N287E - Advanced Financial Management

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N287E - Advanced Financial Management

• Cost Management Strategies

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Cost ManagementPublic vs. Private Sector

• Public Sector
• Custodians of Public Funds
• Must Provide Open Access to Business
  Opportunities
• Must Establish Cost Reasonableness for each
  Decision
• Value Propositions can only be evaluated using
  Cost Per Quality Point Analysis

• Private Sector
• Primary Fiduciary Responsibility is to
  Shareholders
• Cost Management is Focused on Bottom Line
• Strategic Alliances and Supply Chain Management
• Value Propositions evaluated using Best Value
  Analysis

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Cost Consequence Accountability

• Private Sector
• Corporate Business Plan
• Risk and Incentives often Drive Policy
• Performance is Driven by the Bottom Line
• Risk and Profitability Drive Spending

• Public Sector
• Delegations of Authority
• Discretion Limited by Policy
• Balancing Mandates Against Available Funding
• Deficit Spending

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Cost Containment Strategies

• Limit Access to Sources
• Pre-Authorization vs. Post-Audit
• Ensure Accurate Contract Administration
• Process Re-Engineering
• Mutual Gains Incentives (Partnerships)
• Risk Mgmt vs. Risk Defense/Aversion

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Leveraged Purchasing

• Commit Total Spend in Exchange for Deep Long-Term
  Discounts (Commitments Contract)
• Seek Standardization
• Adjust Requirements to Create a Market
• Integrate Order-Delivery-Payment Systems
• Jointly Attack Other Cost Drivers

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Impacts of Integrated Financial Systems

• Upside-
• Minimize Multiple Databases
• Apples to Apples
• Eliminate the Back Room
• Downside-
• Pushes Central Functions to Frontline
• Need to Re-engineer Processes
• If you cant ask for it right, you cant get it.

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E-Commerce Issues

• Cost
• Back-Filling the Requisition Function
• Matching Rules, Tolerances, Returns
• The Need for EDI
• Content Management
• Keeping Up with Innovation

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Return on Capital Employed
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Return on Capital Employed
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Return on Capital Employed
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Return on Capital Employed
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ROCE Example
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Impact from 5 Price Reduction
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What is strategic sourcing?

• Strategic Sourcing
• A systematic process to reduce the total cost of
  purchased products and services by fully
  leveraging the Universitys combined purchasing
  power, without compromising quality or service.
• Up to 41 Business Units
• 10 Campuses
• 5 Medical Centers
• 3 National Laboratories
• 23 California State Universities

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Total Cost ApproachAchieve Best Value

• Total Cost
• Transaction / Admin Cost
• Delivery, Freight, Handling, Set-Up
• Implementation Cost
• Communication/Marketing
• Training
• Cost of Non-Conformance (Quality)
• Maintenance, Warranty, Parts
• Yield, Useful Life, Consumables
• Inventory, Shelf-life, Waste
• Disposal, Scrap
• Risk, Liability

• Tip of the Iceberg
• Purchase Price

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Strategic Sourcing is a process rather than a
series of activities
Strategic Sourcing Process
Traditional Purchasing
Strategic Sourcing

• Focus on tasks
• Function isolated
• Reactive
• Insular, static
• Unit price based
• Adversarial supplier relationship
• Win/lose
• Corrective Measures
• Undefined standards
• Lowest price - price driven

• Focus on process performance
• Alignment with stakeholders
• Proactive
• Total cost framework
• Diverse sourcing strategies
• Create collaboration, trust
• Suppliers as a key resource
• Preventive measures
• Fit for purpose
• Value driven (e.g. lowest cost per quality point)

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Strategic Sourcing Methodology
This must be a joint effort between purchasing
departments across the UC system and our internal
stakeholders

• Project Plan and Scope determined
• Resource Commitment Obtained (people, dollars,
  etc..)
• Kick-Off Meeting Conducted
• Team members identified

• Stakeholder Requirement sessions conducted
• Existing contracts summary produced
• Requirements weighting sessions conducted
• UC requirements published

• Sourcing strategy developed and communicated
• User adoption strategy and implementation plan
  developed
• Initial cost/benefit analysis developed

• Negotiation strategy document developed
• Meetings/Negotiations with finalists
• Agreements signed

Determine UC Requirements
Launch Sourcing Team
Develop Spend Analysis
Develop Category Strategy
Conduct Market Analysis
Implement Solution and begin SRM
Negotiate Agreements
Evaluate Select Suppliers

• Analyze total spend by Category and Location and
  determine percent that is sourceable
• Document historical purchases
• Develop current TCO for each Location
• Quick Hits identified

• Complete pre-bid industry analysis
• RFI developed / distributed (if needed)
• Supplier responses to RFI evaluated
• Final market analysis published

• RFP developed / distributed
• RFP responses evaluated and scored
• Short list of finalists selected

• Implementation team assigned
• Implementation plan finalized
• Implementation completed
• Ongoing SRM plan created and implemented

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Strategic Sourcing Opportunity

• University of California
• 7.0 Billion paid invoices
• 2.5 Billion construction
• 4.5 Billion of opportunities
• 100 Million Commodities
• Office Equipment and Supplies
• Laboratory Supplies
• IT Hardware / Software

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Strategic Sourcing Goals

• Maintain or increase product and service quality
• Leverage UC buying power through strategic
  alliances
• Create more efficient procurement processes
• Educate the UC community
• Determine the appropriate product distribution
  system
• Demonstrate significant on-going cost savings
• Meet our service and community standards
  (Sustainability, Small/Disadvantaged businesses,
  etc.)

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Channeling

• VWR Implementation YTD January to July 2005
• Campus YTD 2005 YTD 2004 ?
• Berkeley 581,295 418,962 38.7
• Los Angeles 1,628,382 1,088,067 49.7
• San Diego 993,908 723,884 37.3
• Average Growth 41.9
• San Francisco 891,566 783,345 13.8

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Automate Payment

• UCSF processes ½ million vouchers
• Federal Express 27,815
• Arrowhead 6,256
• Verizon 8,983

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ROCE Example