The Future Of Procurement

Transcript

Peter McGregor:Good morning. Absolute pleasure to be here, and I'll try and be quick and keep us on time because I'm conscious I'm the one thing standing between all of you and morning tea and a cup of coffee. So what I'd like to talk about today is just some general observations on the procurement industry and then try to sort of pull it together and offer some observations on where procurement is going and what the future of procurement looks like. So think, these days I'm CEO of think, which is a technology company bringing disruption to the procurement space, but I've had a lot of exposure to procurement in a variety of roles over the years, most notably as CFO of a very large transport company. And I wanted to perhaps start by offering some observations from my time as CFO at Asciano, and particularly focus on the fact that there's a temptation to always think that procurement's about cost savings, that the entire objective is to buy things as cheaply as possible. I'd offer the observation that procurement's actually an operating tool, an operating mechanism, and it drives operating efficiency in business, and that's as important as the cost savings that come with it. So to illustrate that, I'm going to start talking about that by talking about the town of Cook in South Australia, which I realise is an unusual place to start, but bear Bear with me. So Cook sits just to the east of the West Australian border. It's about 100 kilometres inland from the Eyre Highway. It has a population of 5 people and it's about 800 kilometres from Port Augusta and about 800 kilometres from Kalgoorlie. So why does Cook matter? Well, I'll tell you why Cook mattered to us, because that's exactly the point that a train running from Sydney or Melbourne to Perth runs out of fuel. So one of the businesses that I was CFO of, Pacific National, runs freight across the Nullarbor and also hauls the iconic Indian Pacific passenger rail line. And we have a refuelling facility, or had a refuelling facility, at Cook. Now at the time that I was CFO, Pacific National was the largest single buyer of diesel in Australia. So obviously, as we looked at the tenders each year for our fuel supply contract, it was important for us to procure the fuel as cheaply as possible. However, a bigger consideration in a lot of ways was the ability of the supplier to integrate into our logistics network and have the fuel in the middle of nowhere, in the middle of the Nullarbor, when we needed it, because there's, you know, in a town of 5 people, there's not a whole lot of options if the train pulls into town and there's no fuel there. to refuel it. So again, it's an example of integration to logistics supply chain and having the goods and services where you need them, when you need them, being as important as the price you pay for them. I'll give you a second example, again related to the rail industry. So what you can see on the screen there is a Hunter Valley coal train. And that train set you can see there costs about $50 million. So there are 3 5,000 horsepower diesel-electric locomotives at about $8 million each and 100 purpose-built specialised coal wagons at about $250,000 each. Every time we procured one of those train sets, we did so off the back of long-term contracts with our mining company customers. And in many cases, these were 25 or 30-year contracts. So at the end of the day, it was important to us every time we bought rolling stock to know that that rolling stock would be serviceable and operating for 30 years in order to meet our obligations under the contracts. So things like maintenance, things like recourse to the suppliers, and things like warranties and guarantees were hugely important to us. While I was at Ashiano, we had the opportunity to procure some rolling stock directly from China. The equivalent of that $50 million trainset would have cost us about $20 million had we procured directly from the Chinese supplier. So you look at that and say, that's a no-brainer. 60% cost saving, 150% improvement in return on capital. You'd do that every day. Well, we didn't do it, and the reason we didn't do it was because we couldn't get comfortable with the maintenance programme and with the recourse against the supplier. Because at the end of the day, even if we'd spent $20 million instead of $50 million, if that train broke down any time in the ensuing 30 years and we couldn't get it repaired or replaced, then we had a massive problem servicing our customers. So the final example, I want to talk about us as a procuree rather than a procurer. And again, it relates to our coal haulage business in the Hunter Valley. So the trains would carry the coal from the mines down to the Port of Newcastle to be loaded on the ships and exported. Up into North Asia. In 2009, during the global resources boom, international coal prices spiked, demand went through the roof, and the queue of ships off Newcastle reached record levels. It peaked at about 92 ships waiting to be loaded. So for the mining companies, they'd have their ships, their customer ships, sitting off the port for literally weeks at a time and have a very, very narrow window when their slot came up to make sure their coal was sitting in the stockpiles ready to be loaded onto those ships. And if they missed the slot, they went to the back of the queue and their ships sat there for another few weeks. So, every time we had negotiations with our customers, it wasn't really about price. Price was not something that had a whole lot of discussion. In fact, we were more expensive than a number of the other suppliers in that supply chain network. The reason we continued to be successful and always had our contracts renewed was the reliability, our track record of reliability in ensuring that we always had the coal at the port on time. So those are just a couple of examples, and hopefully they demonstrate the point I'm making, that at the end of the day, there's a tendency to always think about price, but think about impact on operations and business efficiency. Given that this is a travel conference, I wanted to offer, I guess, a couple of brief observations on travel. And I guess my starting point would be to say that travel, in my view, is different to any other category of procurement. And I say that for 3 reasons. The first is, more than any other industry, it's driven by personal choice and personal preferences. Every airline, every hotel chain, every rental car company have very, very sophisticated customer engagement programmes, very, very sophisticated loyalty programmes, and there's of course just the general personal preference issue to be considered. And again, I know this from personal experience that through the course of my career I've never particularly cared, you know, where we sourced our paper from, but I've always cared which airline I fly on and which hotels I stay at. And from a procurement perspective, that's actually a really interesting dynamic because it's both an opportunity but also a challenge for procurement people and procurement systems to cater for those individual tastes. tastes and preferences. The second reason I think travel is different is just the absolute proliferation of distribution channels in recent time. And I've mentioned at one of these conferences before, you know, I remember the days when you'd go to a website to find the cheapest hotel room. Now you go to a website to find the websites to find the cheapest hotel room. And just as an exercise, I had a look a couple of days ago to look at this very hotel. For accommodation tonight on Trivago, and it gave me those choices as websites offering deals for this hotel for tonight. So there are 20 of them. And again, I can't think of another industry where there are so many competing and overlapping distribution channels selling the same product to the same customer base. The third reason I think travel is different is, again, in my view, travel has the most sophisticated ability to price capacity in real time of any industry I've ever seen. Now there's an obvious example with Uber and their surge pricing model, and you can see the disruptive knock-on effects that's having with the taxi industry in every state now looking to introduce some variation of surge pricing into their sort of fixed tariff structures. Again, as an exercise, I had a look at— on Tuesday afternoon, I had a look at flights from Melbourne to Sydney this afternoon between 2:30 and 4 PM, and there were 7 flights available, 4 on Qantas and 3 on Virgin. Now bear in mind, these are all flights between the same 2 airports, same travel time, same model of aircraft, same class of flying. Yes. 7 flights, 7 different prices. So for example, the 3 PM Qantas, I could have saved myself 50% by going on the 3 PM Virgin instead, or indeed saved myself almost 50% by sticking with Qantas but flying 30 minutes earlier. Now for those of you who are involved in the travel industry every day, this is just an accepted fact of life. But think about any other industries that do this, and there aren't any. No. You know, the— I'd offer the observation that it's a little like going to the supermarket to buy a loaf of bread, and you go in the morning and bread's $2 a loaf because the shelves are full. You go at lunchtime and it's $3 a loaf because the shelves are half empty. You go late in the afternoon, there's only a couple of loaves left and they're $5 each. Now it sounds fanciful, but that's reality, and I'd ask you the question and suggest you ponder, is the travel industry unique or is it simply years and in fact decades ahead of where a whole bunch of industries are going in terms of bringing dynamic pricing to the supply and demand dynamics within their industry. So let me finish very quickly by just talking about why I think procurement is really important. I've talked about the operating implications. There's also obviously a very significant financial impact. When I was CFO at Asciano, the thing that used to keep me awake at night more than anything else was how we could drive bottom-line improvements in the business in a flat top-line environment. And again, it's worth just reflecting for a moment on how tough life is for major company, large company CFOs these days. If you look at the first 7 or 8 years of this century, average company profits, and this is all Australian company gross profits excluding mining, Grew at an average annual rate of 13%, 13.2%. There was then a period of significant disruption through the GFC, 2008, 2009, 2010. If you then just look at the last 5 years, that 13.2% has become 1.2%. And that's the reality for most large corporates today. Virtually every major company in Australia is degeared. You can't pull the balance sheet lever anymore to drive earnings growth. And we've seen a very steady trend down in inventory levels, so you can't pull the inventory lever as well as you used to. So what does that mean? It means procurement's going to continue to be a real area of focus in terms of driving efficiency and driving bottom-line growth in a pretty tough operating environment for most major Australian companies. We at think, it's really these dynamics that have driven our business model and the vision for our business. We're in an environment where procurement's increasingly incredibly important, where it drives real operating opportunities, where it's becoming more and more sophisticated with real-time pricing models in particular, but where historically procurement required a very, very, very significant investment in either capital or people to drive a procurement program. So our business model is all about disrupting procurement. We have built you know, a SaaS platform specific to the procurement industry. It's a low— as a cloud-based solution, it's a low-cost, high-value solution, very quick to deploy, fully automated from the browse and order function at the front end to the payment and reconciliation function at the back end. And it's also been designed with, we think, exceptional user interface, user experience. It actually feels a lot more like— It's a very easy-to-use platform. like a B2C website than a traditional B2B website. So that's our advertisement to finish my session. Thank you so much for your time today, and please enjoy the rest of your conference. Thanks.

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