1. Sourcing Slide 1 © The Delos Partnership 2005 Supplier Relationship Management Module 3 – Sourcing / Supplier Management Process Supply Planning for the future Internal & External Challenges Improved Supply Strategy Improved Sourcing Process Six Sigma and Lean Suppliers

2. Sourcing Slide 2 © The Delos Partnership 2005 Supply Side Planning is dedicated to preparing the future; Current Year – Delivery & the starting point for analysis / assessment for the future Next Three Years – Current / +1 Year / +2 Years Purchasing Strategy, Focus & Priorities for the Current Year What needs to be done in the current year to prepare for next year Purchasing Strategy for next year Plans in the current and next year for 2 years time Preparing the Supply Side future is made up of five key elements; Supply and Purchasing People - Strategy and Education Demand & Innovation Alignment (S&OP – IEP) Manufacturing, Facilities and Process Alignment (including ERP) Quality First & H.S.E. Supply Chain, Procurement & Finance Integration Supply Side Planning Approach Supply Side Planning

3. Sourcing Slide 3 © The Delos Partnership 2005 Internal Business Challenges Pressure for short term savings / fast results Demanding Customers No / Limited Resources Lack of Know-How & Deal Closing Sole / Single Source Approvals Maverick Spenders (CEO downwards) Interference - Roadblocks - Resistance No / Limited Budget External Supply Challenges  Cost Up Company Reputation / Perception Suppliers Strategy and Penetration Lengthening Supply Chains Shortages Reluctance to engage in Supply Chain Mgt. Competition Regulation Supply Side Key Challenges

4. Sourcing Slide 4 © The Delos Partnership 2005 ROCE Profit Capital Sales Costs Materials Labour Overhead Fixed Current Inventory Creditors Debtors Projects SUPPLIER MANAGEMENT FOCUS Supplier ROCE Focus

5. Sourcing Slide 5 © The Delos Partnership 2005 Scenario 1.Product A 2.Product B 3.Service C 4.Service D 5.Supplier E Risk Map Key Severity Likelihood Major Medium Low Minimal Medium Priority High Priority Low Priority Medium Priority 1 4 3 2 5 Supply Risk Map – Month YTD Major Risks - Commentary Example Risk Focus is on single source suppliers & increasing energy costs MinimalLowMediumMajor

6. Sourcing Slide 6 © The Delos Partnership 2005 Commentary Example – Costs and Cash are ahead of prior year. Improvement projects underway Supply Cost & Cash Focus - YTD

7. Sourcing Slide 7 © The Delos Partnership 2005 Cost & Cash Business A or Product A Business B or Product B Business C or Product C Past Month YTD Current Month YTD Past Month YTD Current Month YTD Past Month YTD Current Month YTD % Variable Cost/Sales 60%59%56% 64%63% % Fixed Cost/Sales 34%35% 34%33%34% Raw Materials Inventory (days or €) 12 23222317 Creditor Days 51 747155 Cost of Non Quality € (RFTQ100%OTIF) 100,0015,0007,0004,00025,00035,000 Commentary Example Month on month improving for both Cost & Cash but % costs on sales far too high Cost & Cash K.P.I.’s

8. Sourcing Slide 8 © The Delos Partnership 2005 Cost Element Business A or Product A Business B or Product B Business C or Product C Group Down Chemical A down Photocopier Charges Metal price down Opportunities RFQ for Alternative sources Second sourcing (cost avoidance) Energy usage Third party suppliers Consignment or VMI Packaging Car Hire Legal Fees Logistics Warehouses Travel Hits Energy Supplier Stock Out - Strike Raw Materials Price increase Threats Oil price at $60/barrel Gas/Oil/Electricity Impact Supply (Insolvency) More increases Oil price at $60/barrel Energy Costs Feedstock prices China supply Energy prices Commentary Example - If $60 Oil maintained major cost hit will result on Energy, Feedstocks & Freight Cost Overview

9. Sourcing Slide 9 © The Delos Partnership 2005 Savings Category Business A Product A Business B Product B Business C Product C GroupTotal Finished Products – Toll Conversions Raw Materials & Consumables Packaging Capital, Engineering, MRO Energy & Utilities Logistics (Warehouse & Freight) Technical & HSE Goods & Services People Cash Improvement TOTAL Current Year Cost Savings Goal Net Savings – Month YTD Commentary Example Cost savings are not being properly reported by Business C Cost – Savings Cost – Savings

10. Sourcing Slide 10 © The Delos Partnership 2005 Supply Performance Measurement Business A or Product A Business B or Product B Business C or Product C RFTQ100%OTIF Not being reported by suppliers Supplier Lead Time (Calendar days) Has not been negotiated & therefore not part of supplier service level performance KPI’s Vendor Managed Inventory / Forecasts Supply Side Inventory Reduction Programme in place across all businesses Total Net Value Delivered No system in place to track net total value (Total net cost). No data on savings achieved YTD from each business. Supplier Schedule AchievementNo tracking system in place today On Time New Products No system to record/report supplier led new products and innovation value. Business Supply/Procurement Reporting No reports being made/ sent by the businesses. Only Business A tracking system exists/seen. Commentary Example The right supply performance measures are still not in place Supply – Performance Measures

11. Sourcing Slide 11 © The Delos Partnership 2005 P2P KPIAmerica CentreEurope CentreAsia CentreTotal / Comment Invoices Received (last 12 months) 95,000 (12m Trend is Up) 150,000 (12m Trend is Down 110,000 (12m Trend is Up) 355, 000 Matched 1 st Time (Current Month) 95% (88% prior month) 86% (84% prior month) 71% (61% prior month) No PO, Wrong Price, Quantity variance Creditor Days 46 – Category A 77 – Category B 56 – Category C 31 – Category A 45 – Category B 70 – Category C 90 – Category A 100 – Category B 85 – Category C Standard terms are 60 days from date of invoice plus 5 working days Commentary Example Invoice numbers are not acceptable & match first time rate far too low Process Improvement

12. Sourcing Slide 12 © The Delos Partnership 2005 Global Purchasing – 12 Business A – 7 Business B – 6 Business C – 4 Temporary / Interims – 2 * Supply Chain / Operations / Functions contain a number of people with a high procurement content to their name;  Business A  Business B  Business C  Functions – I.T., Legal, HR, Engineering Commentary Example Increased Spend Category coverage and more capability is required in Purchasing Headcount Focus

13. Sourcing Slide 13 © The Delos Partnership 2005 Feedstocks & Exchange Rates  Oil up at $60+ dollars (+$10 from June)  Energy and Gas prices increasing  Metals prices down  Petrochemical Index dropped by 9% – soft pricing in petrochemicals.  Revaluation of Yuan – Cost Hit Key Raw Materials & Services  Price increase paid on Product A  Product B – 2006 Price Increase announced  Product C – Price Stable  Product D – China opportunity  Product F – Just moved into VMI  Product G – Improved pricing. Commentary example The external supply environment for Oil based products & Key Materials is continuing to worsen External Supply Environment

14. Sourcing Slide 14 © The Delos Partnership 2005  Questions ?

15. Sourcing Slide 15 © The Delos Partnership 2005 Strategic Sourcing Definition #4 The Strategic Sourcing process consists of a number of stages that are designed to assess business risks and supply needs – reduce these risks, define supply needs, strengthen supply performance, improve business profit and safeguard customer value and service. The output of the process is a defined number of potential best value suppliers for the subsequent Dealmaking & SRM stage

16. Sourcing Slide 16 © The Delos Partnership 2005 Supplier & Results Management Risk & Value Analysis Cost & Cash Data Capture Scope, URS, Market Testing Supplier(s) RFI, RFQ, & Performance Leverage & Dealmaking Supplier & Results Management Delos Sourcing Process The Delos Sourcing process is the 4 th of the Delos Six Procurement Dimensions This sourcing process should be used for all Strategic and Critical spends and provides a robust methodology for reducing / eliminating supply risk and improving the total cost and cash of externally purchased products and services and business assets, inventory and processes. The process stages ensures there is gathering of the complete spend (cost & cash), project scoping and boundaries, user requirements are defined and embedded into the RFQ, leverage is maximized and supplier The 4 th of the Six Procurement Dimensions

17. Sourcing Slide 17 © The Delos Partnership 2005 Used for Strategic / Critical Spend Items & Key Projects Required where there is a risk of loss / dislocation to supply Involves significant time / resource investment Involves business critical issues Board awareness and/or approval Global Market Evaluation needed Risk Management analysis required Can involve Intellectual Property & Multi Year Deal Cost of internal / external customer change may be high Strategic Sourcing – Implications

18. Sourcing Slide 18 © The Delos Partnership 2005 Innovation & Sourcing Cycles StrategicSourcing-InnovationCycle StrategicSourcing-ProductManufacturing or Outsourcing Cycle StrategicSourcing -Internal & External Customer Driven

19. Sourcing Slide 19 © The Delos Partnership 2005 Customer Expectations Cost (Price) & Speed Innovation that works Uninterrupted supply RFTQ100%OTIF Awareness of supply strategy & risks To manage these customer imperatives, the procurement vision, focus and goals must include Strategic Sourcing leadership.

20. Sourcing Slide 20 © The Delos Partnership 2005 Risk Map Key Severity Likelihood Major Medium Low Minimal Medium Priority High Priority Low Priority Medium Priority 1 4 3 2 5 Urgent Customer Problems MinimalLowMediumMajor Scenario 1.Shortage of a major Raw Material 2.Third source financially insecure 3.Customer urgent demand to change to a new product 4.Key Supplier has only one factory 5.Key Raw Material price is about to treble

21. Sourcing Slide 21 © The Delos Partnership 2005 1.Product with 4 / 5 suppliers – example Freight 2.Product specified by the customer in a technical application 3.A major service with complexity and one supplier 4.Photocopier Audit 5.Newspapers and Journals Profit Opportunity Key Ease of Implementation Spend Value – Profit Opportunity Hard Average Easy 1 4 3 2 5 Supply Leverage Map MinimalLowMediumMajor STRATEGICSTRATEGIC CRITICAL NUISANCENUISANCELEVERAGELEVERAGE 5

22. Sourcing Slide 22 © The Delos Partnership 2005 DefinitionDescription Sole Source A single supplier who meets 100% of requirements. The product and service is only available from limited Suppliers Bargaining power is reduced due to the limited sources of supply. Single Source Procurement has selected one specific supplier for 100% of requirements. Leverage is focused on one supplier. Other sources exist. Dual Source Two suppliers are fully approved to meet buyers specifications. A decision has been made to split the value between two active suppliers. Multi Source Several suppliers are actively supplying Leverage is reduced but competition increased Second Source A second source of supply has been identified & fully approved Purchasing value is still focused on the single source supplier. The second source is used as a contingency or backup source. Strategic Sourcing Definitions

23. Sourcing Slide 23 © The Delos Partnership 2005 Exact second sourcing Product or service is identical Meets exactly the same specifications. There is no variation in subsequent lot or batch size. Alternative second sourcing Product or service are not identical However they can be qualified to be equivalent Fit for use in a process with no impact on finished product or service quality or process performance. Product Matching Choices Statistical process control and six sigma tools can be used to determine how critical a process is to product variation. Spoilage monitoring is also essential.

24. Sourcing Slide 24 © The Delos Partnership 2005 Use Certificate of Analysis comparisons For critical products or services experimental qualification may be necessary Agree Protocol Perform Experimental work Summary report of findings Implement via change control procedure (three equivalent results) Assessment and Audit of Supplier is needed Batch to batch variation must be minimized and deliveries across multiple batches avoided. Example – Critical Raw Materials

25. Sourcing Slide 25 © The Delos Partnership 2005 Problems Opportunities Risks & Concerns CustomerNeed Assessment Education Tools Benchmarking Assessment & Definition of Total Value Improvement Targets Joint Project Team Agreed Customer Projects Sponsor Definition & Assessment Education, Projects and Timescales Defined Value goals Selection of Tools Deliverables & Measurement system Team in place and projects underway Sourcing Team Joint Customer Strategic Sourcing

26. Sourcing Slide 26 © The Delos Partnership 2005 Value Risk Ease of Implementing Resources Teams Other Priorities Current State Risk & Value Targeting Spend Category Local or Group Cost, Cash & Sourcing Methodology Cost & Spend Addressed Planned Net Savings Results delivered Scope Current QCDI Performance Realistic Goals New performance levels Market Assessment Supplier Testing, Status and Leverage Scope. URS, Market Assessment Focussed RFI and RFQ Clear Targets Degree of Project difficulty and risk Resource Allocation & Teams Defined balanced Risk & Value Improvement goals Specific RFQ Leverage Tools Performance Measures Deliverables Project Benefits Tracking SOURCING PROJECT MANAGEMENT Cost & Cash Plan Strategic Sourcing Summary

27. Sourcing Slide 27 © The Delos Partnership 2005 Requires dedicated team to focus 100% on strategic sourcing Customers need educating on the benefits of strategic sourcing, benefits must be agreed and communication of project goals must be thorough. Confidentiality is essential to ensure that sole suppliers are not aware of the threat and deals must be in place with second and third sources before engaging the sole supplier. The marketplace is dynamic and change is constant e.g. – second source could be acquired by the sole, technology changes, supply worsens... Share the sourcing strategy at the earliest opportunity with customers and be prepared for shared outcomes, roadblocks, the cost of second sourcing and more complexity to manage. Strategic Sourcing Ground Rules

28. Sourcing Slide 28 © The Delos Partnership 2005 Supplier & Results Management… Involves the implementation of a formal program which will focus on current performance and continuous supplier improvement. Formality ensures; Key Performance measures are defined There is focus on what is important to the customer The deliverables in the agreement are defined There is continuous improvement in service as well as additional savings Customer and Supplier partnership is developed and quantified. Supplier & Results Management Supplier Management

29. Sourcing Slide 29 © The Delos Partnership 2005  Questions ?

30. Sourcing Slide 30 © The Delos Partnership 2005 Sales complete Customer forecasts. Customers place forecast & unforecast orders for existing/new products. Bill of Materials exist or are created to determine raw materials and services required. Inventory levels are regularly checked, Production is planned for dates when all required products and services will be available. Sourcing create plan by raw material part number for each product family in the sales forecast. Sourcing completes agreements with quality, cost, price and OTIF performance confirmed. Bills of Materials (Products and sometimes services) are created and requisitions & orders placed. Sourcing ensure suppliers are identified with the capacity and capability to deliver the raw materials forecast Two Integrated Processes Supply Chain Process Sourcing Process All products and services are available and production commences. Finished products are completed, pass Q.C. and are delivered direct or via stocks. Supply Chain plans and executes commitments and measures supplier performance. Sourcing, SC and the Business evaluate product and supplier performance Sourcing & the business feed back to suppliers and resource if required.

31. Sourcing Slide 31 © The Delos Partnership 2005 RFTQ 100% On Time in Full Has a major impact on profit and capacity planning Is a major factor in customer retention and growth Is critical to the manufacturing process and performance Is a key component of supply agreements with penalties applying Requires an integrated Supply Chain & Sourcing Process

32. Sourcing Slide 32 © The Delos Partnership 2005 Eye of the Customer Voice of the Customer Customer Product & Market 5S Quality Status & Accreditation Zero Defects (RFT100%OTIF) Lean & Agile Centric & Lean Suppliers Management of Customer Complaints Management of their Suppliers HSE & Process Capability Training of employees Performance Management / Measures Market / Benchmarking Data Making suppliers Customer Centric & Lean

33. Sourcing Slide 33 © The Delos Partnership 2005  Sourcing (Customer) & Supply (Supplier) (Plan)  Order Management (Do)  Planning & Verification (Check)  Expediting, Supplying and Receiving (Re-Act) PD CA The causes apply to both the customer placing the order and supplier supplying the order. Causes of OTIF Failure

34. Sourcing Slide 34 © The Delos Partnership 2005 Supplier Process Complexity Supplier to Suppliers Supplier

35. Sourcing Slide 35 © The Delos Partnership 2005 Lean O.T.I.F. Supplier IN OUT IN OUT INOUT Future State Current State The aim in "lean" is to get one process to deliver only what the next process needs, when it needs it. The goal is to link all processes in a smooth flow, without detours that generates the shortest lead time, highest quality and the lowest cost.

36. Sourcing Slide 36 © The Delos Partnership 2005 Specify Value - What does the process customer want /need Identify Value Streams - Sequence of Processes Make Value Flow Pull - Process only what the customer wants Perfection - Pursue zero waste and Continuous Improvement Supplier 5 Lean Principles

37. Sourcing Slide 37 © The Delos Partnership 2005 Six Sigma Suppliers

38. Sourcing Slide 38 © The Delos Partnership 2005 Workshop Task How does the Source Planning process and Lean / Six Sigma approach that you have seen in the workshop compare to what you are doing today?

39. Sourcing Slide 39 © The Delos Partnership 2005  Questions ?