest and taxes) Depreciation Provisions, stocks variation and fees Labor Inter/Intra company expenses Expenses Investments EPA

13. Spend Fragmentation Analysis • Used to assess which internal customers use the same or different suppliers for the same commodities & services • Implications: • Highlights the potential for consolidating category spend among a smaller supply base. • Highlights opportunity for supplier development

14. Results of Spend Fragmentation Analysis • After spend analysis, the following key metrics should-among others -become clear: • Baseline spend • Expected future annual spend • Nos. of external suppliers • Nos. of suppliers for 80% of spend • % under contract • No. of items • Key internal customers • Nos. of buyers

15. Trend Analysis • Used to plot a series of data to identify demand patterns • Plots historic data by item, category, buying unit, or supplier • Significant trends may indicate a need for alternative sourcing strategies • Understanding trends may result in benefits: • Greater bargaining power • Improved planning • Improved customer service

16. Variety Analysis • Used to evaluate opportunities for reducing the diversity & complexity of the different products purchased. • Implications: • The placing of greater volumes with fewer suppliers • Process efficiency savings • Increased control over spend through consolidation

17. Supply Planning Framework To ensure existence of a supply Market to which the buying organization has ready access & which enables it to succeed as a business; now & in the future Supply positioning Market Management matrix Supplier preferences Vulnerability management Current market position Vendor Improvement program Procurement marketing Reverse marketing Ideal market position

18. Contract Strategy Model Contract strategy Make or buy Cost analysis Power/dependence Strategic resource Buy Make Market analysis Competitive market Monopoly Market & Managing them Cartel market & Circumventing cartels Dependency evaluation Multiple source Single source Relationship decision Cooperative Mutual deterrent Collaborative Contractual alliance Partnership, vision & synergy Arm’s length

19. Supply Positioning A tool to identify strategies and tactics for goods, works, and Services acquired, including consideration of ; Make, buy, outsource Relationship opportunities Stakeholder management Vulnerability management E-Procurement Controlling Price, cost Inventory management People Allocation, skills Time allocation Contracting strategies

20. Develop Industry & Supplier Profile Identify Industry Leading Practices Determine industry Structure Measure Industry Financials Identify Industry Trends & Dynamics Describe Competition Develop understanding Of supplier/buyer Define overall size & growth Measure key ratios Discern common profit & cost Identify unique solutions Find innovative suppliers Identify key trends Assess impact of tech, govt Assess supply complexity Benchmark supplier costs Define potential Levers as a customer Use best ideas Implications of Industry on Sourcing this Category

21. Threats of entrants Supplier’s Bargaining power Competitive rivalry Buyer’s Bargaining power Threats of substitutes Porters Five Forces

22. Threats of entrants • Potential factors influencing market/business • Rivalry among competitors • Numerous or equally balanced competitors • Slow industry growth • High fixed or storage costs • Lack of differentiation or switching cost • Capacity additions in large increments • Diverse competitors • High exit barriers Supplier’s Bargaining power Competitive rivalry Buyer’s Bargaining power Threats of substitutes Competitive Rivalry – used to assess the supply market complexity

23. The threat of substitute products is a • Function of three factors • The relative value/price of a substitute • compared to an industry’s product • The cost of switching to the substitute • The buyer’s willingness to switch Threats of entrants Supplier’s Bargaining power Competitive rivalry Buyer’s Bargaining power Threats of substitutes Threats of Substitutes

24. Threats of entrants Supplier’s Bargaining power Competitive rivalry Buyer’s Bargaining power Threats of substitutes Threats of Entrants • Examples of Barriers to Entry • Economics of scale (e.g., computer • chip industry) • Product differentiation (e.g., cosmetics) • Capital requirement (e.g., oil extraction) • Switching cost (e.g., chemical industry) • Access to distribution channel (e.g., food • industry) • Cost advantages independent of scale • Product know-how or design characteristics • (e.g., fashion) • Favourable access to raw materials • (e.g., basic chemicals) • Government subsidies (e.g., European • agricultural products such as soyabeans) • Government policy (e.g., regulated • industries)

25. Threats of entrants • A supplier group is powerful if • It is dominated by few companies and is • more concentrated than the industry if it • sells to • It is not obliged to contend with other • substitute products for sale to the industry • The buyer’s industry is not an important • customer of the supplier group • The supplier’s product is an important • input to the buyer’s business • They have built up switching costs (product • differentiation) • They pose a credible threat of forward • integration • There is ‘’pull through’’ from downstream • customers of the buyer (e.g. branded items) Supplier’s Bargaining power Competitive rivalry Buyer’s Bargaining power Threats of substitutes Supplier’s Bargaining power

26. Buyer’s Bargaining Power • A Buyer Group is Powerful if • It is concentrated or purchases large • volumes relative to seller sales • The product it purchases from the industry • represents a significant fraction of the • buyer’s cost of purchases • The product it purchases from the industry • are standard or undifferentiated • It faces few switching costs • It earns low profits, and can use this to • negotiate a greater portion of the profits • in the value chain • It poses a credible threat of backward • integration (make/buy) • The industry’s product is unimportant to • the quality of the buyer’s products • The buyer has full information about the • supply market levers Threats of entrants Supplier’s Bargaining power Competitive rivalry Buyer’s Bargaining power Threats of substitutes

27. Threats of entrants Supplier’s Bargaining power Competitive rivalry Buyer’s Bargaining power Threats of substitutes Porters Five Forces

28. High BOTTLENECK (Strategic security) Guarantee supply CRITICAL (Strategic Critical) Close supplier management Business Risk ROUTINE (Tactical Acquisition) Minimize time LEVERAGE (Tactical Profit) Drive for profit Low Value High Procurement Targeting

29. Activity Bottleneck 10% Spend Routine 70% Critical 8% Critical 45% Leverage 12% Bottleneck 15% Leverage 35% Routine 5%

30. Commercial risks from their examples • # suppliers • Capacity • Power • Time • Want the business? (Supplier Preferencing) • Meet corporate standards • Specification (Special/Standard) • Cost of change • Ease of switching • Commodity markets • Location • Personalities / relationships • Security of supply (financial, lead times) • Future-proofing

31. Long Term Responsive to Suppliers Prepaid to Give EASY to work with Regular Reviews Cool / Flexible / tolerant Highly Specific Clear Measures (2 way) Mutual & Participative Open Innovative Attentive Warm Persistent- High Levels of Achievement Long Term Minimal Day to Day But Lots of Initial Contacts High Levels of Trust Mutual Goals Distant But Close Short Term Competitive How Do They See You? Versatile Supply Positioning: Relationships

32. Risk Analysis & Management Business Acumen Market Knowledge Diplomatic Style Performance Management (sensitively) Excellent Interpersonal Skills Good communicator Good Listening Skills Strong Team work Operate With Executive Creativity To Simplify Customer Service Focus Process Orientation Ability To Delegate (effectively) Open Minded VERY capable negotiator Financially Aware Highly Numerate Assertive Empowered Market Research Skills Supply Positioning: Skill Sets & Styles

33. Long Term Contracts Indexation Stockholding Alternative Products Volume Conscious Cost Insensitive Medium/Long Term Contracts Detailed Contract Conditions Supplier Analysis/Forecasts Close control/Devt. of Supplier Close Price MGMT/PPCA Audits Contingency Systems Contracting Cash Order Stockless Purchase Paperless Purchase Consignment Stocks Simple Procurement procedures Flexibility Active Sourcing Market Exploitation High Market Knowledge Short Term Contracts Take Risks Supply Positioning: PURCHASING ACTION BOTTLENECK CRITICAL ROUTINE LEVERAGE

34. STRATEGIC SECURITY STRATEGIC CRITICAL TACTICAL PROFIT TACTICAL ACQUISITION Focus on total cost of acquisition (not price) Emphasis on simplicity of operation Ensure full suppliers all of whom genuinely behave as if you are a ‘core’ customer Performance is outstanding with minimal time needed to manage Relationship would be ” Distant but Close” Some Deliverables: Data will be well organised Number of suppliers few – 50 instead of 5000 Management of this area requires 5 – 10% of available time Total acquisition cost reduced by at least 10% pa Procurement Targeting • Call-off contracts • e-catalogues • Purchasing card • Local purchasing

35. STRATEGIC SECURITY STRATEGIC CRITICAL TACTICAL ACQUISITION Procurement Targeting • TACTICAL PROFIT • Real focus on total cost • Take full advantage of the market • Practical application of “Active Sourcing” • In-depth market knowledge • Suppliers who see us as “Development” or “core” • Excellent negotiation skills • Selective use of e-Auctions • Some Deliverables: • Excellent market analysis & understanding of “market drive • “real time” identification of developments and opportunities • High quality supplier analysis • Cost modelling • Stretching financial targets year on year • Procurement spends 35 – 40% of time here.

36. STRATEGIC SECURITY • Excellent vulnerability (Risk) Analysis and management • Supply security may mean higher inventories • Internal close management to ensure we only “get here” when we really have to • Focus again on Total Cost OF Acquisition • Longer term contracts • Possible “price indexing” • Some Deliverables: • Zero supply problems • Tight performance measures • High quality risk management/ contingency plans and execution • Specific supplier Relationship Management Plans STRATEGIC CRITICAL TACTICAL ACQUISITION TACTICAL PROFIT Procurement Targeting

37. STRATEGIC CRITICAL • Close understanding of suppliers • Top class and detailed Cost Models • In-depth market knowledge – Local, Regional & International • Focus on Total Cost of Ownership – challenging reduction targets year on year • Excellent vulnerability (Risk) Management programmes • Contingency plans • Suppliers see us as “core” • Detailed Supplier Relationship & Development Plans • Some Deliverables: • Outstanding supplier performance • TCOO reduced substantially year on year • Considerable innovation • Clear procurement strategies in place with full Business support • Clear, agreed Relationship Measures in place and delivering Procurement Targeting STRATEGIC SECURITY TACTICAL ACQUISITION TACTICAL PROFIT

38. High Reliability Management Close Technical Management % Chance Of Occurrence Balance with Commercial Opportunity Contingency Management Low impact High Business Risk Model

39. High DEVELOP Nurture customer Grow business CORE Maximum attention Actively defend Increase share Of supply Account Attractiveness NUISANCE Minimum attention Lose without concern EXPLOITABLE Maintain high prices Accept risk of lost business Low Relative Value High Supplier Preference

40. High ATTRACTIVENESS • Payment on time • Payment secure • Profitability • Relationships • Loyalty • Positioning on supply positioning grid • Product Knowledge/Technology • Cost of servicing the Account • ‘Leading Edge’ Customer • Customer Market Share/Image ATTRACTIVENESS OF ACCOUNT Low High Relative value of Customer Business RELATIVE VALUE OF BUSINESS • Values Sales v average • % Availability Business achieved • Ability to ‘sell through’ other products/services • Ability to ‘sell through’ to other customers

41. Supplier Preferencing Nuisance Supplier’s view: • Little profit made • Customer difficult and/or expensive to service • Probably poor at paying bills • Customer generally unattractive in other ways • Poor service, supplier shows little interest in putting it right Supplier’s overall objective: • “Give low attention” • Withdraw from the business

42. Supplier Preferencing Exploitable • Supplier’s view: • Suppler in unique position of strength • Prices may rise or service costs reduce • Seek short-term advantage • Suppler prepared to risk losing customer • Supplier’s overall objective: • “Drive for best price” • Maximise profit in the short-term

43. Supplier Preferencing Supplier’s view: • Customer has potential • Customer highly sought after • Supplier works hard to exceed customer expectations • Pricing based on “special deals", marginal cost principles • Pro-active service levels Supplier’s overall objective: • “Nurture the customer” • To get further business Development

44. Supplier Preferencing Core Supplier’s view: • Supplier’s core business • High level of service and response • Increase profitability in low key manner • Receptive to strategic alliances • Seeks to lock in customers Supplier’s overall objective: • “Look after the customer” • To retain and expand business • To ensure profitability

45. Development Core Development Core √ √ √ √ √ √ √ √ √ √ Nuisance Exploitable Nuisance Exploitable × × × × × × × B C √ R L Development Core Development Core √ √ √ √ √ √ √ √ √ √ Nuisance Exploitable Nuisance Exploitable × × × √ Market Management Matrix

46. Market Management Matrix Development Seek areas of mutual dependency Core Maintain long Term relationship Development Work together To develop business Core Potential long term relationship Nuisance Change supplier Offer incentives Exploitable Change supplier Monitor price & Service trends Nuisance Very High Risk Raise attraction Change supplier Exploitable High risk Raise mutual Dependency Seek competing Bottleneck Critical Routine Leverage Development Offer incentives Raise mutual dependency Core Strong position Maintain relationship Offer other opportunities Development Encourage Participation Seek mutual developments Core Sound position Improve own profit Nuisance Passive relationship Seek alternative supplier Exploitable Monitor price trend Increase attraction Seek alternatives Nuisance Mismatch Change supplier Exploitable Adversarial position Check power balance Consider other sources

47. Tendered contract Negotiated contract Type: Scope: Applicability Remuneration Turnkey 1,2,3. Bill of Qty 1, 2. Time & materials 2, 3. Combinations of types

48. Different Contract Strategies • Services • lump sum • Bill of quantities • Unit rates • Day rate • Time and materials • Cost reimbursable

49. Model Forms Of Contract • Call-off services • Turnkey model • Fabrication model • Design model • Catering model • Design, procure & fabrication • General services model • Specific services model • Umbrella manpower model

50. Post – Contract Contract final completion Contract award Close loop Final account Inaugural meetings Chart progress - financial - actual vs plan Close out Defects liability period Invoice authorisation Contractor Performance appraisal Payments Progress meetings Retention monies Penalties Substantial completion Performance bond Termination Suspension