Some thought on Corporate Contracting Policy…

Obtain the best possible value for money.

Contract out those services that are either not part of core business activity or for which there is a fluctuating requirement in terms of skills or equipment, or where open market provides a more efficient and commercial alternative.

Procurement/Contract CycleIdentification of Need

Approval of thebusiness case

Defining the specification

Defining the Contractual terms

Analyzing the market

Supplier Appraisal

Select bidders

Inviting quotes/tenders

Analyzing quotes/tenders

Negotiating value for money

Contract award

Monitor Performance

Payment

Vendor rating/reviewof performance

Best Practice Profile - Strategic Procurement Use of techniques Market intelligence Strategy creation Strategy appropriateness & ambition Depth Organization buy in Execution Negotiation Creativity Benefits

Positioning for Supply Contract Management

5. InternalStakeholderManagement

High Performance Procurement

4. Supplier MamgtSupplier Performance

Contract mgmntSupplier integration

Supplier development

1. ProcurementStrategy

Vision/missionCore values

Operating ModelCategory planning

3. Requisition to payTransactionProcessing

Master data management

2. Sourcing & Category MgmtStrategic sourcing

People

Technology Organization

Building Blocks Of Purchasing Strategy

Contributing & influencing

Purchasing &Audit framework

Organization

Relationships internal &external

Processes

Staffing & Training

Enabling foundation

Clear mission for function Corporate commitment Empowered buyers Ethical behaviour Real-time information High quality staff Cross-functional teams

Unproductive & inhibiting activities

Isolation of purchasing from main stream

Lack of client-buyer cooperation Fragmented approach to market Uncompetitive specifications Unsafe or insecure contracts Poor supplier relationships

Business needs

Goal: to fully understand the real business needs of the key stakeholders which should: Drive the selection and development of the

preferred procurement strategy The selection of suppliers and… The nature of supplier relationships But often, perceived business needs are not

the real business needs It is essential to understand what stakeholders

want the procurement strategy to deliver for them

Determining the real Business needs

Identify the stakeholders – a stakeholder map.

Get into their shoes to find out what they really need.

Capture all the identified business needs of every stakeholder

Verify these business needs with the respective stakeholders face to face.

Identify and prioritise the 10-12 key business needs

Purchasing amount by segment

Main suppliersSuppliers’ 80/20 Analysis- Pareto Analysis

Utilities3 033 M NGN

37%

Plants & equipments460 M NGN

6%

Non classified627 M NGN

7%

Industrial Products & Consumables1 059 M NGN

13%

General Supplies & Services1 297 M NGN

16%

Raw Materials626 M NGN

7%Industrial Services

645 M NGN8%

Transport Services276 M NGN

3%

0%

20%

40%

60%

80%

100%

54 suppliers represents 80% of the global purchasing amount (NB : Supplier base contents 1 560 suppliers actives during 2003)

Global Purchasing amount 2003

8000M NGN

54 Nb of suppliers

Intra coy310 M NGN

4%

Purchasingamount

Nigerian Gas Company Ltd.National Electric Power AuthorMOS Engineering Services Ltd.Dys Trocca Valsesia & Co. Ltd.Zenon Petroleum & Gas Ltd.

Mahrat LimitedLitzkuhn Niederwipper GMBH Gri

Tractor And EquipmentDrury Industries LimitedNigerian Foundries Ltd.Abol Ventures Nig. Ltd.

Mobil Oil Nigeria PlcRefratechnick GMBH

Panalpina World TransportExplo-Tech Nigeria Limited

1 6361 2667163091481311291281251219687787771

20,4%15,8%8,9%3,8%1,8%1,6%1,6%1,6%1,6%1,5%1,2%1,1%1,0%1,0%0,9%

123456789

101112131415

Supplier Amount (MNGN) % of globalRank

(*) Source : Account Payable

Category (Portfolio) Snapshot

External Purchase Amount In 2003, the External Purchasing Amount is of 8 000 MNGN, i.e. 67 % of the

sales turnover :Building Materials Company, EPA for 2003 (MNGN)

Labor

988 8331 176

3 095

677

2 780

8 000

SalesTurnover

EBIT(Before

interest and taxes)

Provisions, stocks variation and fees

Depreciation Expenses Investments EPAInter/Intra company expenses

910

5 369

Spend Fragmentation Analysis

Used to assess which internal customers use the same or different suppliers for the same commodities & services

Implications: Highlights the potential for

consolidating category spend among a smaller supply base.

Highlights opportunity for supplier development

Results of Spend Fragmentation Analysis After spend analysis, the following key

metrics should-among others -become clear: Baseline spend Expected future annual spend Nos. of external suppliers Nos. of suppliers for 80% of spend % under contract No. of items Key internal customers Nos. of buyers

Trend Analysis Used to plot a series of data to identify

demand patterns Plots historic data by item, category,

buying unit, or supplier Significant trends may indicate a need for

alternative sourcing strategies Understanding trends may result in

benefits: Greater bargaining power Improved planning Improved customer service

Variety Analysis

Used to evaluate opportunities for reducing the diversity & complexity of the different products purchased.

Implications: The placing of greater volumes with

fewer suppliers Process efficiency savings Increased control over spend through

consolidation

Supply Planning FrameworkTo ensure existence of a supply Market to which the buying organization has ready access & which enables it to succeed as a business; now & in the future

Supplypositioning

Current marketposition

Supplierpreferences

Vulnerabilitymanagement

VendorImprovement

programReverse

marketingProcurement

marketing

Ideal market position

Market Management

matrix

Contract Strategy Model

Contract strategy

Make or buy

Relationship decision

Make

Market analysis

Buy

Arm’s length CooperativeMutual deterrent

CollaborativeContractual alliance

Partnership, vision &synergy

MonopolyMarket & Managing

them

Cartel market &Circumventing

cartels

Competitivemarket

Dependencyevaluation

Multiple source

Cost analysisPower/dependenceStrategic resource

Singlesource

Supply PositioningA tool to identify strategies and tactics for goods, works, and Services acquired, including consideration of ;

Make, buy,outsource

Stakeholdermanagement

Vulnerabilitymanagement

PeopleAllocation, skills

Inventorymanagement

Controlling Price, cost

Relationship opportunities E-Procurement

Contractingstrategies

Time allocation

Develop Industry & Supplier Profile

DetermineindustryStructure

Measure IndustryFinancials

IdentifyIndustryTrends &Dynamics

IdentifyIndustryLeadingPractices

Implications of Industry on Sourcing this Category

DescribeCompetitionDevelop understandingOf supplier/buyer

Define overall size & growthMeasure key ratiosDiscern common profit& cost

Identify key trendsAssess impact of tech, govt

Identify unique solutionsFind innovative suppliers

Assess supplycomplexity

Benchmark supplier costs Define potentialLevers as a customer

Use best ideas

Porters Five Forces

Threats of entrants

Competitive rivalry

Threats of substitutes

Buyer’sBargaining

power

Supplier’sBargaining

power

Threats of entrants

Competitive rivalry

Threats of substitutes

Buyer’sBargaining

power

Supplier’sBargaining

power

Potential factors influencing market/businessRivalry among competitors

• Numerous or equally balanced competitors• Slow industry growth• High fixed or storage costs• Lack of differentiation or switching cost• Capacity additions in large increments• Diverse competitors• High exit barriers

Competitive Rivalry – used to assess the supply market complexity

Threats of Substitutes

Threats of entrants

Competitive rivalry

Threats of substitutes

Buyer’sBargaining

power

Supplier’sBargaining

power

The threat of substitute products is a Function of three factors

• The relative value/price of a substitute compared to an industry’s product• The cost of switching to the substitute• The buyer’s willingness to switch

Threats of Entrants

Threats of entrants

Competitive rivalry

Threats of substitutes

Buyer’sBargaining

power

Supplier’sBargaining

power

Examples of Barriers to Entry

• Economics of scale (e.g., computer chip industry)• Product differentiation (e.g., cosmetics)• Capital requirement (e.g., oil extraction)• Switching cost (e.g., chemical industry) • Access to distribution channel (e.g., food industry)• Cost advantages independent of scale• Product know-how or design characteristics (e.g., fashion)• Favourable access to raw materials (e.g., basic chemicals)• Government subsidies (e.g., European agricultural products such as soyabeans)• Government policy (e.g., regulated industries)

Supplier’s Bargaining power

Threats of entrants

Competitive rivalry

Threats of substitutes

Buyer’sBargaining

power

Supplier’sBargaining

power

A supplier group is powerful if• It is dominated by few companies and is more concentrated than the industry if it sells to• It is not obliged to contend with other substitute products for sale to the industry• The buyer’s industry is not an important customer of the supplier group • The supplier’s product is an important input to the buyer’s business• They have built up switching costs (product differentiation)• They pose a credible threat of forward integration• There is ‘’pull through’’ from downstream customers of the buyer (e.g. branded items)

Buyer’s Bargaining Power

Threats of entrants

Competitive rivalry

Threats of substitutes

Buyer’sBargaining

power

Supplier’sBargaining

power

A Buyer Group is Powerful if

• It is concentrated or purchases large volumes relative to seller sales• The product it purchases from the industry represents a significant fraction of the buyer’s cost of purchases • The product it purchases from the industry are standard or undifferentiated• It faces few switching costs• It earns low profits, and can use this to negotiate a greater portion of the profits in the value chain • It poses a credible threat of backward integration (make/buy) • The industry’s product is unimportant to the quality of the buyer’s products• The buyer has full information about the supply market levers

Porters Five Forces

Threats of entrants

Competitive rivalry

Threats of substitutes

Buyer’sBargaining

power

Supplier’sBargaining

power

Procurement Targeting

BOTTLENECK(Strategic security)

Guarantee supply

LEVERAGE(Tactical Profit)Drive for profit

CRITICAL(Strategic Critical)

Close suppliermanagement

ROUTINE(Tactical Acquisition)

Minimize time

High

Business Risk

Low Value High

Routine 70%

Activity Bottleneck 10%

Critical 8%

Leverage 12%

Spend

Leverage 35%Routine

5%

Bottl

enec

k

15%

Critical 45%

Commercial risks from their examples # suppliers Capacity Power Time Want the business? (Supplier Preferencing) Meet corporate standards Specification (Special/Standard) Cost of change Ease of switching Commodity markets Location Personalities / relationships Security of supply (financial, lead times) Future-proofing

Supply Positioning: Relationships

Long TermResponsive to SuppliersPrepaid to GiveEASY to work withRegular Reviews

Cool / Flexible / tolerant

Short TermCompetitiveHow Do They See You?

Versatile

Highly SpecificClear Measures (2 way)Mutual & ParticipativeOpen Innovative Attentive

Warm Persistent- HighLevels of Achievement

Long TermMinimal Day to DayBut Lots of Initial ContactsHigh Levels of TrustMutual Goals

Distant But Close

Supply Positioning: Skill Sets & Styles

Risk Analysis & Management

Business Acumen

Market Knowledge

Diplomatic Style

Performance Management(sensitively)

VERY capable negotiator

Financially Aware

Highly Numerate

Assertive

Empowered

Market Research Skills

Excellent Interpersonal Skills

Good communicator

Good Listening Skills

Strong Team work

Operate With Executive

Creativity To Simplify

Customer Service Focus

Process Orientation

Ability To Delegate(effectively)

Open Minded

Supply Positioning: PURCHASING ACTION

Long Term ContractsIndexation StockholdingAlternative ProductsVolume ConsciousCost Insensitive

FlexibilityActive SourcingMarket ExploitationHigh Market KnowledgeShort Term ContractsTake Risks

Medium/Long Term ContractsDetailed Contract ConditionsSupplier Analysis/ForecastsClose control/Devt. of SupplierClose Price MGMT/PPCA AuditsContingency

Systems ContractingCash OrderStockless PurchasePaperless PurchaseConsignment StocksSimple Procurement procedures

BOTTLENECK CRITICAL

ROUTINE LEVERAGE

Procurement Targeting

STRATEGIC CRITICAL

TACTICALPROFIT

STRATEGIC SECURITY

TACTICAL ACQUISITION

Focus on total cost of acquisition (not price)Emphasis on simplicity of operationEnsure full suppliers all of whom genuinely behave as if you are a ‘core’ customerPerformance is outstanding with minimal time needed to manageRelationship would be ” Distant but Close” Some Deliverables:Data will be well organisedNumber of suppliers few – 50 instead of 5000Management of this area requires 5 – 10% of available timeTotal acquisition cost reduced by at least 10% pa

• Call-off contracts• e-catalogues

• Purchasing card• Local purchasing

Procurement Targeting

TACTICAL PROFIT• Real focus on total cost• Take full advantage of the market• Practical application of “Active

Sourcing”• In-depth market knowledge• Suppliers who see us as

“Development” or “core”• Excellent negotiation skills• Selective use of e-Auctions Some Deliverables:• Excellent market analysis &

understanding of “market drive• “real time” identification of

developments and opportunities• High quality supplier analysis• Cost modelling• Stretching financial targets year on

year• Procurement spends 35 – 40% of

time here.

STRATEGICCRITICAL

TACTICALACQUISITION

STRATEGICSECURITY

STRATEGIC SECURITY

• Excellent vulnerability (Risk) Analysis and management

• Supply security may mean higher inventories

• Internal close management to ensure we only “get here” when we really have to

• Focus again on Total Cost OF Acquisition• Longer term contracts • Possible “price indexing” Some Deliverables:• Zero supply problems• Tight performance measures• High quality risk management/

contingency plans and execution• Specific supplier Relationship Management

Plans

Procurement Targeting

STRATEGICCRITICAL

TACTICALPROFIT

TACTICALACQUISITION

Procurement Targeting

STRATEGIC CRITICAL• Close understanding of suppliers• Top class and detailed Cost Models• In-depth market knowledge – Local, Regional &

International• Focus on Total Cost of Ownership – challenging

reduction targets year on year• Excellent vulnerability (Risk) Management

programmes• Contingency plans • Suppliers see us as “core”• Detailed Supplier Relationship & Development Plans

Some Deliverables:• Outstanding supplier performance• TCOO reduced substantially year on year• Considerable innovation• Clear procurement strategies in place with full

Business support • Clear, agreed Relationship Measures in place and

delivering

STRATEGICSECURITY

TACTICALACQUISITION

TACTICALPROFIT

Business Risk Model

Reliability Management

ContingencyManagement

Close Technical

Management

Balance with CommercialOpportunity

High

% ChanceOf Occurrence

Low impact High

Supplier Preference

DEVELOPNurture customer

Grow business

EXPLOITABLEMaintain high prices

Accept risk oflost business

COREMaximum attention

Actively defendIncrease share

Of supply

NUISANCEMinimum attention

Lose withoutconcern

HighAc

coun

t Attr

activ

enes

s

Low Relative Value High

1. Payment on time2. Payment secure3. Profitability4. Relationships5. Loyalty6. Positioning on supply

positioning grid7. Product

Knowledge/Technology8. Cost of servicing the

Account9. ‘Leading Edge’ Customer10. Customer Market

Share/Image

ATTRACTIVENESSHigh

High Low

ATTR

ACTI

VENE

SS O

F AC

COUN

T

Relative value of Customer

Business

RELATIVE VALUE OF BUSINESS

1. Values Sales v average2. % Availability Business

achieved3. Ability to ‘sell through’ other

products/services4. Ability to ‘sell through’ to

other customers

Supplier Preferencing

Nuisance

Supplier’s view: Little profit made Customer difficult and/or expensive to service Probably poor at paying bills Customer generally unattractive in other ways Poor service, supplier shows little interest in putting it right

Supplier’s overall objective: “Give low attention” Withdraw from the business

Supplier Preferencing

Exploitable

Supplier’s view:

• Suppler in unique position of strength• Prices may rise or service costs reduce• Seek short-term advantage• Suppler prepared to risk losing customer

Supplier’s overall objective:• “Drive for best price”• Maximise profit in the short-term

Supplier Preferencing

Supplier’s view:

Customer has potential Customer highly sought after Supplier works hard to exceed customer

expectations Pricing based on “special deals", marginal cost

principles Pro-active service levels

Supplier’s overall objective: “Nurture the customer” To get further business

Development

Supplier Preferencing

Supplier’s view:

Supplier’s core business High level of service and response Increase profitability in low key manner Receptive to strategic alliances Seeks to lock in customers

Supplier’s overall objective: “Look after the customer” To retain and expand business To ensure profitability

Core

Market Management Matrix

L

C

R

B

Development

Nuisance

Exploitable

Core

Exploitable

CoreDevelopment

Nuisance

Nuisance

Development

Exploitable

Core

Nuisance

Development Core

Exploitable

×

√ √ √ √ √ √ √

××

×××

×× ××

√√√√√

√

√√√√√

√√√

√

Market Management Matrix

Leverage

Critical

Routine

Bottleneck

DevelopmentSeek areas of mutual dependency NuisanceChange supplierOfferincentives

ExploitableChange supplierMonitor price & Service trends

CoreMaintain longTerm relationship

ExploitableMonitor price trendIncrease attractionSeek alternatives

CoreStrong positionMaintain relationshipOffer otheropportunities

DevelopmentOffer incentivesRaise mutual dependency NuisancePassive relationshipSeek alternativesupplier

NuisanceVery High RiskRaise attractionChange supplier

DevelopmentWork togetherTo developbusiness

ExploitableHigh riskRaise mutual DependencySeek competing

CorePotential long termrelationship

NuisanceMismatch

Change supplier

DevelopmentEncourage ParticipationSeek mutualdevelopments

CoreSound positionImprove own profit

ExploitableAdversarial position

Check power balanceConsider other

sources

Lump sum(1)

Unit rate(2)

Reimbursable Cost (3)

Fully defined Equipment/services definedUsage uncertain

Uncertain, not defined

Construction, EPCDetailed design

Construction, equipment hire, transport, consultancy, Manpower, drilling, seismic acquisition & processing, etc

Conceptual design (EPC) Consultancy

Fixed fee, milestone, Incentive

Day rate/ time rate, measured work, milestone, incentive

Actual cost, Day rate, incentive, measured work

Tendered contract

Negotiatedcontract

Type:

Scope:

Applicability

Remuneration

Combinations of types

Turnkey 1,2,3.Bill of Qty 1, 2.Time & materials 2, 3.

Different Contract Strategies

Services lump sum Bill of quantities Unit rates Day rate Time and materials Cost reimbursable

Model Forms Of Contract

Call-off services Turnkey model Fabrication model Design model Catering model Design, procure & fabrication General services model Specific services model Umbrella manpower model

Post – Contract

Contract award

Inaugural meetings

Chart progress - financial - actual vs plan

Invoice authorisation

Payments

Progress meetings

Penalties

Performance bond

Suspension Termination

Substantial completion

Retention monies

Contractor Performanceappraisal

Defects liabilityperiod

Close out

Final account

Contract finalcompletion Close loop

Performance Management

Incentives Additional business Incentive scheme Milestone

payments Contract extension New business

opportunity Preferred status

Sanctions Retention Litigation Termination Performance bond Withhold payment Suspend future bids Liquidated damages Introduce competition

Different Contract Strategies

Goods Spot Call-off Trading house Fixed rate