GLOBAL 5 - New Strategic Procurement Initiative

SUPPLIER FORUM 2006 – MOL GROUP23 May 2006

NEW EFFICIENCY IMPROVING INITIATIVE: GLOBAL 5 2006 - 2008

2

MOL GROUP – WHO WE ARE

1991 - Established from National Oil & Gas Trust, and other Enterprises

1995 - MOL was privatised

1999 - New Strategy: regional expansion

2000 - Slovnaft became a regional strategic partner

2002 - MOL became the major shareholders of Slovnaft

2001 - Refinery and petrochemical industry cooperation: TVK

2003 - MOL acquired 25% of INA

2004 – MOL acquired Roth Heizöl GmBH.

2004- 2005 - Integrated operation with Slovnaft and TVK; acquisition of SHELL Romania2005 - Network expansion in Southern Region: Creation of the Baltic-Adriatic Corridor

Strategy of 2006 - 2010: „New Europe”

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THE COMPANY OF CHOICE FOR VALUE-CREATING PARTNERSHIPS IN „NEW EUROPE” AND BEYOND

Stable high oil price and refining marginsStable high oil price and refining margins

Continuing convergence of Continuing convergence of „„New EuropeNew Europe”” frontier frontier

•Outstanding growth rate (EBITDA >10% CAGR)•Profitability above peers

•Maximising return of the portfolio with quantified and managed risks

• USD 285 m improvement

• Maximise integration potential

• High utilisation of good quality assets

• Outstanding returns

• Tripledhydrocarbon production

• Double refined product sales

• Become key player in Balkans

• Retail network of 1500

• Leverage transformation and integration experience

• Maintain Quality leadership

• Capital discipline

• Commitment to Sustainable Development and Corporate Governance

Obj

ectiv

eP

illar

sFu

ndam

enta

ls

EFFICIENCYEFFICIENCY GROWTHGROWTH CAPABILITIESCAPABILITIES

SETTINGSETTING THETHEPACE PACE FROMFROM NEW EUROPENEW EUROPE

I. VISION AND VALUES

4

ProcessProcess andcost reductionRevenue

-����-Team player and partner

-

-

����

����

-

����-Quality and company ofchoice

����-Health, safety,

environmental andsocial commitment

--Dedication and

continuous self-improvement

--Pace setter and agent ofimprovement

-����Drive for value-creating

growth

G5*Vision

is to maximisethe growth potential

in „New Europe”while providing superior returns.

1.

2.

3.

4.

5.

6.

PSO

* GLOBAL 5

5

Relationship:„Cooperation with Mutual Benefit under Market

Tension”Dr. Uwe Schulte,

Vice President Global Supply Management, Unilever

Aim:To improve results achieved during PSO initiative

WHAT DOES RELATIONSHIP MEAN?

EFFICIENCY IMPROVEMENT WAVES

• Achieve cost savings of more than 10 % in all cost categories but HC

• Create purchasing spend transparency

• Introduce an integrated measurement and reporting system

• Identify specific measures to meet SPP and Futura commitments

• Improve Group-level coordination and communication

• Achieve further min. 5% efficiency improvement / cost savings in cost categories

• Brainstorm improvement opportunities with suppliers

• Utilize more sophisticated analytical tools to support efficiency improvements

• Create long term relationships with selected suppliers in cost categories

• Support cost category management structure within Procurement

PSO ”INTERNAL FOCUS” –Integrating cross-divisional purchasing processes

GLOBAL 5 “EXTERNAL FOCUS” –Developing integrated, cross-divisional strategic supplier relationships

“FURTHER INTEGRATION” –Realise further value creation through other cross-divisional processes

Achieve additional efficiency improvements by working on the integration of other major processes, building on results of the cross-divisional purchasing / efficiency improvement initiatives

2 years 2–3 years 2–3 years2004 2010

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HOW IMPORTANT IS THE OVERALL PICTURE?

8

(26) Laboratory accessories(27) Facility Management(28) HR(29) IT accessories (30) Logistics(31) Travel and accommodation(32) Consulting, financial and legal(33) Insurance(34) Natural gas(35) Industrial water(36) Catalysts, packing and ceramic balls(37) Retail(38) Petchem additives(39) Single Service Companies

maintenance

(5) Civil construction(6) Additives (EU 2005

brands mainly)(7) Electrical material and

service (8) IT services ((9) PR and marketing I.(10) Process control/

instrumentation(11) Packaging(12) Electricity

III. SPEND CATEGORIES ANALYSED IN PSO ONE BY ONE, IN PROGRAMME STRUCTURE

Pilot (4 analysis units)

Wave 1 (8 analysis units)

Wave 2(13 analysis units)

Wave 3(14 analysis units)

(1) Valves, piping and fittings(2) Production chemicals(3) Technological construction(4) Environmental protection

services

(13) Facility management (14) HSE(15) HR, travel and

accommodation(16) IT accessories and office

material(17) Telecom, mail and

other infrastructure(18) Logistics (19) Pumps, compressors (20) Technical services (21) Steam(22) Refining lubes and

additives, methanol(23) Process control master

purchase agreement(24) PR and marketing II.(25) Mechanical materials

2004, April 2004, August 2005, February 2005, August

3,6 mn EUR 12,2 mn EUR 10,8 mn EUR 8,3 mn EUR

5,5 mn EUR 21,6 mn EUR 24,4 mn EUR 7,5 mn EUR

Savings Target:

Identified saving potential:

34,6 mn EUR

58,9 mn EUR

Total:

Scope: MOL, Slovnaft, TVKand MOL affiliates involved recurring OPEX and CAPEX spend*

* Raw material spend is excluded

EFFICIENCY IMPROVEMENT INITIATIVES- TWO DIFFERENT APPROACHES -

GLOBAL 5 PSO

Key levers Volume boundingHarmonization of specificationsInternal brainstormingTendering

Deep understanding of supplier markets and dynamics of the reviewed areaExploring TCO-concept potentials

MethodologyExtensive internal data gathering and harmonizationParallel technical and commercial processMajor focus on tendering, superficial analysis of markets

Building on the data already available, analysis intensive process, focused on improving bargaining power and insightEarly involvement of suppliers and potential suppliers followed by tendering to achieve benefits if applicable

ScopeCovering as many categories as possibleHarvesting the low hanging fruits across all cost categories

A more focused approach, focusing on all categories especially on those which have key importance

Major objective Cost savings driven mainly by volume bundling and internal idea generationCreating internal spend transparencyFacilitation of integrated operations

Efficiency improving through contacting all suppliers by new levers e. g. blank sheet modelling, linear performance pricing, etc.Involving selected suppliers in defining our requirements already in early phase. Develop value creating long term partnerships with key suppliersCreating deep cost category knowledge

Production capacity

Specifications

R&DDamaged field product

Transportation

Purchasing administration

Inventory carrying costs

Warehousing

Compliance

Purchase price

Warranty expediting

Demand management

Product / service purchase cost

Internalbusiness costs

Joint supplier / company / customer lifecycle costs

TOTAL LIFE COST NEEDS TO BE EVALUATE

PurchasingInstallationSet-up

Operaton costsFinancing costsTraining costsMaintenance costsInsurance costsTaxInventory carrying costsAdministrative costs

+

CATEGORIES TO BE REVISED IN GLOBAL 5 Result of category analysis

Originally proposed primary focus of GLOBAL 5

Siz

e of

the

cate

gory

Low

Hig

h

Impact on end-product/Difficulty of obtaining supply

Low High

Leverage Partner

Shop Manage Risk

Number of sub-categories: 36

Total value of sub-categories:

Number of: 36

Total value of sub-categories:

Number of sub-categories: 87

Total value of sub-categories:

Number of sub-categories: 39

Total value of sub-categories:

Initial categorization resulted in 36 potential partner categories, covering HUF 185 billion.

Value of categories in scope was increased after

Re-grouping categories

Cross-checking data

Revising importance

Revising relevance

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PROJECT ORGANIZATION, ROLES AND WAVE STRUCTURE

GLOBAL 5 WAVES TIMING

1. Electricity 2. Road transportation3. Retail I. / Visual

elements4. Process control5. Valves6. Technical supervision7. EPC **

1. Natural gas2. Environmental

protection services3. Retail II: / Washing

equipments4. Retail III: / Dispensers5. Casing, tubing, joints6. Refining catalyst7. Rotating equipment

1. Upstream services I. / Field operations, development and work over jobs

2. Technological construction

3. Retail IV. / Shop building

4. Methanol, ethanol5. Water transportation

/ Barge6. Technical design7. Packaging / Drums8. MSSC

1. Railway transportation2. Retail technological

construction3. Refining and lubricant

additives4. Telecom services5. Civil construction6. Building operation7. Upstream II. / Rotary

1. Electrical works and materials ( excl. Instrumentation)

2. RTC rental3. Technical studies,

analysis, expert work4. Small trucks and

personal cars leasing5. Mechanical materials6. Packaging / Foils7. Security defence

Categories included in the wave

* Minor changes can be expected in wave structure**EPC is being developed commonly with R&M affected Excellence 2008 project; highly depends on CAPEX project realisation

Wave structure may be fine tuned during the pilot phase

2007 20082006

Pilot

Wave 1

Wave 2

Wave 3

Roadshow

Wave 4

Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec.Jan. Feb. Mar. Apr. May.Jan. Feb. Jun. Jul. Aug. Sep. Oct.

LEVERS TO BE USEDDeeper analysis extended idea generation supported by various tools

make GLOBAL 5 different from PSO

Initiate Build fact base

Hypo-thesizeimprove-mentlevers

Validate and secure decisions

Deliver value

Monitor change, measure impact

sourcingstrategies

Develop

Engage stake-

holders

Strategic sourcing process overview

Team charter development TCO/value

framework and approach

Spend prioritization analysis

Supplier RFI and intelligence gathering

High impact RFX process

Value-based negotiation methods

Sourcing strategy development

Supply marketanalysis

Sourcing and contracting for performance

Productive user and supplier workshops

Supplier economics analysis

Idea generation methods

Design-to-cost/design-to-value

Linear performance pricing

Blank sheet modeling

Best-of benchmarking

Implementation management

Main tools

Levers already used in PSO – are maked with star**new levers to be used in GLOBAL 5 with the already used ones. - yellow coloured

Negotiateinternally

andexternally

Generateideas by using tools/analyses

„It is not the strongest of the

species who survive,

Not the most intelligent,

But those who are the most adaptiveto change”

(Charles Darwin)

Susan GadóMOLHead of Productivity CentreE-mail: sgado@mol.hu