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Evaluating Addressable Spend by Seeing the Invisible By Eugene Fernandez SCMP, CPSM, CPM, CPP, P.Log, PMP (Presentation at ProcureCon Canada March 17-19 2014, Toronto)

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Page 1: Addressable Spend- by Eugene Fernandez V2.9+++

Evaluating Addressable Spend by Seeing the Invisible

By Eugene Fernandez SCMP, CPSM, CPM, CPP, P.Log, PMP

(Presentation at ProcureCon Canada March 17-19 2014, Toronto)

Page 2: Addressable Spend- by Eugene Fernandez V2.9+++

What will we accomplish?

• What is Addressable Spend• Why is Addressable Spend Important• Does type of Procurement Organization impact

Addressable spend percentage• How higher Addressable Spend considerably increases

Net Profit• Saving examples for non-traditional Categories that

increase Addressable Spend – ‘Seeing the Invisible’• Is increasing Addressable Spend a major CPO objective• Q&A

Page 3: Addressable Spend- by Eugene Fernandez V2.9+++

What is Addressable Spend

• The spend value (in Billions/Millions) that Supply Chain and Procurement C-Level Executives claim is in their domain of control

[Example: $10 billion Revenue company has Addressable Spend say $6 billion]

• Procurement/Supply Chain function effectiveness is often measured as a percentage of savings of Addressable Spend value achieved every year

[Example: Savings 5% per year of Addressable Spend = $300 million

(5% of $6 billion Addressable Spend)]

Page 4: Addressable Spend- by Eugene Fernandez V2.9+++

Why is Addressable Spend Important

• Addressable Spend could also be stated as a percentage of Revenue (60% of Revenue)

• The larger the percentage of Revenue of Addressable Spend, means more is the spend effectively managed by Procurement/Supply Chain and consequently savings are larger

• The larger savings can increase Net Profit before Tax by 20% to 75%.

• By ‘Seeing the invisible’ and by ‘Out of the box thinking’ non-traditional Categories of spend can be included in Addressable Spend

• The size of Addressable Spend as a percentage of Revenue, may depend on:

a) Type of Procurement/Supply Chain Organization b) Maturity of Procurement Transformation c) Type of Industry

Page 5: Addressable Spend- by Eugene Fernandez V2.9+++

Types of Procurement Organizations• Decentralized – Procurement negotiation and contracting handled

independently by employees in Department/Business Units

• Centre-Led - Procurement negotiation and contracting handled by employees in Department/Business Units with some support from a central place

• Centralized – Procurement aggregates spend, negotiates and contracts with full support of Department/Business Units, often with decentralized executions of transactions. CPO may be at CEO table

• Orchestrated – Procurement and Business Units fully aligned to the objective of Sales Growth, Vendor Innovation first, Risk Reduction, and Spend Savings. So Corporate and Business Unit Strategies and decisions are evaluated and roadmap set by both Procurement and Department/Business Units from the start. CPO is at CEO table

Page 6: Addressable Spend- by Eugene Fernandez V2.9+++

What is the current type of your Procurement Organization? (Show of hands – Results in brackets from 60 in audience)

• A) Decentralized (Procurement handled mostly by other Departments/Business units) (15)

• B) Centre-Led (Procurement handled with some central support) (15)

• C) Centralized (Centralized Procurement with some decentralized transactions – PO, etc.)

(15 – Many were Government)

• D) Orchestrated (Procurement and Business Units fully aligned and determine business

strategy, decisions roadmap together from start) (2)

Page 7: Addressable Spend- by Eugene Fernandez V2.9+++

Addressable Spend percentage may also be linked to the starting year of Procurement

Transformation The percentage of Addressable spend of Revenue may also be related to the decade (or

year) in which Procurement Transformation (Spend Analysis, Strategic Sourcing, etc.) started/will start, in the organization.

It reflects the maturity of Procurement Transformation after so many years.

When did Procurement Transformation start in your Organization?(Show of hands – Results in brackets from 60 in audience)

• A) 1990 to 1999 (or earlier) (0 – None in the audience were from Retail, Electronics or Automotive Industry which have mature Procurement Organizations)

• B) 2000 to 2009 (5)

• C) 2010 to 2014 (10 - Large number of organizations in Canada have just started Procurement Transformation)

• D) Not started / Do not know (30 – Canada is several years behind US in Procurement Transformation and many organizations have yet to start it)

Page 8: Addressable Spend- by Eugene Fernandez V2.9+++

Spend Categories commonly included as Addressable Spend by most Procurement

Organizations

• Direct Spend Raw Materials, Parts, Equipment, Metals, Services, etc.

• Indirect Spend

MRO, Office Supplies, Equipment, Outsourcing (IT, Contact Centre, Logistics, etc.), Energy, Contract/ Temporary Labor, T&E, Network/Telecom, Packaging,

F&F, Facilities, etc.

Page 9: Addressable Spend- by Eugene Fernandez V2.9+++

Spend Categories included as Addressable Spend in leading Procurement Organizations

• Direct Spend

Commodities (Spot Buying/Hedging), etc.

• Indirect Spend

MARCOM (Marketing, Advertising and Communication), Legal Services, HR Services, Benefits, Meetings,

Professional Services, Real Estate, etc.

Page 10: Addressable Spend- by Eugene Fernandez V2.9+++

% of Revenue

% Increase in Net Profit

Revenue 100.0%Operating Expenses 61.9%EBITDA 38.1%i) Depreciation & Amortization 16.3%ii) Interest 3.4%Net Profit before tax 18.4% 0%

Traditional Addressable Spend a) Direct Spend 40.0%d) Indirect Spend 10.0%Total Traditional Addressable Spend = ( c ) 50.0%

Targeted Savings per year Savings %Decentralized Procurement* 4% 2.0% 11%Centre-Led Procurement* 6% 3.0% 16%Centralized Procurement 10% 5.0% 27%

Actual Addressable Spend c) Traditional Addressable Spend above 50.0%d) Salaries, Wages & Benefits (SG&A) 19.8%e) Depreciation 16.3%f) Interest 3.4%h) Salaries & Wages included in Direct Spend -7.9%Total Addressable Spend (Revenue - Net Profit) 81.6%Targeted Savings per year** Savings %Decentralized Procurement* 4% 3.3% 18%Centre-Led Procurement* 6% 4.9% 27%Centralized Procurement 10% 8.2% 44%Orchestrated Procurement 14% 11.4% 62%

Telecommunication Canada (Rogers-Bell-TELUS)

Impact of a large Addressable Spend on Company Net Profit increase - 62%

* Give away at Contract Management by Business Unit of 2% to 3 % included ** Savings % could be slightly lower as Addressable Spend is much larger

Page 11: Addressable Spend- by Eugene Fernandez V2.9+++

Non -Traditional Addressable Spend Categories can be a source of Competitive Advantage and fuel for company growth

(Examples of spend savings)• CAPEX – Large project purchases often handled directly by Technical functions.

However savings by Procurement involvement from start and not at RFP or Contract stage can save over 20%.

(Examples: 3 Distribution Centres height - 35% saving, Manufacturing Plant equipment – 20% saving, Office Furniture for office – 30% saving on $2 million)

• R&D – Placement of Procurement person in R&D can reduce costs by 20% to 35%. (Examples: Design and Reuse parts increased - 25% to 65%, Electronic Parts

availability and sunset lists on components for R&D Engineers – 20% saving, Value Analysis - 15% saving)

• Interest/ Bank Charges – Impact of Inventory Management, VMI/Consignment (Home Depot hardboard), Dynamic Payables Discounting, Payment Terms, Import Financing, Bonded Warehouse/Manufacturing, etc. can all increase cash flow and reduce Interest

(Examples: Pension Funds interest increased 7.5% to 12.5% by Monte Carlo Simulation, $150 million P-Card payments – over 15% savings)

• Insurance – Earthquake Insurance, Assessable Value, Claims (Examples: Eliminated Earthquake Insurance for 10 plants distributed over many

States, Marine Insurance - 75% Saving, Fridge Packaging crating to grass rope dropped damages by over 99% - Savings 99% savings. See picture last page)

(So all Spend is Addressable and can increase Net Profit by 20% to 75%)

Page 12: Addressable Spend- by Eugene Fernandez V2.9+++

Non-Traditional Addressable Spend Categories can be a source of Competitive Advantage and fuel for company growth (continued)

(Examples of spend savings)• Salaries and Wages – Not just Outsourcing of Logistics/Distribution/IT but also of Procurement,

Marketing, Finance, HR, Manufacturing (by Virtual), R&D, Field Services, etc. is possible (Examples: Retailer 1,000 US Stores – Outsourced 30 Category Managers managing $600 million

Revenue to a Far East Agent to enable <5% to >95% Sourcing from Far East in 6 months Largest PC Manufacturer – Outsourced Procurement and used Vendor Staff from Ingram Micro and

Merisel - 100% procurement staff savings Apple, Nike – Outsource Manufacturing – So Labor and Benefits Cost savings) (So what is left to Outsource in Salary and Wages by Procurement – CEO? A joke)• Taxes – Excise, Customs Duty, Municipal/Business Taxes, HST, Corporate Tax (Examples: Won Supreme Court Case in India after 5 years on Excise is Manufacturing Tax not

Seles Tax – IRs 5 Crores saving, SR&ED Tax credits - $1 to $5 million, PC Manufacturer Customs Duty - 1.54% eliminated and 2 years duty drawback, $3 million savings)

• Revenue – Sales Growth (by using Vendor Innovations first and Vendor Risk reduction) (Examples: LP in two manufacturing organizations by product mix optimizations - 100% Gross

margin increase, PC Manufacturer - 300% increase in sales by Outsourcing procurement with Merge-in-transit and 9 days to 2 days customer delivery, Business Development Main Frames - 200% sales increase, PC Distributor - 300% increase in rebates and sales increase 25%)

• Depreciation – Sell and Lease back (Examples: Trucks and Trailers leased back - $300 million cash flow generated) • Profit – Eliminate Returns and Obsolescence write off, Risk Reduction (Example: Profit Insurance)• Audit – Financial, Special (Example: SMB Audit – 50% reduction in Audit Fees)

(So all Spend is Addressable and Cost reductions in non-traditional spend categories are sometimes in excess of 25%, a game changer, and could also increase Sales and reduce Risks)

Page 13: Addressable Spend- by Eugene Fernandez V2.9+++

Summary ‘Think out of the Box’ and ‘See the

invisible to do the Impossible’ • Need to be fully aware of functions of all Business Units

to increase Addressable Spend Categories• We created ‘Spend’ so Procurement can control ALL

spend (not just the spend allowed to be controlled). Adopt Zero Based Budgeting approach, to Zero Based Spend approach

• Any spend in an organization is Addressable and can lead to savings with Procurement assistance and so increase Net Profit 20% to 120%. (See slides that follow for Bank, Insurance and Retail Industry)

• Some spend is more difficult to get savings due to it being managed by another independent function so needs CEO full support, Change Management of Stakeholders, and Procurement Orchestration

(Keep an ‘Open Mind’ - Left hand should not to take the right hand for granted)

Page 14: Addressable Spend- by Eugene Fernandez V2.9+++

Should increasing Addressable Spend be the CPO objective (Holy Grail)

• Larger the Addressable spend (as percentage of Revenue) the more is the impact by Procurement on Net Profit (20% to 120% increase)

• The more the impact on Net Profit the more would be the support from CEO to CPO (Procurement/Supply Chain function)

• So which comes first, support from CEO or increase in Addressable Spend to get CEO full support (chicken or the egg)

• Could low Addressable Spend be the reason why fewer CPOs are at the CEO table

• Is Addressable Spend the Holy Gail CPOs are searching for to go to the top

(Persistence, Change Management of Senior Stakeholders and use of leading best practices are required to increase Addressable Spend)

Page 15: Addressable Spend- by Eugene Fernandez V2.9+++

% of Revenue

% Increase in Net Profit

Revenue 100.0%Interest Income 52.9%Non-Interest Income 47.1%

Operating Expenses 59.2%Net Profit before tax 34.2% 0%

Total Traditional Addressable Spend ***= ( a ) 28.3%

Targeted Savings per year Savings %Decentralized Procurement* 4% 1.1% 3%Centre-Led Procurement* 6% 1.7% 5%Centralized Procurement 10% 2.8% 8%

Actual Addressable Spend a) Traditional Addressable Spend above 28.3%b) Salaries, Wages & Benefits 30.9%Total Addressable Spend (Revenue - Net Profit) 59.2%Targeted Savings per year** Savings %Decentralized Procurement* 4% 2.4% 7%Centre-Led Procurement* 6% 3.6% 10%Centralized Procurement 10% 5.9% 17%Orchestrated Procurement 14% 8.3% 24%

*** Includes Occupancy, IT, Depreciation, Communication, Professional Fees, Marcom Marketing & Advertising), Capital and Business Taxes, Training, Other

Impact of a large Addressable Spend on Company Net Profit increase - 24%Banks Canada

(TD-RBC-CIBC-Scotia)

* Give away at Contract Management by Business Unit of 2% to 3 % included ** Savings % could be slightly lower as Addressable Spend is much larger

Page 16: Addressable Spend- by Eugene Fernandez V2.9+++

% of Revenue

% Increase in Net Profit

Revenue 100.0%General Expenses (Spend plus Salaries) 13.7%Net Profit before tax 6.2% 0%

Total Traditional Addressable Spend **= ( a ) 5.9%

Targeted Savings per year Savings %Decentralized Procurement* 4% 0.2% 4%Centre-Led Procurement* 6% 0.4% 6%Centralized Procurement 10% 0.6% 10%

Actual Addressable Spend a) Traditional Addressable Spend above 5.9%b) Salaries, Wages & Benefits 7.8%Total Addressable Spend (Revenue - Net Profit) 13.7%Targeted Savings per year Savings %Decentralized Procurement* 4% 0.5% 9%Centre-Led Procurement* 6% 0.8% 13%Centralized Procurement 10% 1.4% 22%Orchestrated Procurement 14% 1.9% 31%

Impact of a large Addressable Spend on Company Net Profit increase - 31%Insurance Canada

(Manulife-Sunlife-Great West Life)

** From Annual reports* Give away at Contract Management by Business Unit of 2% to 3 % included

Page 17: Addressable Spend- by Eugene Fernandez V2.9+++

% of Revenue

% Increase in Net Profit

Revenue 100.0%COGS 74.7%Gross Profit 25.3%SG&A 17.3%Depreciation & Amortization 2.0%Interest 0.5%Net Profit before tax 5.5% 0%

Total Traditional Addressable Spend ***= ( a ) 74.7%

Targeted Savings per year (at Half)** Savings %Decentralized Procurement* 2% 1.5% 27%Centre-Led Procurement* 3% 2.2% 41%Centralized Procurement 5% 3.7% 68%

Actual Addressable Spend c) Traditional Addressable Spend above 74.7%d) SG&A 17.3%e) Depreciation & Amortization 2.0%f) Interest 0.5%Total Addressable Spend (Revenue - Net Profit) 94.5%Targeted Savings per year (at Half)** Savings %Decentralized Procurement* 2% 1.9% 34%Centre-Led Procurement* 3% 2.8% 52%Centralized Procurement 5% 4.7% 86%Orchestrated Procurement 7% 6.6% 120%

Impact of a large Addressable Spend on Company Net Profit increase -120%Retail

(WalMart-Target)

* Give away at Contract Management by Business Unit of 2% to 3 % included ** Savings % cut to half as margins are lower in Retail and Addressable Spend is much larger

Page 18: Addressable Spend- by Eugene Fernandez V2.9+++

‘Thinking out of the Box’ –Solving the world’s oil problem

(Learn to run on all fours at 80 km per hour)

Page 19: Addressable Spend- by Eugene Fernandez V2.9+++

‘Seeing the Invisible’ –70% Damage to Fridges reduced to 0% when wood crate packaging

replaced by grass rope

Page 20: Addressable Spend- by Eugene Fernandez V2.9+++

Look forward to sharing Best Practices

The End

Eugene Fernandez

[email protected] 416 346-1940