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Global Procurement Processes

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

0 Partnership Travel Consulting
Travel Strategic Sourcing Kathy Briski, C.P.M., CCTE Senior Vice President Partnership Travel Consulting May 16, 2012

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 Taxes Fuel Surcharges Security Fees Airfare Cost Air Ticket Cost Room Rate Taxes Upgrade Fees Energy Surcharge Nightly Room Rate Hotel Cost Internet Parking Fitness Center Meals Phone Price Misc. Charges Daily Rate Daily Rate Taxes Self fill Fuel and Service Charges Fuel Purchase Options Total Cost of Ownership Travel Rental Car Cost Fuel 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 FHN Procurement Policy Enforcement Advance Booking Preferred Suppliers Travel Policy Process Online Booking Agent Assisted Booking Client Negotiated Airfare Transaction Fee Management Fees Agency Cost Support Emergency Travel Services Change Requests Copyright © 2007 Accenture All Rights Reserved.

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: Overview
SAMPLE 2011 Global Airline Industry Revenue reached $591 Billion, up 5.5% from Domestic Airline Industry amounted to $147 Billion. Key Points 2011 Airline Industry Revenue reached $591 Billion Domestic Airline Industry amounted to $147 Billion Domestic Airline industry revenue is forecast to exhibit positive growth, increasing at a rate of 2% per year to $162.3 Billion United, Delta, and American are the market leaders based on revenue In 2011, United’s net income was $840M and Delta earned $854M, while American lost close to $2 Billion. Alaska Air earned $244.5M, Southwest $178M, US Airways $71M and Jet Blue earned $86M. For 2012, IATA forecasts an industry profit of $3.5 Billion, but with jet fuel prices at an all time high, it will be interesting if this forecast becomes true Business travel represents 35% of airline’s revenue AirlineFinancials.com predicts a 95% probability that American Airlines and US Airways will merge in the next months. 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. Source: Airlines for America: airlines.org, Airline Financials.com, IATA, Wikipedia

11 Airline Industry: PPI (Producer Price Index) – Scheduled Passenger Air Transportation
The PPI (measures average change in prices over time) for passenger air transportation has decreased 8% since the end of 2009 indicating decreased costs primarily driven by lower fuel prices, but recently have gained an average of 18% back in 2011. NAICS January – April Preliminary. All indexes are subject to revision four months after original publication. Source:

12 Airline Industry: Cost Drivers
SAMPLE Airline costs consist of fuel, landing fees, aircraft, staffing costs, taxes and surcharges. 2012 Cost Drivers Key Points Jet Fuel: In 2008, Fuel prices were at record highs. For 2011, fuel prices have increased to 2009 record highs. Each penny increase in the price of a gallon of jet fuel adds $190 million in additional fuel costs Aircraft Age & Type: Fuel consumption is directly impacted by an aircraft’s age. Standardization of aircraft fleet assists airlines in reducing inventory and maintenance costs Distribution: This is a tiered cost for airlines, ranging from proprietary websites to GDS transaction costs Labor: In 2010, labor cost has exceeded fuel cost even though many airlines have been slashed due to reshaping labor structure, such as redundancies, sickness pay review, bonuses Other: These costs include insurance, utilities, office supplies, advertising and promotions, communication, personnel expenses, injuries, loss and damage, interrupted trips expenses, etc. Sources: Airlines for America:

13 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 is $ per barrel. The most reasonable explanation for such high prices is tight supply and counteracting the weak economic conditions In 2008 and now in 2011, 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. Sources: Airlines for America:

14 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 Sea-Tac Airport has been higher than the U. S. average during 2003 – 2008, but has dropped in line at the end of 2011. Air Travel Price Index for Seattle/Tacoma1 Key Points Historically, air travel prices originating from Sea-Tac Airport has been higher than the US average during 2003 – 2008 , but has dropped in line with the US average at the end of 2011 AMEX 2012 US forecast: Short Haul: 2%-4% Coach 5%-7% Bus/1st Long Haul: 0%-3% Coach 3%-6% Bus/1st CWT’s US forecast: 3.6% - 5.2% increase Advito’s 2012 N/A Regional forecast shows a YOY increase of +5% in Coach fares and +3% in Bus fares. 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 2010, the airline industry earned approx. $23 billion in additional ancillary fees, which includes $3.3 billion for baggage fees. For 2011, the world’s airlines are projected to generate $32.5 billion worldwide from ancillary revenue. 2001 to 2011 Q3 1 The air travel price index measures the percents change over time in prices paid by travelers. Sources: Bureau of Transportation Statistics, AMEX 2012 Forecast, CWT 2012 Forecast, Advito’s 2012 Forecast, Airlines for America:

15 Airline Industry: Baggage Fees
SAMPLE Source:

16 Airline Industry: Cancellation/Change Fees
SAMPLE Ranking * Airline 2007 2008 2009 2010 2011 (thru Q3) 1 Delta 16,331 18,927 406,039 698,611 587,810 2 American 469,883 449,899 471,369 373,674 3 United 331,193 354,471 309,866 321,539 249,891 4 US Airways 68,304 248,840 253,077 211,332 5 Continental 227,868 237,446 180,920 6 JetBlue 74,472 123,468 121,273 113,997 92,430 7 Air Tran 20,820 24,339 42,766 50,416 38,384 8 Spirit 21,514 23,561 23,120 19,036 9 Frontier 33,081 34,279 21,494 16,685 16,562 10 Virgin America 943 9,761 12,866 18,151 15,851 11 Hawaiian 21,801 25,159 23,546 18,192 13,369 12 Alaska 54,700 67,077 60,590 50,357 7,944 TOTAL 553,341 1,217,182 1,948,608 2,272,960 1,807,203 * Airlines ranked by 2011 reservation cancellation/change fee revenue, dollars in thousands (000) Source:

17 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 Product (Unit) 1978 2000 2011 2011 vs 1978 College Tuition: Public (Year) 1 $688 $3,508 $8,244 1005% College Tuition: Private (Year) 1 $2,958 $16,072 $28,500 823% National Football League (NFL) Game Ticket 9 $9.67 $49.35 $77.36 700% Prescription Drugs (Index) 2 61.6 285.4 425.0 590% Major League Baseball (MLB) Game Ticket 10 $3.98 $16.22 $26.91 576% Unleaded Gasoline (Gallon) 4 $0.67 $1.51 $3.53 427% New Vehicle 3 $6,470 $24,923 $29,793** 360% New Single Family Home 5 $55,700 $169,000 $222,600** 300% CPI (All items) 2 65.2 172.2 224.9 245% Movie Ticket 6 $2.34 $5.39 $7.89** 237% First-class Domestic Stamp 7 $0.15 $0.33 $0.44 193% Whole Milk 2 81.0 156.9 209.5 159% Grade-A Large Eggs (Dozen) 2 $0.82 $0.91 $1.77 116% Air Travel: Round Trip Domestic Fare 8 $186 * $314.46 $343 84% Air Travel: Round Trip International Fare 8 n/a* $935.26 $1,160 n/a Apparel: Clothing/Footwear/Jewery (Index) 2 81.3 129.6 122.1 50% Television (Index) 2 101.8 49.9 6.6 -94% * Domestic fare data commences in 1979; international fare data commenes in 1990 ** 2011 data not yet available; 2010 data used as a placeholder 1 The College Board - based on beginning of academic year 2 U.S. Bureau of Labor Statistics - including hedonic "quality-change' adjustments 3 National Automobil Dealers Associaton - average retail selling price 4 U.S. Department of Energy - Monthly Energy Review, Table 9.4 5 U.S. Census Bureau - median value 6 National Association of Theatre Owners 7 U.S. Postal Service - Publication 100 8 ATA via U.S. bureau of Transportation Statistics - exludes taxes; first column reflects 1979 (1978 data not available) 9 National Football League, average nonpremium ticket 10 Major League Baseball, average nonpremium ticket Sources: Airlines for America:

18 Hotel Industry: Overview
SAMPLE 2011 Global Hotel Industry Revenue reached $126.6 Billion, with an overall profit of $7.6 Billion. Key Points 2011 Global Hotel Industry Revenue reached $126.6 Billion, with an overall profit of $7.6 Billion. Hotel industry began its recovery in 2010, following a disappointing 2009 when revenue fall 9.4%, due to declines in travel spending In 2010 and 2011, revenue grew by 4.4% and 6% respectively, as the economy began to improve and travel rates increased. For 2012, industry revenue is expected to continue to grow with an estimated jump of 4% 2012 – 2017 projected annual revenue growth rate is projected to be 2.6% to $144.3 Billion. Smith Travel Research is projecting increases in all three key performance metrics during 2012: Occupancy is expected to rise to 59.5%, Average Daily Rate (ADR) will increase 6.8% to $ and Revenue Per Available Room (RevPAR) is projected to end the year up 8.6% to $64.93. Major market segmentation: 28.5% transient business travelers and 25% conference travelers. Source: Smith Travel Research

19 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

20 Hotel Industry: PPI – Hotels & Motels, Guestroom Rentals
The PPI for hotel rooms has increased an average of 2.4% since 2011 indicating occupancy rates have bounced back hence pricing increasing due to demand. No more buyer’s market! NAICS January – April 2012 Preliminary. All indexes are subject to revision four months after original publication. Source:

21 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 Key Findings Over 80% of costs in the hotel industry is distributed among three categories: (1) purchases, (2) wages, (3) other. Operating cost driver: Purchases is the largest cost – mainly food and alcohol for resale. Wages costs provide the second largest spend category Other costs include those involved in the initial investment in the hotel: Land comprises 45-50% of total project cost Construction is about 25-30% Remainder goes to furniture and fittings Recently, the hotel sector has experienced a significant increase in insurance premiums particularly related to public liability and health benefit policies. Source:

22 Hotel Industry: Room Rates
US hotel room rates started to decrease late 2008 which led to a buyers market. Buyers have enjoyed lower hotel rates for 2 years but rates have been increasing, especially in key markets. Key Points Average Cost Per Night for March Hotel Stays Based on more than 750,00 hotel stays booked through US based corporate travel agencies Hotel showed signs of pricing strength starting in 2011, with 2012 forecast indicating an upward swing. The majority of new hotels in the pipeline are limited service properties, especially in the emerging markets, China and India. Full service and resort properties have been the hardest hit with reduced demand and little new construction. Technology has lowered labor costs, increased productivity and enhanced the customer service. AMEX 2012 forecast for N/A: 2.5% - 6.5% CWT 2012 forecast for N/A: 2.4% - 3.1% Advito 2012 forecast for N/A: 5% - 6% Egencia forecast for N/A: 5% Overall average forecast: 4% For 2012: Hoteliers and analysts expect pricing power to continue rebounding throughout the year, leading to potentially tougher negotiations for buyers in the fall Source: PWC Hospitality Directions, Smith Travel Research, AMEX 2012 Forecast, CWT 2012 Forecast, Advito’s 2012 Forecast, Egencia 2012 Forecast, Business Travel News

23 Car Rental Industry: Overview
SAMPLE Global industry spend is $26.5 billion of which 34% is business travel Key Points Global industry spend is $26.5 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. Good time to competitive bid car rental services. Areas of negotiation – GPS, Fuel charges, City Surcharges, Back end Rebates and multi-year agreement. Source: IBISWORLD, Auto Rental News, Business Travel News

24 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 prices have decreased. NAICS January – April 2012 Preliminary. All indexes are subject to revision four months after original publication. Source:

25 Car Rental Industry: Market Share
SAMPLE The U.S. car rental market is highly consolidated among a small number of major players and it may get smaller. Top 4 Car Rental Companies By Revenue Key Points Enterprise/National/Alamo, Hertz and Avis/Budget account for 90% of the total US on airport market and 80% of total market 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 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 Avis/Budget began working with GDS operators to implement the addition of credit card information to rental car bookings. This opens the door to assess a no-show fee to travelers who fail to cancel their reservation without sufficient notice “Virtual rental technology” – enables customers to reserve, rent, access and return cars just about anywhere. ZipCar, WeCar, Connect. For 2012, industry experts forecast flat to minimal increase in rates. Source: Business Travel News Corporate Travel Index 2011

26 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) Labor. Operating Cost Drivers Key Findings Over 90% of costs in the car rental industry is distributed among four categories: (1) purchases, (2) other, (3) depreciation, and (4) labor. Operating cost driver: Fleet purchases are the largest cost “Other” costs provide the second largest spend category. This represents concession agreements with major airports, fixed rent for terminal counters or other leased properties and facilities. Depreciation and Labor costs complete the top cost drivers in the car rental industry Source: Auto Rental News

27 Travel Management Industry: Overview
The Top 50 travel management companies represent over $155 billion in sale revenue 2010 Top 5 (over $1B in revenue) Travel Management Co’s By Revenues Key Points The top 50 travel management companies represent over $155 billion in sales revenue in 2010. The top 14 travel management companies earned over $1billion in sales revenue, or 92% of the sales revenue in 2010, a top heavy industry. Expedia, Orbitz, Priceline, AAA Travel, and Travelong receive 90% or more sales revenue from the leisure market. Travel Leaders earns 26% of their sales revenue from the leisure market (down from 48%). Agency after agency on the Travel Weekly’s Power List 2011 registered increases over their 2009 results. In many cases, the increases brought them back to where they were before the recession. Second time since the Travel Weekly Power List commenced (1992), AMEX did not occupy the top spot. Source: Travel Weekly Power List 2011,

28 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 is close to its 2007 high once again.. NAICS January – April 2012 Preliminary. All indexes are subject to revision four months after original publication. Source:

29 Appendix: Data Sources
SAMPLE Advito’s 2012 Forecast Airlines for America, AirlineFinancials.om AMEX Business Travel 2011 Forecast and Trends ATWOnline, Auto Rental News Bureau of Labor Statistics, Bureau of Transportation Statistics, Business Travel News Business Travel News Corporate Travel Index 2011 CWT Hotel Solutions CWT 2012 Forecast Egencia 2012 Forecast Forbes, Hoovers Online, IATA (International Air Transport Association) & World Air Transport Statistics (WATS 2006) Global Business Travel Association, OneSource Inc., Power List 2011, Pwc Hospitality Directions Smith Travel Research Data The Transnational.travel Travel Daily News, Travel Procurement Travel Weekly, Wikipedia Wikiinvest

30 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

31 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

32 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

33 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

34 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

35 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

36 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. 36

37 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

38 SAMPLE Car Rental Scorecard

39 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

40 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

41 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

42 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)

43 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)

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 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

45 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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