Procurement Strategies for Uncertain Times Short-Term Actions for Immediate Impact on Net Income...

Procurement Strategies for Uncertain TimesShort-Term Actions for Immediate Impact on Net Income

January 2009

CONFIDENTIAL: All capabilities and dates are for planning purposes only and may not be used in any contract

The following is intended to outline our general product direction. It is intended for information purposes only, and may not be incorporated into any contract. It is not a commitment to deliver any material, code, or functionality, and should not be relied upon in making purchasing decision. The development, release, and timing of any features or functionality described for Oracle’s products remains at the sole discretion of Oracle.

Safe Harbor Statement


“About 50% of costs for most businesses are associated with purchases, what’s spent on basic materials. If you can go after your

supply chain and these costs, you can possibly avoid layoffs. In many ways, it is free money and it’s fairly easy to make happen.”

Managing in Uncertain TimesToday’s Decisions are Critical

Mark Gottfredson, Senior Partner, Bain & Co.

Fortune, December 2008

Mark Gottfredson, Senior Partner, Bain & Co.

Fortune, December 2008


Smart StrategiesLook for High-Impact Opportunities

Targeted technology investments can deliver up to 10X the impact of traditional IT cost reduction efforts

3%-5%

3%-4%

1%-2%

.5%

Source: Managing IT in a Downturn, McKinsey on Business Technology, Fall 2008


Procurement’s Direct Impact on Direct Margin

Other Costs

Profit

Purchases

100% 100%

45

50

45

47.5

57.5

-5%

• Increase sales by 50%

• Reduce overhead by up to 20%

• Significantly reduce headcount

A 5% reduction in purchase cost can result in a 50% increase in profit margin!

A 5% reduction in purchase cost can result in a 50% increase in profit margin!

In order to obtain an equivalent impact, a firm would have to...


Source: © 2005 Greybeard Advisors LLC

Actions to Improve Margins

• Cut Costs – E.g. Apply Sourcing to Non-traditional

Categories

• Increase Revenue – E.g. Purchase Reciprocation Agreements

Actions to Improve Asset Utilization

• Working Capital Related– E.g. Capture Early Payment Discounts

• Capital Expenditure Related– E.g Liquidate Obsolete Assets

Return On Invested CapitalReturn On Invested Capital

ProfitProfit Capital Intensity Capital Intensity (Invested Capital)(Invested Capital)

CASH CASH FLOWFLOWCASH CASH FLOWFLOW

Improves Improves

Improves

Mapping Procurement’s ImpactFar-Reaching Impact on Income Statement

Impro

ves


Immediate High-Impact Opportunities

ReturnReturn

CostCostEconomic

Value Economic

Value

MaterialsMaterials

SG & ASG & A

InventoryInventory

Invested Capital

Invested Capital

Assets & EquipmentAssets &

Equipment

How can we collaborate with Finance & suppliers improve both margin &

working capital?

How can we collaborate with Finance & suppliers improve both margin &

working capital?

How can we eliminate unnecessary expense

and spending?

How can we eliminate unnecessary expense

and spending?

How can we exploit commodity price

volatility?

How can we exploit commodity price

volatility?

Sourcing Optimization

Touchless Buying

Supply Chain Financing


Spend Categories

IndirectGoods

DirectMaterials

EngineeredGoods

Services ApprovalRouting

TouchlessBuying

Automated Payment

Enforce Policy Compliance

Budget-BasedProcurement

ContractManagement

SupplierPerformance

Reduce Spend on Goods and Services

CategoryManagement

OnlineSourcing

SpendAnalysis

Streamline Procurement Processes

SupplierCollaboration

Settlement

Orders

ProfileManagement

SupplierNetwork

Logistics

SupplierPortal

c

Oracle Advanced ProcurementThe Integrated Suite That Dramatically Cuts All Supply Mgmt Costs…


Create Immediate Impact on Net Income

Increase Margin

Increase Margin

Cut SG & A

Cut SG & A

Optimize Cash FlowOptimize

Cash Flow



Increase Margin

Increase Margin

Cut SG & A

Optimize Cash Flow


Sourcing Challenge Average Improvement Through E-Sourcing

High material costs 14.3% cost savings

Avg sourcing cycles 3.3 - 4.2 mo Cut sourcing cycles in half

High transaction & admin costs Reduce sourcing admin costs by over 60%

Long time to market cycles Shrink time-to-market cycles by 10-15%

“E-sourcing technologies deliver information visibility and global infrastructure to enhance and accelerate strategic sourcing.”

Biggest Opportunity for Immediate Impact


Drive Immediate Price ConcessionsWith Oracle Sourcing On Demand

Increase Negotiation Efficiency &

Effectiveness

Increase Negotiation Efficiency &

Effectiveness

Accelerate Time-to-Value

Accelerate Time-to-Value

Eliminate Technology Inhibitors

Eliminate Technology Inhibitors

Source more spend in less

time

Go live rapidly

Build end-user expertise

Ensure proper application

usage

Meet & exceed IT audit

requirements

Eliminate ongoing maintenance

Avoid Infrastructure

expense

Source for lowest total cost

Create immediate & long term

savings


• Create the Optimal Balance Between Cost, Quality, Risk, & Innovation

- Incorporate hard and soft costs

• Use Bid Data to Reduce Manual Effort

- Automatic bid scoring- Side-by-side bid comparison

• Analyze Online for Faster, Better Awards

- Enable selection of suppliers, lots, or specific lines through flexible awards

- Enforce policy compliance (e.g., multi-source rqmts, MBWE suppliers)

• Use Award Summary & Recommendation

- View award details- Award approval by workflow

Lead Reductions in Total CostsSourcing Award Optimization


automated requisition-to-RFQ (up to 150 RFQs daily)automated requisition-to-RFQ (up to 150 RFQs daily)

direct and indirect savings (e.g. carpet $500K in 38min, Shopping bags -- saved $2 million in 2 hrs) direct and indirect savings (e.g. carpet $500K in 38min, Shopping bags -- saved $2 million in 2 hrs)

documented €20M in savings, on target for €200M documented €20M in savings, on target for €200M Thompson

TravelGroup

saved $892K with very first use saved $892K with very first use

Driving Immediate Cost Reductions



Increase Margin

Cut SG & A

Cut SG & A

Optimize Cash Flow


Source: Hackett Group

Performance IndicatorTypical

Purchasing Organization

World Class Purchasing

Organization

% of Long-Term Contracts 37% 75%

Number of Suppliers per $B in Spend 322 10

Cost of Procurement as a % of Spend .96% .24%

Cost per Purchase Order $10.35 $1.52

Purchase Orders in Electronic Form 17% 80%

Cycle Time from Request to PO (hrs.) 50.2 1.4

Cut Transaction Costs by Swapping Labor for Technology

Create Visibility Into Employee Spending Patterns

Goal: Eliminate All Unnecessary CostsWorld-Class Procurement Drives Improvements in Effectiveness and Efficiency


• Negotiate contracts

• Approve items

• Limited to preferred vendors & pricing

• Reject unwarranted spending

• Verify budget & policy compliance

Procurement and Finance

• Define Policies

• Detect budget and policy exceptions

Identify andApprove Suppliers

Shop and Order Approve / Change

Manage Compliance

Budget HolderRequestorBuyer

Stop Unnecessary SpendingWith a Single Point of Purchasing Control


New York City Housing Authority Created Savings of $150 Million

OVERVIEW• Oversees North America’s largest public

housing program

• Manages over 2,700 buildings

• 420,000 people live in New York City Housing Authority housing developments

CHALLENGES / OPPORTUNITIES• Homegrown and vendor legacy systems

were expensive and did not meet management’s information needs

• Gain tighter visibility and control over spending

CUSTOMER PERSPECTIVE

“We have seen increased productivity in warehouse operations, we have eliminated physical inventory, and automated our procurement process. All of which has resulted in significant labor productivity improvement.”

-- Natalie Rivers, Deputy GM for Admin.

RESULTS

• Estimated savings of $50 per requisition, adding up to $150M in savings per year using iProcurement

• Reduced delivery time to housing developments from 9 weeks to 3-5 days

• Reduced maverick spending from $29 million to $10 million

• Plan to save $2 million annually in early payment discounts

SOLUTIONSOracle E-Business Suite

• iProcurement

• Purchasing

• Inventory

• Financials

• Public Sector Budgeting

• Fixed Assets

• Grants

• Human Resources

• Order Management

• Cash Management


Transaction Execution

Procure-to-Pay AutomationProcure-to-Pay Automation

Create Purchase

Order

Dispatch Electronic

PO to Supplier

Auto-Approve

Minor Changes

Receive Goods or Services; Inspect

Receive Electronic

Invoice

Pay Supplier(EFT)

Apply Agreement

Terms & Conditions

Apply Auto-Source Rules

e.g., Refocus Staff on Strategic Sourcing

e.g., Refocus Staff on Strategic Sourcing

e.g., Redeploy Staff to Supplier Risk Mgmt

e.g., Redeploy Staff to Supplier Risk Mgmt

Eliminate Labor-Intensive ProcessesUse Existing Transaction Infrastructure to Create New Benefits


Procurement to Payment Flow

Global Agreement

Business Unit B

Business Unit A

• Pricing and spend commitments

• Specifications• Deliverables

• Signatures• Compliance status

(e.g., supplier barred)

• Terms & conditions• Regulations and

reporting requirements

• Payments and account status

• Projects and budgets

Enforce Negotiated DiscountsWith Embedded Terms Enforcement


TOYSRUS Completes Implementation in 16 Weeks

OVERVIEW• $11.3 billion retail leader with 1,599

children’s stores• Fiercely competitive, low-margin business

CHALLENGES / OPPORTUNITIES• Leverage buying power to reduce the costs of

products and services


“We chose Oracle because of its ability to develop and deliver an integrated e-business suite that addresses both the strategic and tactical aspects of the procurement process.” -- Kimberly Brown, VP of Procurement

RESULTS

• 16-week implementation of entire Advanced Procurement Platform

• Began on-line sourcing with auctions:

– eg. Carpeting for retail stores -- saved nearly $500K in 38 minute auction

– eg. Shopping bags -- saved $2 million in two hours through a reverse auction

• Advanced to negotiating direct materials (eg. kids apparel and registry stationary)

• Expanding to Real Estate department and Internationally (eg. Germany)

SOLUTIONSOracle E-Business Suite • Sourcing

• Purchasing

• iProcurement

• iSupplier Portal

• Purchasing Intelligence

• Financials

• Sales Analyzer


Profile and Banking Details

Mfg Planning• Forecasts • Capacity• Waterfall

Analysis

eRFx & Auctions

VMI & Consigned Inventory

Order Collaboration

Supplier Performance

Mgmt

Contract Negotiation & Binding

Catalog Authoring

Shipping & Work Confirmations

Offload Data Entry to SuppliersSecure Web-Based Supplier Self-Service

• Real-time access

• Seamless integration

• Simple, single point of contact for suppliers


OAG Change PO 006

cXML OrderRequest (update)

OAG Acknowledge PO 008

cXML ConfirmationRequest

OAG Change Sales Order 008

No cXML equivalent

OAG Show Shipment 005

cXML ShipNoticeRequest

OAG Process Invoice 002

cXML Invoice Detail

cXML OrderRequest

OAG Process PO 007

• Reduce errors, holds, and lost invoices

PO Change / Cancel

PO Acknowledgement

Change Sales Order

Advance Ship Notice

Invoice

Purchase Order Suppliers

Supplier Network

• Eliminate labor intensive, manual processes

• Reduce need for “safety stock”

Your Company

Free Transaction Delivery ServiceAutomate Ordering and Invoicing with Message-Based Communication


Sandia National Laboratories Increases Productivity by 83%

COMPANY OVERVIEW• 2.3 billion plus R&D laboratory tasked with

ensuring the safety, security, and reliability of the United States’ nuclear arsenal

• Division of US Department of Energy with over 8,600 employees

CHALLENGES / OPPORTUNITIES• Increase system efficiencies and streamline

financial and mfg processes • Adopt more effective business processes by

implementing commercial, off-the-shelf software

SOLUTIONSOracle E-Business Suite• iSupplier Portal• Procurement• Financials• Projects• Manufacturing

RESULTS

• Increased buyer productivity by 83%

• Reduced headcount in AP department; reduced process time by 23%

• Over $11 million in savings over existing homegrown systems

• Consolidated manufacturing data

• Successfully upgraded from 10.7 to 11i, few customizations



Increase Margin

Cut SG & A

Optimize Cash FlowOptimize

Cash Flow


Gartner, Invoicing and Payments: The Payer Value Proposition

• $2B company with 100,000 invoices / yr• Wastes $1.5 million over 3 years

Erosion of Profit Margins• Unintentionally missed early payment

discounts (1% or more)

• Premiums charged to serial late payers (1.5% or more)

• Undetected over- / double-payments

Poor Cash & Payment Management• Up to 60% of invoices have errors

• Lost interest on prematurely paid invoices

Risk & Control Gaps• ‘Floating’ invoices create invisible and

unaccounted liabilities

• Delayed shipments due to late payments

0

$1

$0.5

$1.5

$2.5

$2

1 2 3

CumulativeCost Difference

Year

Co

st

(in

Mil

lio

ns

)

Electronic Transactions Cost 60% Less1

Physical Cost of Handling PaperPhysical Cost of Handling Paper The Larger Paper PremiumThe Larger Paper Premium

Manual cost @ 8.50 / invoice

Electronic cost @ 3.44 / invoice

Ex.

Paper Invoices Deteriorate Margin, Cash, & ControlManual Processing Costs are Just the Tip of the Iceberg


Source: Working Council of CFOs, “Managing Working Capital Across The Enterprise”

10%

20%

15%

8%

8%5%

5% 3%

21% 100%

Early Payments Financing

Costs

Inventory Financing

Costs

Obsol-escence

Inventory Control

Deterioration & Pilferage

Taxes Warehouse Expenses

Physical Handling

Insurance Excess Receivables

Financing Costs

Total Costs

5%

Total C

osts of the F

inan

cial Valu

e Ch

ainT

otal Costs of th

e Fin

ancial V

alue C

hain

How can procurement make a

positive impact?

eg. Co-location with Suppliers in Economic Empowerment Zones

eg. Liquidate old equipment or

inventory

Opportunities to Reduce Working Capital


• Suppliers Bear Carrying Costs Until Consumption

• Supplier Has Instant Access to Consigned Inventory

– On Hand Inventory

– Shipments

– Invoices / Advice

– Receipts

• Works With or Without VMI

• Combine VMI & Consigned Inventory to Improve Working Capital Positions

Your Company SupplierConsigned Inventory

Agreement

Consume / transfer goods

Consigned Inventory Agreement

Planning

Receive order

Release

PO

Pay on useReceive

payment

Receive items

Receive consumption

advice

Check inventory

Ship items

Consigned Inventory Transfer Inventory Carrying Costs to Suppliers


Purchasing/ Payables

Suppliers

Supplier Portal

• Validate invoices

• Match invoices to purchase orders

• View available line items

• Enter invoicing information

• Track payment status

• Enter non-PO invoices

Drive Efficiencies to Accounts PayableWith Self-Service Invoice Entry and Payment Tracking


Payments

Invoice Validation, Control & Exception Handling

Invoice Review & Approval

Invoices

EDI / XML

Services Invoices

Self Billing(ERS / Consigned

Inventory Usage)

iSupplier Portal

AutomaticTax

Calculation

Capture Early Payment DiscountsWith Complete Accounts Payable Visibility


Ingersoll Rand Achieves 90% Reduction in Supplier Telephone Inquiries

COMPANY OVERVIEW• $9.2B global diversified manufacturer, based in

Hamilton, Bermuda• Major brands include Bobcat, Club Car,

Hussmann, Dresser-Rand, Thermo King, Schlage, and Kryptonite

CHALLENGES / OPPORTUNITIES• Provide direct and indirect material suppliers

with timely planning and shipping schedules• Free employees from supplier inquiries

SOLUTIONSOracle E-Business Suite

• Purchasing• iSupplier Portal• iProcurement


“Oracle applications have helped to streamline our procurement strategy. We now have terrific supply chain integration that has enabled us to exponentially roll out this product to our supplier base. Our suppliers dial in to a self-service application to answer a majority of their questions and it really frees up a lot of time for our procurement folks because we are able to do more strategic activities.”

RESULTS• Automated 59,000 supplier relationships • 90% reduction in supplier telephone

inquiries • Created access to 100K SKU’s via two

online catalogs• 500 users spending $5.4 billion annually via

15K req.’s / month • Rolling out to 5K users at 120 global sites


What Customers are Saying…

“Using Oracle Supplier Network (OSN) is significantlyimproving how we interact with, and are viewed by, our

suppliers. OSN is helping us to optimize the use of our, and our suppliers' technology investments. We are making the use of OSN an integral part of our negotiations with our major suppliers.”

– Mark Thompson, P2P Systems Manager

“Oracle iSupplier Portal is helping us move to real time, automated communications with suppliers, particularly those who don't have EDI. Improved collaboration also improves the receiving process and our first-pass yield for payables.”

– Steve Tracy, Director ERP Program

“Better visibility into our global spend, more extensive information on supplier performance, and increased efficiency through standardized business processes will create significant savings for us.”

– John Basone, Director of Applications


Payment Scheduling /Processing

Remittance Information

CashPosition

& ForecastReconciliation

Delay Payments to Suppliers that… Offer little or no incentive for early payment Will not enforce early payment incentives Offer financing at a lower cost of capital

Selectively Delay Supplier PaymentsWith Integrated Electronic Invoice Presentment & Payment


Recommendations

• If you haven’t done so, start a sourcing program immediately. Oracle Sourcing On Demand drives immediate returns -- with no capital investment or IT implementation.

• Re-examine your requisitioning, ordering, and payment processes -- improvement will help you buy less, at a lower cost, and a lower price. Automation frees up staff to focus on other areas -- like strategic sourcing.

• Eliminate paper invoices. Electronic invoicing and collaboration with finance will create opportunities to improve both early payment discounts and working capital.

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