Procurement Organization Evolving models

Dr. Lydia Bals, Head of Procurement Solutions, Bayer CropScience AG Visiting Scholar, Copenhagen Business School Agenda

Introduction to organizational models Development of models at Bayer Implementation at Bayer CropScience Evolution: where is it heading?

Page 2 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Agenda

Introduction to organizational models Development of models at Bayer Implementation at Bayer CropScience Evolution: where is it heading?

Page 3 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Looking at Procurement Organization from a research angle

Page 4 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Three questions need to be addressed by an organizational model

Questions to be addressed by an organizational model

1 Which dimensions dominate the organizational set up? First priority focus

Second priority focus

2 What is the degree of centralization? Decentralized Center-led Centralized low high Degree of centralization

3 Which “enablers” can support the strengths and compensate the shortcomings of the organizational set up? Enablers

Also compare: Procurement Strategy Council

Page 5 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Procurement functions face the challenge of satisfying four - increasingly demanding - organizational pulls 1

Customers The Pull: Internal clients expect more from Procurement. Getting Stronger: Along with greater savings expectations due to cash constraints, business partners increasingly look to Procurement to take on more complex tasks such as supply risk management. Categories Activities / Processes The Pull: Strategically manage The Pull: Increase productivity and individual spend categories. quality of Procurement work. Getting Stronger: After the initial Getting Stronger: Procurement has to round of sourcing a category, savings Procurement do more with less. Its budget declined drop by 43% the next time you go to 25% from 2007 to 2009, but its market. So, procurement must think workload continues to grow as savings more strategically about how to expectations increase and staff take on squeeze more value out of a category new tasks (e.g. more risk mgt.). as time goes on. Geographies The Pull: Satisfy regional requirements while seizing local opportunities. Getting Stronger: In 2008 foreign sales grew to 45% of revenue for S&P 500 companies, up from 39% five years earlier, and as major corporations expand their global footprint, Procurement must keep up.

Source:PSC, Fit for Purpose: Designing the right structure and learning to live with it (2009)

Page 6 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Generally, all of these “pulls” can be reflected in the organizational structure of procurement functions

Dimensions of organizational structures (1/2) 1

A Categories  Major focus of this type of organization is to – develop procurement expertise in all relevant categories CPO – be accepted as expert from the business partners CAT1 CAT2 …

B Customers  Major focus of this type of organization is to – respond to the (specific) demand of the individual business units in the best CPO possible way – to be involved in more complex tasks (e.g. BU1 BU2 … risk management) – to be involved into the process as early as possible

Page 7 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Generally all of these “pulls” can be reflected in the organizational structure of procurement functions

Dimensions of organizational structures (2/2) 1

C Activities / Processes  Major focus of this organizational type is to – maximize the process efficiency and minimize process costs CPO – execute well established methodologies along the sourcing / purchasing process ACT1 ACT2 … – ensure an environment of clearly defined roles and responsibilities

D Geographies  Major focus of this organizational type is to – respond to the (specific) demand of different regions in the best possible way CPO

GEO1 GEO2 …

Page 8 • Dr. Lydia Bals, Bayer CropScience • November, 2012 The Categories-Customers-Model combines category expertise and closeness to the business

Details: Categories - Customers (tiered) 1

Organizational Model Main Characteristics

 Procurement expertise in each spend category and CPO underline of importance of category specific strategies  Good responsiveness to shifting business needs and CAT1 CAT2 … early involvement by business units  Tiered structure clearly states the hierarchy of consistent category strategies vs. special business demand BU1 BU2 …  Good control over spend (including leverage of spend across different business units)  No special focus on regional/local needs  No special focus on processes, methodologies and split of activities

Page 9 • Dr. Lydia Bals, Bayer CropScience • November, 2012 The Categories-Activities-Model aims to deliver category expertise to the business efficiently & effectively

Details: Categories - Activities (tiered) 1

Organizational Model Main Characteristics

 Procurement expertise in each spend category and CPO underline of importance of category specific strategies  Special focus on clearly defined roles & CAT1 CAT2 … responsibilities on activity level and stringent processes ensure an efficient and effective organization  Tiered structure underlines the overall importance of ACT1 ACT2 … consistent category strategies  No special focus on specific business or regional/local needs

Page 10 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Lloyds TSB Bank employs a Categories - Activities - Model

Example: Categories - Activities (siloed) 1

Lloyds TSB Bank PLC Comments Group Procurement Group Procurement Director

 Special focus on Procurement Group Outsourcing Smart Sourcing Core Procurement categories and Development Center activities (esp.

Business strategic) Media and Print Development  Interesting

Strategy Monitoring Workforce and functions: and Reporting Human Resources – Group

Best Practice Operations Support outsourcing center

Process IT and – Procurement Development Telecommunications development

Travel

Organizational characteristics  Number of FTEs: 70  Number of Distinct Business Units (BUs) Supported: 25  Number of Countries Supported: 1

Source:Procurement Strategy Council Page 11 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Two dimensional organizational models can be run effectively in three variants...

Types of two-dimensional models 1

Tiered model Siloed model Matrixed model

CPO CPO CPO

CAT1 CAT2 BU1 BU2 CAT1 GEO1

CAT1 ACT1 ACT1

CAT1 CAT2 GEO2 ACT2 ACT2

 Two dimensional models in three variants can be run effectively

Page 12 • Dr. Lydia Bals, Bayer CropScience • November, 2012 ...but considering more than two dimensions adds enormous complexity to the organization

Types of three-dimensional models 1

Tiered model Siloed model Matrixed model

CPO CPO CPO

CAT1 CAT2 CAT1 GEO1 ACT1 GEO1 GEO2 GEO3 ACT1 ACT1 ACT2 ACT1 ACT2 ACT2

ACT3 GEO1 GEO1 GEO1 GEO1 CAT2 GEO2 ACT2

CAT1 CAT2 CAT3 GEO2 GEO2 GEO2 GEO2

 Models with more than two dimensions add enormous complexity to the organization

Page 13 • Dr. Lydia Bals, Bayer CropScience • November, 2012 With these restrictions in mind theoretically 12 basic org. models in 36 different variants are possible

1

Choose dominant axis Choose subdominant axis Choose hierarchy Tiered

Activities Siloed Categories Customers Matrix Geographies

Categories

Activities Customers Geographies

Categories

Customers Activities Geographies

Categories

Geographies Activities Customers

4 org. “backbones” 12 basic org. models 36 variants

Page 14 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Exemplary variants of the four models preferred by the majority of companies*

Derivation of exemplary models 1

27%

14% 14%

9% 8% 8% 8%

4% 2% 2% 2% 2%

Dominant Categories Customers Activities Geographies

Sub- dominant Customers Geographies Activities Categories Geographies Activities Customers Geographies Categories Customers Categories Activities

* according to: PSC, Fit for Purpose: Designing the right structure and learning to live with it (2009), n= 54 CEB member companies

Page 15 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Each organizational set up can be operated with a differing degree of centralization

Degree of centralization 2

Decentralized Center-led Centralized

low Degree of centralization high Advantages  Better coordination  Potentially combines  Coordination/control of /communication with the advantages of policies & procedures individual BUs centralized and  Strategic focus & decentralized  Speed of response to expertise functions BU needs  Proximity to major  Knowledge of local decision makers suppliers  Higher leverage/lower  Spend penetration purchasing cost

Disadvantages  Operational vs.  Complications may  Organizational silo - strategic focus arise with regard to distance from users  Lack of leverage and – Role definition  Lack of recognition of standardization unique BU needs – Decision rights  Lack of specialization /  Less two-way – Coordination expertise knowledge sharing  Higher cost of supply

Source:Bayer Business Consulting; Procurement Strategy Council

Page 16 • Dr. Lydia Bals, Bayer CropScience • November, 2012 All basic org. models respond to 2 out of 4 “pulls” - Enablers to compensate for the deprioritized

“pulls” 3

Customers

The Pull: Internal clients expect more from Procurement. Getting Stronger: Along with greater savings expectations due to cash constraints, business partners (at 80% of companies) increasingly  The 2 prioritized organizational look to Procurement to take on more complex tasks such as supply risk management. “pulls” can be considered in the Categories Activities / Processes

The Pull: Strategically manage The Pull: Increase productivity and  dominant and subdominant individual spend categories. quality of Procurement work. Getting Stronger: After the initial Getting Stronger: Procurement has round of sourcing a category, Procurement to do more with less. Its budget organizational axis savings drop by 43% the next time declined 25% from 2007 to 2009, but you go to market. So, procurement its workload continues to grow as must think more strategically about savings expectations increase and how to squeeze more value out of a staff take on new tasks (e.g., more category as time goes on. risk management).

Geographies

The Pull: Satisfy regional requirements while seizing local opportunities. Getting Stronger: In 2008 foreign sales grew to 45% of revenue for S&P 500 companies, up from 39% five years earlier, and as major corporations expand their global footprint, Procurement must keep up.

 The remaining 2 deprioritized organizational “pulls” need to  be addressed by non- organizational enablers like – Communication – Collaboration – People Management

Page 17 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Agenda

Introduction to organizational models Development of models at Bayer Implementation at Bayer CropScience Evolution: where is it heading?

Page 18 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Three questions need to be addressed by an organizational model

Questions to be addressed by an organizational model

1 Which dimensions dominate the organizational set up? First priority focus

Second priority focus

2 What is the degree of centralization? Decentralized Center-led Centralized low high Degree of centralization

3 Which “enablers” can support the strengths and compensate the shortcomings of the organizational set up? Enablers

Also compare: Procurement Strategy Council

Page 19 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Organization of the Bayer Procurement Function

Group Management Board

Bayer HeathlCare Bayer CropScience Bayer MaterialScience Bayer Business Serv.

Procurement Procurement Procurement Procurement

Directs Directs Directs Bayer Technology Serv. Indirect categories responsibility Procurement Marketing Services Blue Collar CURRENTA White Collar / Travel Procurement

Page 20 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Questions of the interview guide were designed in order to capture tendencies for organizational set-up

Interview Guide Methodology ILLUSTRATIVE

Organizational Model Degree of centralization Enablers

Dim Dim Centra- Center- Decentra- Enabler Enabler ...... Geo Category lized led lized 1 2 Question / Statement Type A (Dimension of Org. Model) E.g.: We have minimal common spend across business units.

Statement Type B on (Degree of centralization per activity) E.g.: From my view “purchase order processing” is ideally provided..

Question / Statement Type C (Enablers / Change Mgt. effort) E.g.: The organization adheres to standardized templates (e.g. for market reports, category strategies)

Page 21 • Dr. Lydia Bals, Bayer CropScience • November, 2012 The operating environment clearly puts activities and categories in favor

Importance of dimensions

Comments Activities

 Interview results have been aggregated with a scoring model  Scoring model*:

1 Norming of Questions to 100 Categories Customers

2 Weighting according to rating

3 Weighted score by dimensions

Geographies

Source: Interview results evaluated with a scoring model (up to 100 points per dimension); *For details see backup Page 22 • Dr. Lydia Bals, Bayer CropScience • November, 2012 The model developed will give each pillar a clear performance focus and transparency

Model Results

Three pillar model

Local Sourcing Purchasing Sourcing Solutions

 Decreases time of sourcing project  Improves steady flow through less  Builds process expertise/measures to realization/ implementation approval steps and standardization reduce processing and reporting time  Allows local bundling and better focus  Standardizes & automates processes  Increases stringency and transparency on market opportunities and suppliers leading to reduced error rates of data (supplier / categories)

Benefits  Enhances interlinkage and  Drives higher automation (freeing  Allows broader usage of new effectiveness of global and local resources) & reduces support activities technologies (e.g. e- and reverse sourcing auctioning)  Uses synergies across sites (centrali- zation) & with existing units (e.g. SCM) Focus on value adding activities & respective KPIs per pillar

 Reduce costs of goods and services*  Increase spend compliance  Achieve spend transparency  Risk management for major sales  Reduce processing cost  Steer performance improvement areas & commodity spend areas  Communicate Procurement value

Effects  Provide competitive advantage by added leveraging ext. innovation potentials  Reduced tool/system development  Input mkt. trends for forecast & budget and maintenance costs

Offers outsourcing options (e.g. internally or to external provider)

* Via supply market cost reduction opportunities and challenging spend behaviors by standardization of demand Page 23 • Dr. Lydia Bals, Bayer CropScience • November, 2012 The developed model focuses on activity as first org. dimension & has a dedicated Local Sourcing function

Head of Procurement

Procurement Strategic Sourcing Category n GEO1 GEO2 … Solutions Global Global level

Head of Local Procurement

Local Sourcing Raw Materials Purchasing Indirects Local Procurement Solutions

Local Sourcing Technology & Purchasing Directs Services (in Supply Chain function) Local level

…

…

Page 24 • Dr. Lydia Bals, Bayer CropScience • November, 2012 The “Clear cut” scenario chosen will achieve biggest impact on efficiency and effectiveness

Model scenario evaluation

“Clear cut” Scenario “Virtual teams” Scenario “Integrated teams” Scenario

Co- Co- Co- centralized centralized Centralized centralized centralized located located located but associated  Efficient processes &  High capacity utilization  Maximized closeness clearly assigned and efficiency for and alignment of activities, roles & purchasing possible purchasing and local responsibilities sourcing  Category know-how &  Resource flexibility closeness to sourcing  No major gains in through association & co- purchasing capacity location utilization and efficiency preferred

Page 25 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Agenda

Introduction to organizational models Development of models at Bayer Implementation at Bayer CropScience Evolution: where is it heading?

Page 26 • Dr. Lydia Bals, Bayer CropScience • November, 2012 New Product Supply organization creates an integrated supply chain Integrated network

R&D Product Supply Marketing & Sales

R&D Raw Inter- Active Formu- Filling & Country Dis- Farmer material mediate ingredient lation packaging warehouse tribution / supply production Retail

Procurement (e.g. raw materials, 3rd party AIs & formulation chemicals)

Page 27 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Within an integrated Product Supply Procurement resembles a “virtual factory” Product Supply integration

Integrated Product Supply

MAKE BUY

Internal production Procurement

Make or External Supply Production Network Buy Decision Base

“virtual factory”

Page 28 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Continuous improvement and fair share of benefits are basis for long term partnership External supply base contribution

Increasing purchase costs jeopardize investment capabilities Conclusion

Development and Sales No leverage to Sales increase pricing due External COGS performance depend on Our margin is to potential loss of supplier’s performance. squeezed! Internal COGS market share. Supplier set needs to COGS / match following Sales expectations: Costs External COGS - increase  Continuous performance Increase of costs due improvement and to development of streamlining labor, energy, raw materials etc.  Sharing benefits Internal COGS - constant Gap between Continuous Implemented internal and external improvement drives improvement costs has to be efficiency to fight measures managed cost increase compensate price This requires a new increase of raw skill profile and mind materials. 2011 set for Sourcer time

Page 29 • Dr. Lydia Bals, Bayer CropScience • November, 2012 The organizational change was embedded in a number of initiatives…

PRO Priorities

PROfit Spend Optimization PROfit Organization Capability enhancement

 Review and drive global  Establish global/regional category-driven  Systematically fostering mind-set categories to generate expected organization and integrate key countries diversity in people portfolio with savings  Establish three pillar model regard to educational background, cross-functional & cross-subgroup  Emphasis on sourcing functions – Local Sourcing to drive spend experience, Bayer-external with clear roles and optimization experience, gender & nationality responsibilities together with – Purchasing to get synergies in other PS functions transactional processes  Exchange of personnel, transfers via rotations, in-source new and  Establish best-in class spend – Bundling of supportive/analytical tasks train existing employees optimization methods and tools Strategic key initiatives

Supplier Management Trends in global chemical industry Demand Management  Traditional low cost countries (China/India)  Others emerging (e.g. Russia, Vietnam) Supplier PTT / Efficiency  Future of European and US companies Operational Tools

Adjust mindset: Foster entrepreneurship and drive net contribution to P&L & COGM

Page 30 • Dr. Lydia Bals, Bayer CropScience • November, 2012 …to enable an organizational transformation

PRO Priorities

PROfit Spend Optimization PROfit Organization Capability enhancement

 Review and drive global  Establish global/regional category-driven  Systematically fostering mind-set categories to generate expected organization and integrate key countries diversity in people portfolio with savings  Establish three pillar model regard to educational background, cross-functional & cross-subgroup  Emphasis on sourcing functions – Local Sourcing to drive spend experience, Bayer-external with clear roles and optimization experience, gender & nationality responsibilities together with – Purchasing to get synergies in other PS functions transactional processes  Exchange of personnel, transfers via rotations, in-source new and  Establish best-in class spend – Bundling of supportive/analytical tasks train existing employees optimization methods and tools Strategic key initiatives

Supplier Management Trends in global chemical industry Demand Management • Traditional low cost countries (China/India) • Others emerging (e.g. Russia, Vietnam) Supplier PTT / Efficiency • Future of European and US companies Operational Tools

Adjust mindset: Foster entrepreneurship and drive net contribution to P&L & COGM

Page 31 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Agenda

Introduction to organizational models Development of models at Bayer Implementation at Bayer CropScience Evolution: where is it heading?

Page 32 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Building on the “clear-cut” operating model, make or buy scenarios hold further optimization potential

Further options for evolution

“Make and Centralize” “Centralize or outsource “Outsource” outside one TK” Centralize (core) across Local sites in country Centralize selected categories in Outsource non-core categories to other sub group organizations external specialists Sourcing Centralize (core) in hubs (e.g. lead buyer) within regions

Centralize across sites in country Centralize “Indirects” Outsource transactional activities Purchasing Centralize in hubs within regions on corporate level to external provider

Assign “Directs” to SCM units

Sourcing Centralize across sites in country Handover to other sub groups Outsource to external provider (e.g. data management on (e.g. data management, Solutions Centralize in hubs within regions corporate level) reporting, etc.)

Make Buy

Page 33 • Dr. Lydia Bals, Bayer CropScience • November, 2012 External providers offer the opportunity to leverage flexible resources for optimized internal resource allocation GEP/BEROE service portfolio

Market Intelligence

 Gaining overview on supplier landscapes

 Monitoring (raw material, inflation, etc.) trends

 Benchmarks

Market Sourcing Process Support Intelligence Sourcing  Support e-sourcing events (e.g. Potential Process RFI, RFQ, e-auctions) GEP/BEROE Support Spend Analysis Service – Preparation Portfolio for  Spend data cleanup BCS – Follow-up  Improvement of analyzability – Consolidation

 Analysis for potentials  Support specifications analysis Spend Analysis

GEP/BEROE can disburden sourcers by taking over activities related to the above mentioned activities

Page 34 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Some thoughts on organizational model evolution

• The basic model needs to fit with external and internal Basic Model “pulls” over time • Centralization/decentralization needs to fit over time

Need to strike balance between “match” and “stability”

• Make or buy scenarios depend on the basic model’s

Make or Buy activity implications • The potential packages for external providers need to match their capabilities/strengths

Need to consider “fine-slicing” and to keep a close eye on provider markets

Page 35 • Dr. Lydia Bals, Bayer CropScience • November, 2012 Questions for breakout discussions

1. How to strike the balance between external and internal change and the respective organizational model? 2. Are there some “lasting” pulls in Procurement over the next years? 3. Is the external provider market leading to a convergence of internal models? 4. How does the concept of “fine-slicing” fit in – internally and ? externally? 5. Do the enablers primarily depend on the model versus the organizational maturity of the procurement function at hand? 6. What is the role of people versus organization? 7. How important is simultaneous organizational change at other “neighboring” functions (i.e. the business partner functions) and at the function to which procurement reports to?

Page 36 • Dr. Lydia Bals, Bayer CropScience • November, 2012