1. Strategic Supplier Relationships New Strategies for Changing Times
ISM Chemical Group
Las Vegas, Nevada
2006

2. Agenda Background New Approaches for Strategic Supplier Relationships
Trends in Strategic Supplier Relationships
Characteristics of Strategic Supplier Relationships
Selection Criteria
New Approaches for Strategic Supplier Relationships
Real-Life Management of Strategic Relationships
How This is Different From Other Approaches
Challenges
Q&A

3. Introduction

4. About Denali Consulting and SupplyStaff
Management consultancy, formed in 1996
Focus is exclusively in Supply Chain Management consulting
Primary industries include service based and capital-intensive clients
Electric & Gas Utilities
Financial Institutions
Oil & Gas
Mining
Services include
Strategic Sourcing & Procurement Improvement
Logistics Optimization
Supply Chain Strategy & Assessment
Organizational Development & Design
Supply Chain Staff Augmentation and Search / Recruiting
Typical positions include:
Sourcing & Logistics Analysts
Sourcing & Logistics Managers
Supply Chain Directors & V.P.’s
Offer temp-to-perm conversions at no extra cost after 6 months
Since Supply Chain Management is our only focus, we are experts at finding the best talent for today’s Supply Chain organizations
Provide payroll, benefits, HR services for all resources
Denali Consulting and Supply Staff are certified as woman-owned businesses by WBENC

5. Sample of client engagements that are used to create the basis of this presentation
                                                          
               
Lucas Aerospace

6. Denali Commodity Expertise Across Many Commodity / Service Categories
Partial Listing of Commodities & Services Sourced by Denali
Transformers
Build-Up Trucks
Wire & Cable
Chemicals
Gases
Facility Design & Construction
Vegetation Management/Line Clearing
Meters
Janitorial Services
Turbines & Generators
Automated Metering
MRO
Plant and Facility Maintenance
Travel Related Services
Computers & Desktop Services
Benefits Management
Pipeline Maintenance
Injection Molded Parts
Pole Replacement
Castings
Drug & Alcohol Testing
Fuel & Lubricants
Drilling Equipment
Rotors
Motors & Generators
Supplemental Personnel
Boilers
Switchgear
Line Hardware
Application Development Services
Engineering Services
Office Products & Furniture
Printing & Reproduction Services
Freight & Logistics
Underground Construction
Packaging
Circuit Breakers
Construction Services

7. Background

8. What Is A Strategic Supplier Relationship?
Strategic Supplier Relationships Definition:
A supply strategy based upon joint opportunities, mutual trust, respect and open & honest communication between the supplier and the customer.
This strategy is focused on reducing related supply chain costs and improves the quality of goods and services.

9. Once Again a Procurement “Best Practice”
Beginning of Volatile Commodities Markets
High
Emergence of eSourcing tools & eMarketplaces
Introduction of Strategic Sourcing & Strategic Alliances
Industry Consolidation Waves
Perceived Importance of Strategic Supplier Relationships
Low

10. Why are Strategic Supplier Relationships More Important Now Than Ever?
Volatile Markets
Price-focused sourcing strategies don’t work in periods of increasing commodity prices
More sophisticated relationship-based approaches are required to meet utility cost reduction targets
Based on recent increases in raw material, especially fuel, traditional unit based savings will not generate substantial savings, suppliers must be willing to provide creative solutions to remove costs from how they service or re-engineer the procured materials
Merger & Acquisition Trends
Larger, national/global presences of utilities require more strategic supplier relationships to support growth and cost synergy targets
Expansion of Supplier Value-Added Services
Suppliers continue to expand their value-added services offerings, increasing the value of strategic supplier relationships
Outsourcing

11. Strategic Relationship Characteristics
Types of Goods & Services
High $ Spend
Critical business implications
Custom engineered
Limited availability or alternatives
Buying Considerations
Trust is a major issue
Cross-functional involvement
Highly resource intensive
Long range planning required
e.g. Line Construction Services, Transformers
Competitive Advantage Driven
Supplier Relations
Longer Term Agreements
Total interaction
Close working relationship
Aligned objectives and philosophy
Teamwork

12. Strategic Relationship Criteria
MANAGED
BUSINESS
RELATIONSHIPS
Potential for impact
STRATEGIC
RELATIONSHIPS
Common values
COMPLEXITY/IMPACT
GENERAL
PROCUREMENT
BULK
PRODUCT
SOURCING
Aligned goals
Proper environment
VALUE / COST

13. Elements Of Successful Supplier Relationships
Six critical elements support the development of successful relationships with Key Suppliers:
Focus A common vision for the relationship, with agreed
strategies and activities
Trust Open communication and disclosure of business
drivers
Performance Continuous improvement towards agreed targets and
KPIs
People Clearly defined roles and responsibilities
Proactive Anticipating business needs and providing creative solutions
Profit at Risk Establishing real metrics to drive behaviour for both parties

14. Focus
A common vision for the relationship, with agreed strategies and activities
A Team of representatives from the Buying Company and the Supplier jointly
develop a Business Plan for the Relationship, addressing:
Vision and Mission
Drivers and Values
Breakthrough Strategies
Continuous Improvement Strategies
Key Activities for the Period of the Plan
Key Measures of Success

15. Trust Open communication and disclosure of business drivers
Development of Total Cost of Ownership Model to understand our joint supply chain costs
‘Open Book’ arrangement for Contract Cost Drivers and required margins
More use of incentives to create business drivers for suppliers to provide R&D support…for cost savings or driving new revenue avenues

16. Performance Continuous improvement towards agreed goals
Establish Continuous Improvement Program to
Generate and document opportunities for value
adding and process improvement
Implement ideas
Document benefits achieved
Develop KPIs to quantify progress against
Key Measure of Success identified in the
Business Plan
Customer specific measures
Jointly review progress on a regular basis

17. Sample KPI Scorecard
Example

18. People Clearly defined roles and responsibilities Customer Supplier
Category Manager/Lead Buyer
Manages the performance of the contract and supplier across the organization
Customer Representative
Responsible for the application
of contract to a specific customer group
Supplier Development Team
Representatives of major customer groups who the determine strategy for the category and monitor supplier performance against KPIs
Supplier
Account Manager
Responsible for provision of goods or services under Terms of Contract/Agreement. Customer Contract Manager and decision maker.
Operations Manager
Responsible for the application of contract and improvement program, working directly with the customer

19. Proactive Customer & Supplier Quick responsiveness in sharing ideas
Risk taking behaviour rewarded and encouraged
New ideas move through system of approval on fast track

20. Profit at Risk Bottom-Line Impact
Performance to agreed upon targets is expected-not rewarded
Insist that suppliers proactively know their market for raw materials, technological advances, industry best practices

21. New Approaches to Strategic Supplier Relationships

22. Typical Supplier Development Process
Contract
Start-up
Planning and
Implementation
Supplier
Relationship
Management
Contract and
Performance
Management
Value
Discovery
Review and Define
Category Strategy
Develop Detailed
Transition Plan
Develop Communication
Approach
Manage Contract and
Supplier Performance
Conduct Internal and
External Assessment
Develop Supplier
Relationships
Conduct
Implementation
Perform Relationship
Check-Ups
Manage Contract
Variations
Develop Options and
Recommendations
Manage Stakeholder
Communications
Plan Competitiveness
Assessment
Review Category
Performance
Obtain Stakeholder
Approval
Manage
Contract End
Create Total Cost
Model (if not already
in place)
Conduct Value
Analysis Workshop (s)

23. What’s New With Strategic Supplier Relationships
New approaches are being required to deal with new environmental factors in the supply chain
Volatile
Markets
Broader
Supplier
Offerings
Industry
Consolidation
New Approaches
to Supplier
Relationships

24. Volatile Markets Require Greater Cost Modelling Sophistication
Volatile markets are tough for both customers and suppliers.
Unless cost transparency is achieved in the relationship and pricing structure, larger contingencies will be built into prices.
Working closely with your core strategic suppliers is the best means to continue realizing ongoing savings through volatile markets.
Understand how to approach suppliers’ price increase requests critically but fairly. Share cost increases with suppliers who do a good job of managing their cost by collaboratively working with their suppliers and demonstrating good supply chain management.
Better understand the costs of your purchases and what market forces are effecting them. In times of volatile markets, it’s more important than ever to have an in-depth understanding of supplier cost structures and total supply chain costs.
Proactively work to ensure that the pricing structure of your contracts are appropriately motivating suppliers to decrease cost while maintaining or increasing quality and service.

25. Total Cost of Ownership
The present value of all costs associated with a product, service, or capital equipment that are incurred throughout the supply chain.
Typically these are broken into 4 categories:
Purchase price
Acquisition costs
Usage costs
End of life costs

26. Where do we get the benefits?
Across a Company’s boundaries:
Perceived
Opportunity $$
Purchase Price
Procurement Practices
Supplier Best Practices
Leverage
Supplier R&D Leverage
Specifications
Inventory Practices
Service Measures tracking
Transactional Process
Remnant/Obsolete Practices
Actual
Opportunity

27. Total ownership costing of the supply chain
Identify Need Procurement Distribution Warehousing Disposal
Specification Receiving Application Out-of-Service
“Cradle to Grave” Costing
In purchasing, “total cost” generally includes the purchase cost of item being purchased, plus the following; transportation, indirect handling, inspection, quality, rework, maintenance, incremental operations and all other “follow-up” costs associated with the purchase.
This may also be referred to as the “cradle to grave” or “womb to tomb” costs. It looks at the commodity or service as it moves through the supply chain from initial identification of a need until the final disposal or retirement.
Analysis of the supply chain is done using a concept called Activity Based Costing

28. Example of Total Cost Comparisons
This is an example of an actual team…I won’t tell you the commodity, but it is represented by one of the suppliers in this room.

29. Strategic Supplier Relationships in M&A Environment
As companies continue to consolidate, strategic supplier relationships can play a critical role to support growth and cost management targets
(Hot issue - Maintaining supplier diversity goals, while consolidating the supply base)
Supply chain synergies
are often key elements
of M&A business cases
Broader territories
will require stronger, more
strategic relationships
Strategic suppliers can
be key members of
an M&A joint team
Sophisticated cost
modelling is required
to understand customer
and supplier cost savings
in an M&A environment

30. Broader Supplier Offerings and Strategic Supplier Relationships
The more value added services provided by a supplier, the more strategic the relationship
Typical Offerings Broader Offerings
As companies continue with the trend toward increased variable costs & outsourcing, strategic supplier relationships, along with broader offerings will become the norm
Supplier Managed Inventory
Product training
Warranty utilization
Kitting
Business process outsourcing
Full assembly or category vs. component sourcing
Combination of products and installation

31. Strategic Supplier Relationships In Action

32. Why Should Strategic Relationships Be Important to You?
Continuity of Supply - Especially During Tough or Volatile Times
A Single, Unbroken Supply Chain - From the Supplier Through to the Customer
Continual Dialogue - When Costs Go Up…and Down
Cost Performance Below Market Indices

33. Raw Material Prices Rising: What Does This Mean to Energy Consumers?
Continuity of Supply
Strategic Supplier Relationships help to ensure continuity of supply for strategic material and service categories. This is especially important:
During tough times (e.g. the California utility financial crisis)
During periods of tight supply conditions
When markets are volatile
To ensure alignment with strategic priorities
Edison Stays in Financial Limbo as Lawmakers Debate Rescue Plans; Energy: CFO of utility's parent worries that creditors may force bankruptcy if action is stalled in Legislature
Raw Material Prices Rising: What Does This Mean to Energy Consumers?

34. The Single, Unbroken Supply Chain
The Single Customer/Supplier Supply Chain
ID NEED PROCUREMENT RECEIVING DISTRIBUTION MAINTENANCE DISPOSAL
SELL RECEIVE ORDER SCHEDULE/PLAN MANUFACTURE SHIP PAYMENT
Supply Chain should be one single, unbroken chain from the supplier’s processes through the customer’s
Buyers must have the same expectations from themselves and their companies as they have of their suppliers
One weak link can disrupt the entire supply chain

35. Examples of Strategic Relationships in Action
$36M contract awarded based on Total Cost of Ownership in 1994, delivered originally 34% savings.
Years , delivered an additional 12% TCO savings
2006 awarded 5th 3 year extension with 3% annual TCO goals included in the contract
While facing bankruptcy, only 1 of the 24 Strategic Suppliers to a $1.8B spend base changed terms or delivery options
When one Strategic Supplier faced pending bankruptcy, their major customer pre-paid their orders to help them with cash flow
When faced with escalating prices in raw materials, one Strategic Supplier worked with their major customers to secure 1 year of material on their behalf without confirmed orders

36. The Importance of Continual Dialogue
Must have continual dialogue with suppliers - not just when prices go up
Continuous improvement to reduce total supply chain costs is expected
Must be willing to look at costs and process for both the buying company as well as the supplier
Strategic Relationships can’t be thought of as

37. The Expectation of “Better Than Market” Performance
Strategic Supplier Relationships should deliver performance that is “better than market”
Cost trends should be below market indices
Pricing volatility should be passed onto those customers that buy marginal capacity, not those who have firm, long term commitments
This applies to quality, service and total cost performance

38. Why Strategic Supplier Relationships are Important
A new supplier commences operations every minute
A supplier files bankruptcy every 8 minutes
A supplier ceases operations every 3 minutes
A judgment is filed against a supplier every 14 seconds
A supplier name change happens every 2 minutes
A supplier ownership change happens every 4 hours
A supplier’s risk profile changes every minute
…world of constant change and challenges (opportunities)
Source: Dun and Bradstreet

39. Q&A

40. For Further Information
Please contact
Dawn Tiura
President
Denali Consulting
cell
office