Supply Business preview

GAIN THE COMPETITIVE ADVANTAGE Procurement and supply doesn’t just save money, it can help you increase profit and shareholder value too

INSIDE Why you should care about procurement and supply What your peers are doing in this area Award-winning projects

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WELCOME he chief procurement officer of a very well-known global company recently attended a dinner with a group of CEOs. Far from them understanding the contribution he and his peers make to the smooth running of the supply chain of their businesses, these company heads neither knew nor seemed to care.

He was surprised and disappointed at this lack of awareness and interest. Perhaps it’s the fault of procurement for not shouting about its achievements – and of CEOs for not realising the harm poor procurement and supply chain management can wreak.

Examples of the best of what can be done include the fast and innovative supply chains of companies such as Amazon and Unilever; the London 2012 Olympics coming in on time and to budget; and the quick turnaround of aid to Haiti in the wake of a devastating earthquake.

If procurement and supply is not well managed, massive damage can occur – both financial and reputational. This was the case with the horse meat scandal, West Coast Main Line contract and G4S. With the current financial climate, procurement has received a higher profile, helping companies save – and in some cases make – the money needed to survive and expand. This is borne out by Accenture research that found good procurement can help companies grow and add shareholder value.

What value is your procurement and supply chain function adding? What could it be? Read on for more ideas and subscribe to Supply Business, the quarterly journal for c-suite executives, to find out more.

o talk about the recent horse meat scandal is perhaps a little too obvious, but it does the perfect job of highlighting the critical role supply chains have in today’s business.

This wasn’t a health scandal – it was a business scandal that has left the risk and reputation of some well-known brands in tatters, alongside their diminished share price. And that’s the crux of issue – many CEOs and CFOs have confessed to me they would be ‘caught napping’ if a similar crisis hit their industry – they are too far removed and do not understand the business-critical nature of their procurement and supply teams. That is why we must continue to attract the brightest and best into the profession and strive for a licence to operate.

But I don’t want to just focus on the negative: this global profession is driving global change. Leading organisations can report savings and efficiencies, innovation and creativity, as well as the shaping and developing of markets – all being driven by their procurement and supply teams.

Faced with unprecedented economic turbulence, as business leaders we have to accept that these challenges are only going to get greater: globalisation; ever-increasing logistics costs; scarcity of raw materials; rising labour costs – all are leading to increasing levels of risk and complexity. I agree with Professor Martin Christopher of Cranfield University that future supply chains will be the key success differentiator. It will be those who are smart with their procurement and supply chain strategy who will be fit for the future and lead with a competitive edge.

REBECCA ELLINOR, Editor, Supply Business

DAVID NOBLE, CEO, Chartered Institute of

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Purchasing & Supply

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Welcome Rebecca Ellinor, editor, Supply Business and David Noble, CEO, Chartered Institute of Purchasing & Supply

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Financial performers From Thomas Cook to Rentokil, procurement is making a big contribution to company profits

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The award goes to...

Companies’ prize-winning procurement and supply projects

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Winning formula Transforming its procurement function brought Novartis huge value

The growth generation How strategic procurement teams make money for their businesses Supply chain experts-turned-CEOs and business leaders talk about the function

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SUPPLY BUSINESS Redactive Publishing Ltd, 17 Britton Street, London EC1M 5TP, United Kingdom.

Tel: +44 (0)20 7880 6200 EDITORIAL Tel: +44(0)20 7324 2746 Email: rebecca.ellinor@supplybusiness.com Editor Rebecca Ellinor Chief sub-editor Samantha Robinson Digital content editor Paul Snell Senior designer David Twardawa Picture editor Claire Echavarry Creative director Mark Parry

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Supply chain experts arrive at the top TIM COOK: Regarded as something of a supply chain genius, he rose to become computer giant Apple's present CEO. SAM WALSH: The CIPS Fellow was appointed CEO of global mining group Rio Tinto earlier this year.

KATE ALLUM: Previously head of supply chain at McDonald's, she is now CEO of UK dairy farmer co-operative First Milk.

THE GROWTH GENERATION

Strategic procurement and supply teams are no longer just saving money, they’re making money too Illustration by I A N D O D D S

rocurement organisations can and do contribute to their company’s bottom and top line through innovation or deals that grow profit. Whether they get that opportunity depends on the nature of the business, economic climate, vision of senior leadership and corporate culture.

Photography: Apple, Rio Tinto, Shutterstock

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Money-making schemes At the Football Association (FA) procurement is helping to increase income by bringing in investment from suppliers. The FA has three major

revenue streams: broadcasting rights, which it sells around the world; corporate membership; and sponsorship packages. Procurement manager Ian Fenwick, who joined in December 2011, believes that by the end of this year it’s realistic to think that 10 per cent of box sales could have come off the back of procurement and new contracts.

Using the supply chain as a sales channel was a strategy used by procurement at online media company IAC/Interactive Corp while it was the parent company to Expedia and its corporate travel arm. For example, in

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What business leaders say about procurement LORD ALAN SUGAR: “Buying is very, very important. It's the third most important aspect of business. First is the product, second is the selling and third is the buying.

It has to be. If you don't buy right, you have no business…You have to build supplier relationships…so that in good times and bad times you have support.”

SAINSBURY’S CEO JUSTIN KING, whose company saw a rise in sales after it steered clear of the horse meat scandal: “The issues experienced by the industry over the past quarter underscore the importance of our detailed understanding of our supply chain.”

JON SPARKES, COO, UNICEF UK: “For every pound we earn, we spend 2p on administration and 23p on raising the next pound. Much of this is procurement of fundraising support and the equipment, materials and tools to enable the team to do its job for the world’s children. Effective procurement is extremely important in meeting our objectives in a financially efficient way.”

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every new negotiation for IAC corporate, an introduction to the suppliers’ corporate travel head was requested. It was a successful arrangement that enhanced procurement’s reputation because it was no longer seen as just a price enforcer. And the function has been used to improve the skills of in-house commercial colleagues so they know how to win a tender or negotiation.

The procurement team at MGM Resorts, which owns Las Vegas venues including Bellagio and Circus Circus, has been involved in several deals that capitalise on strong relationships with suppliers and partners, which have resulted in revenue growth as well as raising the internal profile of the function. As a result, procurement is helping the company bring more business, particularly more conventions, to its hotels.

Frank Scharadin, executive director, global procurement, says: “From the chief officer-level down, global

procurement’s opinion now counts. If organisations allow procurement to sit at the table e and have a voice, the more value it can bring.”

At Procter & Gamble’s (P&G) Cover Girl cosmetics, meanwhile, buyers who regard innovation as an essential part of their role have drawn on product ideas from suppliers that meet consumer needs. One example was mascara.

A provider had a brush design that procurement identified when paired with Cover Girl’s mascara formula would deliver a superior performance.

It negotiated a multi-year supply agreement that granted P&G exclusivity on the brush and the result has taken the Cover Girl product from number four to contending for market leadership.

Procurement at the Royal Mail Group (RMG) demonstrated commercial expertise and its ability to deliver

top-line growth when it played a to key role in setting up an k iinternational supply chain that capitalised on the lucrative China-to-Europe market.

C The project had buy-in from the top team, particularly the CEO, and last year delivered a businessa to-business parcels solution at around 20 per cent lower than competitors offering a similar service and opened up a multimillion pound revenue stream.

The UK procurement team at Live Nation, a concert, music festival and ticketing business, “rolls it sleeves up and gets involved with the business”, according to Brian Grew, vice president, commercial. As a result, it has helped to overhaul the way it conducts parts of the company to grow income. Its contribution to the bottom line has demonstrated its ability to understand the wider business and helped dispel the view that the function shouldn’t be involved in more strategic decisions.

KILLER STATS Procurement and supply’s impact on financial performance

£44m

A transformed approach to hotel purchasing at Thomas Cook aims to bring in cost savings of £44 million by 2015 under its turnaround strategy.

The holiday group’s chief executive Harriet Green said in March: “The group-wide approach to hotel purchasing has been innovative, allowing us for the first time to pool requirements and leverage scale, while simultaneously offering those scale benefits to our hotel partners.”

reviewing every area of spend, looking for ways to sensibly reduce cost.” It added: “We are on track to deliver planned savings of £100 million annually by 2013/14.”

£100m

10%

An indirect procurement programme at supermarket chain Morrisons delivered £45 million of “annual revenue benefit”, according to its preliminary year-end financial results. This is in addition to £40 million achieved in 2011/12.

The report for the year ended 3 February 2013 said: “The programme involves

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3.6% Cutting non-labour costs by just 1% could boost profits by 3.6% (Proxima)

Net operating costs at BT Global Services have been reduced by 10 per cent, partly due to the firm’s cost transformation programmes.

“We have improved commercial terms with some suppliers, which reduced contract delivery costs, and opened a new centre for contract management services,

which will provide better customer service and lead to more efficient processes,” a report on the results for the third quarter to 31 December 2012 said.

£59m

Procurement contributed to £59 million savings at services group Rentokil Initial in 2012 – £9 million more than targeted.

The savings were achieved through a combination of restructuring, procurement, service productivity and back-office rationalisation, the preliminary results for the year ended 31 December showed.

25% In manufacturing, a 5% saving on material costs can equal a 25% rise in turnover (Procurement Principles and Management)

£2.4bn

Siemens is integrating supply chain management (SCM) activities more closely into its business operations to save ¤3 billion (£2.4 billion) by 2014.

The firm plans to introduce a framework that aligns the SCM function more closely with the business and will develop cross-functional co-operation between procurement and product development using the ‘design-to-cost’ method.

$115m

More effective procurement at SABMiller contributed to savings of US$115 million (£71.29 million) in April to September, the brewery’s 2012 interim results in late November revealed.

Global procurement firm Trinity provided the most significant contribution.

Executive chairman Graham Mackay said: “Margins have risen modestly, as a result of our cost reduction.”

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THE AWARD GOES TO...

Three companies that have won awards for their very different procurement and supply chain efforts

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NATO

The North Atlantic Treaty Organization (NATO) not only transformed military policy, it also helped save property, money and, most importantly, lives when it took an innovative approach to countering the threat of IEDs. For years, the approach has been defensive and reactive, with many individual NATO nations focusing on activities known as ‘right of the boom’

Photography: NATO

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Everything Everywhere

Telecoms business Everything Everywhere transformed its mobile network to support 4G, with the procurement team working across many functions to achieve significant results.

The company was formed as a result of the merger between Orange and T-Mobile in 2010. At the end of 2011, it announced plans to invest £1.5 billion to provide the UK with a ‘digital backbone’ to support the growing use of superfast broadband and smartphones.

CEO Olaf Swantee said: “We are completely transforming our network and the team – of which procurement and supply chain are core – has done an incredible job in a short time to improve our network performance and put in place the infrastructure to provide this 21st-century digital backbone.”

– after the bomb has been detonated.

These relied on mitigating the effects of a blast with more heavily armoured personnel and vehicles, as well as increased trauma capabilities. A decision was then taken to switch efforts to what happens before a device is planted.

Working with procurement, the project team developed a work package that covered three counter-IED areas: strategic and tactical policy development; training; and mobile advisory teams. The deal was structured as a fixed-price contract with a base period of 12 months and four annual renewal options. Purchasing developed and embedded a non-standard ‘surge capability’ clause in case a quick and temporary increase in support was needed while protecting costs.

Commander Ray Albarado, US Navy, said: “In these times of austerity, this team put together an amazing solution to help with trying to find the right way to combat such a difficult problem and procurement was that method of doing it.”

A cross-functional team was established to manage, plan and deliver this project. Procurement’s role was to source new handsets, IT and network equipment and transform warehouse and logistics operations, while making significant savings – which it achieved.

Chief technology officer Fotis Karonis added: “Working with my team, the procurement team has been instrumental in enabling us to achieve a consolidation of network infrastructure for both brands.”

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Heathrow Airport

While the environmental scene is not synonymous with airports, Heathrow has taken sustainability extremely seriously over the past few years – an approach evident in the eagerly anticipated revamp of Terminal 2, which is expected to open its doors next year.

The new building will include a biomass boiler and combined heat and power plant. Not only will it benefit from the eco-friendly power source, but, in due course, the existing Terminal 5 and central terminal area will, too.

It is hoped that this new approach will reduce Heathrow’s carbon footprint by 34 per cent by 2020. And since prices for oil and gas are ever increasing, cutting out the use of fossil fuels will also reduce costs.

With the help of LC Energy, procurement created a £30 million wood supply contract to fuel the biomass boiler, bring life to undermanaged woodlands in the South East of England, reduce emissions and boost employment in rural areas.

And, all of the ash that results from burning timber will be recycled and blended with fertiliser products to be used in agriculture. This will reduce the unnecessary disposal of waste to landfill – which again cuts costs and helps the land the timber came from.

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WINNING FORMULA How do you transform a decentralised, 1,100-strong procurement function to bring better value to your business? Rebecca Ellinor learns how it was done at Novartis Illustration by I A N D O D D S

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ovartis is a massive company.

Being on its Swiss campus is like being in a mini city. After all, the drug maker operates across seven distinct business divisions in 46 countries around the world. And spanning those is a decentralised 1,100-strong procurement function with an annual third-party operating expenditure of $20 billion (£13 billion).

The company is a profit-making business – results from March 2013 show that 2012 fourth quarter net profit jumped to $2.08 billion (£1.36 billion) and full year net profit was up 4 per cent at $9.62 billion (£6.28 billion) from $9.25 billion (£6.04 billion) in 2011. It does have to face certain facts: most significantly a patent cliff it must contend with as many of its products

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become available to make generic.

In last year’s annual report, CEO Joseph Jimenez said the group made savings of $2.8 billion (£1.83 billion) in 2012 by improving productivity as a result of focusing on four areas, including procurement. He said: “This is important strategically because it helped offset losses from patent expirations and enabled us to invest in growth opportunities.”

Procurement has been tasked with delivering savings of $4 billion (£2.61 billion) in four years to help fill the gap left by drugs coming off patent. Phillip Duncan, chief procurement officer, believes it is well placed to do that, following a transformation programme.

It’s a far from simple task – to work out the best way to leverage the talent,

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processes and systems of the entire function around the globe. Duncan describes what the team has achieved as “phenomenal”.

Procurement’s makeover So how did it do this? The Procurement Transformation Programme was set up with three key pillars: the Procurement Governance Programme (PGP); systems; and people.

“Procurement was already grabbing the headlines and increasing savings by 50 per cent each year,” says Paul Bestford, head of the transformation programme, “but you can’t keep running the engine hotter and hotter. We had to change to sustain that performance.”

They came up with a model that covered four ways procurement can create value: sourcing (through price negotiation and competitive bids); demand management (buy less and alter specifications); process improvements (buy more efficiently by reducing invoicing costs and increasing the use of electronic catalogues); and value management (through improved supplier performance).

To overhaul the procurement set-up, external expertise was pulled in from Deloitte and the project started in 2010. It was decided that one category be fully examined to identify opportunities – laboratory supplies.

Using workshops, they uncovered what was wrong and what the answers might be, as well as what they might do if they could start from scratch.

“We mapped out the process from setting the targets to the purchase order and everything in between,” says Bestford. “Then we explored what roles we needed to achieve the desired result.

The leadership structure was the last thing we got to.”

This bottom-up approach produced a number of findings. First, better data was a must. It also found that the way targets were set didn’t encourage collaboration. In June and July 2011, further design workshops took place involving key stakeholders across all the main categories. Information gleaned over this 18-month journey was distilled into one document, described as a “blueprint of the necessary ingredients”.

The next stage was tailoring the approach according to each country.

While headcount in procurement will remain the same, some job roles had to be changed. Around 900 job titles have been streamlined to around 45, making it easier for staff to identify who does what. In addition, the capability of procurement professionals is being

addressed through an academy.

Systems improvements and investments have included a global e-sourcing platform ($6 billion [£3.9 million] went through e-sourcing in 2012), contract lifecycle management, a global data warehouse to report on every deal, a project-tracking tool, a shared supplier master data platform and a requisition-to-pay system.

And seven separate planning cycles for each division are being replaced with one procurement calendar.

A procurement leadership team, which comprises the group CPO, the divisional heads of procurement and key functional leaders, drives the transformation. Objectives are now set based on what those on the ground think they can achieve and what those at the top think should be possible.

“YOU CAN’T KEEP RUNNING THE ENGINE HOTTER AND HOTTER. WE HAD TO CHANGE TO SUSTAIN THAT PERFORMANCE” All of procurement’s work feeds into the company’s overarching strategic priorities. A balanced scorecard covering savings, customer satisfaction, responsible procurement and more is used to judge the success of their endeavours.

The investment has been enormous, says Bestford, but so, too, is the pay off.

Procurement regularly reports to the CEO and group CFO Jonathan Symonds on three things: how much the programme is delivering against the plan; how much it costs; and how happy the stakeholders are.

Bestford’s team planned to have approached up to 500 stakeholders by the end of 2012 to seek their satisfaction levels and in terms of savings [$4 billion in four years] he’s happy they’re ahead of target. “We achieved north of $1.2 billion [£700 million] in 2012, over delivered in 2011 and expect to again in 2013. We hope to beat it by 20 per cent over four years,” he says. “We’ve built a much more powerful, joined-up procurement engine. It works together rather than having many separate parts.”

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The executive perspective JONATHAN SYMONDS, GROUP CFO, DESCRIBES THE IMPACT OF OVERHAULING PROCUREMENT What impact has the procurement transformation had on the business already?

It is certainly putting us in a better position. It’s helping us address our cost base and enabling us to continue to invest in our pipeline at a time when economic uncertainty and patent expiries are creating significant headwind.

What future impact do you hope it will have?

We have enormous potential for innovation and performance improvement within our supplier community and procurement will increasingly help us unlock that. Equally, I expect procurement to play a key role in identifying and mitigating supply chain risk. In many cases, our customers’ lives depend on the products we make and we depend on our suppliers to get those products to them.

Will it help your company make profit, as well as savings?

Some of the savings flow straight to the bottom line, but we also choose to reinvest some of that productivity in our research programme, which continues to innovate, providing Novartis with a pipeline that is the envy of the industry. Procurement is contributing more than $1 billion (£600 million) each year, which is a dramatic step change in performance and has a very meaningful impact on our performance.

What should the CFO of any business expect from their procurement and supply function?

Procurement needs to really listen to the rest of the business, understand the priorities and respond accordingly.

Procurement people bring a wide range of valuable skills and I expect the function to develop those skills that support the priorities of the business.

Procurement needs to be efficient, but I also expect it to understand its role in helping the rest of the business be efficient too.

Finally, I expect procurement to contribute to competitive advantage, whether that’s through cost leadership, innovation, supply security, quality, or however else the business chooses to differentiate itself.

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