Tricia Schild – August 2008

1. When Your Customer is the “Purchasing Department” Tricia Schild – August 2008

2. Why is Procurement becoming involved now? • Some History………. • In the 7 years prior to 2001, S&P 500 companies • struggled to maintain cost improvements over time • (as measured by total expense as % of sales). • Since 2001 cost reductions have sustained. Total • expenses (as % of sales) are at a 10-year low, at • around 75%. • Procurement is increasingly shifting cost reduction • focus from COGS to SG&A projects. Corporate Executive Board

3. Why is Procurement becoming involved now? • Indirect (expense) spend remains a significant opportunity for S&P • 500 firms. • Average S&P 500 firm leaves $100 Million “on the table” in indirect spend • These savings can be achieved through increased coverage of • previously unaddressed categories and through greater compliance. Corporate Executive Board Procurement Strategy Council

4. Why is Procurement becoming involved now? “Elite” strategic sourcing focused firms deliver greater ROE 17.0% Average Return on Equity 16.8% 15.5% Elite Cost Cutters 15.0% All Companies 14.0% Sourcing savings translate to more profitable firms CFO Executive Research Board

5. 2005 Data indicated only a minority of S&P 500 firms were “elite” cost cutters, but cost-cutting focus is growing since then. 485 Starting Sample of S&P 500 firms 412 One Time Cost- Cutter Between 1994 – 2000 or between 2001 - 2004 342 Focused Cost Cutting Either between 1994-2000 or between 2001 -2004 56 Elite Cost Cutters throughout this period 85% 70% 12% Determine the level of strategic sourcing practiced by your “Purchasing” customer CFO Executive Board Research using 2005 Compustat data

6. Which Indirect Spend Categories Are Being Addressed? Corporate Executive Board Procurement Strategy Council

7. So, who are these “Purchasing” folks? • - 71% male • - Age 46 years; 69% are > 40 years • - Tenure: 15 years • - 77% did not start career in Purchasing • - 77% have B.A. • - 17% have C.P.M. accreditation Understand what shapes your customer’s perspective 2007 Purchasing Magazine Survey

8. How is “Purchasing” motivated? • Corporate level employees are more highly compensated than plant level • 62% of all purchasing staff and 87% of purchasing executives receive • bonuses averaging 13% of salary • Bonuses are tied to hitting aggressive financial targets • The most highly compensated employees are in fields where they can • make the most significant contribution (savings) • The highest compensation is for services responsibility (example: travel) Conclusion: You will be working with purchasing staff who are highly motivated to save $$. Success for them will result in career advancement and bonuses. 2007 Purchasing Magazine Survey

9. Example of Performance Measures Job posting for Vice President - Vendor Procurement Investment Bank, New YorkABOUT THE POSITION: Leads strategic sourcing activities for one or more categories of spend in Professional Services and Human Resources on a global basis, with thegoal of achieving significant initial cost reductions, supplanted with year-over-year productivity improvements of 5 to 10% in the total cost of goods and services procured while maintaining or improving product quality and vendor service levels. This position will initially be responsible for one category of Professional Services (Legal or Marketing) spend, covering €200-300 million in annual spend. The position will report directly to the Category Director.KEY RESPONSIBILITIES:The primary responsibility is the capture of real savings, including direct savings captured through pooling Company-wide purchasing volume and negotiating TCO contracts with suppliers, and savings captured from other TCO cost reduction initiatives. (Posted Dec 1, 2007)

10. How is “Purchasing” organized? • Many organizational variations and levels of expertise exist. • Decentralized purchasing organizations are less focused on cost reductions, • more interested in internal customer satisfaction • Organizations reporting to Finance or Chief Procurement Officer are • more highly focused on cost-take-out. Determine your “Purchasing” customer’s strategic sourcing interest

11. The Difference between Purchasing and Sourcing Definition: Purchasing (Tactical) Purchasing is simply executing routine administrative tasks (requesting quotes, placing orders, expediting, etc.) on a reactive basis, outside of the context of an enterprise-wide focus, and without pursuing continuous improvement or contribution to specific senior management goals.

12. The Difference between Purchasing and Sourcing Definition: Sourcing (Strategic) An organized, systematic, collaborative way to identify competitive suppliers for longer-term agreements to buy materials and services for direct and indirect purposes.

13. The Difference between Purchasing and Sourcing • Strategic Sourcing is organized • An ongoing process • It covers all spend categories • Strategies are reviewed and approved by executives • Suppliers are invited to be part of the process by varying degrees • Senior corporate executives are briefed on key spend categories, • and may enter the process when the financial or operating impact • is significant.

14. The Difference between Purchasing and Sourcing • Strategic Sourcing is systematic • An agreed-upon process • Supply management employees are trained in this process • Results are tracked for cost savings as well as performance metrics • Information from this process is captured, ensuring continuous • improvement for future sourcing teams.

15. The Difference between Purchasing and Sourcing • Strategic Sourcing is collaborative • With department managers who use the products and services • With senior executives to provide information for budgeting purposes • With key suppliers on major opportunities

16. Example: Agency Collaboration on Expense Management Agency Observation: Air expenses booked through agency decreased 20% over previous year. The number of tickets issued also decreased by 27%. Leakage has been Identified and employees are booking directly with airlines. Agency Recommendation: A central bill card for air bookings and Travel Management fees to address Compliance issue. Establish a stronger corporate travel policy.

17. Example: Agency Collaboration on Expense Management Agency Observation: In 4th quarter, a US Air Shuttle agreement was put in place to replace the Delta shuttle agreement that expired at end of September. 34% of the Tickets in the shuttle market continue to be booked on Delta at higher average price. Agency Recommendation: Run a traveler detail report to identify travelers utilizing Delta shuttle. Send a communication outlining the benefits of utilizing the preferred vendor, and the savings.

18. The Difference between Purchasing and Sourcing Traditional Purchasing Shifting Perspective Strategic Sourcing Elite Strategic Souring Focus: Price Specification compliance Spend Consolidation Tools: Spreadsheet based Focus: Landed costs Supply base consolidation Cross-functional teams Tools: Spend analysis Focus: TCO Standardization of processes Strategic supplier alliances Tools: Auctions Focus: Risk mgmt Contributes to Customer value Profitability Revenue enhancement Tools: Measurement systems Establish your strategy based on where your customer falls on this continuum

19. 20% 16% 12% 8% 4% 0% How does Procurement decide where to focus efforts? Early Purchasing Involvement Saves Significant $$ Pre-supplier selection savings of 10 – 17% Post-supplier selection savings of 0 - 5% • Contract • negotiations • Capabilities • assessment • Supplier • selection • Budget review • Project • identification • Market • assessment • Implementation • Supplier • identification • RFI/RFQ Source: Bristol-Meyers Squibb Company

20. How does Purchasing decide where to focus efforts? Strategies vary by company – some structured approaches: Spend Analysis (Software Packages) Consultants (ex: KPMG, A.T. Kearney) Internal Initiatives (ex: Six Sigma)

21. POs A/P P-Cards Spend Analysis Report G/L Data Sources Data Preparation Data Management Master Files Others… Cleansed and Staged Data DataCleanse Extract User Supplier Categories Strategic Procurement Database Typical Spend Analysis Software

22. A. T. Kearney 7 Steps Process Develop category profile Generate supplier portfolio Develop sourcing strategy Select implementation plan Negotiate and select suppliers Implement agreements Continuous improvement • Assessment of a company's current spend (what is bought where?) • 2) Assessment of the supply market (who offers what)? • 3) Development of a sourcing strategy (where to buy what, while minimizing risk and costs) • Identification of suitable suppliers • 5) Negotiation with suppliers (products, prices) • 6) Implementation of new supply structure • 7) Track results and restart assessment (continuous cycle). Use the spend information as the basis for an ongoing program of spend control and demand reduction. Nishiguchi, Toshihiro. Strategic Industrial Sourcing, and A.T. Kearney

23. Bullet Train Process Overview Team Formation Understand Root Cause Data Gathering & Scoping Determine the Opportunities • Schedule • Roles • Experts Needed • Goal Develop Project Ideas Select Projects Select Projects Implement Projects Travel & Entertainment • Id Resources Needed • Pull in subject experts • Communication Plan • Metrics • Test for Understanding Meetings Hotels Airfare Extra Work Best Impact Poorly written policy Measure Progress Report-Outs Reward Successes Lack of training Approval levels Waste of Time Policy Not Followed Good Poor enforcement Lack of awareness Ability to Implement Ldrs No not leading Internal Spend Analysis Projects A Six Sigma Project - DMAIC

24. Definition: Request for Information(RFI) A formal inquiry in the market place for information, typically concerning “expressions of Interest", capacity, capability and availability of suppliers to undertake and bid on work described in the solicitation. Request for Quotation (RFQ) Adocument submitted to one or more potential suppliers requesting quotations for a product or service. Typically, an RFQ seeks an itemized list of prices for something that is well-defined and quantifiable. Request for Proposal (RFP) An invitation to a supplier to submit an offer to a solution to a problem or a need. An RFP is a process in which the supplier's experience, qualifications and proposed solution may take precedence over price.

25. Think about how Purchasing staff are measured and how can you help them be successful.

26. More Examples: Agency Collaboration on Expense Management Agency Observation: Online adoption for hotel bookings was 78% this year. Agency Recommendation: Hotel compliance has been identified as the largest area of opportunity within this travel program. Communication to travelers including information about traveler safety and security, as well as a stronger policy would increase traveler awareness. (Sample communication provided).

27. More Examples: Agency Collaboration on Expense Management Agency Observation: Negotiated rates represent only 23% of all hotel bookings. Agency Recommendation: Adding hotels in key markets to the negotiated hotel program would likely result in lowering the average nightly rate in these markets. We recommend reviewing Chicago, Houston, Dallas, Las Vegas and Atlanta, as these were top destinations without negotiated hotels in 2006.

28. More Examples: Agency Collaboration on Expense Management Agency Observation: Avis represents 69% of the total rental car spend. This is $7.37 higher than Budget’s average daily rate. Agency Recommendation: As contracts exist for both Avis and Budget, shifting market share from Avis to Budget will result in savings. Budget’s average daily rates is 15% lower than Avis.

29. Help Your “Purchasing” Customer Succeed • Give him information that will help him excel with his management. • Explain TCO for your marketplace. Don’t let the customer be naive, or be duped by • competitors. • Provide reporting that nails down the savings or missed opportunities, so he doesn’t • spend time creating spreadsheets and analyzing data. • Work collaboratively to continuously reduce the product / service cost year-over-year. • Think in terms of the customer’s financial reporting time lines. • Alert customer to market trends that will impact cost. • Use your strategic knowledge of how other customers are attacking costs to educate • this client.

30. Definition: Total Cost of Ownership – TCO How much it actually costs to purchase a product or service. As an example TCO for a laptop computer includes: - Original cost of the computer and software - Hardware and software upgrades - Maintenance - Technical support - Training Most estimates place the TCO at about 3 to 4 times the actual purchase cost of the computer.

31. A Strategic Sourcing allegiance does not necessarily mean lost revenue to you!

32. Chief Procurement Officers Top Goals • Enhance Procurement team skills • Improve supplier development and collaboration • Rationalize supply base • Transition to center-led procurement • Increase automation • Increase spend under management How can you help with these objectives? Aberdeen Group “The CPO’s Strategic Agenda” 2006

33. Examples of Cost Reduction Projects • Purchasing takes over responsibility for meeting planning spend • Leverage regional travel programs to global travel programs • Negotiate ground transportation programs • Tighten guidelines for flying business class. • Use company leverage with airlines to negotiate upgrades for executives. • Move employees out of 5 star high cost hotels to mid priced hotels. • Revise travel policy to require employees fuel rental cars before returning them. • Negotiate corporate rates with for airport parking. • Establish a per diem for travel expenses • Require employees to sign an acknowledgement of travel policy

34. Examples of Cost Reduction Projects (continued) • Communicate that video meetings or conference calls should be used rather than travel • whenever possible, and that employees should not travel in packs. • Policy that company training programs be conducted by web rather than onsite. • Policy that when renting cars employees should not purchase liability insurance and / or • loss damage waiver, personal accident insurance, satellite radio service, or personal • navigation systems. • Negotiate employee family programs with preferred suppliers to drive more volume • through contracts. • Require manager approval prior to booking airline travel. • Create a report detailing employees who did not adhere to travel policy that is circulated to • their manager. • Create an internal website that lists preferred / required travel suppliers. Any “upgrades” • for air, car, hotel, etc are made at traveler’s own personal expense. • Loyalty programs that incur a cost to the company are not permitted.