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Global Procurement Processes

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Presentation on theme: "Global Procurement Processes"— Presentation transcript:

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

1 Global Procurement Processes
Day-to-Day Purchasing 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 Supplier Relationship Management Process Define Supplier Evaluation Criteria Collect Data Conduct Performance Evaluation Develop Improvement Strategy Continuous Improvement Core Supporting Capabilities Supplier Scorecard Savings Management Spend Analysis Knowledge Management Contract Management Catalog Management

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

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

4 High Level Travel Project Plan
SAMPLE High Level Travel Project Plan Travel Workplan Review April May June July August September Mobilization & Kick-Off Category Profile Internally & Externally Develop Strategy Screen Suppliers & Selection Factors Conduct Competitive Exercise Negotiate & Develop Sourcing Recommendation Implement Agreement Tony

5 Travel Category Opportunity
SAMPLE Travel Category Opportunity Confirmation of Sourceable Spend Sourcing Group Category Sub-Category Addressable Spend % Addressable Sourceable Spend Est. Mid Saving % Est. Mid Savings $ Travel Airline $6,000,000 100% $5,500,000 3% $165,000 Car Rental $1,000,000 $925,000 5% $46,250 Hotel $4,500,000 $4,400,000 $220,000 Agency - Agency Fees $170,000 $0 0% Demand Management (Compliance) N/A $700,000 Category Opportunity Baseline – Travel SAMPLE Key Travel Contracts and Expiration Dates Preliminary 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

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

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

8 Industry Profile - Objective & Key Questions
SAMPLE 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 Comerica’s 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?

9 SAMPLE Travel Scope The travel industry encompasses a variety of different categories each grouped with an NAICS (North American Industry Classification System) code. In Scope NAICS 481 – Transportation by Air 4811 – Scheduled Air Transportation – Scheduled Passenger Air Transportation NAICS 721 – Accommodation 7211 – Traveler Accommodation – Hotels and Motels Guestroom Rental NAICS 5321 – Automotive Equipment Rental 53211 – Passenger Car Rental and Leasing – Passenger Car Rental (for business travel) NAICS 561 – Administrative and Support Services 5615 – Travel Arrangement and Reservation Services – Travel Agencies (including Meetings & Events) Key Points 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. Source:

10 AIRLINE INDUSTRY – US Airline Mergers
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. 2012 US Airlines Shares Delta % United % Southwest % American % US Airways % JetBlue % Alaska % AirTran Corporation % SkyWest % ExpressJet % Other % Source: Office of Inspector General, AVIATION INDUSTRY PERFORMANCE, A Review of the Aviation Industry, 2008–2011, Number: CC , Date Issued: September 24, 2012 RITA, Bureau of Transportation Statistics BOEING PROPRIETARY

11 Airline Industry: Overview
SAMPLE 2012 Global Airline Industry Revenue reached $636 Billion. North America is the industry's revenue leader, generating about 44.3% of industry revenue. Key Points 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, United’s 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 airline’s 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 Source: Airlines for America: airlines.org, Airline Financials.com, IATA, Wikipedia

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

13 Airline Industry: Cost Drivers
SAMPLE Top 3 Drivers Account For 64.3% of Total Airline Costs. 2012 Cost Drivers Key Points The top three cost drivers for ninety five percent of the world’s airlines, are: fuel, personnel and the cost of aircraft, which together account for an average of 64.3% of an airline’s 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. Source:

14 Airline Industry: Jet Fuel Costs
SAMPLE Fuel is one of the largest cost contributor to airlines’ operating costs. Increasing Jet Fuel Costs Key Points 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 $ 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 $ per barrel Sources: Airlines for America:

15 Airline Industry: Air Travel Price Index
SAMPLE The cost of air travel have been very volatile over the past several years. The cost of airfare flying into Chicago – O’Hare has been consistent with the U.S. average while Chicago – Midway has been consistently lower than the U. S. average. Air Travel Price Index for Chicago1 Key Points The cost of air flying into Chicago – O’Hare 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 1 The air travel price index measures the percents change over time in prices paid by travelers. Sources: Bureau of Transportation Statistics, AMEX 2013 Forecast, CWT 2013 Forecast, Advito’s 2013 Forecast, Airlines for America:

16 Airline Industry: Baggage Fees
SAMPLE Source:

17 Airline Industry: Cancellation/Change Fees
SAMPLE Source:

18 Airline Industry: Price of Air Travel versus Other Goods & Services
SAMPLE 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. Price of Air Travel Versus Other Goods and Services Sources: Airlines for America:

19 Hotel Industry: Overview
SAMPLE 2012 Global Hotel Industry Revenue reached $580 Billion. The US Hotel Industry Revenue reached $128 Billion in 2012. Key Points 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 $ 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. Source: Smith Travel Research

20 Hotel Industry: Chains / Brands
SAMPLE The majority of the global branded properties and revenue are mostly located in North America, Key Points 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 Brands by Service Level Source: PWC Hospitality Directions, Smith Travel Research, CWT Hotel Solutions, Business Travel News, IBISWorld

21 Hotel Chain Scales Chain Scale Brand 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

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

23 Operating Cost Drivers
Hotel Industry: Cost Drivers SAMPLE 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. Operating Cost Drivers Source:

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

25 Car Rental Industry: Overview
SAMPLE Global industry spend is $30.5 billion of which 34% is business travel Key Points 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. Source: IBISWORLD, Auto Rental News, Business Travel News

26 Rental Car Industry: PPI – Passenger Car Rental
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 NAICS February – May 2013 Preliminary. All indexes are subject to revision four months after original publication. Source:

27 US Car Rental Industry - Segmentation
Key Findings 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.

28 Car Rental Industry: Market Share
SAMPLE The U.S. car rental market is highly consolidated among a small number of major players and is getting smaller. Top 4 Car Rental Companies By Revenue Key Points After Hertz’s 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. Source: Business Travel News Corporate Travel Index 2012

29 Operating Cost Drivers
Car Rental Industry: Cost Drivers SAMPLE Over 90% of costs in the car rental industry is distributed among four categories: (1) Purchases, (2) Other, (3) Depreciation, and (4) Wages. Operating Cost Drivers Key Findings The industry have slowly recovered as the demand for air travel, which is the industry’s 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 industry’s 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. Source: Auto Rental News

30 Travel Management Industry: Overview
The Top 50 travel management companies represent over $155 billion in sale revenue 2011 Top 5 (over $1B in revenue) Travel Management Co’s By Revenues Key Points 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 Source: Travel Weekly Power List 2012,

31 TMC Industry: PPI – Travel Agencies
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.. 2013 Data NAICS February– May 2013 Preliminary. All indexes are subject to revision four months after original publication. Source:

32 Appendix: Data Sources
SAMPLE Advito’s 2013 Forecast Airlines for America, AirlineFinancials.om AMEX Business Travel 2013 Forecast and Trends ATWOnline, Auto Rental News Bureau of Labor Statistics, Bureau of Transportation Statistics, Business Travel News CWT Hotel Solutions CWT 2013 Forecast Egencia 2013 Forecast Forbes, Hoovers Online, IATA (International Air Transport Association) & World Air Transport Statistics (WATS 2006) Global Business Travel Association, OneSource Inc., Power List 2012, Pwc Hospitality Directions Rajcoaviation.com Smith Travel Research Data The Transnational.travel Travel Daily News, Travel Procurement Travel Weekly, Wikipedia Wikiinvest

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

34 Sourcing Strategies & Tactics
Several sourcing strategies can be pursued, either separately or together. — Possible Sourcing Strategies — STRATEGIC RELATIONSHIP Establish integrated or close relationships with suppliers where both buyer and supplier work together to share information, collaborate, and further each partner’s goals BEST PRICE ANALYSIS Evaluate and model all costs and use negotiation tactics that increase transparency and maximize competition Best Price Analysis Volume Leveraging Strategic Relationship Process Improvement Demand Management Commodity Sourcing Strategy DEMAND MANAGEMENT Address factors such as standards, requirements, and policies to reduce costs related to internal demand 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 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

35 Strategy Considerations
SAMPLE 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

36 Sourcing Strategy: Airlines
SAMPLE 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

37 Sourcing Strategy: Hotels
SAMPLE 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 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

38 Sourcing Strategy: Car Rentals
SAMPLE 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

39 Category Strategy Deliverable
SAMPLE 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. Savings Opportunity Proposed Strategy Expected Outcome Volume Concentration Consolidate all OpCo car rental spend. Leveraging buying power across all OpCo’s 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 OpCo’s to follow. Consistency across all OpCo’s 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. 39

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

41 SAMPLE Car Rental Scorecard

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

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. Direct Negotiations with an Incumbent Supplier Direct Negotiations with a Target Supplier Brainstorm with a Group of Trusted Suppliers Pre-Negotiation Information Exchange RFPs / RFQs On-Line Auctions Should choose the method(s) that best meets both the Strategic Sourcing objective and the team resource capacity

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

45 Negotiations Approach – Discussion Points
SAMPLE Based on a review of Company’s current program, contract terms, and stakeholder requirements, the following improvement areas have been identified to maximize the annual incentive rebate. Negotiation Point Description Supplier 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 Bonus Reduce/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. 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. Pricing, Deductions Minimize 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. 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. *NACV – Net Annual Charge Volume (i.e. annual spend with Amex)

46 Negotiations Approach – Projected Targets
SAMPLE 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-$600K. SAMPLE Expected Benefits Strategy Type Savings ($) LAS / BATNA Key Enablers Incentive Rebate Structure – fine tune the incentive BSP tiers to maximize the rebate received post spin-off. Financial $200-$400K Focus 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. $100-$150K Concede to a reduction in the performance bonus if the target is simultaneously reduced Mandate a reduction in minimum thresholds for signing bonus retention Deductions – reduce the expense subtracted from the *NACV and deductions from the base incentive rebate. $0-$50K Focus on improving the rebate earned on High-ROC volume Dedicate a resource to handle ad-hoc assessment activities Total $300-$600K *NACV – Net Annual Charge Volume (i.e. annual spend with Amex)

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

48 Implementation Plan Overview
SAMPLE 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. – Overview of Implementation Plan Components – Plan Component Description 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.


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