The New Faces of

Procurement in a Volatile

Energy Sector

Robert Handfield, PhD

Bank of America Distinguished University Professor

Director, Supply Chain Resource Cooperative

Poole College of Management

October 13, 2015

How is procurement contributing to global strategy?

• Faces of Procurement – Internal Consultant

– Relationship Manager

– Supplier Relationship Broker

– Intelligence Agent

– Risk Mitigator

– Sustainer

– Legal Expert

• Supplier Relationship Management – the Next Frontier for Procurement and Supply Managers

2

How is procurement contributing to global business outcomes?

• Faces of Procurement

• Internal Consultant

• Relationship Manager

• Supplier Relationship Broker

• Intelligence Agent

• Risk Mitigator

• Sustainer

• Legal Expert

• What are the key capabilities for the procurement

professional?

3

Faces of Procurement in 2025

1. What will procurement

look like in 2025?

2. How will this evolution

occur?

3. What are the success

factors for achieving this

vision?

We Asked… Survey Participants

4

What everyone wants from Procurement

5

FUTUREBUY as a Financial Expert

P&L and balance sheet impact

Budget impact

Volatility management

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Factors Leading to Increased Market Volatility

Sources: ICIS, NYMEX,EIA

■ Standard deviation of Crude Oil price changes have on average been 10% and at times

+30% driven by market sentiment , disturbances in demand and supply and economic

uncertainty

■ In recent years, commodities such as Petrochemicals, Agro Commodities and Metals

(excepting precious metals) have moved within a band determined by Crude Oil prices

Commodity prices: significant volatility driven by double dip concerns & and unrest in Middle East

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Crude Oil Vs. Commodities

Soya Oil $/MT Tallow $/MT Palm Oil $/MT

Rapeseed Oil $/MT Ethylene $/MT Brent Oil $/BBL

FUTUREBUY as an Internal Consultant

Aligned more closely with business

Listen and distill requirements

Develop solutions and drive value

8

Procurement is 20 years behind marketing in terms of how they work with

internal organizational boundaries. This is crazy if you think about it.” – Tim Cummins, IACCM

9

Category Management Requires Emphasis on Stakeholder Management

“Internal Stakeholders”

• Focus on price savings through preferred supplier contract compliance

• Complain of limited influence and no authority

• Think about leveraging portfolio of transactions with fewer suppliers

• Given contracts and a rule book by legal preventing structuring new forms of relationships

• Contracts are inflexible and tied to static metrics

• Analytics used to track historical spend vs. discounts and monitor performance

“Business Partners”

• Focus is on building relationships that create business value

• Credibility built on successful outcomes: viewed as a key partner to the business

• Think about leveraging relationships across multiple forms of transactions

• Able to create multifaceted forms of relationships based on mutual benefit that are embedded in contracts

• Relationships adopt to changing conditions in the market environment

• Analytics used to monitor conditions that change and drive solutions

Strategic Sourcing vs. Category Management

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Key Differences: Centers on a longer time horizon and broader scope and scale of activities, all

aligned with the life cycle of the category processes Understands the organization’s key value objectives based on continuous

communication and dialogue with business stakeholders Drives business process innovation with key suppliers, which in turn drives

business value, using a Total Cost of Ownership approach

Strategic Sourcing Category Management

Goal Reduce purchase costs (project or LOB based)

Maximize realized category value (enterprise based)

Frequency Periodic and project-based

Ongoing, day-to-day process

Approach Conducted via n-step sourcing process methodology

Develops a category strategy and applies appropriate value levers

Results Reduced contract pricing Category value is targeted

Source: The Hackett Group

FUTUREBUY as a Relationship Broker Supplier

relationship manager

Ongoing performance management

Customer of choice

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Is Supply Management Missing Out on Other Sources of Value to Internal Partners?

Category value objectives that link to internal partners.

Reduce Total Cost Increase revenue Support partner goals

Lower risk of supply disruption

Reduce purchase cost Remove effort for non-core activities

Improve process flow and internal costs

Reduce fixed costs

Reduce working capital

Provide process & design cost ideas

Reduce cycle time

Add new features or services for market

Reduce time-to-market on NPD

Support marketing in developing markets

Create “game-changing” business capabilities

Support marketing negotiations

Drive budgeting and pricing strategic plans

Improve visibility to market trends

Local source of human intelligence

Subject matter expertise

Support network integration

Drive product and service flexibility

Variableize asset structure

Drive product and service flexibility

Support sustainable supply chains

Strengthen the brand

Drive second-tier supplier integration

Adapted from Pierre Mitchell, Hackett Group, 2011.

FUTUREBUY as a Supplier Coach From adversarial to

coaching

Early supplier involvement

Tap into innovation

Time to market and top line

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Spectrum of Supplier Integration

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None “Gray Box”

No supplier

involvement.

Supplier

“makes to

print.”

“White Box”

Informal

supplier

integration.

Buyer

“consults”

with supplier

on buyer’s

design.

Formalized

supplier

integration.

Joint

development

activity

between

buyer and

supplier.

“Black Box”

Design is

primarily

supplier

driven,

based on

buyer’s

performance

specifications

.

Increasing Supplier Responsibility

FUTUREBUY as a Risk Mitigator Source of supply

Regulatory environment

Financials

Labor

Volatility

Brand

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An Automotive Supply Chain

SUPPLIER

NETWORK ENTERPRISE DEALER

NETWORK

Flows of Information, Product, Services, Funds and Knowledge

E

N

D

C

O

N

S

U

M

E

R

S

Resource Base (Capacity, Information, Core Competencies, Financial)

Relationship Management

Supply

Productions

Logistics

Engineering

Who Remembers the Thailand Floods?

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FUTUREBUY as an Intelligence Agent Market intelligence

Internal intelligence

Predictive analytics

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Traditional Focus of Business Intelligence

Customers Suppliers

Suppliers’ Environment Customers’ Environment

Company’s Environment

Customer and

Market Intelligence

Supplier and

Market Intelligence

Business Intelligence

Supply Chain Intelligence is the convergence of four activities (information gathering,

analysis, dissemination and response) both upstream and downstream in the supply chain.

A GUESSING GAME

Stakeholders

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Transforming Data into Knowledge, Knowledge into Action

Supply Management

Supply Chain Risk Mitigation, Strategic Cost Management,

Category Strategies, Stakeholder Value, Innovation

BI/MI Enabling SCM Processes

Gather, Analyze, & Synthesize

Data & Information

Business Intelligence

Spend

Demand

Performance

Finance

Quality

Market Intelligence

Markets

Industries

Goods & Commodities

Finance

Suppliers

Competitors

Technologies

DATA

INFORMATION

KNOWLEDGE

Example: Global Market Intelligence COE

MI COE

Developments -

Global category

analysts

Production -

Global

category

analysts

Subsurface-

global

category

analysts

Regional

MI

analysts

Regional

MI

analysts

Regional

MI

analysts

Central MI

analysts

Key Roles

Global category analysts (deployed to category teams) • Act as global SPA for category specific MI • Consolidate regional sector MI and seconded to RPU teams to

support key CM activities as needed • Build relationships with category SME’s and mobilize resources to

support global and RPU projects • Work closely with regional MI analysts to see through/ deploy

center led initiatives

Regional MI analysts (deployed in regions) • Develop into SME of assigned regional markets • Act as the link between global and regional teams and provide

proper context to global teams in developing global/ regional initiatives

• Effectively channel local market intelligence and MI needs to global category and central MI teams

• Build relationships with local/ regional SME’s and mobilize resources to support global and RPU projects

Central MI analysts (split between US & UK) • Continue analysis of global industry and cost trends that impact

multiple categories and regions • Serve as the hub of MI knowledge management • Develop and maintain standard process and ensure compliance • Drive MI capability development through enhancing tools, process

simplification and optimization e.g. MI outsourcing

21 21

Latex Natural Rubber SIR,

SMR, RSS (10+) Tires,

Mounts

Grommets,

Weatherseal

Carbon Black

Process Oils

Catalytic

Reformate

Pyrolsis Gasoline

Naphtas

Gas Oils

Refinery Fuel

Light Oil

Ethane,

Propane, Butane

Fuel

Gasoline

Intermediates Feedstocks Polymers (# of Grades) Components

Elastomeric Products Value Chain

Oil Seals Nitrile Butadiene

NBR/HNBR (220+)

Ethylene-Propylene EPDM (200+)

Fluoro-elastomers FKM (80+)

Butadiene BR (65+)

Polyurethane Foam

Styrene-Butadiene

SBR (150+)

Silicone (30+) Sand

Fuel Seals, Gaskets

Coke

Hydro- Carbons

Natural Gas

Crude Oil

Keypads, Cables and Cable Seals

Foam Seals

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FUTUREBUY as a Steward of the Environment

Regulatory requirements vs. client expectations

Global code of conduct

Managing, coaching and auditing

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Nike Sustainable Material Index

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Apparel Manufacturing Risks in Bangladesh

FUTUREBUY as a Legal Expert Contract

management

Weigh business value vs. risk

Contract compliance

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Types of Contracts

Type of Contract Buyer Risk

Supplier Risk

Firm-fixed price Low High

Fixed-price with escalation

Fixed-price with redetermination

Fixed-price with incentives

Cost plus incentive fee

Cost-sharing

Time and materials

Cost plus fixed-fee High Low

The terms that are negotiated

with greatest frequency

Terms which would be more productive

in supporting successful relationships

1 Limitation of Liability Change Management 2 Indemnification Scope and Goals 3 Price / Charge / Price Changes Responsibilities of the Parties 4 Intellectual Property Communications and Reporting 5

Payment Performance / Guarantees / Undertakings 6 Liquidated Damages Limitation of Liability 7 Performance / Guarantees /

Undertakings Delivery / Acceptance 8 Delivery / Acceptance Dispute Resolution 9 Applicable law / Jurisdiction Service Levels and Warranties 10 Confidential Information / Non

disclosure Price / Charge / Price Changes

Source: IACCM.com, 2012.

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Anticipating risks and planning during project contract negotiations

“We need to get better at defining the scope, and identify what we need early on – not talking about change orders and variation after the contract is awarded.”

“A lot of volume was contracted by people who were told to put this in place with no changes or exceptions using forms that were spectacularly inappropriate"

Instead of just rounding up the usual suspects for a contract renewal, procurement needs to be involved earlier in the process.

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Evolving procurement’s capabilities requires building a strong foundation that builds trust….

Financial Analytics / Procure to Pay

Internal

Consultant

Relationship

Broker

Intelligence

Agent

Legal

Expert

Risk

Advisor

Supplier

Coach

Supply Chain Innovator

Trusted Advisor

Cost Savings Enabler

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FUTUREBUY – Bringing it all together…

P2P Infrastructure 32