Frits Van Zijdervelt, VP of Finance, European Supply Chain at Coca Cola Enterprises, discusses the intertwined roles of procurement and the greater supply chain.
CG: Frits, you are the VP of Finance at the European Supply Chain within Coca Cola Enterprises, tell me a little about your role.
FVZ: We have functionalised the supply chain within Coca Cola Enterprises (CCE), as such we run all the plants’ data in our territory as well as facilitate all the logistics of our products to our customers. As such we have our own P&L – basically we manufacture all the standard products and sell those to the business units at a set cost. My responsibility here is that of the business partner for the supply chain functions that we have within our business units, which include (mainly) procurement, operations, logistics and engineering. As I mentioned, we manage our own P&L and produce reports on commodity expenditure as well as overall plant production costs incurred.
CG: So, you look after both directs and indirects?
FVZ: Yes, direct spend is clearly my main priority given we have functionalised the operation, when it comes to indirect I only look after the indirect spend as it relates to supply chain not as it relates to the indirect spend of our business units that are selling our products.
CG: There has been quite a bit of discussion around the shifting trends in the soft drink and beverage market space – both from a customer behaviour perspective (looking for healthy alternatives) to the wider economy (increasing prices of raw material). Can you shed some light on the European soft drinks and beverages market and what you think some of the key trends are for 2011?
FVZ: From my prospective a number of trends clearly; consumers are spending less and less money and looking for more competitively priced products - quite often consumers are looking for alternatives that are cheaper. Retailers are continuing to try to be competitive towards each other by selling at lower prices and trying to beat their competitors which clearly puts a lot of pressure on us as a supplier. On the input side, clearly commodities are continuing to be very volatile and many commodities especially with packaging seem to increase year-on-year and that is something that is clearly putting a lot of challenges on the business, increasing input costs and then making sure that consumers continue to buy our products rather than our competitors.
CG: In terms of overarching objectives of the finance department this year what are your areas of focus for the next 12 months?
FVZ: Making sure that we enable our other business units to gain a competitive advantage, which is done on two levels. On a tactical level (looking forward up to 12 months), we need to ensure we are delivering the financial plan as agreed. We need to ensure we are forecasting accurately and identify any issues pro-actively that would not allow us to deliver this plan. We need to be able to shift our focus along with that of the individual business units and market events that are not known at the time of writing the plan – being flexible is key from a tactical level.
The second level is that of a strategic level. We look at trends to monitor how our operational matrices are developing and evolving over the years and extrapolate what we think this means for the future in regards to financial performance – and use this to identify areas of focus. We then work alongside our business partner to make sure we implement strategies to improve our cost base and continue to be competitive for the longer term.
CG: how do you communicate your focus and objectives to the rest of the organisation?
FVZ: within our company we have a clear objective setting process. Our executive leadership team discuss the primary objectives of the organisation which are then cascaded down through the various levels of CCE.
As a company we are ambitious in ensuring there is complete transparency of our corporate objectives – which are tied in closely with our operating frame work. This enables everyone to focus more on achieving these objectives, enabling us to aspire to the number 1 position in every category that we compete in. We also aim to be (and need to be) our customers most valued supplier, establishing a winning and exclusive culture which incorporates world class compatibilities.
Basically, once the primary objectives reach finance, we would add in our functional specific objectives (or amend to suit our function) and cascade these down, they would come from the CFO down to my team and we would then share these with the business partners to make sure that we continue to be aligned in what we do and how we do it.
CG: Once these objectives are set and everyone understands them, how do you then measure progress – particularly your procurement department’s progress?
FVZ: Supply Chain finance and procurement work alongside one another in setting and delivering our respective objectives. We tend to measure procurement in several ways:
For our direct procurement we have built standards, when we draft our plans for the year to come, we calculate standard prices for all our products taking into account our assumptions for direct procurement and other. Success in the following year is measured through a comparison of the actual performance against the standard. We need to be at (or better than) the standard. Our performance against the standards, as it pertains to direct procurement, is what we report as Purchase Price Variances (PPV). This also includes the effects of risk mitigating strategies like hedging.
On the indirects side, we have what we call IOP targets savings. We measure the delivered savings or costs avoidance against what we have included in our annual business plan as the target.
CG: Do you have any measurement around your processes?
FVZ: We measure how we use our systems, for example are all actual ordering activities managed and executed through the different systems (like SAP), is the spend done with preferred suppliers etc. We always look to increase the overall efficiency of these processes as the benefits achieved are passed on to the business partners and overall the customer. Supplier and contract management is another major area which we are always looking to evolve the processes.
CG: Do you ever challenge the tangibility of the numbers that Procurement brings to you?
FVZ: Whenever it comes to the actuals that are being reported it is quite clear where the numbers come from and the results will be unambiguous. Whenever it pertains to the forecast procurement and finance have their own expertise and would apply this accordingly. It is obvious that we both challenge the results. Furthermore, finance and procurement work very closely in a transparent fashion which allow both teams to focus on their responsibilities and accountabilities but at the same time delivers high quality end products.
Procurement also report on OPEX and capital expenditure savings as it relates to indirect procurement. In these reports we make a distinction between what are hard savings and what is actually cost avoidance. We also work closely together on the annual plan, which adds another level of transparency.
CG: I came across an article that states large corporates can have up to 20,000 - 40,000 contracts at any one time, which seems like a pretty impossible challenge for a CFO or CPO to understand exactly what makes up their cost base. Does this statement resonate with your role at Coca Cola - do you also face this overwhelming number of contracts?
FVZ: Not to the extent of the numbers you mentioned above for our company, but I can imagine that we potentially face a similar challenge. In the event not managed well this would potentially bring up the issue of risk. The only thing you can really do in a large corporation is to make sure you build systems and an infrastructure to control those contracts and that you have a sufficient number of controls in place that govern how these contracts are managed.
All our contracts relating to direct spend are issued on an internal portal for authorisation to ensure we are using only approved suppliers. I feel we have a robust set of controls in place to address the governance challenge but none the less I think there is always a risk of something being out there that you are not aware which happens outside of our procurement activity – a new starter who doesn’t know the process for example.
CG: If we take a step back for a moment, in your opinion, what do you think procurement means?
FVZ: I have never thought about this until now, I think procurement as such is a process and the procurement process starts with getting a contract in place with a supplier or agree terms with a supplier for a transaction in line with the objectives of the company. This is where the process starts – it ultimately ends with an invoice being paid or a transaction taking place.
So, if you then ask me what does procurement function mean in terms of getting contracts in place with suppliers, I would say procurement is there to ensure that we obtain our resources at the best price and quality in a balanced way, aligned with the overall objectives of the company. Both facets work together to ensure that we out perform other market players - maintaining quality and availability the whole way through the process.
CG: How closely do you work with your procurement team in ensuring they are driving as much value possible through the supply chain?
FVZ: I have a dedicated team of two and their only responsibility is to work closely with procurement, we provide procurement with insight and actual performance, identifying areas they should be focussing on. In return procurement brings us a strategy on how they intend to drive out the value from finance’s recommendations and add it to the bottom line.
CG: What is your reference point for good procurement, how do you know that procurement are striving for best in class?
FVZ: If you ask me what an effective or good procurement function delivers, I would say good availability of resources against competitive terms, strong market forecasting capabilities and effective risk mitigation strategies. In the short term, procurement must deliver the savings they have committed to and achieve the operational targets agreed.
CG: Finally, do you see a trend to increase outsourcing over the next twelve months.
FVZ: There has been an increasing trend over the last couple of years towards the outsourcing of back office functions – F&A, HR, IT and with the rebound of the economy I believe there will be less focus on outsourcing as a result of this.
Companies that have outsourced to cut cost and not as a long term strategic decision, will soon find their outsourced operation ineffective. I am a firm believer that outsourcing can provide a competitive advantage by delivering bottom line savings and allow you to focus your internal resources on maintaining your core competitive advantage (what you do best).
The flow-on benefits from outsourcing such as hard savings, labour arbitrage, access to expertise, control etc can only be fully realised when the outsourced operation is completely aligned with your company’s objectives - if not, you have probably missed the point of outsourcing.