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POWERADVOCATE VIEW

PowerAdvocate

ASSESSING THE CENTER-LED SOLUTION FOR SUPPLY CHAINS

PowerAdvocate 179 Lincoln Street Boston, MA 02111 T 857.453.5700 F 857.453.5656 info@poweradvocate.com www.poweradvocate.com

November 2011
Copyright 2011 Power Advocate, Inc. All rights reserved.
Copyright 2010 Power Advocate, Inc. All rights reserved.

POWERADVOCATE VIEW: CENTER-LED SUPPLY CHAIN MODEL

Leverage Market Data

Identify Your Costs

Go-To-Market

ENERGY INTELLIGENCE PLATFORM


delivers industry leading supply market intelligence

Understand Your Spend

Monitor Your Contracts

Manage Your Suppliers

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Copyright 2011 Power Advocate, Inc. All rights reserved.

POWERADVOCATE VIEW: CENTER-LED SUPPLY CHAIN MODEL

Assessing the Center-Led Solution for Supply Chains

The changing dynamics of todays supply market has required energy companies to take a very focused look at how their supply chain departments are structured. Defining the right organizational structure is critically important. It determines the degree of flexibility and nimbleness that a company has to respond to immediate market volatility. And the organizational strategy can also determine the level to which a company can leverage its size and scale to ensure best-in-class costs. For most companies, this trade-off between a decentralized, small and fragmented organization versus a larger, centralized, and scalable department has been a rather black or white scenario. Recently, however, more energy companies are discovering that a hybrid center-led model may in fact be able to deliver upon the best of both worlds; allowing critical decisions to be made at the site of execution, but retaining the ability to leverage spend across the entire enterprise. PowerAdvocate has found that more of our customers are trending toward this center-led model of procurement. A recent review of our client base reveals that 24% of utilities and energy companies have transitioned (or are transitioning) to a center-led procurement model. While the benefits of switching to a center-led model may be numerous, there are still significant challenges that need to be overcome to be successful with such an organizational transformation. PowerAdvocate prefers to frame these challenges in the context of assembling the right team of people, ensuring that the right processes are in place, and enabling the organization with the correct set of tools to monitor and execute against the new strategy. This People, Process, Tools paradigm is especially important. Breakdown in any of these three areas may mean the difference between a successful realignment and an organizational failure. In fact, organizations often spend their resources in acquiring or developing the right talent and incorporating complex processes for category management or market intelligence. However, it is PowerAdvocates view that too little time is spent on the third leg of the stool; that of implementing the right tools for the new organization. The purpose of this View is to discuss the challenges and benefits of a center-led procurement department within the context of executing against the new strategy. By ensuring that the right technology is in place to allow the assembled professionals to execute against the corporate strategy enables the company to maximize the value of a center-led approach.

CASE EXAMPLE The best center-led organizations are able to leverage enterprise knowledge across various regions to maximize savings opportunities. One of the best examples of this comes from a Midwest customer that PowerAdvocate worked with. The customer had several different facilities across the Midwest and was examining opportunities to cut costs and reduce the number of suppliers that they were managing. Through a comprehensive spend analysis, the area of oil analysis was targeted as being an opportunity where the company could improve. PowerAdvocate worked closely with the category lead, analyzing the various oil analysis companies currently being used and identifying the best-in-breed resource available. Where the center-led model became effective was when we helped that supplier establish a new testing lab in a centralized location, effectively enabling the supplier to broaden their capabilities across the customers entire fleet of facilities. The result was a reduction of oil analytics companies down to one major supplier and a significant cost savings across the fleet.

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Copyright 2011 Power Advocate, Inc. All rights reserved.

POWERADVOCATE VIEW: CENTER-LED SUPPLY CHAIN MODEL

PROCESS , PEOPLE, TOOLS


The trend toward center-led organizations has evolved since 2004 to respond to uncertain market conditions such as commodity volatility, federal regulations and an increase in capital projects. Market volatility greatly impacts decentralized organizations where wide disparities between the prices being paid for equipment and materials across different sites. On the other hand, centralized groups were having a difficult time being nimble enough to account for the different technical nuances in the field to be able to leverage a corporate buying platform in time with rapid price BU swings. The subsequent financial BU BU collapse merely reinforced the Center-Led Supply Chain: need for a new organizational Spend Visibility Across Enterprise model to address these issues. Market Intelligence Gathering The center-led model is the most common of the iterations that have occurred since then. In essence, the centerled organization delegates purchasing decisions to the field, but is supported by a centralized department that aggregates intelligence from across the enterprise. It is this centralized departments responsibility to leverage best practices across the various field sites while not inhibiting them from being flexible enough to react to local conditions.

Supply Chain

Distilling Category Knowledge Supplier Management

BU

BU

BU

Business Units: Technical Expertise Local/Regional Expertise Suppliers Categories Isssue POs and manage against

In general, there are four key tenets to an effective center-led organization: Organizational Leverage (ensuring that the organization is maximizing its scale and breadth) Category Management (distributing deep domain knowledge across the enterprise) Market Intelligence (anticipating and proactively taking action to changing market conditions) Performance Management (monitoring and improving company and supplier performance) This center-led model can be powerful in delivering benefits to an energy company. These benefits include bringing additional spend under management, leveraging stronger relationships with alliance style contractors, incorporating best practices in managing risk and pricing volatility in contracts, hedging commodity risk across an enterprise, balancing supplier constraints, securing supplier capacity ahead of time, and increasing collaboration between business units and corporate. And these benefits lead to real savings as well. One energy company responded that for every dollar worth of spend that they are able to bring under management, they average a 6% return in savings. For companies with hundreds of millions of dollars of spend that can be leveraged under this model, such savings can be a significant incentive to consider a more centralized approach toward category management. To execute this strategy, though, requires overcoming some significant -4-

CASE EXAMPLE Decentralized organizations typically struggle at understanding the upcoming demand that the enterprise will have for critical materials or components. However, center-led organizations have the ability to aggregate these demand plans and take proactive steps to secure supply capacity. Take a Midwest customer that PowerAdvocate was assisting on new scrubber projects across three very different sites. Each of the sites already recognized the need to order pilings over the next year, but none of them had collaborated to determine the total anticipated order size that was about to be executed. PowerAdvocate quickly identified the leverage opportunity and mapped the order times against the rolling schedules of the local steel mills. As such, the company was able to secure a premium spot in the rolling schedule, saving time and money across all of the projects.

Copyright 2011 Power Advocate, Inc. All rights reserved.

POWERADVOCATE VIEW: CENTER-LED SUPPLY CHAIN MODEL

Four Key Tenents to an Effective Center-led Organization


Organizational Leverage Center-led Group Understand and leverage corporate spend across the enterprise Develop and execute against a common corporate sourcing strategy Establish demand plans across the organization that allow proactive sourcing management Identify and qualify national suppliers Category Management Distill category knowledge and insight to the procurement personnel in the field Leverage best practices in commercial, technical and pricing across various sites Develop consistent go-to-market templates Establish appropriate contract indices and escalators Disseminate best practice contracting strategies for key categories Category Management Market Intelligence Understand key market dynamics and communicate with the field Ensure a growing representation of diverse suppliers Incorporate corporate hedging solutions into supply risk management Performance Improvement Benchmark performance both internally between business units and externally with peers Continually monitor and improve organizational and supplier performance

Organizational Leverage Field Procurement Define the functional and technical specifications unique to their project Issue the Purchase Orders and manage against them Ensure that field information is included and assessed in the corporate model

Market Intelligence

Performance Improvement

Identify local or Communicate Ensure contract regional suppliers regional trends compliance, Incorporate back to corporate including regional category to validate or reporting and KPI nuances into proactively monitoring procurement identify critical Audit invoice strategy issues receipts around Identify local work completion constraints that and payment require enterprise collaboration

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Copyright 2011 Power Advocate, Inc. All rights reserved.

POWERADVOCATE VIEW: CENTER-LED SUPPLY CHAIN MODEL

challenges. Balancing the distribution of responsibilities between the corporate office and the field is tricky and requires a clear, consistent message from senior management. In addition, having the right personnel in place within the center-led organization is critical. These are not traditional procurement professionals, but they instead have the responsibility to analyze and react to cost trends in the marketplace, evaluate benchmarks and suggest market strategies around critical categories. These professionals are required to have deep domain expertise and the ability to manage divergent needs across a number of different sites.

CASE EXAMPLE

As for changing processes, most center-led models have switched to a category management discipline for their organizations. This model enables the company to leverage enterprise spend across similar materials, equipment and services while providing for deep domain expertise to be disseminated from the center-led group. Processes are standardized across the enterprise to ensure compliance and a strategic sourcing outlook is incorporated to emphasize the need for procurement savings at every level of supply chain sourcing. Lastly, the need for new tools in the center-led model cannot be overstated. The right software applications not only identify areas for cross-organizational leverage, but put in place the monitoring and measurement capabilities to continually grow and improve as a company. PowerAdvocate has been involved in center-led initiatives for more than a decade, having helped one of our first customers execute a center-led initiative across multiple global facilities. Over the years, our development of software-as-a-service applications has aligned with our understanding and expertise within the center-led procurement model. The need to deliver on-demand data and to disseminate that information across hundreds (if not thousands) of field personnel is critical to effective center-led management.

Todays volatile supply market continues to carry significant risks. Commodity prices continue to bounce back and forth. A center-led organizations responsibility is to help insulate the field facilities from this volatility while ensuring on-time, quality deliveries. An energy company in Canada came up with the solution of incorporating a hedging function within the procurement organization. Analyzing steel, copper, and other purchases across the enterprise, the company can now take financial and physical hedges to better manage the cost volatility in the marketplace.

OWN YOUR SPEND


Situation:
The fragmented nature of a utilitys procurement turned out to be a big problem when the CFO mandated significant cost reductions across the enterprise. Nobody owned the spend. The decentralized procurement organization did not even have a VP of Supply Chain and was sitting under the Office of the Controller.

Challenge:
Realizing such an ambitious cost savings goal was going to be difficult under the current organizational structure. Instead, the utility needed to transform the supply chain function to one that owned the enterprise spend but was nimble enough to react to market conditions. Cross-functional buy-in from business units was imperative. The new organization would need to: Break down silos by engaging directly with the Business Units Add value to the Business Units by sourcing the right suppliers at the right price to maximize performance, quality and sustainability (Total Cost of Ownership) Implement a category management model, combining enterprise-wide spend for similar materials, goods, and services and selecting the optimal mix of suppliers for these natural buying groups Standardize practices, align technology, leverage spend, and achieve savings across center-led supply chain processes. Create a culture of performance-based metrics and results

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Copyright 2011 Power Advocate, Inc. All rights reserved.

POWERADVOCATE VIEW: CENTER-LED SUPPLY CHAIN MODEL

Approach:
The newly appointed VP of Supply Chain recognized this undertaking as a transformational shift in the way they thought about and managed their spend and supply chain processes. It would impact the entire enterprise, not just the Supply Chain. However, since this initiative was cost-savings driven, the VP of Supply Chain needed to identify enterprise-wide spend and gain visibility across categories and suppliers. Spend aggregation across the organization demanded a technology that complemented the transformation focus and would not complicate matters. People: The VP of Supply Chain began the transformation by building up the organization from the ground. The centrally led plan had to be de-centrally executed. This required a massive change management effort with relentless reinforcement of the Future State of the Supply Chain. She created a Road Map to explain what success looks like. Since the existing processes were changing, she expected the existing skill sets to shift. Approximately 60% of the Supply Chain was retained but required retraining of skill sets. The training focused on creating a learning environment to develop employees and build leaders. This was accomplished through the assembling of cross functional project teams and the design of a rotational program to move employees between groups to learn new skills. Process: To execute a center-led change required the examination of existing processes to not only identify the gaps but to understand the balance of responsibilities between the corporate office and the business units.

Supply Chain
Long/Short Term Planning Category Management Logistics & Inventory Management Procure to Pay Supplier Management Support Services

Standardized Operations
Warehousing Procurement

Enterprise-wide Center-led
Contract Labor Managing Contracts

Tools: The technology needed to augment the people and process efforts without disrupting or diverting the momentum. The client turned to the PowerAdvcoate Energy Intelligence Platform to supercharge their transformational efforts. During the design, PowerAdvocates Spend Intelligence established the spend in various categories across the enterprise. Sourcing Intelligence promoted greater collaboration and partnership with the Business Units. Finally, category profiles and strategies were created leveraging Cost Intelligence and delivered through Market Intelligence to increase collaboration among category teams.

Results:
In the two years time, our client has transformed from a fragmented tactical responsive organization with no ownership of spend to a center-led organization partnering with the Business Units and using analytics to drive decision making. They have successfully identified and executed upon the CFO mandated savings targets.

CONCLUSION:
PowerAdvocate continues to innovate around the support of center-led organizations. As the center-led model becomes increasingly used across the energy space, our applications (along with our in-house team of energy procurement experts) are well positioned to enable success for our customers.

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Copyright 2011 Power Advocate, Inc. All rights reserved.

POWERADVOCATE VIEW: CENTER-LED SUPPLY CHAIN MODEL

For more information, please contact PowerAdvocate: Paul Schuster (857) 453-5720 direct (857) 453-5656 179 Lincoln Street Boston, MA 02111 www.poweradvocate.com info@poweradvocate.com

PowerAdvocate

About PowerAdvocate
PowerAdvocate provides supply market insight and solutions to energy companies to optimize financial results. We combine best-in-class information, innovative technology,and expert services to save our customers money. PowerAdvocates Energy Intelligence Platform and advisory services span the energy value chain in Fossil & Environmental, Nuclear, T&D, Oil & Gas and Renewable Energy.