Barcelona conference 2013


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Business process outsourcing in procurement: opportunities, challenges and methods.

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Barcelona conference 2013

  1. 1. Global Procurement and Supply Chain Management for the Oil and Gas Industry conference in Barcelona, September 2013 Business process outsourcing in procurement: opportunities, challenges and methods
  2. 2. Agenda 2 Bright Group / Credentials Why outsource? What can you outsource in procurement? How to do? We start with a short introduction of ourselves and what lead us to the topic of BPO… …then do a short overview of outsourcing benefits… …and stop in more detail on how can you outsource procurement, what are benefits and challenges, to figure out feasible options. …and wrap up with an overview of the approach we developed properly manage a project of transferring procurement to the outsource. How to decide? As you will see, there is far more then one option. So we talk a bit about an analytical tool we developed to support decision with proper analysis… Pavel Goryachev, senior manager Gleb Skrypin, manager Speakers: Ivan Marchenko, manager Materials Management, Data analysis Simulations and modeling Category management Process and organisation enginering Regulation
  3. 3. Bright group 3 ► Bright Group is a leader in procurement advisory services on Russian market ► Key services: ► Procurement and SCM advisory ► Strategic advisory ► IT solutions ► Bright Group is the trusted business advisor that contributes most to the success of its people and clients by creating value and confidence ► Bright Group helps its clients to search for new approaches and strategies to achieve their potential - from globalization to technological innovation Strategic Advisory Business consulting IT consulting Outsourcing ► Established in 2010 by a team of like-minded professionals in SCM and management ► Our more than 100 professionals are the foundation of our success
  4. 4. Credentials 4 Our clients: Our partners: TNK-BP, Royal Dutch Shell and Russian TNK joint venture, major Russian oil and gas producer Sakhalin Energy, joint venture (shareholders include Shell and Gazprom), leading energy supplier in Asia Pacific, the only LNG in Russia, one of the largest complex oil&gas projects in the world Gazprom Neft, major Russian oil producer, Gazprom oil producing subsidiary Rosneft, major oil producer in Russia and in the world …and multiple other local and international companies in oil&gas, energy, petrochemicals and other industries
  5. 5. What lead us to look into the topic of BPO (1/2) 5 Sakhalin Krasnoyars k Hanty-Mantsiskiy Tyumen Moscow Saint-Petersburg Murmansk Irkutsk Samara Yamalo- Nenetskiy Boston USA USA RUSSIA Birmingham EUROPE Melbourne AUSTRALIA Bright has implemented more than 25 SCM projects for large international companies:  Demand planning  Category management  Contract and obligation management  Supplier management  Inventory management  Materials movement management  Inbound logistics  Large investment projects supply Bright has partners all over the world, accumulating world best practices.
  6. 6. 6 What lead us to look into the topic of BPO (2/2) The majority of BPO providers start their activity in 2000 year. The volume of BPO shows significant volume growth from year to year. In 2012, the volume growth is estimated in 33% due to new customers coming. Barriers for BPO development in Russia:  Large part of “shadow” company’s activity  Assuming exclusivity of certain sectors of the economyLack of vendor management skills in Russia  High mental tolerance  Low trust level  Managing different time zones with different legal requirements  Data integrity issues BPO service structure
  7. 7. Why companies outsource? 7 • Pressure to reduce operating costs and improve bottom-line performance • Access to specialist skills not available internally • Release of cash from the transfer of assets • Access to leading-edge technology without capital investment • Ability to transfer risk to the service provider • Desire for flexible and scalable solutions that support growth or divestitures • Drive to focus more on core processes and business activities • Delivery of continuous improvements in process effectiveness and efficiency
  8. 8. What can be outsourced? 8 … Finance  Accounts payable/receivables  Expenses reporting  Payroll accounting  Cash management  Foreign exchange  Fixed assets Procurement  Requirements creation and approval  Order processing  Service desk support  Claims management  Supplier additions/updates  Indirect procurement Real estate  Facilities planning  Property usage  Least management  Portfolio optimisation  Project management  Asset management HR processes  HR administration processing  Training  Recruitment  Expatriate programmes  Payroll processing  Compensation benefits Business process outsourcing services
  9. 9. Why outsource procurement and SCM 9  Accuracy of planning  Reduction of lead times  Complete and timely satisfaction of needs  Reduction of administration costs  Solutions for standardization and unification of production equipment  Decrease in unclaimed high liquid positions  Increase in stock turnover  Reduction of unfinished construction due to supply storage  Increasing the transparency of procurement processes  Significantly improved reporting and controls to manage the business  Access to enabling technologies and 3rd party experience and expertise at a lower cost ADVANTAGES CONCERNS Improving reliability of production Cost reduction Capital optimization Function improvement  Organizational change issues  Electronic system modifications  May require new skills set to manage service provider performance  Requires investment of time for existing indirect staff
  10. 10. 11 What can be outsourced in procurement and SCM Goods Processes StructureGoods/services: • Wells, • Rotating Equipment, • Energy • IT Infrastructure • Valves, etc Organisational Scope: • Entire organisation • Specific Business Units • Specific Subsidiaries • Specific Assets Business process scope: • Demand management • Strategic procurement management • Sourcing & Award • Contract Management • Supplier Management • Inventory Management • Materials Movement Management • Warehousing • Logistics BPO BOX
  11. 11. What answers will you need to take a conscious decision 11 Scope: Which processes? Which materials/services? Which organisations/subsidiaries? Organisation: What will you need to change inside and how do you do it? How do you organise interaction with the outsourcer? How do you control? Analytics: What will it give? What’s the effect? What should be requirements to the outsourcer? Levels in the SLA?
  12. 12. 12 Holistic approach to assess opportunities of BPO Our integrated solutions are designed on a client by client basis Step 1 Step 2 Step 3 Step 4 Step 5 Benchmarking, gap analysis, and opportunity development Define scope and vision Current state assessment Improvement portfolio Scenario analysis Future state model Agreement on indicators Implementation Step 6 Step 7 Bright’s Spend Analyzer Supply Chain Network Modeling Data procurement process and spend KPI’s ‘As Is’ model and ‘To Be’ options ‘To Be’ models validation What to outsource; Where to spend; How to track
  13. 13. Key challenges and trends 13 How could organisations respond from BPO prospective? Supply Chain Network Design is an integrated process focused on quantifying, designing and improving the physical supply chain with focus on cost and leadtime reduction and service level improvement The business environment today is characterized by long and complex supply chains, growing cost pressures and customer expectations, high levels of Merger and Acquisition activity and development of new and emerging markets What are the key trends impacting Supply Chains today? Significant pressure on companies’ margins, increasing working capital, a lack of Supply Chain rationalisation and an increased focus on route to market design. Therefore, many organisations have no choice but to embark on the journey to critically analyse Supply Chain Network performance and design How do these affect organizations? ► Lack of data in company’s information environments makes tactical decision making a challenging task ► There exists a tendency to estimate the efficiency of tactical decisions only with financial model. Such models are often high-level and do not concern operational aspects of the business. Although such operational impacts are very important in many industries ► On strategic level, there are often a lot of interdepending factors that need to be considered simultaneously
  14. 14. Bright’s Spend Analyzer reports will provide significant insight into Company’s expanding spend 14 Before Supply Chain Network Design we starts with Bright’s Spend Analyzer can provide a view into a number of important procurement process and spend KPI’s, including: Supplier/contract management  Benchmarking  Contract / project monitoring  Key performance measurement  Performance reporting  Continuous productivity improvement Supplier selection  Certification  Negotiations  Contract development and issuance  Pre-qualification  Enquiry Expenditure profiling  Spend analysis  Item categorization  Strategic sourcing plans Transaction processing  Requisition receipt  Contract / supplier identification  Order placement  Invoice / receipt processing  Payment preparation/documentation Administrative  Development of policy, procedure, processes  Vendor management  Training, reporting Strategy development  Establish policy and procedure  Procurement vision / mission development  Develop savings targets and multi year plans Source planning  Supply base reconfiguration  Commodity management  Supply/demand market analysis  Aggregate spend  Identify areas of opportunity Staff and process  Re-engineering people and processes  Develop organization profile  Develop process maps and best in class processes Strategy Business process management Strategic spend analysis Transaction management
  15. 15. Bright’s Spend Analyzer reports will provide significant insight into Company’s expanding spend 15 Bright’s Spend Analyzer can provide a view into a number of important procurement process and spend KPI’s, including: ►Total spend ($ volume) by the organization ►Total number of transactions by the organization ►Total spend ($ volume) by vendor ►Total spend ($ volume) by GL (General Ledger) account ►Spend by type (channel) — PO, p-card, other ►Spend by business unit ►Spend by region / geography of business unit ►Spend by region / geography of vendor ►Spend by category ►Spend by category + sub-category ►Spend by category + vendor ►Spend by category + sub-category + vendor ►Average transaction amount by vendor ►Number of transactions ►By FTE requestor ►Spend trend analysis / pattern analysis ►Transactions by category ►Transactions by threshold ►Duplicated item analysis …that allows for additional customized analysis by using Supply Chain Network Modelling
  16. 16. Data driven approach supported by Supply Chain Network Design (SCND) 16 Supply Chain Network Design permits the evaluation of operating performance prior to the implementation of a system: ► It enables to perform powerful what-if analyses leading to the most efficient decisions ► It permits the comparison of various operational alternatives without interrupting the real system; it permits time compression so that timely policy decisions can be made Service level analysis Quantify market coverage and reaction time based on time and distance analysis Inventory Modeling Quantify and define appropriate stocking levels throughout the Supply Chain Centre of Gravity Find the ideal locations for DCs, crossdocks or satellite facilities in order to minimise time, distance and overall cost to serve Network Optimisation Apply advanced mathematical optimisation models to evaluate all facility, transport, leadtime and service options in a single, integrated model Simulation ► Use simulation to understand pressure points and to quantify potential risks ► Supply Chain Networks, warehouse flow, production lines etc Network Flow ► Quantify and optimise flow across the Supply Chain Network ► Understand the impact of cross border trading, import/export regulations and trade compliance Geographical Display Create geographical maps of the Supply Chain Network enabling effective communication and visual problem solving
  17. 17. Supply Chain Network Design steps case study 17 Modeling steps illustrated Step 4 – Sensitivity Analysis is conducted to determine the effect of changes in key input variables on the overall cost/service output. These can be plotted if needed to illustrate the most important factors. Step 2-3 – A number of alternative ‘to-be’ models are created (agreed in the original scope) from blue sky to constrained models. These are evaluated with the client to demonstrate the cost/service options. Step 5 – This sensitivity analysis is repeated against the preferred to be model to determine key factors and build sensible contingency into the to be network design. Step 1 – The as-is network cost breakdown is gathered and used to create and baseline the as-is network model. Flex input variables up and down to determine variable sensitivity Flex input variables up and down to determine variable sensitivity and contingency Warehousing costs example 1 Labor $1,199,191 2 Management salaries $456,648 3 Warehousing system costs $234,554 4 Insurance $76,739 5 Fuel surcharges $5,567 6 Transportation $365,536 7 Customs and duties $6,657 8 Tax $33,456 9 Inventory $1,908,987 10 Rental equipment $33,456 Total $4,320,791 Cost service trade off curve 50 60 70 80 90 100 High cost Low cost Low service High service 1,000 900 800 700 600 500 Blue Sky Option 2 Option 4 Option 1 As-Is Option 3 Option 5 % of volume within target lead time Service Totalnetworkcost Sensitivity Level Low HighBase Volume Fuel Labor Costs Network cost breakdown – region 1 Sensitivity graph 50 60 70 80 90 100 High cost Low cost Low service High service 1,000 900 800 700 600 500 % of volume within target lead time Service Totalnetworkcost As-Is Option 3
  18. 18. BSA + SCND benefits 18 1. What categories to outsource 3. What processes to outsource 2. Where to spend and allocate 4. How to optimize 5. How to track  We can leverage expert’s view and assumptions to create a model of the system being managed…  …evaluate the impact of planned changes on operations in production, logistics, retail and other industries…  …and we also have a useful tool to support strategic decisions. Creating simulation model is a good way to formalize all the things and put them together into a single decision support tool
  19. 19. Scenario analysis of material management policies case study Definition of problem and formulation of modeling task Development of simulation model concept Development of simulation model Testing and validation of model Scenarios planning and data preparation Scenario analysis Expert evaluation of scenario analysis results Повторное использовани е имитационной модели Повторное использовани е имитационной модели Re-use of simulation model Description of problem and proof of simulation approach to its solution Simulation model concept containing description of model and means of its usage Simulation model in simulation environment Ready-to- use validated simulation model Scenario analysis plan, data prepared for scenario analysis Scenario analysis results Scenario analysis report including recommendations based on modeling data
  20. 20. Most common tasks solved with simulation differ by model complexity and number of considered parameters 20 Tactical levelMid-term management level Strategic level Compare logistic network development options at a high level using macro indicators Determine the connection between costs and service level depending on forecasting accuracy Determine replenishment policies for SKU groups Modelsize,numberofconsideredparameters • Allocation of warehouses, consumption points, plants, etc… • Stock distribution between warehouses • Logistic characteristics of product types • Transportation and warehousing tariffs • Transportation load building policies • Trucks and containers properties • Orders aggregation and processing algorithms and parameters • Parameters of goods reservation policies at warehouses • Consideration of various demand profiles for SKU groups Functional blocks of simulation model can be re-used from previous stages Task: Task: Task: Complexity of model algorithms
  21. 21. Simulation models allow to determine dependency between service level and logistic costs for certain network configuration 21 • Replenishment • Modeling of manual interventions into ordering and replenishment processes • Transportations • Warehouse operations Forecasting accuracy Target service level 50% … 95% 80% … 99% Simulation model Costs Requirements to logistic infrastructure The model iterates over pairs «Forecasting accuracy – Target service level». For example, for interval from 80% to 99% for service level with step 1% and forecasting accuracy from 50% to 95% with step 5%, 20x10=200 iterations will be performed. If necessary each iteration can be split into 10-50 launces to perform Monte-Carlo experiment for each iteration. Simulation model will allow to determine requirements to warehouse and transportation capacities considering seasonality, forecasting accuracy and logistic network configuration The model will not give mathematically optimal solution but, on the other hand, it will be able to consider random demand changes and manual interventions into ERP systems material management processes The model will provide sound and verified knowledge about dependency between service level, forecasting accuracy and logistic costs. This knowledge might be used by experts when taking decision about supply chain management
  22. 22. Simulation models also allow to estimate effect of changing replenishment algorithms into the entire supply chain 22 Alternative algorithm N Alternative algorithm 1 Existing replenishment algorithm Order placementDeliveryDemand plan Lead time Reorder point level Safety stock Current unrestricted stock Simulation model allows to estimate the effect of changing replenishment algorithms into the entire supply chain Service level Logistic costs Modeling of the entire supply chain will provide a holistic view into effect of selected replenishment policies which, in its turn, will help experts determine a optimal balance between service level, stock volume and logistic costs Stock volume
  23. 23. How do you decide, which processes and which materials/services to outsource: sample 23 High Value/ High Complexity Low Value/ Low Complexity HSSE IAE Engineering & Maintenance Services MRO/PVFF Offshore Installation Oil Sands Mining Equipment Rigs Rotating Equipment Static Equipment Subsea Equipment & Umbilicals Trading Wells Installed Equipment Industrial Gases Logistics Metals & Alumina Technology Wells Services & Suppliers Engineering & Project Management Services Fabrication Geophysics IT Infrastructure Professional Services Purchased Chemicals Real Estate Retail Software Apps Technical Resources Travel Supplier Engagement Supplier Transition Demand Management Category Management Supplier Management Collaborative Planning Issue Resolution Supplier Detail Maintenance Catalogue and Content Management Originate and Process Requisitions Originate and Process Purchase Orders Tracking and maintenance of order Fulfilment Resolving Disputes and Enquiries Ongoing Compliance and Monitoring Ongoing Compliance and Monitoring Sourcing Strategy Understand Market Trends Understand Business Needs / Requirements Category Sourcing Strategy Market Engagement Contract Negotiations CATEGORIESPROCESSES HARD EASY MED
  24. 24. How do you estimate the effect 24 Quantitative • Less procurement and SCM costs • Better deals (prices, quality) • Risk transfer to the outsourcer • Less “request to delivery” time Key effects: Qualitative How do you estimate: • Use process mapping to identify possible workforce reduction • Use simulation to find the optimal option given your situation • Contact possible providers to find out their deal details • Use experts to identify risks • Request SLA parameters from possible providers • Use other’s experience – learn on other’s mistakes
  25. 25. How do you organise the interaction 25 Employees Procurement Delivery & Returns Contract Mgmt Accounts Payable Buy Desk Help Desk Category Management Suppliers {CLIENT} Procurement Outsourcer •Deliver goods/service •Manage returns •RFP/RFI responses •Contract negotiations •Pricing information/updates •Manage relationship •Approve sourcing strategy •Approve strategic suppliers and contracts •Create and approve requisitions •Receive/return of goods and services Invoice approval •Strategic Sourcing •Category Management •Tactical Buying Support •Inquiry Support •Employee / Supplier inquiry management •Escalation to 2nd level support Create Non-catalog POs Manage Catalog Inquiries •Requisition and PO Management •Compliance / Policy / Approval Management •Tactical Buying •Claims Management •2nd level inquiry support P2P Tool Requisitions Supplier ERP {CLIENT} SAP There are multiple ways to organise procurement outsourcing. Here is a sample option
  26. 26. How do you control 26 Client (control dep.) Service provider Client Service provider3rd party This model assumes creating of control department of outsourcing activity. This model assumes drawing a 3rd party, responsible for reviewing outsourcer’s activity. Technical Monitoring Close Interaction Risk assessment Demand Finance Commercial Receipt Reporting  Non-compliance to technical requirements and HSE standards  Failure to achieve production goals  Production downtime and untimely execution of works  Non-receipt of a target commercial effect  Inefficient accommodation needs in the market  Incomplete and untimely receipt of materials  Distortion of financial data untimely formation and presentation of financial results  Inefficient use of budget resources Control department/ 3rd party RISKS MODEL 1 MODEL 2 Control instruments  Service Level Agreement  KPIs  Function development plan
  27. 27. How do you change (1/2) 27 PREPARE: Align objectives with service Provider CREATE: Define and optimize processes IMPLEMENT: Secure internal support and Adoption 2 3 4 5 6 Savingpotential 1 5 year and more1 year TRANSITION: Establish strong governance TRANSFORM: Assure provider innovation PERFORM: Gaining savings 2 year Short term Medium term Savingsources Long term  Cutting down on engaging external consultants  Cutting down on trainings and learnings  Stopping projects  System optimization  Optimization and standartization of processes  Outsourcing of parts of the organization  Integration, mergers and concentration
  28. 28. How do you change (2/2): fail reasons and how-tos 28  Be realistic about your capabilities and skills  Use what you have, hire what you need  Careful and thorough planning of migration/transition  Monitor impact of project on control of day-to-day business  Not understanding legacy or cultural issues  Not understanding the detail  Detailed mapping of current processes, systems and organisation: why are things done the way they are?  Lack of robust or well articulated Business Case  Lack of forward planning  Invest in creating a robust Business Case  Invest in planning now to save later  Change overload (e.g. integration program)  Identify current change load  Don’t duck the issues - stop initiatives if necessary  Insufficient senior sponsorship  Lack of buy-in from Business Units  No assessment of business readiness for change  Conflict over centralisation versus decentralisation  Strong, visible, sustained sponsorship  Carry out ‘readiness for change’ review at the start  Ensure buy-in from businesses  Make the case for centralisation versus decentralisation Why Projects Fail How to manage  Inappropriate migration strategy  Poor transition management  Skills mismatch  Underestimation of complexity and implementation time  Detailed project planning, partitioning in different project stages with clear and realistic goals
  29. 29. Wrap up 29 • You can outsource in Procurement and SCM… • …and it’s not about just transactional processes. • There is a lot of complex analysis to do to decide… • …which can be done properly, and there are proper tools. • Outsourcing project in Procurement and SCM is not easy… • …and is mainly about change management and proper control… • …but can be done. • If you think someone experience could be of some help – Bright is always there
  30. 30. BRIGHT is a successful Russian company which provides consulting services and expertise in the field of supply chain management, planning and control, project management, development and implementation & operation of integrated business processes based on ERP-systems. Our services are aimed at achieving global standards in business processes and control mechanisms in the Russian market. © 2013 BRIGHT Group. All rights reserved . Gleb Skrypin, manager +7 (903) 550 60 20 Ivan Marchenko, manager +7 (926) 111 20 45 Pavel Goryachev, manager +7 (984) 181 19 54