Business process outsourcing in procurement: opportunities, challenges and methods.

1. Global Procurement and Supply Chain Management for the
Oil and Gas Industry conference in Barcelona, September 2013
Business process outsourcing in
procurement: opportunities,
challenges and methods

2. Agenda
2
Bright Group / Credentials
Why outsource?
What can you outsource in
procurement?
How to do?
We start with a short introduction of ourselves and what
lead us to the topic of BPO…
…then do a short overview of outsourcing benefits…
…and stop in more detail on how can you outsource
procurement, what are benefits and challenges, to figure
out feasible options.
…and wrap up with an overview of the approach we
developed properly manage a project of transferring
procurement to the outsource.
How to decide?
As you will see, there is far more then one option. So we
talk a bit about an analytical tool we developed to support
decision with proper analysis…
Pavel Goryachev,
senior manager
Gleb Skrypin,
manager
Speakers:
Ivan Marchenko,
manager
Materials
Management,
Data analysis
Simulations and
modeling
Category
management
Process and
organisation
enginering
Regulation

3. Bright group
3
► Bright Group is a leader in procurement
advisory services on Russian market
► Key services:
► Procurement and SCM advisory
► Strategic advisory
► IT solutions
► Bright Group is the trusted business
advisor that contributes most to the
success of its people and clients by
creating value and confidence
► Bright Group helps its clients to search for
new approaches and strategies to
achieve their potential - from globalization
to technological innovation
Strategic
Advisory
Business
consulting
IT consulting Outsourcing
► Established in 2010 by a team of like-minded professionals in
SCM and management
► Our more than 100 professionals are the foundation of our success

4. Credentials
4
Our clients:
Our partners:
TNK-BP, Royal Dutch Shell
and Russian TNK joint
venture, major Russian oil
and gas producer
Sakhalin Energy, joint venture (shareholders
include Shell and Gazprom), leading energy
supplier in Asia Pacific, the only LNG in
Russia, one of the largest complex oil&gas
projects in the world
Gazprom Neft, major Russian
oil producer, Gazprom oil
producing subsidiary
Rosneft, major oil
producer in Russia
and in the world
…and multiple other local and
international companies in
oil&gas, energy, petrochemicals
and other industries

5. What lead us to look into the topic of BPO (1/2)
5
Sakhalin
Krasnoyars
k
Hanty-Mantsiskiy
Tyumen
Moscow
Saint-Petersburg
Murmansk
Irkutsk
Samara
Yamalo-
Nenetskiy
Boston
USA
USA
RUSSIA
Birmingham
EUROPE
Melbourne
AUSTRALIA
Bright has implemented more than 25 SCM projects
for large international companies:
 Demand planning
 Category management
 Contract and obligation management
 Supplier management
 Inventory management
 Materials movement management
 Inbound logistics
 Large investment projects supply
Bright has partners all over the
world, accumulating world best
practices.

6. 6
What lead us to look into the topic of BPO (2/2)
The majority of BPO providers start their activity in 2000 year. The volume of BPO shows significant volume
growth from year to year.
In 2012, the volume growth is
estimated in 33% due to new
customers coming.
Barriers for BPO development in
Russia:
 Large part of “shadow”
company’s activity
 Assuming exclusivity of certain
sectors of the economyLack of
vendor management skills in
Russia
 High mental tolerance
 Low trust level
 Managing different time zones
with different legal
requirements
 Data integrity issues
BPO service structure

7. Why companies outsource?
7
• Pressure to reduce operating costs and improve bottom-line performance
• Access to specialist skills not available internally
• Release of cash from the transfer of assets
• Access to leading-edge technology without capital investment
• Ability to transfer risk to the service provider
• Desire for flexible and scalable solutions that support growth or divestitures
• Drive to focus more on core processes and business activities
• Delivery of continuous improvements in process effectiveness and efficiency

8. What can be outsourced?
8
…
Finance
 Accounts payable/receivables
 Expenses reporting
 Payroll accounting
 Cash management
 Foreign exchange
 Fixed assets
Procurement
 Requirements creation and approval
 Order processing
 Service desk support
 Claims management
 Supplier additions/updates
 Indirect procurement
Real estate
 Facilities planning
 Property usage
 Least management
 Portfolio optimisation
 Project management
 Asset management
HR processes
 HR administration processing
 Training
 Recruitment
 Expatriate programmes
 Payroll processing
 Compensation benefits
Business
process
outsourcing
services

9. Why outsource procurement and SCM
9
 Accuracy of planning
 Reduction of lead times
 Complete and timely satisfaction of
needs
 Reduction of administration costs
 Solutions for standardization and
unification of production equipment
 Decrease in unclaimed high liquid
positions
 Increase in stock turnover
 Reduction of unfinished construction
due to supply storage
 Increasing the transparency of
procurement processes
 Significantly improved reporting and
controls to manage the business
 Access to enabling technologies and
3rd party experience and expertise
at a lower cost
ADVANTAGES CONCERNS
Improving
reliability of
production
Cost
reduction
Capital
optimization
Function
improvement
 Organizational change issues
 Electronic system modifications
 May require new skills set to
manage service provider
performance
 Requires investment of time for
existing indirect staff

10. 11
What can be outsourced in procurement and SCM
Goods
Processes
StructureGoods/services:
• Wells,
• Rotating Equipment,
• Energy
• IT Infrastructure
• Valves, etc
Organisational Scope:
• Entire organisation
• Specific Business Units
• Specific Subsidiaries
• Specific Assets
Business process scope:
• Demand management
• Strategic procurement management
• Sourcing & Award
• Contract Management
• Supplier Management
• Inventory Management
• Materials Movement Management
• Warehousing
• Logistics
BPO
BOX

11. What answers will you need to take a conscious decision
11
Scope:
Which processes?
Which materials/services?
Which organisations/subsidiaries?
Organisation:
What will you need to change inside and how do you do it?
How do you organise interaction with the outsourcer? How do you control?
Analytics:
What will it give? What’s the effect?
What should be requirements to the outsourcer?
Levels in the SLA?

12. 12
Holistic approach to assess opportunities of BPO
Our integrated solutions
are designed on a client
by client basis
Step 1 Step 2 Step 3 Step 4 Step 5
Benchmarking, gap analysis, and opportunity development
Define scope
and vision
Current state
assessment
Improvement
portfolio
Scenario
analysis
Future state
model
Agreement on
indicators
Implementation
Step 6 Step 7
Bright’s Spend Analyzer
Supply Chain Network Modeling
Data procurement
process and spend
KPI’s
‘As Is’ model and
‘To Be’ options
‘To Be’ models
validation
What to outsource;
Where to spend;
How to track

13. Key challenges and trends
13
How could organisations
respond from BPO
prospective?
Supply Chain Network Design is an integrated process focused on quantifying,
designing and improving the physical supply chain with focus on cost and
leadtime reduction and service level improvement
The business environment today is characterized by
long and complex supply chains, growing cost pressures
and customer expectations, high levels of Merger and
Acquisition activity and development of new and
emerging markets
What are the key trends impacting Supply
Chains today?
Significant pressure on companies’ margins, increasing
working capital, a lack of Supply Chain rationalisation
and an increased focus on route to market design.
Therefore, many organisations have no choice but to
embark on the journey to critically analyse Supply Chain
Network performance and design
How do these affect organizations?
► Lack of data in company’s information environments makes tactical decision making a challenging task
► There exists a tendency to estimate the efficiency of tactical decisions only with financial model. Such
models are often high-level and do not concern operational aspects of the business. Although such
operational impacts are very important in many industries
► On strategic level, there are often a lot of interdepending factors that need to be considered
simultaneously

14. Bright’s Spend Analyzer reports will provide significant insight
into Company’s expanding spend
14
Before Supply Chain Network Design we starts with Bright’s Spend Analyzer can provide a
view into a number of important procurement process and spend KPI’s, including:
Supplier/contract
management
 Benchmarking
 Contract / project monitoring
 Key performance
measurement
 Performance reporting
 Continuous productivity
improvement
Supplier selection
 Certification
 Negotiations
 Contract development and
issuance
 Pre-qualification
 Enquiry
Expenditure
profiling
 Spend analysis
 Item categorization
 Strategic sourcing
plans
Transaction processing
 Requisition receipt
 Contract / supplier identification
 Order placement
 Invoice / receipt processing
 Payment
preparation/documentation
Administrative
 Development of
policy, procedure,
processes
 Vendor management
 Training, reporting
Strategy development
 Establish policy and procedure
 Procurement vision / mission development
 Develop savings targets and multi year plans
Source planning
 Supply base
reconfiguration
 Commodity management
 Supply/demand market
analysis
 Aggregate spend
 Identify areas of
opportunity
Staff and process
 Re-engineering
people and
processes
 Develop organization
profile
 Develop process
maps and best in
class processes
Strategy
Business process
management
Strategic spend
analysis
Transaction management

15. Bright’s Spend Analyzer reports will provide significant insight
into Company’s expanding spend
15
Bright’s Spend Analyzer can provide a view into
a number of important procurement process
and spend KPI’s, including:
►Total spend ($ volume) by the organization
►Total number of transactions by the organization
►Total spend ($ volume) by vendor
►Total spend ($ volume) by GL (General Ledger) account
►Spend by type (channel) — PO, p-card, other
►Spend by business unit
►Spend by region / geography of business unit
►Spend by region / geography of vendor
►Spend by category
►Spend by category + sub-category
►Spend by category + vendor
►Spend by category + sub-category + vendor
►Average transaction amount by vendor
►Number of transactions
►By FTE requestor
►Spend trend analysis / pattern analysis
►Transactions by category
►Transactions by threshold
►Duplicated item analysis
…that allows for additional customized analysis by using
Supply Chain Network Modelling

16. Data driven approach supported by Supply Chain Network
Design (SCND)
16
Supply Chain Network Design permits the evaluation of operating performance prior to the implementation of a
system:
► It enables to perform powerful what-if analyses leading to the most efficient decisions
► It permits the comparison of various operational alternatives without interrupting the real system; it permits
time compression so that timely policy decisions can be made
Service level analysis Quantify market coverage and reaction time based on time and distance analysis
Inventory Modeling Quantify and define appropriate stocking levels throughout the Supply Chain
Centre of Gravity
Find the ideal locations for DCs, crossdocks or satellite facilities in order to minimise time,
distance and overall cost to serve
Network Optimisation
Apply advanced mathematical optimisation models to evaluate all facility, transport,
leadtime and service options in a single, integrated model
Simulation
► Use simulation to understand pressure points and to quantify potential risks
► Supply Chain Networks, warehouse flow, production lines etc
Network Flow
► Quantify and optimise flow across the Supply Chain Network
► Understand the impact of cross border trading, import/export regulations and trade
compliance
Geographical Display
Create geographical maps of the Supply Chain Network enabling effective communication
and visual problem solving

17. Supply Chain Network Design steps case study
17
Modeling steps illustrated
Step 4 – Sensitivity Analysis is conducted to
determine the effect of changes in key input
variables on the overall cost/service output. These
can be plotted if needed to illustrate the most
important factors.
Step 2-3 – A number of alternative ‘to-be’ models are
created (agreed in the original scope) from blue sky to
constrained models. These are evaluated with the client
to demonstrate the cost/service options.
Step 5 – This sensitivity analysis is repeated
against the preferred to be model to determine key
factors and build sensible contingency into the to
be network design.
Step 1 – The as-is network cost breakdown is
gathered and used to create and baseline the
as-is network model.
Flex input variables
up and down to
determine variable
sensitivity
Flex input variables up
and down to determine
variable sensitivity and
contingency
Warehousing costs example
1 Labor $1,199,191
2 Management salaries $456,648
3 Warehousing system costs $234,554
4 Insurance $76,739
5 Fuel surcharges $5,567
6 Transportation $365,536
7 Customs and duties $6,657
8 Tax $33,456
9 Inventory $1,908,987
10 Rental equipment $33,456
Total $4,320,791
Cost service trade off curve
50 60 70 80 90 100
High cost
Low cost
Low service High service
1,000
900
800
700
600
500
Blue Sky
Option 2
Option 4
Option 1
As-Is
Option 3
Option 5
% of volume within target lead time
Service
Totalnetworkcost
Sensitivity Level
Low HighBase
Volume
Fuel
Labor
Costs
Network cost breakdown – region 1
Sensitivity graph
50 60 70 80 90 100
High cost
Low cost
Low service High service
1,000
900
800
700
600
500
% of volume within target lead time
Service
Totalnetworkcost
As-Is
Option 3

18. BSA + SCND benefits
18
1. What categories
to outsource
3. What processes to
outsource
2. Where to spend
and allocate
4. How to optimize
5. How to track
 We can leverage expert’s view and assumptions to create a model of the system being managed…
 …evaluate the impact of planned changes on operations in production, logistics, retail and other
industries…
 …and we also have a useful tool to support strategic decisions. Creating simulation model is a good
way to formalize all the things and put them together into a single decision support tool

19. Scenario analysis of material management policies
case study
Definition of
problem and
formulation of
modeling task
Development of
simulation model
concept
Development of
simulation model
Testing and
validation of model
Scenarios
planning and data
preparation
Scenario analysis
Expert evaluation
of scenario
analysis results
Повторное
использовани
е
имитационной
модели
Повторное
использовани
е
имитационной
модели
Re-use of
simulation
model
Description of problem
and proof of simulation
approach to its
solution
Simulation model concept
containing description of
model and means of its
usage
Simulation
model in
simulation
environment
Ready-to-
use validated
simulation
model
Scenario analysis plan,
data prepared for
scenario analysis
Scenario analysis
results
Scenario analysis report
including recommendations
based on modeling data

20. Most common tasks solved with simulation differ by model
complexity and number of considered parameters
20
Tactical levelMid-term
management level
Strategic
level
Compare logistic
network development
options at a high level
using macro indicators
Determine the
connection between
costs and service level
depending on
forecasting accuracy
Determine replenishment
policies for SKU groups
Modelsize,numberofconsideredparameters
• Allocation of warehouses, consumption points, plants, etc…
• Stock distribution between warehouses
• Logistic characteristics of product types
• Transportation and warehousing tariffs
• Transportation load building policies
• Trucks and containers properties
• Orders aggregation and processing algorithms and
parameters
• Parameters of goods
reservation policies at
warehouses
• Consideration of various
demand profiles for SKU
groups
Functional blocks of
simulation model can be
re-used from previous
stages
Task:
Task: Task:
Complexity of model algorithms

21. Simulation models allow to determine dependency between
service level and logistic costs for certain network configuration
21
• Replenishment
• Modeling of manual
interventions into ordering and
replenishment processes
• Transportations
• Warehouse operations
Forecasting
accuracy
Target
service level
50% … 95%
80% … 99%
Simulation model
Costs
Requirements
to logistic
infrastructure
The model iterates over
pairs «Forecasting
accuracy – Target
service level». For
example, for interval from
80% to 99% for service
level with step 1% and
forecasting accuracy
from 50% to 95% with
step 5%, 20x10=200
iterations will be
performed. If necessary
each iteration can be split
into 10-50 launces to
perform Monte-Carlo
experiment for each
iteration.
Simulation model will allow to
determine requirements to
warehouse and transportation
capacities considering
seasonality, forecasting
accuracy and logistic network
configuration
The model will not give
mathematically optimal solution
but, on the other hand, it will be
able to consider random
demand changes and manual
interventions into ERP systems
material management
processes
The model will provide
sound and verified
knowledge about
dependency between
service level,
forecasting accuracy
and logistic costs.
This knowledge might
be used by experts
when taking decision
about supply chain
management

22. Simulation models also allow to estimate effect of changing
replenishment algorithms into the entire supply chain
22
Alternative algorithm N
Alternative algorithm 1
Existing replenishment algorithm
Order
placementDeliveryDemand plan
Lead time
Reorder point
level
Safety stock
Current
unrestricted stock
Simulation model allows to
estimate the effect of changing
replenishment algorithms into the
entire supply chain
Service
level
Logistic costs
Modeling of the entire supply chain will provide a holistic view into effect of
selected replenishment policies which, in its turn, will help experts determine a
optimal balance between service level, stock volume and logistic costs
Stock
volume

23. How do you decide, which processes and which
materials/services to outsource: sample
23
High Value/
High Complexity
Low Value/
Low Complexity
HSSE
IAE
Engineering & Maintenance Services
MRO/PVFF
Offshore Installation
Oil Sands Mining Equipment
Rigs
Rotating Equipment
Static Equipment
Subsea Equipment & Umbilicals
Trading
Wells Installed Equipment
Industrial Gases
Logistics
Metals & Alumina
Technology
Wells Services & Suppliers
Engineering & Project Management Services
Fabrication
Geophysics
IT Infrastructure
Professional Services
Purchased Chemicals
Real Estate
Retail
Software Apps
Technical Resources
Travel
Supplier Engagement
Supplier Transition
Demand Management
Category Management
Supplier Management
Collaborative Planning
Issue Resolution
Supplier Detail Maintenance
Catalogue and Content Management
Originate and Process Requisitions
Originate and Process Purchase Orders
Tracking and maintenance of order
Fulfilment
Resolving Disputes and Enquiries
Ongoing Compliance and Monitoring
Ongoing Compliance and Monitoring
Sourcing Strategy
Understand Market Trends
Understand Business Needs /
Requirements
Category Sourcing Strategy
Market Engagement
Contract Negotiations
CATEGORIESPROCESSES
HARD
EASY
MED

24. How do you estimate the effect
24
Quantitative
• Less procurement and SCM costs
• Better deals (prices, quality)
• Risk transfer to the outsourcer
• Less “request to delivery” time
Key effects:
Qualitative
How do you estimate:
• Use process mapping to identify
possible workforce reduction
• Use simulation to find the optimal
option given your situation
• Contact possible providers to find out
their deal details
• Use experts to identify risks
• Request SLA parameters from
possible providers
• Use other’s experience – learn on
other’s mistakes

25. How do you organise the interaction
25
Employees
Procurement
Delivery &
Returns
Contract Mgmt
Accounts
Payable
Buy Desk
Help Desk
Category
Management
Suppliers {CLIENT} Procurement Outsourcer
•Deliver
goods/service
•Manage returns
•RFP/RFI responses
•Contract negotiations
•Pricing
information/updates
•Manage relationship
•Approve sourcing
strategy
•Approve strategic
suppliers and
contracts
•Create and approve
requisitions
•Receive/return of
goods and services
Invoice approval
•Strategic Sourcing
•Category Management
•Tactical Buying Support
•Inquiry Support
•Employee / Supplier inquiry
management
•Escalation to 2nd level
support
Create Non-catalog POs
Manage Catalog
Inquiries
•Requisition and PO
Management
•Compliance / Policy /
Approval Management
•Tactical Buying
•Claims Management
•2nd level inquiry support
P2P Tool
Requisitions
Supplier ERP
{CLIENT} SAP
There are multiple ways to organise procurement outsourcing. Here is a sample option

26. How do you control
26
Client
(control dep.)
Service
provider Client
Service
provider3rd party
This model assumes creating of control department of outsourcing
activity.
This model assumes drawing a 3rd party, responsible for reviewing
outsourcer’s activity.
Technical
Monitoring
Close Interaction
Risk assessment
Demand
Finance
Commercial
Receipt
Reporting
 Non-compliance to technical requirements and HSE standards
 Failure to achieve production goals
 Production downtime and untimely execution of works
 Non-receipt of a target commercial effect
 Inefficient accommodation needs in the market
 Incomplete and untimely receipt of materials
 Distortion of financial data untimely formation and presentation of financial results
 Inefficient use of budget resources
Control
department/
3rd party
RISKS
MODEL 1 MODEL 2
Control instruments
 Service Level Agreement
 KPIs
 Function development plan

27. How do you change (1/2)
27
PREPARE:
Align
objectives
with service
Provider
CREATE:
Define and
optimize
processes
IMPLEMENT:
Secure
internal
support and
Adoption
2 3 4
5
6
Savingpotential
1
5 year and more1 year
TRANSITION:
Establish strong
governance
TRANSFORM:
Assure provider
innovation
PERFORM:
Gaining savings
2 year
Short term Medium term
Savingsources
Long term
 Cutting down on engaging
external consultants
 Cutting down on trainings
and learnings
 Stopping projects
 System optimization
 Optimization and
standartization of
processes
 Outsourcing of parts of the organization
 Integration, mergers and concentration

28. How do you change (2/2): fail reasons and how-tos
28
 Be realistic about your capabilities and skills
 Use what you have, hire what you need
 Careful and thorough planning of migration/transition
 Monitor impact of project on control of day-to-day business
 Not understanding legacy or cultural issues
 Not understanding the detail
 Detailed mapping of current processes, systems and organisation:
why are things done the way they are?
 Lack of robust or well articulated Business Case
 Lack of forward planning
 Invest in creating a robust Business Case
 Invest in planning now to save later
 Change overload (e.g. integration program)  Identify current change load
 Don’t duck the issues - stop initiatives if necessary
 Insufficient senior sponsorship
 Lack of buy-in from Business Units
 No assessment of business readiness for change
 Conflict over centralisation versus decentralisation
 Strong, visible, sustained sponsorship
 Carry out ‘readiness for change’ review at the start
 Ensure buy-in from businesses
 Make the case for centralisation versus decentralisation
Why Projects Fail How to manage
 Inappropriate migration strategy
 Poor transition management
 Skills mismatch
 Underestimation of complexity
and implementation time
 Detailed project planning, partitioning in different project
stages with clear and realistic goals

29. Wrap up
29
• You can outsource in Procurement and SCM…
• …and it’s not about just transactional processes.
• There is a lot of complex analysis to do to decide…
• …which can be done properly, and there are proper tools.
• Outsourcing project in Procurement and SCM is not easy…
• …and is mainly about change management and proper control…
• …but can be done.
• If you think someone experience could be of some help – Bright is always there

30. BRIGHT is a successful Russian company which provides consulting
services and expertise in the field of supply chain management, planning
and control, project management, development and implementation &
operation of integrated business processes based on ERP-systems.
Our services are aimed at achieving global standards in
business processes and control mechanisms in the Russian market.
© 2013 BRIGHT Group. All rights reserved .
Gleb Skrypin, manager
+7 (903) 550 60 20
gskrypin@bright-group.ru
Ivan Marchenko, manager
+7 (926) 111 20 45
imarchenko@bright-group.ru
Pavel Goryachev, manager
+7 (984) 181 19 54
pgoryachev@bright-group.ru