fortum procurement - aalto...• enable further development in supplier relationship management •...

Fortum Procurement Mika Lahti

Vice President, Procurement & Real Estate

7.9.2015

7.1.2015 2

Topics

• Fortum today

• Procurement Development Program

• New Category Based Management Model

• What Is Good Procurement Management?

• Questions and answers

Procurement & Real Estate / Mika Lahti

Introduction – Mika Lahti

• Fortum 2011-

– Vice President, Procurement & Real Estate, Fortum 12/2013 -

– Head of Category Management & Strategic Purchasing

• Nokia Siemens Networks 2007-2010

– Head of 3rd Party Management, Business Solutions

– Head of Product Line Management, Messaging & Browsing

• Nokia 1999-2007

– Director, IT&IP Systems Sourcing, Nokia Networks

– Head of Supply Partner Integration, Nokia Business Infrastructure

– Concept Integrator, E-business with Suppliers, Nokia Mobile Phones

• Helsinki Institute of Physics (HIP), CERN, Switzerland 1997-1999

– Project Leader, Process & Quality Control

• TAI Research Centre, Helsinki University of Technology 1994-1997

– Project Manager & Scientific Researcher

• Education

– Master of Science, Industrial Engineering, Helsinki University of Technology

• Publications – Jahnukainen, J., Lahti, M. & Luhtala, M. LOGIPRO - Towards

World Class Make-to-Order Supply Chains. Helsinki University of Technology, Espoo 1995.

– Jahnukainen, J., Lahti, M. & Virtanen, T. LOGINET: Supplier collaboration in make-to-order supply chains (In Finnish) Helsinki 1997, Metalliteollisuuden kustannus

– Meklin, J., Lahti, M., Kovanen, V., Arenius, M. & Artto, K. FIT-PRO - A Product-oriented Approach to Industrial Project Management. Helsinki 1999, Project Management Association Finland.

– ~15 articles in international journals and research seminars

3 7.1.2015 Procurement & Real Estate / Mika Lahti

Fortum’s Mission and Strategy

4

Strategy

Fortum’s purpose is to create energy that improves life for present and future

generations. We provide sustainable solutions for society and deliver excellent

value to our shareholders.

Mission

Build on the strong

Nordic core

Create solid earnings

growth in Russia

Build a platform for

future growth

Strong competence in CO2-free hydro and nuclear, efficient CHP production and

energy markets

Our current geographical presence

5

Nordic countries

Power generation* 49.2 TWh

Heat sales* 10.9 TWh

Electricity customers 1.3 million

Power

generation

Electricity

sales

Heat

Poland Power generation 0.7 TWh

Heat sales 3.4 TWh

Baltic countries Power generation 0.7 TWh

Heat sales 1.2 TWh

India Power generation 9 GWh

Key figures 2014 Sales EUR 4.1 bn

Comparable operating profit EUR 1.1 bn

Balance sheet EUR 21 bn

Personnel 8,200

* In addition, Fortum has a 29.5% share in TGC-1 * Including Fortum’s associated company Fortum Värme;

power generation 1.2 TWh and heat sales 7.6 TWh.

OAO Fortum

Power generation 23.3 TWh

Heat sales 26.0 TWh

Russia*

0

200

400

600

800

1 000

1 200

DE

I

RW

E

Dra

x

SS

E

CE

Z

E.O

N

Vatt

en

fall

ED

P

Enel

Edip

ow

er

EnB

W

Gas N

atu

ral F

enosa

GD

F S

UE

Z

Do

ng

En

erg

y

Fo

rtu

m to

tal

Iberd

rola

PV

O

ED

F

Verb

und

Fort

um

EU

Sta

tkra

ft

64

g CO2/kWh electricity, 2013

2014

64% of Fortum's total power generation CO2-free

94% of Fortum’s power generation in the EU CO2-free

Close to 100% of the ongoing investment programme

in the EU CO2-free

Average 328 g/kWh

200

Fortum's carbon exposure among the lowest in Europe

6

Note: : Fortum’s specific emissions of the power generation in 2014 in the EU were 39 g/kWh and in total 177 g/kWh.

Only European generation except “Fortum total“ which includes Russia.

Source:

PWC & Enerpresse, December 2014

Climate Change and Electricity, Fortum

Lo

w

Eff

icie

ncy

Hig

h E

ffic

iency

High Emissions Emission free

Solar Economy Solar based production with

high overall system efficiency

Traditional

energy production Exhaustible fuels that

burden the environment

Coal Gas

Oil

Advanced

energy production Energy efficient and/or

low-emission production

Nuclear

today

Nuclear

tomorrow

CHP

CCS

Geothermal

Hydro

Wind

Sun

Ocean

Bio

Storage

Active

Consumer Demand

Response

Interconnectors

Smart

applications

7

Copyright © Fortum Corporation

All rights reserved by Fortum Corporation and shall be deemed the sole property of Fortum Corporation and nothing in this slide

or otherwise shall be construed as granting or conferring any rights, in particular any intellectual property rights

Towards Solar Economy

7.1.2015 8

Topics

• Fortum today






Fortum Procurement Spend

Fuels

Other OPEX

CAPEX

9

Other countries

Purchasing spend is ~ 5 x annual

employee benefits

7.1.2015 Procurement & Real Estate / Mika Lahti

Fortum annual purchasing spend

varies between 2 and 3 M€/year

depending on investment level

Targets of the development program launched 2010

2010

2012-13

• Basic building blocks in place

• New purchasing concepts

introduced – lead buying and

global sourcing

• Achievement of set goals

• Strategic purchasing – pull from the rest

of the organization to create value

• Effective organization – strong

cooperation across divisions and

functions

• Capability building and talent

development – exciting function to be in


11

Purchasing focus was on operational purchasing

Core purchasing processes

Prepare

Analyse Facts

& Generate

Ideas

Operational purchasing

Supplier Relationship Management

Supporting processes (business intelligence, process development, …)

Purchasing strategy

creation

Cate

go

ry

str

ate

gy

Evaluate

purchase

Handle

invoice

Receive

material/

service

Receive

material/

service

Execute

purchase

Execute

purchase

Plan

purchase

Plan

purchase

Define

need

Define

need

Follow up

purchase

Supplier portfolio

Development

Management

Phase-In

Supplier management

and development

Develop Strategy

Step 3

Analyse Facts & Generate Ideas

Step 2

Prepare

Step 1

Supporting processes (business intelligence, process development, …)


12

What is Strategic Procurement?

“Strategic purchasing is a systematic

and collaborative process for

to buy commodities and services at

the lowest total cost of ownership and

the highest value to our business”

• determining supply requirements,

• identifying external and internal

improvements,

• selecting the most competitive

suppliers, and

• managing supplier performance

Quality

Purchase

price

Strategic purchasing goes below

the surface…

Specifications

Strategic

need

Make-or-

buy Innovation

Delivery time

Order

process Transport

Inventories

Internal demand

Life cycle

costs

Transactional

focus

Sustainability


13

Collaborative,

cross-functional

approach

Total cost of

ownership (TCO)

approach

Systematic,

methodological

approach

Strategic purchasing

Value creation

5 steps Specs Price

Process/

admin

Usage/

demand

Team


Cornerstones of the Development Program

14

Systematic Approach Was Developed

Monitor and Improve

Step 5

Implement Strategy

Step 4

Develop Strategy

Step 3

Analyse Facts & Generate Ideas

Step 2

Prepare

Step 1

• Follow up

implementation

progress

• Measure and

improve

supplier

performance

• Measure and

improve

savings capture

• Carry out

sourcing process

• Collaborate with

existing

suppliers

• Implement

internal changes

• Insource /

outsource

• Develop

improvement

ideas

• Identify savings

potential

• Develop

strategy options

and scenarios

• Assess

constraints

• Review strategy

• Perform current

state analysis

• Develop TCO

model

• Define business

requirements

• Carry out

market research

• Generate

improvement

ideas

• Identify cross-

functional team

and stakeholders

• Develop project

plan

• Review high-

level spend

• Identify initial

opportunities

• Organize team

kick-off

Depending on

strategy:


15

2011

Pilot categories

• Implementation and savings capture

Wave 2

categories

Wave 2 implementation and

savings capture

Implement

changes

Strategic

purchasing

+ capability

building

Operating

model

Wave 3

categories

Wave 3 implementation

and savings capture

Wave 5

categories

Integrate

into normal

operations

2012

…

Chosen apprach: pilots and waves

Review and refine

organization &

processes

Pilot categories

• New strategic

purchasing process

introduced and

tested

• Capability building


16

2011 – 2012 we carried out 17 “PUMA projects”

2011 2012

Cars and

vehicles

Distribution

network

materials *

Civil and dam

works

District heating

networks

Distribution network

and field services

(‘Radisson’)

Oil

Boilers

Technical

consulting

Biofuels

Coal

Civil Works

J F M A M J J A S O N D J F M A M J J A S

Turbines and

generators 1

Electrification and

automation systems

in Renewables

Automation II

Real estate &

facility management

Service & mainte-

nance works (pre-

study in Finland)

* Handed over to Radisson

Solar

O N D


17

Category Management

2011 2012

2012: Transition from Program to Category Management

PUMA

program

2013


Purchasing Organisation 2010

CEO

CFO

Corporate

purchasing

Power

purchasing

Heat

purchasing

Russia

purchasing

18

ESD Power Heat Russia

Distribution

purchasing

Distribution Other ESD Corporate

center


2014 New Category Based Procurement Organisation

CEO

CFO

Corporate

purchasing Procurement

Russia

purchasing

19

ESD

Distribution

purchasing

Purchasing in our largest spend categories led by category

managers, BA Purchasing teams resp. for BA specific needs

Power Segment:

NTP & HTP

HESS Russia Corporate

Center

Distribution


7.1.2015 20

Topics

• Fortum today






21

Category Based Procurement Management

Typical category management activities:

• Developing category strategy to optimize the Total Cost

of Ownership (TCO) for the category

• Implementing the category strategy

• Leading / supporting main negotiations in the category

• Coordinating supplier relationship management

activities

• Following actively the supply market; sharing market

knowledge

• Measuring category performance and maintaining the

TCO model

• Preparing input for the business plan regarding own

category

A category refers to an area of spend, for example,

a type of equipment, service, fuel or material (e.g., boilers,

travel, oil or spare parts). Often a category consists of

several related sub-categories with similar characteristics

and/or similar supply markets.

Category management optimizes the

Total Cost of Ownership (TCO)

Quality

Purchase

price

Specifications

Strategic

need

Make-or-

buy Innovation

Delivery time

Order

process Transport

Inventories

Internal demand

Life cycle

costs

Transactional

focus

Sustainability


22

Other purchasing areas managed

as categories

Categories with dedicated

Category Managers

The initial category setup

District Heating Networks

Boilers and Auxiliary Equipment

Turbines & Generators

Construction & Civil Works

Automation

Consulting

Distribution Network Services

Service & Maintenance

Power

Heat

ESD

Corporate

Purchasing

Home

unit

Category

Electrical Materials*

Fuels

IT

Cars & Vehicles, Travel, Work Wear…

Real Estate and Facility Management

Consulting

Corporate

Purchasing

Power, Heat


23

Benefits of the new model

• Use our internal competences and purchase volumes better to improve profitability

• Make strategic purchasing to be part of our normal purchasing activities

• Make operational purchasing process more effective

• Clarify roles and responsibilities related to our main purchasing categories

• Enable further development in supplier relationship management

• Support regional sourcing activities in different countries (e.g., Poland, Russia, India) by sharing effectively best practices and common supplier information

• Support new business growth initiatives


24

Job Profile of a Category Manager

General

• Full-time role dedicated

to category management

(there can be several

categories per manager)

• Must have commitment

and encouragement from

the ‘home’ organization

to support all units

involved in the category

work

• Recruiting decisions to

be jointly approved by

the ‘home’ organization

and Corporate

Purchasing

Required profile

• Leadership skills (ability to lead a cross-functional team)

• Collaboration across organization

• Project management skills

• Problem solving and analytical skills

• Ability and willingness to challenge established way of working

(internally & externally)

• Negotiation skills

• Relevant commercial and technical experience in own categories


25

25

21

17

37

Capabilities and

culture

Category management

and execution

Structure and systems

Strategic alignment

and posture

IMPORTANCE OF DRIVERS FOR OVERALL PURCHASING PERFORMANCE

Percent

Source: McKinsey & Company and European Business School research


…and it good to remeber that people matter

7.1.2015 26

Topics

• Fortum today






Who truly leads Procurement in a company?


Personal

Relationships

Favours

Trust Loyalty

Handshakes

Ethics ”Business is

done

between

people”

Supplier Relationship Management

Supplier Phase Out

Supplier Business

Management & Development

Supplier Phase In

Supplier

Selection &

Negotiations

Contract Management

Monitoring & Performance Management

Supplier Portfolio Management

Fact Based

Management

Facts & Figures

Feelings & Emotions

28

”Business is done between people”


7.1.2015 29

Topics

• Fortum today






fortum procurement - aalto...• enable further development in supplier relationship management •...

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