1. N287E - Advanced Financial Management Cost Management Strategies

2. Cost Management Public vs. Private Sector Public Sector –Custodians of Public Funds –Must Provide Open Access to Business Opportunities –Must Establish Cost Reasonableness for each Decision –Value Propositions can only be evaluated using Cost Per Quality Point Analysis Private Sector –Primary Fiduciary Responsibility is to Shareholders –Cost Management is Focused on Bottom Line –Strategic Alliances and Supply Chain Management –Value Propositions evaluated using Best Value Analysis

3. Cost Consequence Accountability Public Sector –Delegations of Authority –Discretion Limited by Policy –Balancing Mandates Against Available Funding –Deficit Spending Private Sector –Corporate Business Plan –Risk and Incentives often Drive Policy –Performance is Driven by the Bottom Line –Risk and Profitability Drive Spending

4. Cost Containment Strategies Limit Access to Sources Pre-Authorization vs. Post-Audit Ensure Accurate Contract Administration Process Re-Engineering Mutual Gains Incentives (Partnerships) Risk Mgmt vs. Risk Defense/Aversion

5. Leveraged Purchasing Commit Total Spend in Exchange for Deep Long-Term Discounts (Commitments Contract) Seek Standardization Adjust Requirements to Create a Market Integrate Order-Delivery-Payment Systems Jointly Attack Other Cost Drivers

6. Impacts of Integrated Financial Systems Upside- –Minimize Multiple Databases –Apples to Apples –Eliminate the “Back Room” Downside- –Pushes “Central Functions” to Frontline –Need to Re-engineer Processes –If you can’t ask for it right, you can’t get it.

7. E-Commerce Issues Cost Back-Filling the Requisition Function Matching Rules, Tolerances, & Returns The Need for EDI Content Management Keeping Up with Innovation

8. Return on Capital Employed

12. ROCE Example

13. Impact from 5% Price Reduction

14. Strategic Sourcing… A systematic process to reduce the total cost of purchased products and services by fully leveraging the University’s combined purchasing power, without compromising quality or service. Up to 41 Business Units 10 Campuses 5 Medical Centers 3 National Laboratories 23 California State Universities What is strategic sourcing?

15. Total Cost Approach Achieve Best Value Tip of the Iceberg Purchase Price Total Cost Transaction / Admin Cost Delivery, Freight, Handling, Set-Up Implementation Cost Communication/Marketing Training Cost of Non-Conformance (Quality) Maintenance, Warranty, Parts Yield, Useful Life, Consumables Inventory, Shelf-life, Waste Disposal, Scrap Risk, Liability

16. Strategic Sourcing is a process rather than a series of activities Focus on tasks Function isolated Reactive Insular, static Unit price based Adversarial supplier relationship Win/lose Corrective Measures Undefined standards Lowest price - price driven Focus on process performance Alignment with stakeholders Proactive Total cost framework Diverse sourcing strategies Create collaboration, trust Suppliers as a key resource Preventive measures Fit for purpose Value driven (e.g. lowest cost per quality point) Traditional PurchasingStrategic Sourcing Strategic Sourcing Process

17. Strategic Sourcing Methodology Launch Sourcing Team Develop Spend Analysis Determine UC Requirements Develop Category Strategy Conduct Market Analysis Implement Solution and begin SRM Negotiate Agreements Evaluate & Select Suppliers Project Plan and Scope determined Resource Commitment Obtained (people, dollars, etc..) Kick-Off Meeting Conducted Team members identified Stakeholder Requirement sessions conducted Existing contracts summary produced Requirements weighting sessions conducted UC requirements published Sourcing strategy developed and communicated User adoption strategy and implementation plan developed Initial cost/benefit analysis developed Negotiation strategy document developed Meetings/Negotiations with finalists Agreements signed Analyze total spend by Category and Location and determine percent that is “sourceable” Document historical purchases Develop current TCO for each Location “Quick Hits” identified Complete pre-bid industry analysis RFI developed / distributed (if needed) Supplier responses to RFI evaluated Final market analysis published RFP developed / distributed RFP responses evaluated and scored “Short list” of finalists selected Implementation team assigned Implementation plan finalized Implementation completed Ongoing SRM plan created and implemented This must be a joint effort between purchasing departments across the UC system and our internal stakeholders

18. Strategic Sourcing Opportunity University of California –$7.0 Billion paid invoices –$2.5 Billion construction –$4.5 Billion of opportunities $100 Million Commodities –Office Equipment and Supplies –Laboratory Supplies –IT Hardware / Software

19. Strategic Sourcing Goals Maintain or increase product and service quality Leverage UC buying power through strategic alliances Create more efficient procurement processes Educate the UC community Determine the appropriate product distribution system Demonstrate significant on-going cost savings Meet our service and community standards (Sustainability, Small/Disadvantaged businesses, etc.)

20. Channeling VWR Implementation YTD January to July 2005 Campus YTD 2005 YTD 2004 ∆% Berkeley$ 581,295$ 418,96238.7% Los Angeles$1,628,382$1,088,06749.7% San Diego$ 993,908$ 723,88437.3% Average Growth: 41.9% San Francisco$ 891,566$ 783,34513.8%

21. Automate Payment UCSF processes ~ ½ million vouchers – Federal Express: 27,815 – Arrowhead: 6,256 – Verizon: 8,983

22. ROCE Example