© The Delos Partnership 2005 Dairygold Workshop Strategic Sourcing Process

© The Delos Partnership 2005 Strategic Sourcing Definition #4 The Strategic Sourcing process consists of a number of stages that are designed to assess business risks and supply needs – reduce these risks, define supply needs, strengthen supply performance, improve business profit and safeguard customer value and service. The output of the process is a defined number of potential best value suppliers for the subsequent Dealmaking & SRM stage

© The Delos Partnership 2005 Supplier & Results Management Risk & Value Analysis Cost & Cash Data Capture Scope, URS, Market Testing Supplier(s) RFI, RFQ, & Performance Leverage & Dealmaking Supplier & Results Management Delos Sourcing Process The Delos Sourcing process is the 4 th of the Delos Six Procurement Dimensions This sourcing process should be used for all Strategic and Critical spends and provides a robust methodology for reducing / eliminating supply risk and improving the total cost and cash of externally purchased products and services and business assets, inventory and processes. The process stages ensures there is gathering of the complete spend (cost & cash), project scoping and boundaries, user requirements are defined and embedded into the RFQ, leverage is maximized and supplier The 4 th of the Six Procurement Dimensions

© The Delos Partnership 2005 Used for Strategic / Critical Spend Items & Key Projects Required where there is a risk of loss / dislocation to supply Involves significant time / resource investment Involves business critical issues Board awareness and/or approval Global Market Evaluation needed Risk Management analysis required Can involve Intellectual Property & Multi Year Deal Cost of internal / external customer change may be high Strategic Sourcing – Implications

© The Delos Partnership 2005 Innovation & Sourcing Cycles StrategicSourcing-InnovationCycle StrategicSourcing-ProductManufacturing or Outsourcing Cycle StrategicSourcing -Internal & External Customer Driven

© The Delos Partnership 2005 Customer Expectations Cost (Price) & Speed Innovation that works Uninterrupted supply RFTQ100%OTIF Awareness of supply strategy & risks To manage these customer imperatives, the business vision, focus and goals must include Strategic Sourcing leadership.

© The Delos Partnership 2005 Risk Map Key Severity Likelihood Major Medium Low Minimal Medium Priority High Priority Low Priority Medium Priority Urgent Customer Problems MinimalLowMediumMajor Scenario 1.Shortage of a major Raw Material 2.Third source financially insecure 3.Customer urgent demand to change to a new product 4.Key Supplier has only one factory 5.Key Raw Material price is about to treble

© The Delos Partnership Product with 4 / 5 suppliers – example Freight 2.Product specified by the customer in a technical application 3.A major service with complexity and one supplier 4.Photocopier Audit 5.Newspapers and Journals Profit Opportunity Key Ease of Implementation Spend Value – Profit Opportunity Hard Average Easy Supply Leverage Map MinimalLowMediumMajor STRATEGICSTRATEGIC CRITICAL NUISANCENUISANCELEVERAGELEVERAGE 5

© The Delos Partnership 2005 DefinitionDescription Sole Source A single supplier who meets 100% of requirements. The product and service is only available from limited Suppliers Bargaining power is reduced due to the limited sources of supply. Single Source Procurement has selected one specific supplier for 100% of requirements. Leverage is focused on one supplier. Other sources exist. Dual Source Two suppliers are fully approved to meet buyers specifications. A decision has been made to split the value between two active suppliers. Multi Source Several suppliers are actively supplying Leverage is reduced but competition increased Second Source A second source of supply has been identified & fully approved Purchasing value is still focused on the single source supplier. The second source is used as a contingency or backup source. Strategic Sourcing Definitions

© The Delos Partnership 2005 Exact second sourcing Product or service is identical Meets exactly the same specifications. There is no variation in subsequent lot or batch size. Alternative second sourcing Product or service are not identical However they can be qualified to be equivalent Fit for use in a process with no impact on finished product or service quality or process performance. Product Matching Choices Statistical process control and six sigma tools can be used to determine how critical a process is to product variation. Spoilage monitoring is also essential.

© The Delos Partnership 2005 Use Certificate of Analysis comparisons For critical products or services experimental qualification may be necessary Agree Protocol Perform Experimental work Summary report of findings Implement via change control procedure (three equivalent results) Assessment and Audit of Supplier is needed Batch to batch variation must be minimized and deliveries across multiple batches avoided. Example – Critical Raw Materials

© The Delos Partnership 2005 Problems Opportunities Risks & Concerns CustomerNeed Assessment Education Tools Benchmarking Assessment & Definition of Total Value Improvement Targets Joint Project Team Agreed Customer Projects Sponsor Definition & Assessment Education, Projects and Timescales Defined Value goals Selection of Tools Deliverables & Measurement system Team in place and projects underway Sourcing Team Joint Customer Strategic Sourcing

© The Delos Partnership 2005 Value Risk Ease of Implementing Resources Teams Other Priorities Current State Risk & Value Targeting Spend Category Local or Group Cost, Cash & Sourcing Methodology Cost & Spend Addressed Planned Net Savings Results delivered Scope Current QCDI Performance Realistic Goals New performance levels Market Assessment Supplier Testing, Status and Leverage Scope. URS, Market Assessment Focussed RFI and RFQ Clear Targets Degree of Project difficulty and risk Resource Allocation & Teams Defined balanced Risk & Value Improvement goals Specific RFQ Leverage Tools Performance Measures Deliverables Project Benefits Tracking SOURCING PROJECT MANAGEMENT Cost & Cash Plan Strategic Sourcing Summary

© The Delos Partnership 2005 Requires dedicated team to focus 100% on strategic sourcing Customers need educating on the benefits of strategic sourcing, benefits must be agreed and communication of project goals must be thorough. Confidentiality is essential to ensure that sole suppliers are not aware of the threat and deals must be in place with second and third sources before engaging the sole supplier. The marketplace is dynamic and change is constant e.g. – second source could be acquired by the sole, technology changes, supply worsens... Share the sourcing strategy at the earliest opportunity with customers and be prepared for shared outcomes, roadblocks, the cost of second sourcing and more complexity to manage. Strategic Sourcing Ground Rules

© The Delos Partnership 2005 Supplier & Results Management… Involves the implementation of a formal program which will focus on current performance and continuous supplier improvement. Formality ensures; Key Performance measures are defined There is focus on what is important to the customer The deliverables in the agreement are defined There is continuous improvement in service as well as additional savings Customer and Supplier partnership is developed and quantified. Supplier & Results Management Supplier Management