Master Class in Supply Chain Management …

1 Collaborative Sourcing: Supplier Management for Competitive AdvantagesMichel PhilippartMaster Class in Supply Chain Management2 Michel Philippart 200715 Years of passion for Procurement94969800020406 Frito-LayDevelopmentTrainingLatin America TeamConferenceSIPMMMcKinseyStructuringMc K Functional trainingTribuneLa Lettre des AchatsTeaching Ms AchatBook*CollaborativeSourcingGSK BioApplicationConferencesEuropeanPharmaR eviewCPOM agazine**With Christian Verstraete et Serge Wynen9092 Booz AllenDiscoveryViewpointStrategic Sourcing3 Michel Philippart 2007 Objectives Understand the respective benefits of different types of supplier relationships Understand the difference between value creation and cost reduction Structure a portfolio of supplier relationships that matches the needs of the enterprise and maximize value4 Michel Philippart collaborate?

2 Sourcing Philippart 2007 Most supplier relations bring short term benefits Strong competitors work on Procurement equally hard .. and obtain similar price decreases .. that their sales force must give away to stay competitive with their clients Those Procurement actions are necessary but do not improve either long term competitive position or profitability therefore do not enhance shareholder value Is Procurement a basic survival skill? Are you satisfied?6 Michel Philippart 2007 Secure resources in times of shortage require to rethink supplier Management approaches Nissan is to stop production at some of its domestic car plants for five days due to a steel shortage (BBC News 25/11/04 ) Raw-material shortages and high prices are fueling a new wave of acquisitions (India Daily 14/08/06) Capacity Shortages Loom for Lower Tier Suppliers: The recipe for collaboration requires key ingredients that are not yet in place(Automotive Industries February 2005) Michelin has reached the conclusion that its strategy is no longer compatible with General Motors purchasing policy.

3 Consequently, Michelin will not renew its original equipment tire shipment contract with General Motors Europe which expires on July 31, 2002(Michelin press release First Half 2002 Earnings) Today's turbine constrained market makes control of the Supply Chain especially critical. Ownership of or at least close ties with key suppliers in these areas is therefore important for ensuring a wind turbine vendor is able maximize production and thereby their sales potential and market share (Wind Energy Report 2005 - REA)7 Michel Philippart 2007 Example : Wind Turbine Manufacturers (2002)Wind turbine design and assemblyFinancingGear boxBladesNon criticalcomponentsConsultingWind farmSources: Internet publications, interviews with industry executivesInformation summarized and simplified8 Michel Philippart 2007 Key Players PerformanceSources.

4 BTM Consult ApS, World Market Update 2002, March 2003 Amadeus Financial Data REpowerWind Turbine Manufacturers PerformanceGamesaEnerconBonusNECN ordexVestasREPowerREPower0%2%4%6%8%10%12 %0%50%100%Growth Last 3 YearsLatest ProfitabilityMarket9 Michel Philippart 2007 Integrated Blade ProductionMarket LeaderWind turbine design and assemblyFinancingArm length w/ Gear boxNon criticalcomponentsConsultingWind farm10 Michel Philippart 2007 Challenger : REPowerWind turbine design and assemblyFinancingGear box: Exclusive partnershipwith Renk for the largest high performance gearboxBlades: Development partnership with LM for large bladesNon criticalcomponentsConsultingWind farm11 Michel Philippart 2007 REPower has developed a growth strategy to enhance its market presence Survival in front of larger competitors Adaptation to a fast mutating environmentNeed Identification of the cultural weakness of the leaders Focus on differentiating componentsStrategic Analysis Privileged relation with gearbox and blade suppliers Sharing of information about market needs and technology trends Co-marketingCollaborative Sourcing12 Michel Philippart 2007 Key Figures Vestas0250500750100012501500175020001999 2000200120022003 Revenues 050100150200250300350400 EBIT in EUR millionTotal revenue in EUR million13 Michel Philippart 2007 EBIT in EUR MillionTotal revenue in EUR , Figures REpowerSource.

5 REpower corporate presentation March 2003 14 Michel Philippart 2007 Impact on ShareholdersComparative Stock Price Variation00,511,522,5avr-01sept-02janv-0 4mai-05oct-06f vr-08 Index ref 1/4/02 REPowerVestas15 Michel Philippart 2007 Repower Learning A small company can leverage smarter supplier Management to over perform larger competitors Supplier Management was initially viewed as a way to stretch limited resources but soon turned into a common project to develop a better solution to emerging needs This culture increased the company value made the company desirable to large firms outside the industry: at least two attempts to acquire it Share over performed key players16 Michel Philippart 2007 Raw Materials and LaborEmpire1960 Components & SubassembliesMatrix1980 Brains & ServicesNetwork2000 Business Environment EvolutionSource:Big Fish Building and implementing an effective SRM approachhow to work in an extended enterprise 17 Michel Philippart collaborate?

6 Sourcing Philippart 2007 The key to corporate success lies in the creation of Sustainable Competitive Advantages The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage* Company value is often evaluated with discounted cash flow models The competitiveness of most industries will make the differentiation of negotiated cost reduction short lived because cash benefits quickly pass to the final users Only suppliers that can help differentiate our products or services will provide sustainable value and competitive advantages*Warren Buffet, Nov. 199919 Michel Philippart 2007 Procurement evolves to contribute to SCAS upplier Management for growth Source of innovation / unique capabilities and raw materials Faster introduction to new markets Exclusive knowledge capture and leverage Long term securing of hard to find resources: price, volumes, serviceCostShareholder ValueImpactNATacticalStrategicScopeSuppl y Chain Management Simplify Optimize TCO* Increase transparency, knowledge of supplier markets e-ProcurementTraditional Purchasing Mindset Leverage scale Negotiate Divide and conquer etc.

7 *TCO: Total Cost of Ownership 20 Michel Philippart 2007 This evolution allows Procurement to contribute more and more to valueBenefits of Supplier Management Focus of Supplier ManagementExclusivity pricing Rent Differentiation and lifecycle market valueFull cost optimizationTotal cost of ownershipPriceNegotiationValue21 Michel Philippart 2007 Illustration in Consumer Goods Demise of a former local market leader in France, Flodor Frito-Lay , a global giant expanding in Europe Analysis from a journalist in an economic weekly: it won with its innovative seasonings and packaging Henri Haget, Touche pas mon usine , L Express,September 4, 2003 Why couldn t Flodor source from the same supplier?22 Michel Philippart 2007 Frito-Lay Integrated ApproachProcurement leadscross-functional teams to lift company potentialsProcurementMarketingSalesManuf acturingDevelopmentLegalIdentify need for packaging with better barrier properties to improve freshnessHarmonize across Europe to lowers costsCapture competitive advantage Produce on new, dedicated linesConsolidate European volume to key suppliersUKBJ ointly develop new technology JapanUSA23 Michel Philippart 2007 Client Invest volume Share projections and market understanding Co-develops specifications Insure that supplier enjoys competitive ROICS upplier Allocates tools Target innovation efforts Dedicates best staff Open booksImpact of new packaging 70 days without flavor variation vs.

8 15-30 for the competition 70/30 consumer preference in blind test Capture of category leadership in key markets 30% cost reduction over 3 years Strengthened negotiation position against organized trade24 Michel Philippart 2007 Frito-Lay changed the competitive field Identified critical skills available outside its own operations that could contribute to its objective of superiority versus the competition Built such a relation with suppliers that competitors could not access the same resources Nurtured the relationship to create an extended enterprise that provided competitive advantages25 Michel Philippart 2007 Frito-Lay has applied this approach systematically to all differentiating supplier categories Packaging: film as seen above, packaging equipment Seasoning: global suppliers providing exclusive developments and deploying them worldwide Impact of global seasoning in Brazil: +214% Best seasonings from large markets rolled out globally, eventually with cross licensing Point of sales display.

9 Exclusive designs to improve presentation, facilitate refill, and support promotions Design by a British firm, but Frito-Lay property Initial manufacturing in Eastern Europe and Turkey Global roll out with the expertise of European suppliers26 Michel Philippart 2007 Frito-Lay Learning Culture of measuring performance versus the supplier applied to all functions in the company Already in 1994, procurement staffed with high potential managers Demanding but fair attitude to be recognized as the preferred client of our suppliers In Frito-Lay s case worked better with medium size suppliers rather than the dominant players in the market27 Michel Philippart 2007 Corporate Sustainable Advantages Mission Logo MISSION Our Objective is to leverage Purchasing as a significant source of Sustainable Cost Advantage and Proprietary Barrier to Entry, whilst delivering 100 % Consumer preferred specifications to every plant, every day *STACKED WINS Innovation Quality Service Cost* Source:Function motto in 1997 28 Michel Philippart collaborate?

10 Sourcing Philippart 2007plasticsinkcircuitsink chamberorifice plateflex circuitsdry assemblywet assemblytestingpackagingtoolinghp ManufacturedPartner manufactured1985 ComponentsProcessesCo-development increase: Inkjet2005* Source:Christian Verstraete, Supply Chain Operational Efficiency and Effectiveness 30 Michel Philippart 2007 New vendor relationships in PharmaResearchResearchDevelop-Develop-me ntmentManufacturingManufacturingMarketin gMarketingSalesSalesResearch/Research/Bi otech Biotech companiescompaniesCo-mark-Co-mark-eting/ co-eting/co-promotionpromotionAlliances/ licensingService industriesCROsCROsCSOsCSOsSpeciality Speciality chemicals chemicals supplierssuppliersThird-Third-party party Philippart 2007 Pharma Example: R&D outsourcing Virus with about 100 variants. Some can induce lesions that can become cancerous Two variants are dangerous and must be identified (up to 70% of the cancer cases) Task.