Building a Sustainable World Class Sourcing Organization

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Building a Sustainable World Class Sourcing
Organization

• International Association of Contract and
  Commercial Mgrs
• October 14, 2003
• Bill Knittle Global Procurement Director

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Agenda

• BP Context and What we stand for
• BP Procurement Transformation
• Key Areas to Address

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BP Context
BP p.l.c. is an oil company whose main businesses
are Exploration and Production, Gas and Power,
Refining and Marketing, and Chemicals.

• Group Turnover US 174,218M
• Gross Profit US 14,932M
• Profit for the year US 8,010M
• Earnings US 0.44 (Per ordinary share)
• Employees1 110,100
• Market CAP 1 US 193,82.2M
• CEO Lord John Browne

• Third largest oil company in the world
• Reserves of 16.3 billion barrels of oil
  equivalent
• Liquids Production 1,931 mb/d
• Gas Production 8,632 mcf/d
• Refinery Throughput 2,929 mb/d
• Marketing Sales 3,797 mb/d
• Chemical Production 22,716 m tons

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BP Values

• Progressive means keeping ahead of changing
  patterns of demand in our business and setting
  the trends because the future is more important
  than the past.
• Innovative means using technology and the talents
  of 100,000 people our human capital - to find
  new answers rather than settling for something
  imperfect and inadequate.
• Green summarizes our commitment to the
  environment producing and providing products
  that do no damage to the natural environment,
  giving people lower carbon intensive products
  including natural gas, clean fuels and renewable
  energy.
• Performance-driven means being committed to
  achieving results in bad times as well as in good
  times.

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BP has great brand names
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Manufacturing and Marketing has many different
business models to support that are global.

• B2B ? Distribution and Commercial customers
  (Marine, LPG, Air BP- worlds largest aviation
  fuel marketer, Bitumen, Value-Added Services)
• Lubricants ? Retail and Manufacturing across
  Americas, Africa, Europe, Asia Pacific, and
  Middle East
• Manufacturing sites ? 50 global locations for
  both chemicals and refining products
• New Markets ? Business Development in Asia
  Pacific, Africa, Venezuela, and Mexico
• Retail ? Convenience Stores and Fuels
  Distribution over 30K stations in over 100
  countries (17,000 USA)

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Downstream Coast to Coast presence
Number of retail sites (Thousands)
Gasoline Market Share
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Chemicals in the top 3 and leading in aromatics
Aromatics
Marietta
Intermediates and Fabs.
Joliet
Whiting
Salt LakeCity
Lima
Olefins and Polymers
Carson
Charlotte
Greenville/Rock hill
US Primary Chemicals Capacity
Decatur
Cooper River
Augusta
Cedar Bayou Chocolate Bayou Green
Lake Pasadena Texas City
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BP Retail European Presence

• The evolution in BP Retail brings new
  opportunities for strategic partners to build
  collaborative relationships.
• The Aral merger transformed BP in Europe to a
  network of over 6,000 sites1
• BP is investing in company owned sites
• Total Shop sales are approximately 3bn in Europe
  20022

Germany / Lux
Netherlands
240 sites
2,600 sites
Central Eastern Europe A 600 sites, PL
250 sites Czech Rep 58 sites Russia 36
sites (Moscow)
UK
1,274 sites
France
526 sites
Portugal
280 sites
Greece and Turkey 300 sites
Spain
Switzerland
294 sites
300 sites
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Global Spend by Market Sector - 30bn
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Agenda

• BP Context and What we stand for
• BP Procurement Transformation
• Key Areas to Address

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Procurement Strategy Model

• Procurement Strategy will leverage industry best
  practice to enhance the management of 3rd party
  expenditure. It is consistent with the Group 3rd
  party Spend Operating Policy and builds on
  progress in the other segments.
• The Strategy is not Procurement function centric
  but involves an active involvement from segment
  users and major suppliers to efficiently manage
  the whole supply chain. Market Sector Management
  approach will drive this change, ensuring clear
  organisational accountabilities
• It is the effective integration of the
  Performance Levers and Critical Enablers that
  will deliver the next level of Procurement
  performance.
• New Capabilities will be required to operate in
  this manner with significant improvements in
  Demand Management, Supplier Management and
  People.

Performance Levers
DEMAND PLANNING
Market Sector Management
SUPPLIER MANAGEMENT
STRATEGIC SOURCING
Critical Enablers
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Governance Process
The governance will be derived from both BU
ownership and central coordination of market
sector procurement strategies.
SET
Procurement
Procurement Council
Performance Contracts
Support Prioritise Projects and Optimise ROI
Enforce the governance Effort toward Business le
verage
Enterprises
BUs
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What is Accountability around all 3rd Party Spend?
DemandPlanning
StrategicSourcing
SupplierManagement
Integrated Capability
ACCOUNTABILITY
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Generic Organizational Roles
Market Facing Roles
Business Facing Roles
Market Sector Managers
Delivery Managers
Commodity Managers
Cluster Managers
Sourcing Specialists
Sourcing ProjectManagers
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Demand Planning
Demand Planning is a systematic approach for
identifying, evaluating and prioritizing project
opportunities. The objective is to create a
coordinated and consistent Demand Planning
process that will help the user optimize the
selection of the most promising procurement
projects saving opportunities.

• Provides for
• Deep understanding of current and future
  business demand.
• Understanding of specifications configuration.
• A portfolio of opportunistic value enhancing
  opportunities.
• Direction on the right mix of projects.

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Demand Planning Value Levers

• Quality historical and forecast spend readily
  available
• Proactively responds to change in marketplace to
  capitalize on supply opportunities
• Anticipates business requirements tighter
  alignment with Business financial and strategic
  goals
• Accelerate value delivery by prioritizing efforts
  (i.e. best options first)
• Standardize or simplify materials and services
  requirements to optimize cost and service level

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How Demand Planning Process
Poor Contract Performance
Expiring Contracts
Spend Analysis Data
Workshop Brainstorming Sessions
Poor SupplierPerformance
Changing MarketConditions
Strategies
Opportunity Identification Analysis

• Top Down Targets
• TPS by Geography SPU
• Procurement Capabilities
• Leakage
• External Savings Benchmarks
• Maturity

• Market Sector Strategies
• Industry Trends and Forces
• Value Potential
• Spend Demand Segmentation
• Geographic Scope and Distribution
• Accountabilities
• Key cost structure and value levers
• Roles and Responsibilities
• Key Commodity Strategies
• Risk Assessment

Opportunity 1 Opportunity 2 Opportunity 3

• Assessment Prioritization
• Savings Potential
• Ease of Implementation
• Readiness to implement
• Level of supplier competition
• Level of supplier capabilities
• Level of aggregation

Output Document

• Projects
• Timing
• Resources
• Savings

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Opportunity Identification Process Overview
Define the Opportunity Scope by Commodity,
Business Geography
Select Key Areas to Analyze Savings
Opportunity Geographic Analysis Spend
Analysis Supplier Management Info Strategic
Sourcing Market Conditions
Geographic Analysis
Spend Analysis
Supplier Management Info
Strategic Sourcing
Market Conditions
Savings Opportunity Identified Yes / No
Additional Sources of Information and
Questions to Consider
No
Yes
Add to List of Opportunities by saving an
Opportunity Summary Worksheet
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Strategic Sourcing
Strategic Sourcing is a systematic approach for
identifying , evaluating, selecting and executing
a Strategic Sourcing program using standard
tools, templates and processes. The objective
is to create a coordinated sourcing strategy
designed to leverage BP purchases of products and
services throughout the enterprise.
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Strategic Sourcing Value Levers

• Aggregation and consolidation of spend based on
  the appropriate geography
• Approach market based on supply market and demand
  analysis
• Negotiations based on more transparent economics
  and total value chain
• Clearly articulated supplier selection criteria
  and exit strategy

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Integrated Strategic Sourcing Process
Opportunity (Demand Planning)
Appraise
Select
Execute
Define
Key Activities

• Revisit Select Stage
• Develop Supplier Selection Criteria
• Refine Potential Sources of Supply
• Determine Method to Approach the Market
• Prepare Appropriate Documents for Approval

• Approach the Market
• Evaluate Supplier Responses
• Develop and Implement Negotiation Strategy
• Finalize Agreement That Meets Business
  Requirements and Complete DSP

• Analysis of Appraise Stage
• Refinement of Appraise Stage Data
• Draft Alternative Procurement Strategies and
  Evaluate
• Complete Draft Strategy and DSP

• Identify Possibilities
• Engage Business
• Finalize Recommendations of Projects

• Establish Team
• Develop Project Plan
• Analyze Market
• Refine Business Requirements
• Understand Life Cycle Costs
• Identify Value Opportunity
• Identify Risks and Assumptions
• Finalize Recommendation

Key Outputs Approved by Gatekeeper

• Project List (P20/P50/P80)
• Business Case PRELIM

• Summary of Results
• Executed Contract
• Implementation Plan

• Final Strategy
• Supplier Requirements
• Approach to the Market
• Communications

• BUSINESS CASE

• Draft Procurement
• Strategy Plan
• Communications

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Supplier Management
Supplier Management is the entire set of
processes, tools and related activities that
insure the optimized value delivery from a third
party relationship. The objective is to create
a coordinated and consistent approach to measure
and manage supplier performance so that
pre-identified business saving is fulfilled and
incremental improvement achieved.

• Includes
• Management of the contract life cycle
• Enabling purchase-to-pay transactions
• Visibility of buying compliance to agreements
• Measurement management of supplier
  relationships
• Risk Management
• Ethics Assurance

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Value Proposition Supplier Management
2 to 3 Plus Savings Strategic Relationship
Management
2 to 3 Plus Savings Operational Supplier
Management
Annualized Savings of 4 to 6 Over 24 months
achievable through the implementation of a
rigorous Supplier Management Program
Sourcing Life Cycle without Supplier Management
Note Up to 30 of savings identified through
strategic sourcing are not realized due to lack
of Supplier Management.
Supplier Management Value
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Supplier Management Process Key Components
Integrated Procurement Capabilities
SupplierManagement
StrategicSourcing
DemandPlanning
Supplier Management Process
Without proper processes the full value of
Managing Supplier Performance will never be
realized.
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Knowledge Management
Knowledge Management involves sharing critical
internal and external procurement market
intelligence in a common repository to facilitate
better decision making based on lessons learned
and common best practices to improve delivery
cycle time and value. The objective is to
provide procurement professionals with access to
an advanced and developing set of capabilities to
deliver better opportunities and manage risks.

• Includes
• Market Intelligence
• Procurement best practices
• Spend history and forecast
• Contract management and compliance

• Market Sector strategies
• Supplier performance
• Procurement networks

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Value Proposition Knowledge Management

• Facilitates better decision making based past
  lessons learned and common best practices to
  improve delivery cycle time.
• Provides procurement professionals with quick
  assess to advanced and developing set of
  capabilities, best practices and supply
  opportunities to deliver better value and manage
  risks.
• Accelerates benefits realization by providing a
  ready-made, standard framework.
• Drives improvement of our information sources.
  Key information is kept up to date.

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Knowledge Management
Create
Apply
Data
Analyze
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People and Organisation
People and Organisation comprises having a clear
organizational structure which has a balance
between leadership generalists and functional
experts and is respected as providing functional
excellence for BP. Roles and responsibilities
within the organisation are clear and are
designed to effectively leverage the Procurement
opportunities across Chemicals and Refining.
Procurement competences are well defined and
our peoples' development is aligned around
them. We have a motivated Procurement community
who value their roles and are respected by their
peers within and beyond the function
Performance Levers
DEMAND PLANNING
Market Sector Management
SUPPLIER MANAGEMENT
STRATEGIC SOURCING
Critical Enablers
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People Competencies
Technical skills for Procurement need updating to
support the new strategy.
What it takes to excel
Executive

Core
Technical
Professional
Foundation
Skills
The basic essentials
Current Technical Competencies

• Procurement Process Development
• Strategy Development and Application
• Supplier Evaluation and Selection
• Agreement Execution
• Performance Management
• Risk Management
• Inventory and Materials Management

• Opportunity Identification
• Financial Analysis
• Influence
• Value / Supply Chain Management
• Cost Tracking and Modeling

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Performance Management
Performance Management comprises a number of
aspects of delivery assurance. Tracking
Procurement savings to ensure they appear on the
BU and site GFOs. Tracking the progress of
delivery of the Procurement Strategy to enable
executive interventions where appropriate.
Reviewing our performance against internal and
external peers to identify areas and ideas for
functional improvement Rigorously executing
projects with excellent Project Management
disciplines and running a portfolio management
approach to ensure that resources are aligned to
the best projects
Performance Levers
DEMAND PLANNING
Market Sector Management
SUPPLIER MANAGEMENT
STRATEGIC SOURCING
Critical Enablers
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Procurement Performance Tracking

• Key Performance Indicators (KPIs)
• of TPS with value generated through
  procurement lever (3-4)
• Forecast Savings underpinned by completed
  projects
• Forecast Savings underpinned by projects not
  yet started
• Volume Sourced as of Spend
• Identified Savings as Spend Sourced
• Volume Compliance
• Spend covered by agreements executed via
  robust sourcing process
• Top N key suppliers for which relationship is
  performance managed
• Pricing Compliance

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Link Procurement Value to BU Results
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Agenda

• BP Context and What we stand for
• BP Procurement Transformation
• Key Areas to Address

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Creating Procurement as a lever for the SPU
The Procurement Lever
Supply Chain Management
Supplier Management
Value
Market Sector Mgnt
Performance Management
Capabilities
Data Quality
Accountabilities
MI
Getting proper accountabilities in place is a
foundation in our strategy
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Integrated Process of Procurement Capabilities
Tools Processes
Data
Competencies