The supply review for business leaders
PRESENTING TO THE CFO DIAGEO OBAMA’S CHALLENGE CAREERS COACHES NOVARTIS
SUPPLY BUSINESS
SUPPLYBUSINESS JANUARY 2013
JANUARY 2013 VOLUME 1 NUMBER 1
HEALTHY OUTLOOK The transformation of procurement at global giant Novartis
VOLUME 1 NUMBER 1
INSIDE Presenting to the CFO | Obama’s challenge | Careers coaches
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WELCOME
Rebecca Ellinor, editor
rebecca.ellinor@supplybusiness.com
SUPPLY BUSINESS Redactive Publishing Ltd, 17 Britton Street, London EC1M 5TP, United Kingdom. Tel: +44 (0)20 7880 6200
EDITORIAL Tel: +44(0)20 7324 2746 Fax: +44 (0)20 7880 7690 Email: rebecca.ellinor@supplybusiness.com Editor Rebecca Ellinor Projects editor Anna Scott Chief sub-editor Samantha Robinson Sub-editor Kathryn Manning Editorial/web assistant Hannah Whittaker Senior designer David Twardawa Picture editor Claire Echavarry Creative director Mark Parry
ADVERTISING & MARKETING Tel: +44 (0)20 7880 7551 Fax: +44 (0)20 7880 7690 Email: rav.kang@redactive.co.uk or norbert.camenzuli@redactive.co.uk Senior sales executive Rav Kang Sales executive Norbert Camenzuli Events manager Rebecca Montwill
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REDACTIVE PUBLISHING LTD Managing director Brian Grant
CONTRIBUTIONS Supply Business welcomes ideas for articles. Email a short synopsis to rebecca.ellinor@supplybusiness.com
Introducing Supply Business elcome to Supply Business magazine, the new quarterly title for business leaders. If you’ve missed the announcements over the past few months, you might be wondering about the new name and new look. Supply Business replaces CPO Agenda. It is for CPOs, aspiring CPOs and their most senior stakeholders – CFOs, COOs and CEOs – who are interested in the massive impact a successful procurement and supply operation can have on their business. As every CPO will be aware, the attention on the profession from the higher echelons of senior management has dramatically increased. As CIPS CEO David Noble said at the Annual Conference: “The attention I get from chief execs and senior people now is all about this profession called ‘supply’ and how it can make a difference to their competitive strength. It is right up there on their agenda, believe me.” The magazine has changed to reflect this, delivering a publication that is not only relevant for senior leaders in the profession, but also their bosses and their bosses’ bosses. It builds on the principles that underpinned the launch of CPO Agenda in 2005: “The belief that purchasing and supply management… is a
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key driver of business success and that excellence in this discipline produces superior performance and significant value.” This continues to hold true and promoting this message is a primary reason for the development of a new magazine – in line with the key CIPS objective to promote the profession more widely. Supply Business will continue to provide the in-depth, thoughtful and practical analysis and interviews CPO Agenda has become known for and will build upon the legacy it has created. We hope you find it inspiring and useful. With this in mind, find inside a feature on the massive procurement transformation project at Novartis and why it’s important to the company’s CFO and CEO; leadership advice from the chief executive and founder of Admiral Group and an interview with a board director from FTSE250 firm Interserve. There’s also a piece on how to best present to your CFO – with input from CFOs themselves – and a look at who uses career coaches and why. As always, we welcome your input. Email me at rebecca.ellinor@supplybusiness.com about what you would like to see covered and with your feedback.
SUBSCRIPTIONS Supply Business is available by annual subscription. The standard rate is £110 for four issues, and £90 for members of CIPS and discounts for other participating institutes. Call Ryan Hadden on 0207 880 7618 or email ryan.hadden@redactive.co.uk Supply Business is published four times a year by Redactive Publishing Ltd, a division of Redactive Media Group, in partnership with the Chartered Institute of Purchasing & Supply (CIPS). It is a sister title to Supply Management, the institute’s monthly magazine. For more information about CIPS, call +44 (0)1780 756777, email info@cips.org or visit its website at www.cips.org For more information about Supply Management, call +44 (0)20 7880 6200 or visit www.supplymanagement.com © 2013 Redactive Publishing Ltd. All rights reserved. This publication (and any part thereof) may not be reproduced, transmitted or stored in any print or electronic format (including but not limited to any online service, any database or any part of the Internet) or in any other format in any media whatsoever, without the prior written permission of the publisher. Redactive Publishing Ltd accepts no liability for the accuracy of the contents or any opinions expressed herein. Printed by Pensord Press.
REBECCA ELLINOR, editor
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BRIEFING
Advice, research and handy miscellany for the senior decision-maker
$115m
Savings procurement has contributed to at SABMiller
FINANCIAL ANNOUNCEMENTS
BREWER’S MILLIONS ore effective procurement at SABMiller has contributed to savings of US$115 million (£71.29 million) in April to September, the brewery’s 2012 interim results released in late November revealed. The company’s ‘business capability programme’ has seen finance, human resources and procurement activities streamlined through the deployment of global systems. Common sales, distribution and supply chain management systems have been introduced,
PHOTOGRAPHY: SABMILLER
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at a cost of $70 million (£43.4 million) during the six months prior. Trinity, the global procurement organisation at SABMiller established in 2010, has provided the most significant contributions to savings in that period, according to the report and the company is extending its remit to cover more of the purchasing other than brewing materials. The report revealed that while raw material inputs rose as a result of higher cereal costs, these were partly offset by procurement savings. Group revenue for the company
increased by 11 per cent on 2011, to $1.75 billion (£1.08 million). Graham Mackay, executive chairman of SABMiller, said in a statement: “Margins have risen modestly despite higher input costs, as a result of our cost reduction and procurement.”
Siemens targets SCM Siemens is to integrate supply chain management (SCM) activities more closely into its business operations to save €3 billion (£2.4 billion) by 2014. The company plans to introduce a framework that aligns the SCM function more
SABMiller’s margins have risen modestly, despite the challenges of higher input costs, thanks to procurement and cost reduction
closely with the business and will develop cross-functional co-operation between procurement and product development using the ‘design-to-cost’ method. Siemens said its CPO Barbara Kux would work with the company’s four sector CEOs (energy, healthcare, industry, infrastructure and cities) to drive savings of at least €3 billion (£2.4 billion) through this approach. At the same time, it announced Kux would leave the company when her contract expires in December 2013.
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BRIEFING
Best of the web
Design to value Procurement functions have an increasingly cross-functional remit, but their efforts have focused primarily on cost reduction. A new management approach – Design to Value – lets procurers in challenging consumer-facing industries increase customer value, too. Each function of the business must be fully focused on maximising the value of every stock keeping unit, by making use of a number of different tools, including cost transparency, competitor transparency and customer transparency tools. bit.ly/SbtolX
Get on board with coaching Like any business service, getting the most out of coaching comes from sufficient research and analysis before making the decision to receive coaching. Then coachees must commit and monitor its output. Finally, they need to know when the coaching is no longer working for them. bit.ly/UBRjFI See more on careers coaches in our feature on page 50
PHOTOGRAPHY: MGN RESORTS, COCA-COLA
Putting procurement and finance in sync Procurement and finance departments both want to save organisations money, yet they are often not aligned. The two functions should work together in a ‘good cop, bad cop’ mode, with CFOs imposing a savings challenge top-down and positioning procurement as the ‘good guy’ who can help realise the savings through renegotiated prices. bit.ly/XbKgFV
MORE EXCLUSIVE CONTENT AT SUPPLYBUSINESS.COM
CSR UPDATE
SUSTAINABLE PERFORMANCE MGM Resorts scoops Green Keys award for CSR Four of MGM Resorts International’s Las Vegas properties have been awarded the ‘5 Green Keys’ rating for showing the highest standards of environmental and social responsibility in their meeting and convention facilities. The rating, awarded by international certification body Green Key Global is an assessment tool for eco-friendly resorts and hotels, based on how properties perform in six areas: core areas (carbon, energy, water, waste, air quality); communication; activities; people; exhibitions and audio/visual. It was given to the Bellagio Resort and Casino (pictured), ARIA Resort & Casino, Mandalay Bay Resort and MGM Grand Las Vegas. The company has a platform called Green Advantage to “ensure that environmentallyconscious decisions are at the forefront of our business operations and facilities”, according to Cindy Ortega, MGM Resorts International’s senior vice president and chief sustainability officer. Green Advantage focuses on
five areas – natural resources conservation, sustainable construction and renovation, waste management, sustainable supply chain, and education and communication.
Coca-Cola reports on sustainability The Coca-Cola Company has trained 40,000 fruit farmers in Kenya and Uganda to meet demand for its expanding juice business, which it expects to triple by 2020. The training programme – called Project Nurture – is also aimed at improving the livelihoods of small-scale fruit farmers, many of whom are women, and so far 14,000 of
those trained are female. The farmers have been trained on quality specifications, logistics and negotiation of prices, and received assistance in agronomy and post-harvest handling. Coca-Cola’s East Africa Business Unit has contributed $4 million (£2.5 million) to the four-year programme, which has been formed with NGOs the Bill & Melinda Gates Foundation and TechnoServe. “Local farmers will gain a market for their fruit, consumers will be able to support their local farmers through the purchase of beverages and our business will benefit from procuring locally produced fruit, lowering our costs and increasing supply chain flexibility,” according to Coca-Cola’s Global Reporting Initiative report.
L’Oreal leads way with Social Change award L’Oreal has been awarded for its positive approach to sustainability, which includes a sustainable sourcing programme within the purchasing department. The beauty company received the ‘Leader of Change’ award from the Foundation for Social
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Change, which is intended to “inspire business to promote environmental stewardship and social responsibility and demonstrate positive business benefits of sustainability”. The Solidarity Sourcing programme includes more than 100 initiatives in more than 40 countries and aims to help economically vulnerable people find long-term access to work. Louise Guido, CEO of the Foundation for Social Change, said: “We believe that real social change happens when the private sector embeds sustainability as core to their profitability goals.”
BOOK REVIEWS
Brands, risk and leaders Grow the core: how to focus on your core business for brand success DAVID TAYLOR | WILEY | £18.99/$30.64 There are a number of analogies with exercise in David Taylor’s book. Founder of the brandgym consultancy, Taylor highlights how having a strong core brand is as important for a company as exercising core muscles is for physical exercise. The book goes on to describe six “workouts” to grow a company’s core brand. Fundamentally, he writes, companies focus too much on stretching their brands, by developing new products and services, swallowing up marketing budgets and confusing
Noble secures water rights Noble Energy has implemented a life-cycle water management programme to responsibly source water for its operations at DJ Basin in Colorado, by working with local landowners to secure necessary water rights. The Wattenberg field in Colorado is Noble Energy’s largest onshore US asset and used an estimated 8.5 million barrels of water in 2011, the company has revealed in its first sustainability report. The programme enables the company to source water from systems unsuitable for drinking purposes, including brine aquifers, grey water or produced water. The firm has also reduced the quantity of water transported to each site by strategically locating storage ponds and tanks, and using pumps and pipelines as alternative means of water delivery. In 2011, the company reduced its truck mileage by five million miles at the Wattenberg site, yielding an annual reduction of 58,000 tons of carbon dioxide emissions. “Our approach to securing water rights seeks to strike a balance between effective, long-term and reliable water supply planning to meet our operational demands with the economic, social and environmental needs of landowners and surrounding communities,” the report read.
customers in the process. Companies should instead ask themselves what made them famous and which products are their best sellers, then go about rejuvenating their brand by making consumers’ experience of the product linked to the narrative of the brand itself. PROS: Includes useful tips, including how to strengthen a core brand with a limited communications budget. CONS: Some conflicting advice about whether to extend core brands to other products.
Managing fraud risk: a practical guide for directors and managers STEVE GILES | WILEY | £34.99/$56.46
BEST READ
Steve Giles was tasked with leading the team at Touche Ross (now Deloitte) investigating claims of corporate fraud at Polly Peck International in 1990. He writes that fraud is a blind spot for many businesses – most of the directors and managers he works with have little understanding of corporate fraud. The book has been written to deal with this and provides an
understanding of the subject from a business perspective, rather than a theoretical or legal approach. The structure of each chapter which provides guidance, examples from well-known cases and learning points for directors reflects this. PROS: Well written with many interesting anecdotes. CONS: May well date quickly in light of the changing nature of fraud.
We are all leaders: leadership is not a position it’s a mindset FREDRIK ARNANDER | WILEY | £12.99/$20.96 Swedish business guru Arnander believes that it is time for a new approach to leadership, in which everybody should be considered a leader and should develop the concepts and tools to lead themselves. Unlike most management tomes, this book is aimed at people just starting out in their career, as well as established leaders. But there are lessons for
everyone, disseminated via 100 tips on issues such as holding meetings in other people’s offices and not always your own, omitting needless words from any communication and understanding that you never really lead anyone but yourself. PROS: Simply and engagingly written CONS: A number of the tips given may seem obvious to readers
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OPINION
Advice from directors, executive coach, negotiator and tools of other trades
FIVE MINUTES WITH
BRUCE MELIZAN nterserve is a FTSE 250-listed company with gross revenue of £2.3 billion and a workforce of more than 50,000 worldwide. Bruce Melizan was appointed to the board in January 2008 and has been in the outsourcing industry for 14 years. He is responsible for Interserve’s support services division, which employs 29,000 of the workforce and has a £1.3 billion turnover. His team provides a broad range of facilities management and support services to both commercial and government clients. We had five minutes to ask him the following…
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What’s the best part of being a director? The real satisfaction comes from being in a position that affords a comprehensive view of the organisation and a real understanding of the company’s challenges, strengths, weaknesses and opportunities. It’s also about having the ability to shape the direction and pace of the organisation, while being able to drive it towards being a successful and sustainable business – for its employees, customers and the communities in which we operate. And what’s the worst? The old saying is true – it can be lonely at the top. What’s the current boardroom priority of your company? The current business climate is presenting many challenges, but it hasn’t deterred Interserve from its ambition to double earnings-pershare from the 2010 base, and to support that, we have set ourselves a support services target of five per cent margin in the UK.
Although these appear to be internal financial drivers, they are driven by the need to deliver more efficient, productive services for clients. Every organisation we support is facing a constant demand to cut costs without comprising quality. This is why our 2013 objective is to deliver our promises; to ensure that on every contract, clients not only receive the services they expect, but also the added value benefits. It could be delivering better levels of service, driving down cost, supporting local economic growth or securing future job prospects. We’re also considering alternative directions to take our business in – such as how to enter new markets and further move towards delivering a broader range of front-line services. What’s the company’s biggest challenge? To become smarter users of technology. For me, technology isn’t about the latest gadget or software, it is about the process of supporting a diverse and challenging business in a more efficient, productive and risk-free manner while enhancing the customer’s experience. With 29,000 people working across the UK, Europe and the Middle East, technology can support us and our clients, but it has to be developed and embedded in the right way. How is procurement and supply helping you achieve those aims and tackle the challenges? Our procurement team is actively involved in our strategic direction and this centralised procurement policy has materially benefited us. Last year, it delivered £9.6 million of incremental in-year savings through mobilising 135 deals, across 56 categories within only eight months.
“Done right, procurement can fundamentally shape the wider strategic direction of the business” However, it is only by delivering it in combination with regional flexibility that we can support our customers’ requirements for a local, sustainable supply chain. In this respect, our procurement team has been active in increasing our small-to-medium enterprise supplier base, which now represents up to 80 per cent of our supply chain – highlighting the ‘scale’ of purchasing power that is available at a corporate level to great effect. BRUCE MELIZAN is executive director of Interserve and is responsible for the company’s support services division
Has your procurement and supply function helped improve the profitability of your business? The short answer is yes. Our procurement team has benefited us with financial savings. For instance, the £9.6 million saving equates to 26 per cent of our operating margin.
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LEADERSHIP TIPS WITH
Henry Engelhardt In 2012, Interserve joint venture PriDE completed a major project to renovate Horse Guards, Whitehall, in preparation for a busy summer of events
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HENRY ENGELHARDT is founder and chief executive of Admiral Group insurance company But further to this, its role in developing a robust supply chain – engaging the right suppliers and finding the right solutions for our diverse service delivery – helps us deliver our customer promise better. What advice would you give procurement and supply professionals who want to get the attention of their CFO/COO/CEO? That they understand the wider strategic direction of the business and find a way to support it. They also have to take responsibility for communicating their successes and changes to the business; this is essential in keeping all internal stakeholders engaged. Finally, they need to understand the nuances of the business. For instance, schools, hospitals and offices are all very different and our clients demand a real understanding of their needs. If done right, procurement can be much more than a functional role. It can fundamentally shape the wider strategic direction of the business.
ack in 1991, Henry Engelhardt, then sales and marketing manager at Churchill Insurance, was tasked by Hayter Brockbank, a managing agent at Lloyd’s of London insurance market, with setting up a business to sell private motor insurance to drivers directly, a concept which was still relatively new at the time. Targeting higher premium drivers who found it difficult to get cheaper car insurance, Admiral launched in 1993 from its Cardiff headquarters with 57 employees. Just 19 years later, Admiral Group employs more than 6,000 members of staff in seven different global locations, insures 3.55 million vehicles and in November 2012 recorded a 3 per cent increase in year-to-date group turnover, at £1.74 billion. It has a number of high-profile brands, including Confused.com, Diamond and Elephant.co.uk. The firm floated on the London Stock Exchange in 2004 with an
initial public offering of 275 pence per share and became the highest-valued public company in Wales. All growth of Admiral Group has been organic. Engelhardt has led the organisation over the past 19 years, including the 1999 management buy-out from Hayter Brockbank. Now CEO and personally worth £600 million, according to Forbes, he ensures the plc puts a strong focus on its original core values. Its customer base remains the same and the company believes everyone with an interest in the success of Admiral is a stakeholder, including staff, customers, the local community, investors and suppliers. It puts a strong emphasis on its employee wellbeing, with a “Ministry of Fun”, for employees. This year the firm was named best workplace in the UK, by the Great Place to Work®Institute, and it has featured in the Best Companies To Work For in the UK every year since The Sunday Times newspaper launched the list in 2001.
US-BORN ENGELHARDT, WHO INITIALLY TRAINED AS A JOURNALIST, GIVES SUPPLY BUSINESS HIS VIEWS ON WHAT IT TAKES TO LEAD Are leaders born or made? Both. There is no magic formula for how someone becomes a leader. Often it’s a combination of the two. How would you describe your leadership style? Indescribable. Or possibly: inconsistent, forceful, weak, sad, happy, energetic, passive, intelligent, ignorant... or maybe just indescribable. What’s the best advice you were ever given? Don’t spend a quarter until you’ve got 50 cents. What key messages would you give aspiring leaders? Leading is not about you; it’s
about the people you lead. Leave your ego at the door when you come to work every morning. If you could go back and speak to a younger you about leadership, what would you say? “Calm down.” Which leaders do you admire? Michael O’Leary [director and CEO of Ryanair]. He defies all the rules. What helped you become the leader you are today? Experience. Gleaned by either working for interesting people or reading about how it’s done. Can you give an example of a
challenging situation and how you handled it? Today I handle challenging situations by involving lots of people, getting lots of points of view that help shape my own point of view. The power of the team is invariably greater than the power of any single individual. So use the team. How does one know if they are a ‘good’ leader? You know when people follow you. What are the three words you think your employees would use to describe you? I don’t know – I’ve never asked them. Perhaps something like: “He’s still here?”
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ANALYSIS Experts and business journalists examine matters arising
GOVERNMENT CONTRACTING
FOUR MORE YEARS...
In his first presidential campaign, Barack Obama homed in on the issue of waste and mismanagement in government contracting, making radical promises to fix it. But now he is back in office the challenges remain. So what has Obama’s administration done so far – and what does the future hold? Words by P A U L S N E L L uring the 2008 presidential campaign, Barack Obama made the bold promise he would “fix government contracting”. Sharp increases in spending and cases of waste and mismanagement had brought it to the nation’s attention and it became a campaign issue. Four years on, it was a struggle to find a single mention of government contracting in the speeches made by either candidate in the 2012 presidential race. But the challenges have not gone away. One is sequestration – the automatic spending cuts and tax rises that will kick in if no political deal is struck to stop them – which was looming as SB went to press. So did the US president make good on his promise? And what challenges will he face as he returns to the Oval Office for four more years?
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First cut is deepest? A primary objective was to reduce the amount of government contracting that was actually taking place. Federal government spend on contracts grew from around $203 billion (£126 billion) in 2000 to around $405 billion (£252 billion) in 2008. In addition to a rise in domestic spending, the two wars in
Afghanistan and Iraq, and the impact of Hurricane Katrina in 2005 all forced contracting up. Obama had promised to cut federal spending on contractors by “at least 10 per cent”, saving $40 billion (£24.8 billion). According to latest figures, the administration spent $535 billion (£332.7 billion) on contracting in the 2011 financial year, roughly the same as was spent in 2010, and claimed this was the first cut in 13 years. It appears the administration
has missed the $40 billion target. But, it argues, the work that has been done to reduce spending has been critical. Had contract spending continued to increase at the same rate it did under the Bush administration, it would now be approaching $690 billion (£429 billion). This has led to a ‘saving’ (perhaps, in reality, cost avoidance) of $155 billion (£96.4 billion). Danny Werfel, controller of the Office of Federal Financial
Pressures on state and local government procurement Procurement professionals in state and local government are facing many of the same issues as their federal counterparts, according to Rick Grimm, CEO of the National Institute of Governmental Purchasing. “The number-one challenge that all levels of government – including state and local – is going to be presented with is having to produce greater value with fewer resources. We’re not seeing a dramatic increase in the volume of purchases, but we are seeing a massive reduction in the number of professionals,” he tells SB. The sector also faces the prospect of an older workforce now approaching retirement, and
thus risks losing their knowledge and expertise. “I don’t think we will be able to act quickly enough to find quality replacements able to go into public procurement.” But this is also an ideal time to demonstrate the value of public procurement and raise its profile. “Ultimately, it comes down to people,” Grimm adds. “Making sure those people are qualified, trained and professionally accredited. “Pay them the right compensation and treat them as a strategic player so they not only make a difference, but can help sustain that employment and are there for the long haul to have a continued positive impact.”
Management, comments on his White House blog: “There is good reason to be optimistic that this bending of the procurement-spending curve that agencies worked so hard to achieve in FY2012 and FY2011 will continue for the foreseeable future.” From a procurement perspective, the tactics used to cut spending have been straightforward in theory. There has been increased use of government-wide contracts – a joint deal on delivery services has saved $30 million (£18.6 million) and one on office supplies $18 million (£11 million). There have also been efforts to cut down deal duplication among agencies. And a presidential order ‘promoting efficient spending’, means agencies are examining spend on travel, IT, printing, fleet and promotional items. The conclusion of the wars in Iraq and Afghanistan should also push spending down, with experts suggesting spending could drop below $500 billion (£311 billion), or even $450 billion (£280 billion) a year.
Workforce challenge Experts point to one consistent issue that has affected the work of the past four years, and will continue to be a challenge in the future: the workforce itself. Dan Gordon was appointed
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10%
Federal spending on contractors Obama promised to cut
Onward and upward? President Obama succeeded in securing another four years in office, but will he make good on his 2008 promise to fix government contracting?
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ANALYSIS
BUSINESS ETHICS
FROM GAMEKEEPER 1 TO POACHER How can you prevent buyers leaving your company and using what they know to join a supplier to your business instead? And should you? Words by A N N A S C O T T
ack in October, the UK’s Sunday Times newspaper published details of damning recordings of retired senior military figures – including the former procurement chief of the Ministry of Defence (MoD) – appearing to offer their knowledge and contacts to help defence manufacturers win contracts. The newspaper story led the MoD to investigate whether any rules had actually been broken by the individuals concerned and do checks to ensure it was not possible for anyone to have ‘privileged access’ to anyone with responsibility for procurement. The rules state that the UK government department’s staff must wait two years after leaving before working in the defence sector. Similar rules have been
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introduced in other organisations, particularly in the public sector. Following his first election to the US presidency, Barack Obama introduced a ‘revolving door’ policy for federal officials involved in procurement. They were banned from taking up positions in current and potential supplier firms for one year after leaving government employment. Procurement professionals at the United Nations (UN) are also prohibited for one year from seeking or accepting employment with vendors, under reforms to procurement introduced in 2009 following the discovery of widespread corruption within the UN’s procurement practices. Suppliers attempting to hire ex-procurement staff could also have their registration as qualified vendors to the UN suspended or terminated. The use of post-employment restrictions is the main way that buying organisations can deal with the risks associated with their procurement staff moving to work for supplier organisations. The speed with which business changes means that in “over a year procurement professionals may have lost a certain amount of intellectual property because technology and business have moved on”, according to Larry
Beard, CPO global procurement, Tate & Lyle. These kinds of measures are necessary, Beard says, because there is a “direct conflict of interest in decision makers with a line of sight to the bidding process who would also have the unique selling points and intellectual property of various suppliers” moving to work for a supplier.
Years ex-US federal procurement staff must wait before working in supply
Right side of ethical But the practice of procurement professionals moving to supply side companies is not outright unethical. Beard adds that there is an “absolute categorical difference” between suppliers taking on procurement staff because of their overall knowledge and to help win business, and hiring those with a direct knowledge of the bidding process in order to influence bids. “This is a fine line between keeping on the right side of ethical.” One particularly difficult issue is the fact that the procurement professional will have knowledge of the new employer’s competitors. Mike Inman, former CPO of MGM Resorts International, now instructor and contract negotiator at TableForce and Supply Business columnist, says: “On the one hand, they owe it to their new employer to
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“It’s difficult to prevent or enforce people leaving and being hired by another company and post-employment restriction may not stop it occurring, and may even drive it underground” MIKE INMAN, INSTRUCTOR AND CONTRACT NEGOTIATOR AT TABLEFORCE AND SUPPLY BUSINESS COLUMNIST
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COVER STORY TRANSFORMATION
WINNING FORMULA
Novartis is a massive company. Being on its Swiss campus is like being in a mini city. Its scale means the prize of procurement working closer together is huge – but so, too, is the challenge
Words by R E B E C C A E L L I N O R Illustration by I A N D O D D S
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ow do you transform a decentralised, 1,100-strong procurement function that operates across seven distinct business divisions operating in 46 countries around the world? Phillip Duncan, CPO, knows he’s biased, but he says that what the Novartis team has achieved is “phenomenal”. He says that the task was straightforward, but far from simple: to work out the best way to leverage the talent, processes and systems of his entire function around the globe. The transformation of procurement was signed off by the executive committee in 2008. We take a look at what it’s done.
Introducing Novartis The company is made up of seven divisions: pharmaceuticals including biotechnology; generics business Sandoz; eyecare company Alcon; vaccines and diagnostics; consumer health and over-thecounter products; research; and animal health. Each is quite different and operates separately with its own CEO, CPO and so on. And that’s how the company likes it. However, when you’re talking about an annual third-party operating expenditure of $20 billion (£12.4 billion) and you know there is lots of commonality – and therefore some replication of work – across those divisions, you know there are opportunities to be had. The $6-7 billion (£3.7-4.3 billion) it spends on directs is dwarfed by indirect
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COVER STORY TRANSFORMATION
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spend, which covers massive areas, including marketing and research and development. Duncan estimates around 60 per cent of the overall expenditure is homogenous. And that size of opportunity couldn’t be overlooked, especially given the business environment. Novartis is a healthy, profit-making business. The most recently available figures show that in 2011 it posted sales of $58.6 billion (£36.4 billion) and net income of $9.2 billion (£5.7 billion) and had more than 130 products in the development pipeline. It does, however, have to face certain facts: most significantly, a patent cliff it must contend with as many of its products become available to the market to make generic. Procurement was tasked with saving $4 billion (£2.5 billion) in four years to help fill the gap left by drugs coming off patent. And Duncan believes the company is well-placed to deal with these challenges, having put appropriate plans in place. In the company’s most recent annual report, CEO Joseph Jimenez said he gets a lot of questions about why Novartis would announce plans for cost reductions at a time it was doing so well. In reply, he said: “We must address the increasingly challenging external environment from a position of strength. To continue to be successful we need to reduce our cost base. In this sense, cost savings are strategic. They allow us to maintain strong levels of research and development spending, which leads to innovation and, in turn, sales growth.”
“YOU CAN’T JUST KEEP RUNNING THE ENGINE HOTTER AND HOTTER. WE HAD TO CHANGE TO SUSTAIN THAT PERFORMANCE” Four key areas are targeted for productivity improvements: manufacturing; general and administration expenses; marketing and sales spend; and procurement. “We made procurement a major source of savings by leveraging our scale, implementing global category management and creating country Centres of Excellence in key markets, which generated annual savings in 2011 of approximately $1.3 billion (£800 million),” the latest annual report adds.
The first phases So how did it do this? Novartis successfully created shared country procurement teams, but this didn’t cover all countries and had limited scope. Similarly, global cross-divisional category managers were put in place, but not for all categories and they lacked structured teams to support them. This early progress did, however,
TEAMWORK
Where and how it’s working US cross-divisional integrated facility management Site and facility services with several hundred contracts across 20 sites were consolidated into one provider with an outcomebased contract. This will deliver around 18.5 per cent committed savings over five years, with incentives for further productivity.
Alcon procurement This was partnered crossdivisionally to leverage combined scale to reduce fees paid to primary US wholesalers, covering $2 billion (£1.2 million) in revenue. Savings from contracts in the first half of 2012 were estimated at $13.6 million (£8.4 million) Shared expertise Online guides accessible by all
procurement personnel include the balanced scorecard, a performance management handbook, the procurement calendar, common sourcing plan and a ‘category playbook’. The playbook has been introduced to pull together everything from price lists to framework agreements with key suppliers. These are stored on SharePoint and regularly updated by category teams.
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help procurement convince senior leaders to support it in making the institutional change required if it was to make significant improvements. The Procurement Transformation Programme was set up with three key pillars, the Procurement Governance Programme (PGP), systems and people. “Procurement was already grabbing the headlines and increasing savings by 50 per cent each year,” says Paul Bestford, head of the procurement transformation programme, “but you can’t keep running the engine hotter and hotter. We had to change to sustain that performance.” Bestford, who joined Novartis in 2009 as head of category management, says most of that initial value came from just doing deals. “It was working, but it was scratching the surface,” he says. “You can only renegotiate about a third of deals every year because some are tied up in longer-term contracts, which means you cycle through the whole spend about once every three years. To average 6 per cent savings across $20 billion [£12.4 billion] spend you need to average an 18 per cent saving on every deal. That’s quite a scary number and probably not sustainable, so you look at what you can do to the rest of the spend.” They came up with a value levers model that covered four ways that procurement can create value: sourcing (through price
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negotiation and competitive bids); demand management (buy less and alter specifications); process improvements (buy more efficiently by reducing invoicing costs and increasing the use of electronic catalogues); and value management (through improved supplier performance). Some of these were not within procurement’s full control. Take demand management, for example – while procurement could consult with and advise stakeholders in other departments, it couldn’t insist, and having these persuasive conversations takes time and a particular skill. The function wasn’t able to ask the business for more people to do the work, so it had to find ways to become more efficient. Bestford says one of the advantages of working for such a large organisation was examples of excellence already existed, he and his colleagues just had to identify them all and make them more widespread.
Under the microscope To go beyond just doing deals and capturing more value, Bestford and his colleagues had to thoroughly test the theory that greater opportunities existed if they overhauled the current procurement set up. “This is not a company where a few sound bites and slick presentation are going to get you very far,” says Bestford. “You have to have all the detail worked
The team 1. PAUL BESTFORD Head of procurement transformation 2. DIANE BOLTON Project coach 3. LIN-ROGER LI Project coach 4. DANIEL UGO Project coach 5. CHRIS HOLMES Head of procurement governance programme 6. GIANLUCA FILACCHIONE Head of global category management 7. HANNAH PERRY Project coach 8. DEAN BENNETT Procurement governance programme project manager 9. RICHARD NORCROSS Global HR head, procurement
out before you start to change.” At this point, the team pulled in some external expertise to help. Deloitte won the work and the project started in April 2010. For the purposes of the trial, one category was examined to identify opportunities and challenges – laboratory supplies. Procurement partner at Deloitte oitte James Gregson says: “Everybody dy thinks organisational design is about standing in front of a whiteboard. What you need to do is ask those who do the work what the pain points are. “To get to the crux of the issues we ran two workshops – one in the US, one in Switzerland. Initially, we focused d on process, what was going wrong and what the answers might be. We then considered ‘if we started again, what would we do?’” “We mapped out the process from setting the targets to the purchase order and everything in between,” says Bestford. “Then we explored what roles we needed to achieve the desired result. The leadership structure was the last thing we got to.” This bottom-up approach produced a number of findings. First off, better data was a must. It also found that the way targets were set didn’t encourage collaboration. “We needed to get the
targets lined up so people were rewarded on the basis of cross-divisional goals,” says Bestford. While some findings applied across the board, the team didn’t know if others were specific to lab supplies and would therefore be quite different in categories such as marketing and packaging. Further progress was made in March 2011 when the business’s top 200 procurement professionals met for their annual conference. At that event Bestford set them a game to play in which the only way to achieve a successful outcome was to exchange skills and resources and work together. “It really helped people understand the problem,” he says. This new, collaborative approach was more readily accepted by some. One man who immediately appreciated the potential benefits was Thomas Zinsli, global head of procurement at Novartis’s smallest division, animal health. Zinsli currently manages a team of 30, quite a change from his previous role heading up a large procurement team in the division with the largest third party spend, pharmaceuticals. “Along with the other divisional heads, I was excited about it. It gave us the opportunity to access resources and expertise we didn’t have. For example, example I had a guy buying packaging material who packa suddenly realised others were sud doing the same thing and do that he would benefit by t working with them.” w
Design workshops D Work got underway in earnest W in June and July 2011 as the J transformation team spoke to trans stakeholders to discover what the stakehold opportunities could be. They also surveyed key procurement professionals in the business and quizzed some key suppliers on what it was like to work with Novartis. Suppliers said the company acted professionally and with integrity, but they were less keen on dealing, as some of them did, with 40 to 50 different people across the business. Buyers were also frustrated that they couldn’t tell who else was dealing with their suppliers. Design workshops took place involving key stakeholders across the main categories. A total of 300 people from
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INTERVIEW PAUL GALLAGHER
SWIFT AND SURE Global supply operations for alcoholic drinks company Diageo is a finely tuned machine – not least in its award-winning Singapore hub. Paul Gallagher, Asia Pacific supply chain director, outlines the need for speed and sustainability in the region Words by A N N A S C O T T
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he range of household-name brands Diageo is responsible for manufacturing and distributing means that the global supply operations for the drinks manufacturer is a finely tuned machine. It owns seven of the world’s top 20 alcoholic drinks brands. It is also an award-winner, most recently scooping the Asia Pacific Supply Chain Excellence Award at the SCM Logistics Excellence Awards in Singapore in October 2012 for its Supply Finishing Centre and Super Deluxe Centre, part of its supply operations in Asia Pacific. This region is of increasing importance to Diageo – the total alcohol beverage market is growing at 6 per cent each year – and the company has a growth strategy to move half of its business to the emerging markets, with Asia Pacific expected to make up 20 per cent of the overall global business by 2015. In the past financial year, the region contributed 10 per cent to Diageo’s total operating profits. Further growth is expected following the announcement on 9 November 2012 that the company is to acquire a 27.4 per cent stake in United Spirits Ltd (USL), the leading spirits company in India, for 57,254 million Indian Rupees (approximately £656 million). The acquisition and tender offer is expected to be completed in the first quarter of 2013. As well as ensuring its production and distribution facilities can meet the increasing demand in Asia Pacific, the company has put the spotlight on the environmental repercussions of its operations, making a number of high-profile and global commitments to reducing energy use and waste. Such goals are included in Diageo’s approach to sustainable procurement, which has three main priorities: sustainable energy for its manufacturing sites; ethical sourcing of goods and services; and sustainable agriculture in its raw-material supply chains. Diageo operates production and distribution facilities that include distilleries, breweries, vineyards and packaging plants, and it undertakes four-fifths of its total production across 11 countries. The remaining fifth is produced in a number of countries by joint ventures and commercial partners.
We spoke to Paul Gallagher, Diageo supply chain director in Asia Pacific, about the supply operation and other challenges for Diageo. Tell me about Diageo’s supply operations in your region of responsibility. One of the areas we are particularly proud of here in Singapore is our postponement centre. It serves as an import and export operation to all our in-market companies around Asia Pacific, as well as in the Middle East and some of North Africa. Our products are brought in from various places around the world to the Singapore hub and are then customised or postponed to market as appropriate for different regions. We see the Singapore centre as providing a competitive advantage for the business because it brings enormous flexibility and agility into our distribution process. The centre also
“WE LOOK TO SOURCE LOCALLY, WITH A VAST ARRAY OF GLOBAL SUPPLIERS WHO BRING AGILITY TO OUR PROCESS” enables us to deliver on customer demand, especially in an environment such as Asia Pacific, in which demand forecast can be somewhat volatile at times. We have also established our Super Deluxe Finishing Centre principally to avail of the opportunities we are seeing in the luxury end of the business [the region is expected to supply about 40 per cent of the world’s demand for luxury drinks brands by 2014]. This centre deploys a differentiated supply chain that allows us to personalise and customise luxury products depending on the market they are going to. Diageo’s luxury products include Tanqueray No. Ten gin and Johnnie Walker Blue Label whisky. The finishing centre also allows us to take advantage of procurement opportunities in
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IUNDERCOVER A N C I D CPO ER A head of procurement at a large global business gives his reflections on corporate life
Heading for nirvana often come across an undercurrent of disquiet and professional angst among procurement and supply chain directors. This anguish surrounds the fact that they do not have their ‘true place’ in corporate life – namely, a position on the management board. I find myself slightly bemused by those who bemoan this lack of recognition. If this vision of collective success (a boardroom seat) is the correct one – and I am not convinced it is – we seem to have ended up with all the responsibility, but no authority. Very often, cost-saving plans and strategies are made in the boardroom, but it is someone outside of that decision-making den who is expected to implement these ideas. Hence, responsibility without authority. I did begin to wonder how other functions like HR and IT have achieved this apparent nirvana of corporate elevation? Somewhat flippantly, I wondered whether we need to be known by an acronym: ‘P’ or ‘SC’ or ‘PSC’ – or perhaps not. I also mused, perhaps cynically, that HR is involved in both hiring the entire executive and in assigning their pay, terms and conditions. IT does a great job in hiding behind its own language and in the art of unreasonable management. Its message always seems to include some implied threat of the corporate consequences of not agreeing to fund the latest mystically named ‘cnp.2s4 upgrade’, with the associated additional multiple headcount required to manage the system. Is it this scaremongering that assures IT a place on the board? Or is it that these departments simply ask to be represented? As my mum used to say, if you don’t ask, you don’t get. Are we actually asking for a place or just hoping that our brilliance will shine through and the CEO will come a-knocking? Another possible explanation is that these functions give the board what they want. Maybe company boards only want procurement and supply chain for the cost savings we can achieve, but is this really such a bad thing? I always did warm to the mantra of ‘faster, cheaper, quicker’, which I gather is the mission statement of a large food retail chain. I would be
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delighted to be the ‘go to’ function in corporate life to ensure these three words were put into action. And when you start to apply them to the seven areas of waste: avoidance, reduction, reuse, recycle, recover, treat or dispose, in all parts of the procurement cycle, we have the most impressive scope for both authority and responsibility. Don’t get me wrong, I am not arguing for a mono-dimensional profession, defined only by its contribution to cost savings in its simplest sense. I am suggesting that a senior procurement practitioner can make a very persuasive argument for cost savings as our raison d’être, but in all its breadth, colour and nuances. We should not, as a profession, be defined by other people’s use of language and point of view. We have to be clear and eloquent in articulating our own. Those who succeed in making this breadth of argument, with effortless ease seem to be the ones gaining recognition, position and influence. I suspect the differentiator between the good, the bad and the ugly in procurement (and whether we make it to the top table) is the ability to sell ourselves and communicate the value of our role. I am not saying that we should be out-and-out sales people, but the differentiation goes beyond just asking and procurement skill. There is the need to have a track record, not just in procurement, but in business. If you make a case using expressions like ‘RFPs’ and ‘RFIs’, the eyes of your CFO or CEO will glaze over. It’s not about how you get somewhere, but what more broadly you’re going to do to achieve the business’s ultimate goal. So the next time you feel the gospel of envy or the burden of ability that’s not recognised, book yourself on to a persuading and influencing course. Who knows where you might find yourself.
“The differentiator between the good, the bad and the ugly in procurement is the ability to communicate the value of our role”
AGREE? DISAGREE? Email me at undercovercpo@ supplybusiness.com to share your thoughts.
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