4.2 Quality Management applied to financial modelling
Ultimately this subject is about Finance becoming an intrinsic part of the total organisation using their experience and analytics to assist with the performance of the whole.u00a0u00a0
In a traditional sense, finance report on business performance but through quality management and partnering with the departments finance can assist the operational heads of department to achieve financial improvements within their budgets.
The best way to grasp the importance of this is through a case study.
An oil and gas major placed an operational expert as their Global Category Manager for Aviation a role that had traditionally been served by a procurement specialist.u00a0 The operational expert knew that the key changes would add value by reducing cost and improve safety performance by improving the business partnering relationship and utilising the latest generation of aircraft.
- Commercial drove short term contracts 2-3 years to maximise re-negotiation and competitor benefit opportunities. This was procurement policy set at the highest level and procurement professionals would not deviate.
This behaviour meant that the suppliers would only offer the aircraft they had u2013 they would not invest in the latest or optimal aircraft type for the mission from a size and cost perspective for the client.u00a0 The contract price also reflected the short-term nature of the contract.u00a0 The suppliers would not invest in long term safety improvements for a short-term contract.
Through a partnership with Finance, the operational expert and the incumbent supplier a u201cwhat ifu201d financial model was generated that modelled the following:
- Change the aircraft type to the optimal aircraft from a size and cost perspective this changed the aircraft in use from 3 x AW139 to 3 x AH160.
- Price the contract for a 10-year relationship with exit clauses that supported the supplier in terms of their risk.
Because the financial model was completed to a high degree of fidelity and came from Finance the Business Leader through the executive board levels of the group achieved the necessary policy changes which saved 10% on a 1.5-billion-dollar contract.
The savings were $150 million spread over the 10 years. Following this example all high value shipping and aviation supplier contracts were no longer subject to time constraints for a perceived price advantage which in reality prevented the modelling of the best value contracts.
Every major supplier contract is now modelled with finance and operational experts prior to commercial being given the procurement strategy for that contract.