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Travel Strategic Sourcing Kathy Briski, C.P.M., CCTE June 24, 2013.

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Presentation on theme: "Travel Strategic Sourcing Kathy Briski, C.P.M., CCTE June 24, 2013."— Presentation transcript:

1 Travel Strategic Sourcing Kathy Briski, C.P.M., CCTE June 24, 2013

2 Page: 1 Global Procurement Processes Define Supplier Evaluation Criteria Collect Data Conduct Performance Evaluation Develop Improvement Strategy Supplier Relationship Management Process Generate Requisition Approve/ Submit Requisition Process/ Submit Order Receive Goods & Services Approve Invoice Process Invoice & Generate Payment Strategic Sourcing Process Access Opportunity & Establish Team Profile Category Internally & Externally Develop Sourcing Strategy Create Selection Factors & Evaluate Suppliers Conduct Competitive Exercise w/ Approved Suppliers Negotiate & Develop Sourcing Recommend- action Implement Agreements Continuous Improvement Supplier Scorecard Savings Management Spend Analysis Knowledge Management Contract Management Catalog Management Core Supporting Capabilities Day-to-Day Purchasing Process

3 Page: 2 Strategic Sourcing Process Overview Profile Category Internally & Externally Create Selection Factors & Evaluate Suppliers Negotiate & Develop Sourcing Recommend- action Implement Agreements Strategic Sourcing Methodology Activities Deliverables or Tools Validate Internal Requirements & Profile Category Conduct Industry Analysis Internal Category Profile TCO Model Cost Reduction Ideas Industry Profile Build TCO Model Develop Sourcing Objectives Sourcing Strategy Plan: Competitive Supplier Selection or Existing Supplier Development Conduct Supplier Analysis Create Supplier Selection Criteria Supplier Selection Decision Matrix RFIs (optional) Short List of Suppliers Complete Traditional RFP Process RFPs / RFQs eAuctions Collaborative Discussions Conduct eAuction(s) Collaborate w/ Incumbent Supplier(s) - AND/OR - Prepare Fact- Based Negotiation Packages Negotiate Agreements Fact-Based Negotiation Packages Supplier Negotiations Presentation Sourcing Recommendation Finalized Agreements Benefits Realization Continual Supplier Improvement Implement Agreements and Monitor KPIs Evaluate Performance and Develop Suppliers Develop Sourcing Strategy Conduct Competitive Exercise w/ Approved Suppliers Fast Track for Quick Savings Develop Sourcing Strategies & Tactics ANALYSISSTRATEGY SUPPLIER SELECTION IMPLEMENTATION Assess Opportunity & Establish Team Assess Opportunity Obtain Sponsorship & ID Team Create Project Plan Project Plan Analyze Current Spend Document Requirements

4 Page: 3 Strategic Sourcing Process Overview Profile Category Internally & Externally Create Selection Factors & Evaluate Suppliers Negotiate & Develop Sourcing Recommend- action Implement Agreements Strategic Sourcing Methodology Activities Deliverables or Tools Develop Sourcing Strategy Conduct Competitive Exercise w/ Approved Suppliers ANALYSISSTRATEGY SUPPLIER SELECTION IMPLEMENTATION Assess Opportunity & Establish Team Assess Opportunity Obtain Sponsorship & ID Team Create Project Plan Project Plan Analyze Current Spend Document Requirements

5 4 High Level Travel Project Plan Travel Workplan Review Mobilization & Kick-Off Category Profile Internally & Externally Develop Strategy Screen Suppliers & Selection Factors Conduct Competitive Exercise Negotiate & Develop Sourcing Recommendation Implement Agreement AprilMayJuneJulyAugustSeptember SAMPLE

6 Page: 5 Travel Category Opportunity SAMPLE Category Opportunity Baseline – Travel Key Travel Contracts and Expiration DatesPreliminary Opportunities to Drive Accelerated Benefit Hertz Car Rental Agreement – Expiration Date: July 31, 2010 Northwest Airlines Agreement – Expiration Date: November 30, 2010 American Express Travel Agency Agreement – Expiration Date: September 30, 2009 – Currently Extended until September 30, 2010, with an additional 1 year extension (2011). Mandated Travel & Entertainment Policy Drive Demand Management (Compliance Behavior): On-Line Booking Tool Advance Ticket Purchase Non-Refundable Tickets Preferred Hotel usage Preferred Car Rental usage Hotel Competitive Bid Negotiate American Airlines contract Car Rental Competitive Bid Confirmation of Sourceable Spend Sourcing Group CategorySub-Category Addressable Spend % Addressable Sourceable Spend Est. Mid Saving % Est. Mid Savings $ TravelAirline$6,000,000100%$5,500,0003%$165,000 TravelCar Rental$1,000,000100%$925,0005%$46,250 TravelHotel$4,500,000100%$4,400,0005%$220,000 TravelAgency - Agency Fees$170,000100%$00%$0 Travel Demand Management (Compliance)N/A $700,000 SAMPLE

7 Page: 6 Strategic Sourcing Process Overview Profile Category Internally & Externally Create Selection Factors & Evaluate Suppliers Negotiate & Develop Sourcing Recommen- dation Implement Agreements Strategic Sourcing Methodology Activities Deliverables or Tools Validate Internal Requirements & Profile Category Conduct Industry Analysis Internal Category Profile TCO Model Cost Reduction Ideas Industry Profile Build TCO Model Develop Sourcing Strategy Conduct Competitive Exercise w/ Approved Suppliers ANALYSISSTRATEGY SUPPLIER SELECTION IMPLEMENTATION Assess Opportunity & Establish Team

8 Copyright © 2007 Accenture All Rights Reserved. 7 Total Cost of Ownership Travel Hotel Cost Agency Cost Total Cost of Ownership – Elements Air Ticket Cost Emergency Travel Services Change Requests Support Management Fees Online Booking Agent Assisted Booking Client Negotiated Airfare Transaction Fee Price for airfare, room rates and rental rates make up a portion of the TCO for Travel with cost drivers laying hidden in process. Rental Car Cost Airfare Cost Nightly Room Rate Misc. Charges Internet Parking Fitness Center Misc. Charges Fuel Daily Rate Mileage Charge Vehicle Fees GPS Concession Fee Recovery Self fill Fuel and Service Charges Fuel Purchase Options Price Procurement Process Labor Costs Time to register new online users on Cliqbook Time to train new online users Air Ticket Cost Taxes Room Rate Taxes Daily Rate Taxes Travel Policy Policy Enforcement Advance Booking Preferred Suppliers Meals Phone Fuel Surcharges Security Fees Insurance Airport Fees City Surcharge Upgrade Fees Energy Surcharge SAMPLE Ancillary Fees Baggage Fees Change Fees In Flight Internet Status Level

9 Page: 8 Industry Profile - Objective & Key Questions Objective Provide a detailed understanding of the current corporate travel industry as well as the forces shaping future travel services. The results of this profile will shape Comericas travel Sourcing Strategy. Key Questions How big is the industry? Who are the major players? How competitive is the market? What are the key cost drivers? Is the industry in a state of growth or decline? What are the current pricing trends? SAMPLE

10 Page: 9 Travel Scope NAICS 481 – Transportation by Air 4811 – Scheduled Air Transportation 481111 – Scheduled Passenger Air Transportation NAICS 721 – Accommodation 7211 – Traveler Accommodation 721110 – Hotels and Motels 721110.1 Guestroom Rental NAICS 5321 – Automotive Equipment Rental 53211 – Passenger Car Rental and Leasing 532111 – Passenger Car Rental (for business travel) NAICS 561 – Administrative and Support Services 5615 – Travel Arrangement and Reservation Services 561510 – Travel Agencies (including Meetings & Events) In Scope Scheduled passenger air transportation, hotel, passenger car rentals and meeting/event planning services are in scope for travel sourcing. Because of the existing relationship with current travel agency and the subsequent process standardization, it does not make sense to fully source the travel agency component of travel at this time. However, there may be components of the contract to reevaluate. Meeting/Event Planning Services are categorized under the same NAICS code as Travel Agencies. Key Points The travel industry encompasses a variety of different categories each grouped with an NAICS (North American Industry Classification System) code. Source: http://www.bls.gov SAMPLE

11 In 2000, 10 airlines accounted for slightly more than 90% of available seat-mile capacity in the United States. By early 2012, those 10 airlines, through mergers, were reduced to 5 airlines controlling about 85% of the domestic passenger market. Moreover, American and US Airways is currently merging which would further reduce the number of airlines controlling the vast majority of passenger ridership to only four. BOEING PROPRIETARY Source: Office of Inspector General, AVIATION INDUSTRY PERFORMANCE, A Review of the Aviation Industry, 2008–2011, Number: CC-2012-029, Date Issued: September 24, 2012 RITA, Bureau of Transportation Statistics AIRLINE INDUSTRY – US Airline Mergers 2012 US Airlines Shares Delta 16.3% United 15.1% Southwest 15.0% American 12.9% US Airways 8.1% JetBlue 4.9% Alaska 3.8% AirTran Corporation 2.9% SkyWest 2.3% ExpressJet 2.2% Other 16.5%

12 Page: 11 Airline Industry: Overview 2012 Airline Industry Revenue reached $636 Billion. North America is the industry's revenue leader, generating about 44.3% of industry revenue. United, Delta, and American are the market leaders based on revenue In 2012, Uniteds net income was $589M and Delta earned $854M, while American lost $1.87 Billion. Alaska Air earned $245M, Southwest $417M, US Airways $637M and Jet Blue earned $376M. Business travel represents 35% of airlines revenue From 2000 – 2010, US Airlines improved their on- time arrivals from 72.6% to 79.8%. From 2000 – 2010, airlines reduced greenhouse gas emissions by 10%, while transporting 15% more passengers and cargo. Federal taxes constitutes $61 or 20% of a typical $300 domestic round trip ticket. In 2013, Airfare Average Ticket Prices are expected to be: Up 2-4% in the US Up 1-3% in Europe Up -1 to 4 % in Asia-Pacific (5-10% in India) Up 5-10% in Latin America Up 2-4% in Africa Up 2-4% in Middle East Key Points Source: Airlines for America: airlines.org, Airline Financials.com, IATA, Wikipedia 2012 Global Airline Industry Revenue reached $636 Billion. North America is the industry's revenue leader, generating about 44.3% of industry revenue. SAMPLE

13 The PPI (measures average change in prices over time) for passenger air transportation. For 2012 the average amounted to 285.0 which represents a gain of 9.5% from 2011. Airline Industry: PPI (Producer Price Index) – Scheduled Passenger Air Transportation NAICS 481111 February– Mary 2013 Preliminary. All indexes are subject to revision four months after original publication. Source: http://www.bls.gov/ppi/ 2013 Data

14 Page: 13 Airline Industry: Cost Drivers Source: www.rajcoaviation.com 2012 Cost Drivers Key Points The top three cost drivers for ninety five percent of the worlds airlines, are: fuel, personnel and the cost of aircraft, which together account for an average of 64.3% of an airlines total cost structure. Dependence on oil production, labor agreements and a duopoly in aircraft manufacturing prevent airlines from having any substantive impact on these cost drivers. With revenues fixed by competitive ticket pricing and the majority of their costs out of their control, airlines are challenged to maintain earnings and gain competitive advantage by controlling less than 35% of their cost structure. Top 3 Drivers Account For 64.3% of Total Airline Costs. SAMPLE

15 Page: 14 Airline Industry: Jet Fuel Costs Historically jet fuel expenses have ranged between 10% and 15% of U.S passenger airline operating costs, but in 2008 the cost of fuel was between 30% – 40% of total operating expenses for most carriers. For 2012, average price of jet fuel was $129.60 per barrel. The most reasonable explanation for such high prices is tight supply and counteracting the weak economic conditions In 2008 and now in 2013, every dollar increase per barrel (42 gallons) drove an additional $448M in fuel expenses to carriers bottom lines From 2000 – 2010, US airlines carried 15% more traffic while using 2.1 Billion fewer gallons of fuel. In 2011, US passenger and cargo airlines spent $50.5 Billion on fuel, up $11.7 Billion from 2010. For 2013 jet fuel prices averaging $124.60 per barrel Increasing Jet Fuel Costs Key Points Sources: Airlines for America: www.airlines.org, www.bts.gov, www.iata.orgwww.airlines.orgwww.bts.gov Fuel is one of the largest cost contributor to airlines operating costs. SAMPLE

16 Page: 15 Airline Industry: Air Travel Price Index Sources: Bureau of Transportation Statistics, AMEX 2013 Forecast, CWT 2013 Forecast, Advitos 2013 Forecast, Airlines for America: www.airlines.org Air Travel Price Index for Chicago 1 Key Points 1 The air travel price index measures the percents change over time in prices paid by travelers. The cost of air flying into Chicago – OHare has been consistent with the U.S. average while Chicago – Midway has been consistently lower than the U.S. average. In 2013, Airfare Average Ticket Prices are expected to be: Up 2-4% in the US Up 1-3% in Europe Up -1 to 4 % in Asia-Pacific (5-10% in India) Up 5-10% in Latin America Up 2-4% in Africa Up 2-4% in Middle East Airlines found several ways to grow revenue without raising fares – a la carte pricing: from charging for select coach seat assignments, boarding after elite status members, baggage fees and fuel surcharges and possibly using restrooms! In 2011, US airlines posted the lowest annual rate of mishandled baggage ever recorded. In 2012, the airline industry earned approx. $36.1 billion in additional ancillary fees, an increase of 11.3% from 2011 The cost of air travel have been very volatile over the past several years. The cost of airfare flying into Chicago – OHare has been consistent with the U.S. average while Chicago – Midway has been consistently lower than the U. S. average. SAMPLE

17 Page: 16 Airline Industry: Baggage Fees SAMPLE Source: www.bts.gov

18 Page: 17 Airline Industry: Cancellation/Change Fees SAMPLE Source: www.bts.gov

19 Page: 18 Airline Industry: Price of Air Travel versus Other Goods & Services Sources: Airlines for America: www.airlines.org Price of Air Travel Versus Other Goods and Services Shown in their original values, facilitating comparisons with other goods & services versus the price of air travel and with movements in the U.S. Consumer Price Index (CPI). CPI is defined as a measure that examines the weighted average of prices of a basket of consumer goods and services. SAMPLE

20 Page: 19 Hotel Industry: Overview 2012 Global Hotel Industry Revenue reached $580 Billion. The US Hotel Industry Revenue reached $128 Billion in 2012 In 2013 global hotel revenues are estimated to grow 2.2 % to $592.6 billion. Over the five years to 2017, revenue is projected to increase at an average annual rate of 2.3% to $650.9 billion. This will result from growth in business and pleasure travel, and rising room rates. In 2013, US industry revenue is expected to increase 3.5% to $127.8 billion. Global industry profit is estimated to account for 10.8% of total industry revenue in 2012, up from an estimated 6.5% in 2009, and similar to pre-2008 levels. US industry profits in 2013 are expected to be 9%. Smith Travel Research is projecting increases in all three key performance metrics during 2013: Occupancy is expected to rise 0.8% to 61.9%, Average Daily Rate (ADR) will increase 4.6% to $111.27 and Revenue Per Available Room (RevPAR) is expected to grow 5.7% to $68.86. Major US market segmentation: 28% transient business travelers and 25% conference travelers. Key Points Source: www.IBISWorld.com, Smith Travel Researchwww.IBISWorld.com 2012 Global Hotel Industry Revenue reached $580 Billion. The US Hotel Industry Revenue reached $128 Billion in 2012. SAMPLE

21 Page: 20 Hotel Industry: Chains / Brands The majority of the global branded properties and revenue are mostly located in North American Major revenue for global chains (such as Marriott, Hilton, etc) is from franchise and management fees. Business travelers, including executives, are shifting from luxury hotels to more moderate mid-priced hotels Hotel taxes, usually a combination of sales and occupancy taxes along with the occasional flat fee, range from 10% to more than 18%. Hotel costs represent the single largest component of non-air expenses, about 43% of the travel dollar Key Points Source: PWC Hospitality Directions, Smith Travel Research, CWT Hotel Solutions, Business Travel News, IBISWorld The majority of the global branded properties and revenue are mostly located in North America, SAMPLE Brands by Service Level

22 Hotel Chain Scales Chain ScaleBrand Name Luxury Upper Upscale Upscale Midscale Economy Ex-Upscale Ex-Midscale Ex-Economy For Domestic Hotel Bookings (2012) : Total Tracked Spend: $XXM 46% of spend in Upper Upscale. Average Nightly Rate: $XXX 21% of spend in Upscale. Average Nightly Rate: $XXX

23 The PPI for hotel rooms have fluctuated during 2012 due to pressures from both buyers and sellers. The 2012 average ended at 131.4 indicating rates are raising. Hotel Industry: PPI – Hotels & Motels, Guestroom Rentals Source: http://www.bls.gov/ppi/ NAICS 721110.1 February – May Preliminary. All indexes are subject to revision four months after original publication. 2013 Data

24 Page: 23 Hotel Industry: Cost Drivers Source: www.IBISWorld.com Operating Cost Drivers Over 80% of costs in the hotel industry is distributed among four categories: (1) administrative overhead, (2) labor, (3) repairs and maintenance, and (4) food and beverage. SAMPLE

25 Hotel Industry: 2013 Expected Changes in Room Rates Expected Changes in Hotel Prices

26 Page: 25 Car Rental Industry: Overview Global industry spend is $30.5 Billion of which 34% is business travel The industry is segmented by business travelers, leisure travelers, car leasing and car sharing Leisure market has grown larger than corporate business market Industry revenue is forecasted to increase 2% for the next 5 years High fuel cost is impacting industry as customers, especially leisure travelers, are finding other alternatives (public transportation) Hertz and Avis expanding off-airport locations to compete with Enterprise Car rental industry adjusted to global recession better than other travel industry categories. They can right size fleet to meet demand by disposing vehicles quickly and reduce costs. Key Points Source: IBISWORLD, Auto Rental News, Business Travel News Global industry spend is $30.5 billion of which 34% is business travel SAMPLE

27 Rental Car Industry: PPI – Passenger Car Rental NAICS 532111 February – May 2013 Preliminary. All indexes are subject to revision four months after original publication. Source: http://www.bls.gov/ppi/ The PPI for passenger car rentals has gone up 22% from 2005 to 2008 indicating increased fleet and fuel cost. In 2008 and 2009, prices have slightly increased and in 2011 and 2012 prices dropped significantly. 2013 Data

28 US Car Rental Industry - Segmentation Leisure car rentals have been making up a larger portion of industry revenue over the last few years, largely in response the sizeable drop in business travel, which happened as a result of the economic downturn. Car leasing involves paying an up- front lease fee plus fixed monthly payments in return for taking possession of and operating a car for 12 months or more. This industry does not include cars leased to purchase or leased to own. The off-airport market, sometimes called the local market, includes car sharing; insurance replacement, and leisure and business rentals independent of the airport market. Page: 27 Key Findings

29 Page: 28 Car Rental Industry: Market Share After Hertzs purchase of Dollar Thrifty, the top three rental car companies will make up 95% of the total on-airport US car rental industry revenues Suppliers offer different brands that focus on specialized markets: Corporate Traveler – On-airport convenience – Hertz, Avis and National Leisure Market – On/Off-airport Budget, Dollar Thrifty, and Enterprise Additional Non-US regional players include: Europcar (Europe and Asia Pacific) Sixt (Germany and EMEA) In high risk countries such as India, China, Thailand, Latin America, etc. the business model is to rent a car with driver. Cost is less than a chauffer / limo as a typical rental vehicle is used In the past 4 years, major car rental companies trimmed fleets from a total of about 2 million cars to about 1.3 million Car rental companies have implemented a variety of new ancillary fees to help preserve some of the lost revenue in recent times, such as tacking on fees to extend a reservation, eliminating 60 minute grace period, or increasing the cost of a two-day rental Virtual rental technology – enables customers to reserve, rent, access and return cars just about anywhere. ZipCar, WeCar, Connect. It is forecasted that that base rates will decline on average between -1.5% to -2% for business travel rental cars in the U.S. next year. However, ADR will increase by 1% to 2%, due to slight increases in ancillary fees, taxes, other fees, vehicle license fees (VLFs), and energy recovery fees. Key Points Source: www.autorentalnews.com, Business Travel News Corporate Travel Index 2012www.autorentalnews.com The U.S. car rental market is highly consolidated among a small number of major players and is getting smaller. SAMPLE Top 4 Car Rental Companies By Revenue

30 Page: 29 Car Rental Industry: Cost Drivers Source : www.ibisworld.com, Auto Rental Newswww.ibisworld.com Operating Cost Drivers Key Findings The industry have slowly recovered as the demand for air travel, which is the industrys primary revenue source, started to increase as of 2010: Profit margins turned positive again in 2010, growing to 3.5% in 2012. It is estimated that in 2012 the industry grew 5.6% and reached a revenue level of $33.7 billion. In 2013, industry revenue is expected to grow 3% to $34.7 billion. Car rental companies are forecast to purchase more new cars in 2013 for two reasons. The anticipated increase in the number of rental customers will force companies to field a larger rental fleet. Companies will likely replace older cars with new cars after letting the average age of their fleets rise to save money. Although the industrys future looks brighter, rising gas prices may slow the recovery. As such, revenue is forecast to grow at an annualized rate of 2.8% from 2012 to 2017 to $38.6 billion. Over 90% of costs in the car rental industry is distributed among four categories: (1) Purchases, (2) Other, (3) Depreciation, and (4) Wages. SAMPLE

31 Travel Management Industry: Overview The top 50 travel management companies represent over $160 billion in sales revenue in 2011. Five companies registered more than $20 billion in sales, including a snowballing Priceline, which showed significant increases each year. There were 16 listees with sales of more than $1 billion, up from 14 last year. Expedia, Orbitz, Priceline, AAA Travel, and Travelong receive 90% or more sales revenue from the leisure market. Many of the listees registered surges in year-over-year sales, a couple by acquisitions but most by generating additional revenue from existing clients or winning new clients. AMEX regained top stop over Expedia in 2011 by a slim margin. It was just announced that BCD was purchasing Travelocity 2011 Top 5 (over $1B in revenue) Travel Management Cos By Revenues Key Points Source: www.travelweekly.com Travel Weekly Power List 2012, www.bts.govwww.travelweekly.com The Top 50 travel management companies represent over $155 billion in sale revenue

32 The PPI for travel agencies has gone down 13% since its high in 2001 (due to 9/11 and the commencement of the on-line booking tool), but has risen since and has hit its 2007 high once again.. TMC Industry: PPI – Travel Agencies NAICS 561510 February– May 2013 Preliminary. All indexes are subject to revision four months after original publication. Source: http://www.bls.gov/ppi/ 2013 Data

33 Page: 32 Advitos 2013 Forecast Airlines for America, www.airlines.orgwww.airlines.org AirlineFinancials.om AMEX Business Travel 2013 Forecast and Trends ATWOnline, www.atwonline.comwww.atwonline.com Auto Rental News Bureau of Labor Statistics, www.bls.govwww.bls.gov Bureau of Transportation Statistics, www.bts.govwww.bts.gov Business Travel News CWT Hotel Solutions CWT 2013 Forecast Egencia 2013 Forecast Forbes, www.forbes.comwww.forbes.com Hoovers Online, www.hoovers.comwww.hoovers.com IATA (International Air Transport Association) & World Air Transport Statistics (WATS 2006) www.ibisworld.com Global Business Travel Association, www.gbta.orgwww.gbta.org OneSource Inc., www.onesource.comwww.onesource.com Power List 2012, www.travelweekly.comwww.travelweekly.com Pwc Hospitality Directions Rajcoaviation.com Smith Travel Research Data The Transnational.travel Travel Daily News, www.traveldailynews.comwww.traveldailynews.com Travel Procurement Travel Weekly, www.travelweekly.comwww.travelweekly.com Wikipedia Wikiinvest Appendix: Data Sources SAMPLE

34 Page: 33 Strategic Sourcing Process Overview Profile Category Internally & Externally Create Selection Factors & Evaluate Suppliers Negotiate & Develop Sourcing Recommen- dation Implement Agreements Strategic Sourcing Methodology Activities Deliverables or Tools Develop Sourcing Objectives Sourcing Strategy Plan: Competitive Supplier Selection or Existing Supplier Development Develop Sourcing Strategy Conduct Competitive Exercise w/ Approved Suppliers Develop Sourcing Strategies & Tactics ANALYSISSTRATEGY SUPPLIER SELECTION IMPLEMENTATION Assess Opportunity & Establish Team

35 Page: 34 Sourcing Strategies & Tactics Several sourcing strategies can be pursued, either separately or together. Possible Sourcing Strategies Best Price Analysis Volume Leveraging Strategic Relationship Process Improvement Demand Management Commodity Sourcing Strategy STRATEGIC RELATIONSHIP Establish integrated or close relationships with suppliers where both buyer and supplier work together to share information, collaborate, and further each partners goals STRATEGIC RELATIONSHIP Establish integrated or close relationships with suppliers where both buyer and supplier work together to share information, collaborate, and further each partners goals PROCESS IMPROVEMENT Identify opportunities to standardize and streamline business processes that will result in improved quality, reduced cycle times, and lower total cost of ownership PROCESS IMPROVEMENT Identify opportunities to standardize and streamline business processes that will result in improved quality, reduced cycle times, and lower total cost of ownership BEST PRICE ANALYSIS Evaluate and model all costs and use negotiation tactics that increase transparency and maximize competition BEST PRICE ANALYSIS Evaluate and model all costs and use negotiation tactics that increase transparency and maximize competition DEMAND MANAGEMENT Address factors such as standards, requirements, and policies to reduce costs related to internal demand DEMAND MANAGEMENT Address factors such as standards, requirements, and policies to reduce costs related to internal demand VOLUME CONCENTRATION Aggregate like goods and/or services across organizational units in order to increase negotiation leverage and negotiate better pricing, and terms and conditions VOLUME CONCENTRATION Aggregate like goods and/or services across organizational units in order to increase negotiation leverage and negotiate better pricing, and terms and conditions

36 Page: 35 Strategy Considerations Company should examine current travel policies. Enforcement of on-line booking tool, advance booking, preferred hotels and other travel guidelines will result in significant savings. Because of the relative small air travel spend compared to other companies, in addition to moving corporate headquarters to Dallas while still maintaining their Detroit area locations, Company should consider focusing hard dollar airline discounts with one or two major carriers supporting both markets. Furthermore, Company should consider exploring additional benefits for their secondary markets Company should re-examine their current preferred hotel program and consolidate markets and room nights to leverage buying power Company should leverage hotel spend for meetings/events in negotiating hotel rates for transient travel Preferred car rental utilization is best in class, therefore consider a competitive bid to leverage utilization Company may consider utilizing teleconferencing as an alternative to reduce their overall travel usage SAMPLE

37 Page: 36 Sourcing Strategy: Airlines Current State Travel policies located in Accounts Payable Expenditure Manual – No enforcement All departments using one travel agency, however suspect that some Southwest bookings are going directly to Southwest.com Travel compliance is not be monitored Recently moved corporate headquarters from Detroit, MI to Dallas, TX Top 3 airline spend: Northwest, American and Southwest Current contract with Northwest only (no discount in Tier 3 and high market share commitment) 70% of air spend in Tier 3 Some international air spend – about 15% Sourcing Recommendation Create separate travel policy with management enforcement Enter into negotiations with Northwest (current contracted supplier) and American Airlines. In addition, pursue possible corporate deal with Southwest Airlines. Stimulate competition between Northwest and American Airlines in multi-hub city pairs Stimulate competition between Northwest and American Airlines for international air spend Negotiate with Southwest and determine if market share can support a formal corporate agreement Market dynamics suggest a 2 year contract Results Separate travel policy resulting in improved compliance Discount in Tier 3 level pricing Capture all Southwest spend SAMPLE

38 Page: 37 Sourcing Strategy: Hotels Current State Travel policies located in Accounts Payable Expenditure Manual – No enforcement All departments using one travel agency, however suspect that some hotel bookings are being booked directly with hotel Travel Agency manages and negotiates hotel program Large number of properties are being utilized in top city markets (e.g. 75 hotels were utilized in the Detroit (and surrounding) area in the last 12 months) Cities are classified as Room Nights per City: Tier 1 (approx. 200+ Nights): 45% of hotel spend in 12 market areas Tier 2 (<200 Nights): 55% of hotel spend in the rest of the market area Sourcing Recommendation Create separate travel policy and enforcement of policy Tier 1: Issue a Request for Proposal to the existing supply base as well as comparable properties in defined geographies. Consolidate volume to increase bargaining power Minimize number of options available in each geography Pursue value-added amenities at no additional cost Tier 2: Utilize Travel Agency rates and drive volume to those properties with the lowest rates Results Separate travel policy and enforcement which will result in improved compliance Competitive room rates in preferred cities Strategically selected properties by geography which will increase preferred property usage SAMPLE

39 Page: 38 Sourcing Strategy: Car Rentals Current State Travel policies located in Accounts Payable Expenditure Manual – No enforcement All departments using one travel agency for booking car rentals, however some spend is being booked via another source 97% of the car rental spend is with one preferred supplier Over 75% of car rental returns are subject to refueling charges The top 15 cities, by volume, represent 78% of the rental car spend Sourcing Recommendation Develop and implement one travel policy for all departments Issue a Request for Proposal to the top 5 rental car companies Consolidate volume from all sources to increase bargaining power Request pricing for one primary and one primary and one secondary supplier relationship Negotiate refueling charges, if possible Negotiate city surcharges for the top 15 cities, by volume Market dynamics suggest a 2 year contract with the option for a 1 year extension Results One travel policy for all departments resulting in capturing the non-compliance that is being done Award contract to one primary or one primary and one secondary supplier, whichever is more advantageous SAMPLE

40 Page: 39 Savings Opportunity Proposed StrategyExpected Outcome Volume Concentration Consolidate all OpCo car rental spend. Leveraging buying power across all OpCos to maximize savings. Primary and Secondary Considerations Pricing exercise to include using one primary vendor only or having one primary and one secondary vendor for car rentals. Award business to one primary only, or one primary and one secondary vendor, whichever is more advantageous. Service Consolidations Increase total spend to include cargo van/truck rental business to leverage buying power with Enterprise and Budget. Enterprise to acknowledge additional spend with cargo van/truck business which could help achieve additional savings. Show Budget total spend across their business units to obtain best pricing. Additional Concessions Ask for additional concessions, including higher rebate, lower city surcharges, lower refueling charges, lower one-way and weekly rentals, and lower GPS rental fee. Better rebate terms, possible lower city surcharges, and flat rate refueling charge which amounts to additional savings. Demand Management – Global Policy Develop a global travel policy for all OpCos to follow. Consistency across all OpCos leads to demand management savings. Demand Management – Enforcement Mechanism Empower Global Travel Department to enforce global travel policy with key OpCo team members. Demand management savings in all areas, airline, hotel and car rental. Demand Management – Class of Service Standardization Standardize car rental class of service to intermediate size car only. Average daily car rental rate to decrease, providing incremental cost savings to the program. Category Strategy Deliverable Perform pricing exercise to include primary and primary/secondary considerations, include cargo van/truck rental spend and negotiate additional concessions such as better rebate terms, lower city surcharges and flat rate refueling charge. SAMPLE

41 Page: 40 Strategic Sourcing Process Overview Profile Category Internally & Externally Create Selection Factors & Evaluate Suppliers Negotiate & Develop Sourcing Recommen- dation Implement Agreements Strategic Sourcing Methodology Activities Deliverables or Tools Conduct Supplier Analysis Create Supplier Selection Criteria Supplier Selection Decision Matrix RFIs (optional) Short List of Suppliers Develop Sourcing Strategy Conduct Competitive Exercise w/ Approved Suppliers ANALYSISSTRATEGY SUPPLIER SELECTION IMPLEMENTATION Assess Opportunity & Establish Team

42 Page: 41 Car Rental Scorecard SAMPLE

43 Page: 42 Strategic Sourcing Process Overview Profile Category Internally & Externally Create Selection Factors & Evaluate Suppliers Negotiate & Develop Sourcing Recommen- dation Implement Agreements Strategic Sourcing Methodology Activities Deliverables or Tools Complete Traditional RFP Process RFPs / RFQs eAuctions Collaborative Discussions Conduct eAuction(s) Collaborate w/ Incumbent Supplier(s) - AND/OR - Develop Sourcing Strategy Conduct Competitive Exercise w/ Approved Suppliers ANALYSISSTRATEGY SUPPLIER SELECTION IMPLEMENTATION Assess Opportunity & Establish Team

44 Page: 43 Supplier Engagement Options There are many ways to initially exchange information. While RFPs are often appropriate, they are one of many means of engaging suppliers. Pre-Negotiation Information Exchange Direct Negotiations with an Incumbent Supplier Direct Negotiations with a Target Supplier Brainstorm with a Group of Trusted Suppliers On-Line Auctions RFPs / RFQs Should choose the method(s) that best meets both the Strategic Sourcing objective and the team resource capacity

45 Page: 44 Strategic Sourcing Process Overview Profile Category Internally & Externally Create Selection Factors & Evaluate Suppliers Negotiate & Develop Sourcing Recommen- dation Implement Agreements Strategic Sourcing Methodology Activities Deliverables or Tools Prepare Fact- Based Negotiation Packages Negotiate Agreements Fact-Based Negotiation Packages Supplier Negotiations Presentation Sourcing Recommendation Develop Sourcing Strategy Conduct Competitive Exercise w/ Approved Suppliers ANALYSISSTRATEGY SUPPLIER SELECTION IMPLEMENTATION Assess Opportunity & Establish Team

46 Page: 45 Negotiations Approach – Discussion Points Based on a review of Companys current program, contract terms, and stakeholder requirements, the following improvement areas have been identified to maximize the annual incentive rebate. Negotiation PointDescriptionSupplier Pricing, Incentive Rebate Structure Size down the gap between rebate tiers to reduce the risk associated with dropping to a lower tier. Closing the gap between tiers will inset Company to drive more spend to Amex. Ensure incentive BPS earned at each tier are best in class for domestic and non- domestic spend. ABC Pricing, Signing BonusReduce/eliminate minimum signing bonus *NACV thresholds (claw back clause) to avoid refunding any portion of the $1M signing bonus paid to Company in 2008. Take a position which suggest Company is doing Amex a favor by offering them other potential business. ABC should fight to keep this business considering transition cost will be minimal for them, thus their margin will not be adversely be effected. ABC Pricing, Performance Bonus Establish a realistic performance target based on the post spin *NACV, the current (pre spin) performance target is too aggressive. Maximize the annual performance bonus. ABC Pricing, DeductionsMinimize consulting assessment expenses (hourly rate) and Membership Reward (MR) fees which are deducted directly from the incentive rebate. Negotiate an annual credit which can be applied to consulting and MR expenses. ABC Pricing, High ROC Transactions Reduce the 50 BSP reduction on P-card transactions > $10K (Hi-ROC volume). Negotiate a buffer which can be applied to the Hi-ROC volume, i.e. request that the BSP penalty apply only to Hi-ROC volume which exceeds a specified amount. ABC *NACV – Net Annual Charge Volume (i.e. annual spend with Amex) SAMPLE

47 Page: 46 Negotiations Approach – Projected Targets Below are the projected results should Company be successful in driving ABC to the negotiation points proposed. Total Savings is projected to be approximately $300-$600K. SAMPLE Expected Benefits StrategyTypeSavings ($)LAS / BATNAKey Enablers Incentive Rebate Structure – fine tune the incentive BSP tiers to maximize the rebate received post spin-off. Financial$200-$400KFocus on sizing down the gap between rebate tires. Put business out to bid Stakeholder buy-in Executive sponsorship Procurement Support Performance & Signing Bonus – adjust bonus targets to align with the post spin-off spend portfolio. The current targets are far to aggressive. Financial$100-$150KConcede to a reduction in the performance bonus if the target is simultaneously reduced Mandate a reduction in minimum thresholds for signing bonus retention Stakeholder buy-in Executive sponsorship Procurement Support Deductions – reduce the expense subtracted from the *NACV and deductions from the base incentive rebate. Financial$0-$50KFocus on improving the rebate earned on High- ROC volume Dedicate a resource to handle ad-hoc assessment activities Stakeholder buy-in Executive sponsorship Procurement Support Total$300-$600K *NACV – Net Annual Charge Volume (i.e. annual spend with Amex) SAMPLE

48 Page: 47 Strategic Sourcing Process Overview Profile Category Internally & Externally Create Selection Factors & Evaluate Suppliers Negotiate & Develop Sourcing Recommen- dation Implement Agreements Strategic Sourcing Methodology Activities Deliverables or Tools Validate Internal Requirements & Profile Category Conduct Industry Analysis Internal Category Profile TCO Model Cost Reduction Ideas Industry Profile Build TCO Model Develop Sourcing Objectives Sourcing Strategy Plan: Competitive Supplier Selection or Existing Supplier Development Conduct Supplier Analysis Create Supplier Selection Criteria Supplier Selection Decision Matrix RFIs (optional) Short List of Suppliers Complete Traditional RFP Process RFPs / RFQs eAuctions Collaborative Discussions Conduct eAuction(s) Collaborate w/ Incumbent Supplier(s) - AND/OR - Prepare Fact- Based Negotiation Packages Negotiate Agreements Fact-Based Negotiation Packages Supplier Negotiations Presentation Sourcing Recommendation Finalized Agreements Benefits Realization Continual Supplier Improvement Implement Agreements and Monitor KPIs Evaluate Performance and Develop Suppliers Develop Sourcing Strategy Conduct Competitive Exercise w/ Approved Suppliers Fast Track for Quick Savings Develop Sourcing Strategies & Tactics ANALYSISSTRATEGY SUPPLIER SELECTION IMPLEMENTATION Assess Opportunity & Establish Team Assess Opportunity Obtain Sponsorship & ID Team Create Project Plan Project Plan Analyze Current Spend Document Requirements

49 Page: 48 Implementation Plan Overview An effective implementation plan consists of several key components necessary to ensure rapid and complete benefits realization from the new supply arrangement(s), and to follow through on agreed to parameters during contract negotiations. Plan ComponentDescription Transition Plan Shift from old supply agreements to new ones. May or may not involve switching suppliers. Communication Plan Inform the user community of the outcome of the strategic sourcing effort. Specify to users how they are impacted and what actions they are required to take as a result of the strategic sourcing effort. Highlight all benefits that users may derive from the new supply arrangements. Compliance Plan Determine how compliance to new supply arrangements will be enforced (if possible). Closely linked to the Communication Plan. Benefits Tracking & Reporting Plan Measure benefits resulting from new supply arrangements relative to targets Report to senior management on both status and any necessary actions required to improve benefits realization. Performance Management Plan Ensure that suppliers are performing along key metrics as required by the contract. Put in place a regular communication vehicle with suppliers to drive improvements in supplier performance. – Overview of Implementation Plan Components – SAMPLE


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