Vaughn Hovey The Ohio State University January, 2010 (Name Firm) Procurement “The Business Imperative for Supplier Management Processes” Vaughn Hovey The Ohio State University January, 2010

Agenda (Name Firm) Procurement Process Assessment Supplier Management (Name Firm) Key Business Perspectives List Major Business Initiatives Procurement Process Assessment Supplier Management Benefits Page 2 Copyright © 2010 All rights reserved

(Name Firm’s) Business Key Factors Annual Revenues and assets . # Employees Major Products and services Subsidiaries Etc…. Page 3 Copyright © 2010 All rights reserved

(Name Firm) Business Perspectives (Examples Shown) Increasing annual revenue is an challenge Growing the business organically is desired but in effect may need to capture more market share to grow Competitors are becoming more creative with products and services Effectively managing the total costs of operating the business are becoming a significant issue Have implemented most of the usual business methods to remain competitive while meeting customers needs Page 4 Copyright © 2010 All rights reserved

Major (Name Firm) Business Initiatives (Usually from Strategic/Annual Operating Plans) Etc. Page 5 Copyright © 2010 All rights reserved

(Name Firm) Business Opportunities Aligned With Effective Procurement Models (Examples Shown) Controlling external spend enables improved financial measures and meeting financial objectives. A reallocation of saved funds to higher priority initiatives is an advantage. Knowing who the critical and preferred suppliers are leads to expecting more value being provided from them to meet business needs A focus on purchase prices is useful but with enhanced procurement processes it can drive better TCO analysis Page 6 Copyright © 2010 All rights reserved

(Name Firm) Departments & Procurement Markets & Competitors Business Strategies Suppliers Manufacturing Distribution Customers Engineering, Facilities Mgmt, Finance, HR, IT, Legal, Marketing, etc, Procurement Process & Supplier Management Page 7 Copyright © 2010 All rights reserved 7

What Class Is Most Procurement Organizations? “Best Practice” Research: World-Class Aberdeen AT Kearney CAPS/ISM Hackett Best-in-Class Grange Procurement Little-Class* Major gaps exist between “Leaders & Followers” 8 Copyright © 2010 All rights reserved

The Progression to World Class Supply Management SM Procurement (“To Be” Supply management a core competence Strategic sourcing Monitor supply environment Develop and implement commodity strategies Supply base by design Develop and manage alliances and networks Time based competition Virtually defect free materials and services Leverage supplier technology Integrated supply strategy Manage risk Emphasis: total cost relationships Relationships: transactional, collaborative and alliance Bottom line impact: increase shareholder value Reporting: member, executive group Data: facilitates strategic planning Understand key supply industries E-Commerce II Proactive Coordinate procurement system Develop suppliers Long-term contracts Involved in development of requirements Plan for recurring requirements Procurement adds value Active in source selection Near defect free materials and services Emphasis: cost, quality and timeliness Relationships: transactional and collaborative Bottom line impact: profit contributor Reporting: upper management Data: facilitates sourcing and pricing Fulfill social responsibilities E-Commerce Procurement (“As Is”) Mechanical Transactional focus React to requisitions Not involved in key source selections Emphasis: purchase price Relationships: transactional and adversarial Bottom line impact: revenue neutral Reporting: low level Data: used to expedite Computers process paperwork Clerical Process Paperwork Confirm actions of others Emphasis: convenience Relationships: personal Bottom line impact: overhead Reporting: very low level Data: not available 1 2 3 4 5 6 7 8 9 10 Page 9 Copyright © 2010 All rights reserved 9

Procurement Processes Copyright © 2010 All rights reserved

(Name Firm) Procurement Model Objectives (Examples Shown) Effectively manage the annual external spend to deliver on-going competitive prices Manage the critical and preferred suppliers so that they meet their commitments and provide value to the businesses To leverage the category knowledge within the Businesses and use of the effective procurement processes to ensure competitive supplier proposals To mitigate supply and price risks Page 11 Copyright © 2010 All rights reserved

(Name Firm) Procurement Process Recommended Elements (Representative Items) Formalize the (name Firm) Procurement Polices and Processes Develop “Spend Category Strategies” with (name Firm) Departments and Procurement working together Establish formal “Spend Category Teams” with (name Firm) Department Resources and Procurement collaborating with each other Prepare, issue and analyze appropriate Request For Proposals (RFPs) including Department and Procurement associates Analyze the suppliers and categorize them into meaningful business relationships Page 12 Copyright © 2010 All rights reserved

(Name Firm) Supplier Categorization “The Hopefuls**” “The Vital Few” Potential Strategic Supplier* “The Many” Preferred “The Masses” Tactical *Approved By Senior Management **New suppliers selected where the incumbents can’t meet our growing business needs Page 13 Copyright © 2010 All rights reserved 1313

(Name Firm) Procurement Model Supplier Management Processes Existing Supplier Reviews Supplier Categorization Interactions & Communication Establish Account Plans (Annual and/or semi-Annual Feedback & Performance Management Relationship Contracts Expectations/Responsibilities Opportunities Major Projects 3 Yr. Product/Service Roadmap Knowledge Performance Metrics Sponsorship (Executive / Department/Technical /Procurement ) Sr. Mgmt Approvals Supplier Evaluation - Scorecard Process - Dept. Interactions Strategic Supplier Listing Preferred Supplier Listing Tactical Supplier Listing Supplier Profiles - Historical spend analysis - Contract status - Executive Boards Category strategies Projects & initiatives Current & Future Challenges Ongoing Expectations Dept Relationship Perspective Risk Management Supplier expectations Supplier Development KPI / SLA Reviews Roadmap Review Recognition Program? Performance Market New Suppliers? Continuous Improvement Page 14 Copyright © 2010 All rights reserved

Can we get similar benefits from our key suppliers? Strength and stability The expertise of independent agents A variety of competitive, affordable products Superior, local claims service Many options for saving money Several convenient payment options Financial & Operational Strength Expertise of Account Teams A variety of competitive, affordable products Superior service Options for improving processes and saving money Competitive discounts Page 15 Copyright © 2010 All rights reserved

Relationship Styles Competitive Collaborative Win/Lose Win/Win Positional Different Goals Combative Collaborative Win/Win Interest Based Shared Goals Work Things Out Copyright © 2010 All rights reserved 16

(Name Firm) Expectations Current View Inconsistent process adherence Contracts not always in place Not fully leveraging relationships and firm’s capabilities Supplier base too broad Future View Process adherence Contracts implemented Fully leveraging relationships and capabilities of suppliers Reduced supplier base Copyright © 2010 All rights reserved

Expectations of Suppliers Operations performance Fulfilling their commitments Seamless transaction processes Responsiveness/Technology leadership Provide technology applicable to our business Solution provider Prompt and complete issue resolution Quality Performance of suppliers meet agreed metrics Knowledge transfer Economic impact Attain savings Preserve investments Promote effective use of products and services Volume discounts Ritter… Vaughn has done a very nice job of laying out the Vision of our Company and why are we making changes? Now time to move onto the implications As we move forward these are the Cornerstones of our Expectations of you. Copyright © 2010 All rights reserved 18

Supplier Management Current State Plan - 2010 Plan – 2011 - 2013 Too many suppliers in some categories Segment suppliers into Strategic , Preferred and Tactical for the two identified categories Sr.Executive sponsors to Strategic Suppliers Strategic/Preferred supplier management processes do not exist Reduce tactical supplier base by 15% No satisfaction assessment of suppliers Strategic and preferred suppliers provide quarterly and annual reports of SLA and performance Satisfaction assessments performed for 100% of strategic and preferred suppliers June 22 , 2009 Copyright © 2010 All rights reserved

Key Supplier Relationships A Real WIN-WIN Opportunity If… You Know What’s Expected and Why Relationships were Initiated Select the Right Suppliers Focus on Mutual Benefits Manage the Relationship Copyright © 2010 All rights reserved

(Name Firm) Departments & Procurement Potential Benefits Improved Budgeting for Goods & Services Enhanced Supplier Relationships Lower Purchase Costs Reduced TCO Suppliers Manufacturing Distribution Customers More Supplier Value Engineering, Facilities Mgmt, Finance, HR, IT, Legal, Marketing, etc, Better Financial Forecasts Effective Demand Mgmt More Alignment Procurement Process & Supplier Management Page 21 Copyright © 2010 All rights reserved 2121

Q A & Vaughn W. Hovey The Ohio State University Fisher College of Business hovey.7@osu.edu Copyright © 2010 All rights reserved