Supplier Relationship Management Description and Benefits

Definition The SRM process aligns, provides structures, and manages the supplier relationships.

Supplier Relationship Management Description Aligns and integrates process, information and cash layers within supply chain networks structure social networks & cultural value systems process oriented (horizontal) framework within supply chain networks Plans, resources, directs, confirms and adjusts the relationship between company and key suppliers Develops the network bonds of trust, commitment, cooperation & dependence Balances the levels of power within supply networks Contract Administration is genesis process for SRM

Outcomes of Supplier Relationship Management Integrates external organizations into company’s cross functional teams Develops an environment of trust between company Suppliers and Internal Customers Manages external functions to meet business objectives Ensures relationship is mutually beneficial Engages talent and skills of suppliers personnel in achieving company’s business goals Extends company’s influence on suppliers supplier Deliver maximum value to company

Supplier Relationship Management Process

Enablers of Supplier Relationship Management Effective contract administration processes Agreements purposely structured for SRM Aligned values between company & Supplier Skilled, trained and capable personnel Leadership that supports & believes in SRM value proposition

Key Indicators of Maturity - SRM Foundation: (Defined) Basic RM processes, programs, and structures for the organization are defined and documented, however, are not duplicated in supplier’s organization. Company and supplier relationship managers are identified and documented. Basic: (Managed) RM participates early in Strategic Sourcing processes. For each relationship, a balanced, two-way set of RM process measures is in place. Performance review is on a regular and formal basis with actions and follow ups management. Advanced: (Leveraged) RM processes are well defined, implemented, and duplicated in most relationships. Open information sharing about relevant criteria, such as capacity and demand forecasting, facilitates cross-enterprise decision-making. Cross-functional RM teams review optimal rationalization measures for alignment with organization strategy and strategic sourcing plans. Key relationships begin to duplicate process in own organization.

Level 1 – Ad Hoc SRM is a very manual, unpredictable, time consuming process that is largely undefined and left up to individual methods and preferences. No forecasting or planning takes place for the relationship. Suppliers are not involved in anything but “filling the order”. Communication is one-way and in response to requests from internal customers. Supplier performance is not evaluated through any formal process. Information flows are unreliable. Information on the relationship is difficult to find and often resides on spreadsheets in individual computers.

Level 3 – Managed (Linked) Level 2 – Defined SRM is defined but still unpredictable with >50% of the suppliers not in SRM and largely uncontrolled. Basic relationship forecasting and planning takes place but by the SRM people without customer or supplier input. 40% accuracy is typical. Suppliers are mostly involved only in response to a request but some key suppliers have annual agreements with releases being generated by procurement. Only these key suppliers are involved in process or product improvement. Others are asked for input on occasion. Communication procedures are defined (quarterly meetings, identified points of contact, frequency, etc.) Supplier performance is defined but measures are unreliable. Quarterly reviews are done with key (strategic) suppliers only. Information flows are manual. Information on the relationship is easier to find and resides in a central repository (often a file cabinet). Level 3 – Managed (Linked) SRM performance is predictable with >80% of the suppliers in an SRM process. Relationship forecasting and planning takes place by the SRM people in collaboration with the customer and supplier. 80% accuracy is typical. The majority of Suppliers are involved in process or product improvement. Supplier are often involved in annual planning and budgeting discussions. Joint communication processes are in place and institutionalized. Formal relationship structure are in place on both sides (Executive Sponsor, Relationship Manager, teams, etc.) Supplier performance is defined and measures are aligned with strategy. Relationship performance reviews are a continuous process. Information flows are connected. Information on the relationship is easily available on line.

Level 4– Leveraged Level 5 – Optimized SRM performance is predictable and variability is reduced. 100% of the suppliers are in an SRM process. Relationship forecasting and planning takes place by the SRM people and suppliers Often manage this process without company involvement. 80% accuracy is a minimum requirement. Suppliers are involved in process or product improvement and often lead this effort. Suppliers are a formal part of the annual planning and budgeting discussions. Communication across companies is almost “frictionless”. Trust is high and an “open book” environment exists. Company relationship structure run together. Supplier and Company performance is clearly defined and measures are aligned with both strategies (suppliers and company). Relationship performance reviews are “two-way”, sometimes lead by the supplier. Information flows are integrated. Two-way Information on the relationship is easily available on line. Level 5 – Optimized Suppliers are active and formal members of the process teams. Suppliers share responsibility for performance improvement. Suppliers share in the rewards of performance improvements. Customers share responsibility for performance improvement. Customers share in the rewards of performance improvements. Suppliers and customer IT systems are deeply connected (two way interaction) with your IT systems. Suppliers, customers and the process team members feel like they are “all in this together” in regards to process performance and improvement. Process management and optimization across the network is a major focus.

SCM Maturity and Associated Performance Optimized 2 4.0 1 1 1 RM Processes LT<40% SS<40% PO>40% 54 No. of FTEs Per $B Spend 1700 No. of Suppliers Per $B Spend 0.7% of Spend Procurement Costs Leveraged (Integrated) 3.0 Anticipated Performance at the Top Maturity Levels ROI = 20% ROCE = 19.5% 3 Managed (Linked) Suncor Performance at Current Maturity Levels ROI = 16.5% ROCE = 16% 2.0 Defined RM Processes LT=1 SS=1 PO=1 Additional research suggests that the new processes we are setting into motion are directly aligned with these benefits. How? In the early stages of improvement, we will deploy strategic sourcing processes, that will reduce the number of suppliers. This is a key ticket to heaven – you can’t deploy some of the more advanced strategies, until you reduce the number of people you’re working with, leverage your spend to the extent possible, and partner with the right group of people. Note that not every relationships will be a “partnership” – but we need to really understand our markets, and make better decisions that reduce our risk exposure. As we do so, we will save money – the next benefit. This will impact our COGS, and we will be able to cut prices for all business units. The majority of people working in SCM at Suncor today are doing manual paperwork – non-value added work. As we become more efficient – we can grow the company, without having to dedicate people to non-value added transactional work – and instead train our people to become more strategic – in working with suppliers to find additional opportunities to improve delivery, quality, cost, technology, and ways of working. Some of these benefits will accrue from Cornerstone – but the majority are a function of the new processes we will put into place. Finally, the greatest opportunities occur once we have established our supply chain network, and have designed the supply chain to be able to deliver. In the words of Dave Balsom: “The biggest opportunity for savings occurs after the ink on the contract has dried.” Moreover, by working on managing the relationship with our suppliers, collaborating and sharing ideas and innovation, we can find ways to take cost OUT of the supply chain – in a way that mutually benefits both parties, and which would not occur otherwise. Think of it as exploiting the human capital and intellectual property that resides in our supply base – and putting those ideas to work for Suncor. That is the most advanced level of supply chain maturity, and one that we aspire to, and which we have set our sights on. We project that at level four, we can move the needle on ROI from 16.5% to 20%, and ROCE from 16^ to 19.5%. How (see notes below): SCENARIOSROIROCE1. No Action ROI 16.5% ROCE 16.0% 2. Inventory Decrease supply chain inventory to 0 ROI 16.7% (effort to reduce inventory has no huge movement)ROCE 16.0% (no change) Productivity Work with Maintenance and Ops to increase productivity by 5% (assuming $ 85 million cost of Maintenance) ROI = 18.2% ROCE 17.7% Expenses Inventory at $85 M Production at $100M Decrease Expenses by 5% (focus on cost) RoI = 17.2%ROCE = 16.7% Capital savings No increase in production revenue No decrease in costs over life of creating capital Major projects delivers 5% less Capital decreased by 5% ROI = 17.4% ROCE 16.9% 6. Combined Impact:Uptime improved by 5%Decrease expenses by 5%Capital decreased by 5% ROI = 19.9% ROCE = 19.4% 7700 No. of Suppliers Per $B Spend 1% of Spend Procurement Costs 104 No. of FTEs Per $B Spend 1.0 Ad Hoc LT = Leadtime SS = Safety Stock PO = Perfect Order Source: “Procurement: Current Benchmark Findings.” The Hacket Group, 2004 2. “The Quit Revolution in Supplier Management.” Aberdeen Group, 2004 3. A Presentation to SCC Members “Supply Chain Practice Maturity Model and Performance Assessment”, The Performance Measurement Group, November 6th, 2001.

SRM Results

Supplier Improvements from Measurement Programs