More Than Just Buying Well - The Intelligent Way to Defend Profits


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  • ISA –I would probably group ‘depth of offering’ and ‘Deep industry expertise’, not have the latter to the right as it seems a bit like an after thought. The visual organization could be rethought so that we don’t have the impression that we go from most important on the left to least important on the right.
  • More Than Just Buying Well - The Intelligent Way to Defend Profits

    1. 1. B MC Defend Profits by Reducing COGS in the “New Normal” of Commodity Volatility: The Role of Sourcing Gianni Giacomelli, SVP of Product Innovation Genpact© 2012 Ariba, Inc. All rights reserved.
    2. 2. Agenda • Speaker Introduction • Commodity Volatility Challenges • How Can Volatility Be Managed?2 © 2012 Ariba, Inc. All rights reserved.
    3. 3. Agenda • Speaker Introduction • Commodity Volatility Challenges • How Can Volatility Be Managed?3 © 2012 Ariba, Inc. All rights reserved.
    4. 4. Keynote Speaker Gianni Giacomelli - Senior Vice President, Product Innovation Leader, Genpact Gianni is responsible for building and executing a global Product Innovation framework which takes an integrated view of Genpact’s process excellence capabilities, IT solutions and analytical tools. His career spans over 20 years’ experience across innovation strategy, organization redesign, corporate business development, and across three continents. He has worked, among others, with SAP, the Boston Consulting Group, and Danone.4 © 2012 Ariba, Inc. All rights reserved.
    5. 5. Making Sourcing & Procurement MoreIntelligent Processes • Formerly GE Capital Information Services, 50+ Pioneers spun off in 2006, NYSE (“G”) Nationalities in Global • 55,000+associates. 600+ Clients, 35+ BPM Fortune 500, 95+ Fortune 2000. Over 25+ 4,500 processes Languages Software integration Sourcing Loans Engineering Services Risk Management Research/Analytics Depth of Collections Supply Chain Analytics Procurement Finance and Accounting Offerings Helpdesk Marketing Support Order to Cash Customer Service Treasury Management Fleet and Logistics Proprietary Tools to Deliver Framework for Best Foundation 10,200 + Industrial Strength Practices That are „Must Green Belts* Operations Haves‟ of 480+ Common Metrics and Standards to operating Black Belts* / MBBs* Report Process excellence $2.82 Billion Health Business Impact Delivered* 5m+ 15+ years of Sourcing 40m+ 12 34 56 Deep Transactions Invoices per year Experience per year Sourcing 30+ Expertise 3,000 transitions executed Procurement 2,000+ customers Procurement FTEs * 2010 Figures.
    6. 6. Agenda • Speaker Introduction • Commodity Volatility Challenges • How Can Volatility Be Managed?6 © 2012 Ariba, Inc. All rights reserved.
    7. 7. Commodity Prices Have Increased Sharply Since 2000, Erasing All Declines of the 20th Century Source: Economist7 © 2012 Ariba, Inc. All rights reserved.
    8. 8. Since 2002 the CPG Sector Hasn’tOutpaced the S&P 500 Because of theResponse to Changing Commodity Prices • 1985-2002: companies passed on the input price increases while holding prices when raw material costs declined. In 1996-2002, this provided 60%+ of net margin expansion i.e. ~$10 bn • 2002-2007: companies passed on just 15% as commodity costs grew 40%, driving 75% of the sector’s margin contraction ($70 bn) • If CPG commodity prices increase 20% in next 5 years and companies maintain prices to hold share, 4.5% EBITDA - or about 33% of it! Source: Genpact analysis on McKinsey data8 © 2012 Ariba, Inc. All rights reserved.
    9. 9. What We Asked • 180 senior finance executives in the United States, Europe, and Asia • CPG, discrete manufacturing, $100m+ • Survey conducted by CFO Research Services in December 20119 © 2012 Ariba, Inc. All rights reserved.
    10. 10. In 2011, Commodity Price Volatility ErodedEarnings; Little 2012 ImprovementHow much has commodity price volatility affected your EBIT over the past12 months? What do you expect over the next 12 months? Decrease EBIT Increase Over past 12 24% 34% 18% 15% 9% months Over next 12 17% 36% 23% 19% 5% months Decrease Decrease No effect Increase Increase >50 basis pts <50 basis pts <50 basis pts >50 basis pts Percentage of Respondents10 © 2012 Ariba, Inc. All rights reserved.
    11. 11. …Same Mayhem on Share Prices…What has been the effect of commodity price volatility on your share price during the past12 months? What do you expect over the next 12 months? Negative Share price Positive Over past 12 7% 44% 27% 16% 5% months Over next 12 2% 42% 33% 19% 4% months Very negative Somewhat negative No effect Somewhat positive Very positive11 © 2012 Ariba, Inc. All rights reserved.
    12. 12. We’ve Never Been Here Before… Is your business experiencing any more or less commodity price volatility than in the past? Less Volatility More 1% 3% 15% 46% 35% Much less Somewhat Somewhat more Much more less Copyright © 2012 CFO Publishing12 © 2012 Ariba, Inc. All rights reserved.
    13. 13. …Across the Board Which of your business’s cost inputs do you anticipate will be affected substantially by price volatility in the coming year? US/Canada Europe Asia/Australia 48% Energy 67% 49% 71% Raw materials 16% 39% 48% Transportation and logistics 36% 41% 8% Services 42% 26%13 © 2012 Ariba, Inc. All rights reserved.
    14. 14. The Effects Are Not Limited toSourcing – But They Start ThereIn which cost areas do you expect your company will feel the effects ofcommodity price volatility the most over the coming year? Procurement Production 52% Logistics 44% 36% Inventory & warehousingMarketing 18% 16%
    15. 15. First - Look for Better Forecasts, But Also… In which of the following areas would improvements be most helpful in enabling your company to manage commodity price volatility better 54% and achieve timely and accurate costing? 38% 39% 39% 33% 31% Standard costing Sales forecasts Cross-functional IT systems Pricing process Estimates of of our products process support commodity price integration fluctuation15 © 2012 Ariba, Inc. All rights reserved.
    16. 16. Agenda • Speaker Introduction • Commodity Volatility Challenges • How Can Volatility Be Managed?16 © 2012 Ariba, Inc. All rights reserved.
    17. 17. It Is a Cross-Function Process Issue Typical process Implications • Lean cross-functional teams • Imprecise forecasts for brand P&L and category roll-ups for next • ERP systems of records with 6 to 9 months no detailed scenario planning capabilities • Future cost volatility isn’t fully used to optimize product P&L by Sales & • Standard cost (product accounting) Marketing, Finance, other SCM in ERP from past data only • Inventory optimization doesn’t • Potentially suboptimal marketing mix and inventory optimization include COGS volatility and spend allocation, and • Aggregate (S&OP) and ad-hoc optimization sought only at local – not forecast input from sourcing and other regional – level cost owners (e.g. logistics), in Excel • Re-pricing analysis not granular • Reallocation of resources enough - marketing asked to “raise happens nationally price” across the board17 © 2012 Ariba, Inc. All rights reserved.
    18. 18. The Six Sigma Way Forward Key impact on COGS, capital intensity, EBIT volatility (β) company value Key source of Which products, regions variance Most exposed parts of the BOM Focus on material exposure Process for Advance visibility to SC, Finance, S&M reduction Statistical analysis, not management of defects accounting heuristics18 © 2012 Ariba, Inc. All rights reserved.
    19. 19. Step 1: Prioritize Products High Rationalize products Regain Margins 2 3 Keep viable or Improve profit with cost strategically important control, optimal use of ones, rationalize the rest marketing and inventory. Cost surge potential* Else, review volume mix Do nothing Promote actively 1 4 Continue with existing Optimize volumes to marketing approach maximize profits 4 3 Low High Profit Pool (Rev * Margin)19 © 2012 Ariba, Inc. All rights reserved.
    20. 20. Step 2 – Step Up What You Do Already • Watch for early warning signs of suppliers’ financial stretch • Detect which inputs’ volatility affects them (resources, politics) and their Scrutinize your access to credit to reassess e.g. payment terms to improve their cash suppliers more velocity, ensure they can finance raw materials and production, shorten payment terms, limit suppliers on open accounts, buy raw materials for them, etc. • Assess alternatives (geographies, secondary suppliers) Re-evaluate • Analyze transit lanes for lead times and lead time variability, cargo options security, and resiliency to e.g. weather, labor strikes, natural hazards, community conflicts Consider • Weigh the inventory holding and obsolescence costs vs. other costs forward buying Revisit supply • Transportation expediting can cause of total landed cost excess chain speed20 © 2012 Ariba, Inc. All rights reserved.
    21. 21. Step 3: Establish Granular, Timely End-to-End Information Flow Vendor portfolio management TermsSupply chain Current and renegotiation future cost Commodity price hedging Inventory Cost of optimization production Manufacturing Cost of optimization logistics Logistics optimization Accurate AccurateFinance Accurate budget Product and timely Profitability and Costing BOM / guidance scenario- (current, SCA based forecast) forecast Portfolio Marketing Price /Marketing optimization, planning marketing / Sales volume and profit analysis Sales forecast planning21 © 2012 Ariba, Inc. All rights reserved.
    22. 22. Step 4 – Use Sourcing as a Catalyst of Change: Your Data Is Worth Gold, Use It! Simulate near-term impact of pricing, marketing, inventory Prioritized commodities – sourcing data • margin regain • volume mix • stock management Cost forecast range by: Profitability forecast for key Volume products and portfolio Location • which products Fluctuation magnitude • when Time Accurate, timely, granular product standard cost • which cost inputs • where22 © 2012 Ariba, Inc. All rights reserved.
    23. 23. Sourcing is the beginning of the (process) solution Claim your role as an input – not an output - of your company’s strategy23 © 2012 Ariba, Inc. All rights reserved.
    24. 24. THANK YOU Gianni.giacomelli@genpact.com24 © 2012 Ariba, Inc. All rights reserved.
    25. 25. Don’t Miss the General Session Panel Today at 5:15 p.m.• Sustainable Supply Chains through Vested Trading Partner Relationships Long-term, mutually beneficial partnerships between buyers and suppliers are increasingly being described as vested relationships, defined by a shared vision, agreed-upon desired outcomes, transparency, trust, and win-win. Developing such trading partner relationships pays dividends in many ways, particularly when your goal is ensuring a sustainable supply chain. Join Tim Minahan, chief marketing officer for Ariba, as he explores the concept with Kate Vitasek, author of Vested Outsourcing, and Tim McBride, general manager for global finance shared services at Microsoft. Mr. Minahan and his guests will engage with Ariba customers who will talk about such investments at their companies, and the impact they have on their comprehensive sustainability programs. 5:15 p.m. – 6:00 p.m. – Florentine III and IV25 © 2012 Ariba, Inc. All rights reserved.
    26. 26. Share This Session…NOW…from your mobile! • All presentations are posted: Guidebook mobile app – Search Apple or Android app store for Guidebook – Enter code “collabor8” Or at • Share via email or social media **Come back soon – we are syncing #AribaLIVE audio and video interviews to the presentations**26 © 2012 Ariba, Inc. All rights reserved.