Strategic Supplier Relationships New Strategies for Changing Times

Strategic Supplier Relationships New Strategies for Changing Times ISM Chemical Group Las Vegas, Nevada 2006

Agenda § Background – Trends in Strategic Supplier Relationships – Characteristics of Strategic Supplier Relationships – Selection Criteria § New Approaches for Strategic Supplier Relationships § Real-Life Management of Strategic Relationships – How This is Different From Other Approaches – Challenges § Q&A 2

Introduction 3

About Denali Consulting and Supply. Staff § Management consultancy, formed in 1996 § Focus is exclusively in Supply Chain § § § Management consulting Primary industries include service based and capital-intensive clients § § § Sourcing & Logistics Analysts § Sourcing & Logistics Managers § Supply Chain Directors & V. P. ’s § Electric & Gas Utilities Financial Institutions Oil & Gas Mining § § Services include § § Supply Chain Staff Augmentation and Search / Recruiting Typical positions include: § Strategic Sourcing & Procurement Improvement Logistics Optimization Supply Chain Strategy & Assessment Organizational Development & Design Offer temp-to-perm conversions at no extra cost after 6 months Since Supply Chain Management is our only focus, we are experts at finding the best talent for today’s Supply Chain organizations Provide payroll, benefits, HR services for all resources Denali Consulting and Supply Staff are certified as womanowned businesses by WBENC 4

Sample of client engagements that are used to create the basis of this presentation Lucas Aerospace 5

Denali Commodity Expertise Across Many Commodity / Service Categories Partial Listing of Commodities & Services Sourced by Denali • • • • • Transformers Build-Up Trucks Wire & Cable Chemicals Gases Facility Design & Construction Vegetation Management/Line Clearing Meters Janitorial Services Turbines & Generators Automated Metering MRO Plant and Facility Maintenance Travel Related Services Computers & Desktop Services Benefits Management Pipeline Maintenance Injection Molded Parts Pole Replacement 6 • • • • • Castings Drug & Alcohol Testing Fuel & Lubricants Drilling Equipment Rotors Motors & Generators Supplemental Personnel Boilers Switchgear Line Hardware Application Development Services Engineering Services Office Products & Furniture Printing & Reproduction Services Freight & Logistics Underground Construction Packaging Circuit Breakers Construction Services

Background 7

What Is A Strategic Supplier Relationship? Strategic Supplier Relationships Definition: A supply strategy based upon joint opportunities, mutual trust, respect and open & honest communication between the supplier and the customer. This strategy is focused on reducing related supply chain costs and improves the quality of goods and services. 8

Once Again a Procurement “Best Practice” Perceived Importance of Strategic Supplier Relationships High Introduction of Strategic Sourcing & Strategic Alliances Emergence of e. Sourcing tools & e. Marketplaces Beginning of Volatile Commodities Markets Low 1990 1995 2000 9 2005 Industry Consolidation Waves

Why are Strategic Supplier Relationships More Important Now Than Ever? § Volatile Markets – Price-focused sourcing strategies don’t work in periods of increasing commodity prices – More sophisticated relationship-based approaches are required to meet utility cost reduction targets – Based on recent increases in raw material, especially fuel, traditional unit based savings will not generate substantial savings, suppliers must be willing to provide creative solutions to remove costs from how they service or reengineer the procured materials § Merger & Acquisition Trends – Larger, national/global presences of utilities require more strategic supplier relationships to support growth and cost synergy targets § Expansion of Supplier Value-Added Services – Suppliers continue to expand their value-added services offerings, increasing the value of strategic supplier relationships – Outsourcing 10

Strategic Relationship Characteristics u Types of Goods & Services l l u High $ Spend Critical business implications Custom engineered Limited availability or alternatives l l e. g. Line Construction Services, Transformers u Buying Considerations Trust is a major issue Cross-functional involvement Highly resource intensive Long range planning required Competitive Advantage Driven Supplier Relations l l Longer Term Agreements Total interaction Close working relationship Aligned objectives and philosophy Teamwork 11

COMPLEXITY/IMPACT Strategic Relationship Criteria MANAGED BUSINESS RELATIONSHIPS Potential for impact STRATEGIC RELATIONSHIPS Common values Aligned goals GENERAL PROCUREMENT BULK PRODUCT SOURCING VALUE / COST 12 Proper environment

Elements Of Successful Supplier Relationships Six critical elements support the development of successful relationships with Key Suppliers: Focus A common vision for the relationship, with agreed strategies and activities Trust Open communication and disclosure of business drivers Performance Continuous improvement towards agreed targets and KPIs People Clearly defined roles and responsibilities Proactive Anticipating business needs and providing creative solutions Profit at Risk Establishing real metrics to drive behaviour for both parties 13

Focus A common vision for the relationship, with agreed strategies and activities A Team of representatives from the Buying Company and the Supplier jointly develop a Business Plan for the Relationship, addressing: • Vision and Mission • Drivers and Values • Breakthrough Strategies • Continuous Improvement Strategies • Key Activities for the Period of the Plan • Key Measures of Success 14

Trust Open communication and disclosure of business drivers • Development of Total Cost of Ownership Model to understand our joint supply chain costs • ‘Open Book’ arrangement for Contract Cost Drivers and required margins • More use of incentives to create business drivers for suppliers to provide R&D support…for cost savings or driving new revenue avenues 15

Performance Continuous improvement towards agreed goals Establish Continuous Improvement Program to § Generate and document opportunities for value adding and process improvement § Implement ideas § Document benefits achieved Develop KPIs to quantify progress against § Key Measure of Success identified in the Business Plan § Customer specific measures Jointly review progress on a regular basis 16

Sample KPI Scorecard Example 17

People Clearly defined roles and responsibilities Customer Supplier Category Manager/Lead Buyer Account Manager Responsible for provision of goods or services under Terms of Contract/Agreement. Customer Contract Manager and decision maker. Manages the performance of the contract and supplier across the organization Customer Representative Operations Manager Responsible for the application of contract to a specific customer group Responsible for the application of contract and improvement program, working directly with the customer Supplier Development Team Representatives of major customer groups who the determine strategy for the category and monitor supplier performance against KPIs 18

Proactive Customer & Supplier Quick responsiveness in sharing ideas Risk taking behaviour rewarded and encouraged New ideas move through system of approval on fast track 19

Profit at Risk Bottom-Line Impact Performance to agreed upon targets is expected-not rewarded Insist that suppliers proactively know their market for raw materials, technological advances, industry best practices 20

New Approaches to Strategic Supplier Relationships 21

Typical Supplier Development Process Supplier Relationship Management Contract and Performance Management Develop Detailed Transition Plan Develop Communication Approach Manage Contract and Supplier Performance Conduct Internal and External Assessment Develop Supplier Relationships Conduct Implementation Perform Relationship Check-Ups Manage Contract Variations Develop Options and Recommendations Manage Stakeholder Communications Plan Competitiveness Assessment Review Category Performance Obtain Stakeholder Approval Contract Start-up Planning and Implementation Review and Define Category Strategy Value Discovery Manage Contract End Create Total Cost Model (if not already in place) Conduct Value Analysis Workshop (s) 22

What’s New With Strategic Supplier Relationships New approaches are being required to deal with new environmental factors in the supply chain Volatile Markets New Approaches to Supplier Relationships Industry Consolidation 23 Broader Supplier Offerings

Volatile Markets Require Greater Cost Modelling Sophistication § Volatile markets are tough for both customers and suppliers. § Unless cost transparency is achieved in the relationship and pricing structure, larger contingencies will be built into prices. § Working closely with your core strategic suppliers is the best means to continue realizing ongoing savings through volatile markets. § Understand how to approach suppliers’ price increase requests critically but fairly. Share cost increases with suppliers who do a good job of managing their cost by collaboratively working with their suppliers and demonstrating good supply chain management. § Better understand the costs of your purchases and what market forces are effecting them. In times of volatile markets, it’s more important than ever to have an in-depth understanding of supplier cost structures and total supply chain costs. § Proactively work to ensure that the pricing structure of your contracts are appropriately motivating suppliers to decrease cost while maintaining or increasing quality and service. 24

Total Cost of Ownership § The present value of all costs associated with a product, service, or capital equipment that are incurred throughout the supply chain. § Typically these are broken into 4 categories: · Purchase price · Acquisition costs · Usage costs · End of life costs 25

Where do we get the benefits? Across a Company’s boundaries: Perceived Opportunity $$ Purchase Price Actual Opportunity Procurement Practices Supplier Best Practices Leverage Supplier R&D Leverage Specifications Inventory Practices Service Measures tracking Transactional Process Remnant/Obsolete Practices 26

Total ownership costing of the supply chain Identify Need Procurement Specification Distribution Receiving Warehousing Application Out-of-Service “Cradle to Grave” Costing Analysis of the supply chain is done using a concept called Activity Based Costing 27 Disposal

Example of Total Cost Comparisons Exa mpl 28 e

Strategic Supplier Relationships in M&A Environment As companies continue to consolidate, strategic supplier relationships can play a critical role to support growth and cost management targets (Hot issue - Maintaining supplier diversity goals, while consolidating the supply base) Supply chain synergies are often key elements of M&A business cases Broader territories will require stronger, more strategic relationships Strategic suppliers can be key members of an M&A joint team Sophisticated cost modelling is required to understand customer and supplier cost savings in an M&A environment 29

Broader Supplier Offerings and Strategic Supplier Relationships § The more value added services provided by a supplier, the more strategic the relationship Typical Offerings Broader Offerings • Business process outsourcing • Full assembly or category vs. component sourcing • Combination of products and installation • Supplier Managed Inventory • Product training • Warranty utilization • Kitting § As companies continue with the trend toward increased variable costs & outsourcing, strategic supplier relationships, along with broader offerings will become the norm 30

Strategic Supplier Relationships In Action 31

Why Should Strategic Relationships Be Important to You? § Continuity of Supply - Especially During Tough or Volatile Times § A Single, Unbroken Supply Chain - From the Supplier Through to the Customer § Continual Dialogue - When Costs Go Up…and Down § Cost Performance Below Market Indices 32

Continuity of Supply Strategic Supplier Relationships help to ensure continuity of supply for strategic material and service categories. This is especially important: – During tough times (e. g. the California utility financial crisis) – During periods of tight supply conditions – When markets are volatile – To ensure alignment with strategic priorities Edison Stays in Financial Limbo as Lawmakers Debate Rescue Plans; Energy: CFO of utility's parent worries that creditors may force bankruptcy if action is stalled in Legislature 33 Raw Material Prices Rising: What Does This Mean to Energy Consumers?

The Single, Unbroken Supply Chain The Single Customer/Supplier Supply Chain ID NEED SELL PROCUREMENT RECEIVE ORDER RECEIVING DISTRIBUTION SCHEDULE/PLAN MAINTENANCE MANUFACTURE SHIP DISPOSAL PAYMENT § Supply Chain should be one single, unbroken chain from the supplier’s processes through the customer’s § Buyers must have the same expectations from themselves and their companies as they have of their suppliers § One weak link can disrupt the entire supply chain 34

Examples of Strategic Relationships in Action § $36 M contract awarded based on Total Cost of Ownership in 1994, delivered originally 34% savings. – Years 1994 -2005, delivered an additional 12% TCO savings – 2006 awarded 5 th 3 year extension with 3% annual TCO goals included in the contract § While facing bankruptcy, only 1 of the 24 Strategic Suppliers to a $1. 8 B spend base changed terms or delivery options § When one Strategic Supplier faced pending bankruptcy, their major customer pre-paid their orders to help them with cash flow § When faced with escalating prices in raw materials, one Strategic Supplier worked with their major customers to secure 1 year of material on their behalf without confirmed orders 35

The Importance of Continual Dialogue § Must have continual dialogue with suppliers - not just when prices go up § Continuous improvement to reduce total supply chain costs is expected § Must be willing to look at costs and process for both the buying company as well as the supplier § Strategic Relationships can’t be thought of as 36

The Expectation of “Better Than Market” Performance § Strategic Supplier Relationships should deliver performance that is “better than market” § Cost trends should be below market indices § Pricing volatility should be passed onto those customers that buy marginal capacity, not those who have firm, long term commitments § This applies to quality, service and total cost performance 37

Why Strategic Supplier Relationships are Important 1. A new supplier commences operations every minute 2. A supplier files bankruptcy every 8 minutes 3. A supplier ceases operations every 3 minutes 4. A judgment is filed against a supplier every 14 seconds 5. A supplier name change happens every 2 minutes 6. A supplier ownership change happens every 4 hours 7. A supplier’s risk profile changes every minute …world of constant change and challenges (opportunities) Source: Dun and Bradstreet 38

Q&A 39

For Further Information Please contact Dawn Tiura President Denali Consulting dtiura@denaliusa. com 530 -448 -0000 cell 530 -550 -5213 office www. denaliusa. com www. supplystaff. com 40