“Procurement can drive strategic business decisions”

Jamie Ogilvie-Smals

Hypothesis

2

• “Procurement can drive strategic business decisions”

- Cost strategy is a fundamental part of business strategy

- Procurement can deliver the cost strategy

- Delivering the cost strategy will positively impact the bottom line and

shareholder value

If organisations are not making use of Procurement effectively,

they are not maximising value for their shareholders

Business strategy

3

Michael Porter identified cost leadership strategy as a fundamental part of broad business strategy

What is Cost Leadership?

4

Cost Leadership is based on being the lowest cost producer in an industry, for a certain quality of product

Improve process efficiencies

Gain unique access to a source of lower cost materials

Outsource and use lower cost alternatives for appropriate functions

Avoid certain costs altogether

5

Cost leadership strategy

Cost leadership examples

Companies focusing on cost are among the FTSE 100 risers this year

Cost leadership examples

6

• CRH has successfully employed the principles of cost leadership as part of its strategy since 2007. Cumulative annualised gross savings of €2 billion implemented to 2011, of which €0.5 billion was realised in 2010

• Whitbread has a cost leadership strategy, focusing on relatively inexpensive food and hotel prices. They have championed the use of dedicated management teams to make operational and cost efficiencies, including through procurement

• Ryanair has a strategy based on cost leadership, which has helped the business make a profit of €503m in the past financial year. Cost reduction initiatives include eliminating the need for check in desks, cutting the weight of its aircraft, and investigating using larger aircraft doors to speed up boarding

Procurement can deliver the cost leadership strategy

7

Procurement have the role and tools to deliver the strategy

Responsibilities Tools and skills

- Insource vs. outsource decisions- Management of external spend- Selecting appropriate suppliers- Supplier relationship

management- Reducing costs from 3rd parties

- Cost/benefit and cost/quality analysis

- Reviewing input vs. output costs

- Transparent and rigorous fact-based decision making

- Specification/demand challenge- Benchmarking and Negotiations- Focus on value rather than just

cost

Procurement activities shape the company direction

Procurement have the ability to deliver cost leadership

Procurement can deliver the strategy - examples

8

• Research* has shown that- 3rd party spend represents 47% of revenue- Procurement are managing 83% of spend- Procurement are on average saving 5.3% of spend

- 2.5% cost reduction- 2.8% cost avoidance

• In a stagnant economy, cost reduction can be easier than revenue growth as a tool for margin improvement

• Procurement and finance are jointly setting up genuine savings tracking mechanisms that reflect the true position and have credibility

• 4C Client experience 2011/12 of 8% cost reduction savings

Procurement are playing a major part in managing external spend and delivering cost reductions in the current market

* 2012 CAPS research: Cross-industry report of standard benchmarks

Delivering the cost leadership strategy impacts shareholder value

9

• 4C research has shown that there is a strong correlation between margin and PE ratio (e.g. share price)

• Work which maintains or improves margin will therefore have a major positive impact on shareholder value

Ladbrokes

William Hill

Paddy Power

Margin is the critical measure for shareholder value

Conclusion

10

• “Procurement can drive strategic business decisions”

- Cost strategy is a fundamental part of business strategy

- Procurement can deliver the cost strategy

- Delivering the cost strategy will positively impact the bottom line and

shareholder value

If organisations are not making use of Procurement effectively,

they are not maximising value for their shareholders