How to optimize your processes

1. How to optimize your processes Private Company Webcast Series: Part 1 of 4 21 March 2013

2. Today’s agenda 1 Why optimize processes? 2 Common challenges 3 Approach to process transformation 4 “Source-to-pay” process examples 5 A primer on how to do it

3. Pressure on business is relentless Off-shore labour rates Increasing wages New competitors New customer requirements Poorquality Fluctuating exchange rates Processfailures High overhead costs Long lead times New technologies Working capital pressures Excess inventory Inventory stock outs

4. Increasing competitiveness is critical • Customers normally demand the highest quality at the lowest possible cost • Since the competition never rests, we must also strive to become more cost competitive • Survival requires organizations to reduce costs and provide the highest value to our customers Transforming business processescan eliminate waste and deliver increased value

5. Waste is everywhere • Companies have traditionally worked to maximize “conversion costs”, that is, direct costs • But companies often ignore the importance of indirect costs Waste Direct Costs Indirect Costs Value-Add

6. Examples of waste • Expediting of late orders • Correction of billing errors • Returns and warranty costs • Write-down and disposal of excess inventory • Rework of purchased material • Parts inspection and testing • Re-keying data into multiple systems • Export and manual analysis of data An optimal process is one that delivers just what and how much is needed, when it is needed, and where it is needed

7. Common challenges 1 Why optimize processes? 2 Common challenges 3 Approach to process transformation 4 “Source-to-Pay” process examples 5 A primer on how to do it

8. Common challenges experienced while undertaking process transformation • Point solutions often fail due to their piecemeal approach • Inability to address functional behaviours resulting in the failure of end-to-end process initiatives • Lack of senior executive endorsement • Ignoring the need for a customer centric approach and failing to measure customer requirements • Inability to properly identify sources of competitive advantage to deliver sustainable value to the organization • Lack of internal capabilities and under-investment in training and continuous improvement frameworks • Failure to consider people culture

9. Addressing typical process transformation challenges Situation / Complication Case for change Pitfalls of point solution initiatives • A non-holistic approach to process management and process improvement often results in focused improvement initiatives fixing one issue which gives rise to a separate issue or has an adverse downstream effect • Taking a holistic view of the process and enterprise landscape will often avoid the pitfalls of isolated targeted improvement initiatives Challenges associated with cross functional processes • End to end processes are difficult to implement given the functional nature of enterprises • End to end processes generally lack nominated champions, rewarded through end to end process performance • Introducing clear process owners accountable for specific end-to-end process performance will impact behaviors and change the silo mentality Impact of internal focus on customer needs • Greater focus on customer satisfaction, quality and value for money • Requirement for overall streamlining of operations to create efficiencies and productivity within the business • Lack of market and environmental perspective • Mentality of “we know best” and “that’s the way we’ve always done it” hampering the ability to embrace change Operating complexity & unaligned organization • History of organic growth creating a legacy of non standardized processes • Lack of clearly defined end to end processes recognizing key operating processes crucial to delivery vs. supporting processes • Standardization and streamlining of processes across the enterprise aligned with new business priorities High transaction volumes and lack of KPIs • Implementation of improvement measures that will deliver measurable and sustainable benefits • Improvement of efficiency for common processes through standardization and automation • High volumes of transactions, very manual processes and interventions with limited metricsto manage, monitor and control

10. Approach to process transformation 1 Why optimize processes? 2 Common challenges 3 Approach to process transformation 4 “Source-to-Pay” process examples 5 A primer on how to do it

11. Approach to the process transformation journey IDENTIFY AND DIAGNOSE DESIGN DELIVER AND SUSTAIN Objectives Understand current state, assess enterprise and process maturity, identify and align core end to end processes, identify and prioritize key areas of improvement Develop detailed future state aligned to operating model, perform business readiness assessment, finalize detailed business case including benefits realization Validate and refine initial future state design, execute plan incorporating continuous improvement initiatives supported by capability and skills upgrading program Outcomes “Building the case for change” • Building senior leadership understanding for the need to have clearly identified core end to end processes with a customer centric focus, ultimately generating customer and shareholder value • Recognizing the importance of having a process agenda linked to nominated process champions empowered and rewarded within the enterprise • Recognizing the need to track and monitor performance both internally and externally to gain/maintain a leading position “Detailing the aspirational design” • Acknowledgment from the organization of the implications and requirements of embark on the change journey • Senior leadership commitment to the future state enterprise process design and adherence to the new vision • Developing an appetite to transform the enterprise by leveraging the full extent of their sources of competitive advantage “Unlocking value inimplementation” • Embracing a new culture of continuous improvement with the ambition of continuously enhancing performance levels • Realizing the enterprises’ potential through major investment in up-skilling people and infrastructure • Capitalizing on the shift of mindset within the enterprise creating the potential for sustainability • Releasing targeted benefits back into the enterprise setting ambitions for year on year improvement drives

12. The approach can be tailored to manage multiple entry points Example: Enterprise Key focus areas • Assess strategy and operating model for execution alignment • Identify core end-to-end processes delivering competitive advantage and value to customers and shareholders • Design and overlay performance management framework • Achieve senior stakeholder and business buy in to the process agenda Enterprise level (Entry point 1) Example: Finance Accounts Receivable Accounts Payable Payroll Fixed Assets Treasury Mgmt Tax Mgmt Record-to-Report Planning & Mgmt Accounting Internal control Functional level (Entry point 3) Key focus areas • Identify and improve deficient processes within a given function (i.e. Finance). • Identify the cross functional integration points which lead to sub-optimized performance caused by processes being fragmented (i.e. they are not designed from an end-to-end perspective) Example: Purchase to Pay Process Requisition Approval Order Receiving Validation Invoice Processing Approval Payment Settlement Process level (Entry point 2) Key focus areas • Improve and streamline aspecific end-to-end process (i.e. Purchase to Pay). • Take a holistic approach in aggregating such processes back up to a enterprise level

13. What do we mean by “end-to-end processes”? Order Goods The functional entry point does not effectivelyaddress end-to-end processes

14. “Source-to-pay” process examples 1 Why optimize processes? 2 Common challenges 3 Approach to process transformation 4 “Source-to-Pay” process examples 5 A primer on how to do it

15. Core source-to-pay process flows When companies think of procurement,they often focus on these sub-processes

16. Example requisition and PO approval – current state • Multiple word-based requisition and contract approval forms • Manual approval of requisition and contract • Separate system used for requisition processing • Manual upload of requisition information into purchase order module of financial system

17. Example requisition and PO approval – future state • Leverage eProcurement module in financial system • Dynamic approval/contract approval form as part of the workflow process • Approvals routed automatically • Requisition automatically converted to a purchase order upon approval

18. Benefits realized • Eliminates duplicate entry of information into requisition system and two approval forms • Eliminates the need for the business units to attach documents to both the contract and requisition systems • Manual approval and release of the purchase order requisition to finance is eliminated completely • Elapsed time for approvals reduced • Improved data capture for spend analysis • Improved control over procurement rules and unauthorized spending

19. Improvement opportunities in the broader source-to-pay process

20. A primer on how to do it 1 Why optimize processes? 2 Common challenges 3 Approach to process transformation 4 “Source-to-Pay” process examples 5 A primer on how to do it

21. A typical facilitated team-based approach Phase 1 Phase 2 Establish projectcharter Define and prioritize processes Prepare for Phase 2 Design processes Present report Implement Processes Activities • Conduct kickoff meeting • Establish mandate roles and responsibilities • Clarify, confirm and align leadership’s goals and objectives • Review and confirm the assumptions and scope • Develop understanding of current processes • Prepare high level process map for the organization • Prioritize processes based on strategic alignment and opportunity assessment • Develop a plan for Phase 2, including methodology and toolkit • Present plan to senior team • Form working teams • Conduct initial training sessions • Facilitate working teams through process design steps • Document current state processes • Identify opportunities • Design future state processes • Facilitate development of high-level business case and implementation plan • Prepare report summarizing team findings and recommendations • Present recommendations to senior team • Facilitate working teams to implement future state processes • Implement metrics to measure improvement success • Assist with change management and communications Work Products • Project Charter • Overall high level process map • Ranked listing of processes based on potential impact • Approach, methodology and toolkit • Implementation plan for Phase 2 • Training sessions • Current state process documentation • Future state process documentation • Final report including business case and implementation plan • Implemented future state processes Bi-weekly Status Meetings and Change Management

22. Developing a common understanding of the core and supporting processes • Core process • Overall view of the organization • The set of linked processes that convert customer needs into satisfied customers and money in the bank, for example • Support processes • The list of processes required to maintain or support the effectiveness of the core process, for example • Hire staff • Pay employees Satisfied customer Customer needs Sell product Accept orders Plan production Produce product Distribute product Collect payment Money in the bank • Provide IT support • Maintain facilities

23. Identify the primary customers and outputs of the process • Conduct interviews and/or surveys with customers • Document requirements of the outputs, for example: • Delivery performance • Inventory accuracy • Productivity • Freight cost 5.0 Distribute Product 4.0Produce Product 6.0 Collect Payment Inputs Outputs 5.1 Activity 5.2 Activity 5.3 Activity • Flowchart the activities of the process • Explode activities into tasks where more detail is required Inputs Outputs 5.2.1 Task 5.2.2 Task 5.2.3 Task Process teams then have to define the current state processes

24. S I P O C Suppliers Inputs Processes Outputs Customers ...after which they identify future state solutions using a variety of tools SIPOC Pareto Chart Materials, resources, and data needed to execute the process The primary activities that use one or more inputs to create an output that is of value to customers Products, services, or data resulting from a process Internal or external recipients and users of outputs Anyone who supplies inputs to a process 100% 50 75% Frequency Duty paid on products 50% 25 Cause and Effect Analysis 25% Project Prioritization Catalogue Health Improvement High Scope Stability VTIP Process Redesign Assessment Milestone Adherence Inventory Optimization Impact on Efficiency MetricsImplementation Vendor & Order Mgmt Technology Organizational Realignment &Training Low Low High Ability to Influence

25. Key success factors • Agreed project charter with support from the project champion • Effective communication and change management • Strong team members with the ability to “think outside the box” • Involvement of users and customers in shaping solutions • Training using internal trainers where possible • Implementing performance measures to ensure objectives are being met

26. Questions? Barry Levine Associate Director Process Improvement Advisory Services Ernst & Young LLP Barry.G.Levine@ca.ey.com 416.943.3696