Join Forces

These gloomy and unpredictable economic times pose many problems for the finance teams of large corporations. Finance directors, however, are not alone in facing challenges that can impact the future of an organisation. Procurement teams are also under pressure to manage their spend more efficiently.

One might argue that there is always a need for efficiency in procurement, but the pressure has never been greater than it is today.

‘The volatility of the markets is a major challenge. The first half of 2008 was a sellers’ market and there was a fight to guarantee raw materials and services amid huge commodity price rises,’ observes Nando Galazzo, vicepresident of procurement for plastics company Borealis.

‘Then it moved to a buyers’ market, so the challenge is to make sure that we keep our suppliers up and running and align the financial elements of the business plan to keep the right balance for them and for us. The volatility could be an opportunity too, but the amplitude is unlike anything we have seen before,’ he adds.

Volatility makes markets harder than usual to predict, so organisations have to be prepared for the unexpected. ‘It is hard to see what the market will look like in 2009, but we forecast so that we know where the risks are, and we keep an eye on customers and suppliers. But there are always challenges and we are set up well to deal with it. Plus, we good have structures in place for credit, collections and procurement,’ says Daniel Shook, Borealis CFO.

Borealis is a well-established plastics company with 40 years’ experience in the polyolefins market and has its own proprietary Borstar technology. It is a major supplier of polypropylene (PP) and polyethylene (PE) to the infrastructure, automotive and advanced packaging markets in Europe, the Middle East and Asia. Its raw materials, therefore, leave it exposed to fluctuations in oil prices, which can have a major impact on turnover.

Its procurement function has won many plaudits, with Galazzo recently voted Procurement Leader of the Year in the ProcureCon 2008 awards, having transformed procurement activity at Borealis, which has moved from a transactional focus to an era of global portfolio management to improve sourcing leverage, resources utilisation and innovation. The result has been a major improvement to the bottom line, increased productivity and better control of overall total cost. Galazzo’s work in helping Borealis to meet the challenge of market volatility and the need to invest in ongoing, high capital expenditure projects has been greatly helped by the fact that he has worked closely with Shook in the finance team.

As Shook suggests, the ability to address such challenges, which include the development of a new plant in Sweden this year and a joint venture in Abu Dhabi in 2010, depends greatly on the quality of communication between finance, operations and procurement teams.

‘Links between finance and procurement are more critical nowadays. We see lots of different structures, but at Borealis procurement does not report to the CFO. Procurement is very much an extension of operations, so Nando reports to the COO for Europe,’ comments Shook.

Lines of communication

The reporting structure at Borealis ties procurement to operations, but the ties to finance are equally strong. Furthermore, the structure itself is less important than the ability for all departments to communicate easily and effectively.

‘We have the benefit of being a big company but not so big that we need to rely on complex, formal relationships between departments. We get things done amiably on a more informal basis and communication is very good,’ says Shook.

Borealis has a separate team with the procurement department that focuses on business services procurement. Also, the feedstock team has been carved out of procurement and IT under the aegis of the finance department, though it operates almost as a separate business unit because of the importance of raw materials to the overall business. Basic feedstock – naphtha, butane, propane and ethane – is purchased from oil and gas producers, and then converted into ethylene and propylene through Borealis’ olefin units.

‘This team operates effectively as its own business unit to optimise the procurement process. Everything else goes through Nando, from major purchases to service contracts and IT. He has specialists in each area on his team,’ says Shook.

The structure into which the feedstock and other teams fit is determined by the company’s desire to ensure that it remains agile. The term used at Borealis is ‘Nimblicity™’, which means the organisation is fit, fast and flexible enough to both create and capture opportunities through smart and simple solutions. This is possible because all of the teams know they can communicate effectively to achieve shared goals.

‘There are no Chinese walls. Whether it is the CFO or the CEO, there is direct interaction with management teams,’ says Galazzo.‘We have the efficiency of centralisation, but we are also nimble,’ stresses Shook.

The focus on centralisation sees the company use little in the way of offshored services. Some IT services are outsourced and there is a case-by-case approach to the benefits of offshoring, but the current structure offers the flexibility and control that suits Borealis’ focus on sustainability rather than mere cost reduction. Outsourcing to low cost countries will not be a significant part of the company’s future.

Technology, on the other hand, has been paramount in improving process efficiency and, thereby, controlling costs. The goal here has been to get maximum leverage from its ERP system. Electronic payments are handled through its SAP system, which delivers straight-through-processing for 80% of invoices. As most of these invoices are self-billing, Borealis has a relatively small payables team, which resides in its shared services operation.

Through leveraging ERP functionality the company has successfully reduced transaction costs and freed up people for knowledge-based activities.

‘We have a clear strategy to use SAP as much as we can, maybe more than other companies. We want to use ERP as much as possible so that we are not pioneering another system in the short term,’ notes Galazzo.

‘From my perspective, the best way for us to tackle efficiency is for us to get the right information to the right people, so we have to track all payments to the right bucket and get the value from our SAP system. We need to ensure that finance and shared services teams give out good information so that we can act quickly,’ agrees Shook.

Looking to the long term

Like every other organisation Borealis is seeing its structure and strategy put to the test by the economic downturn. The goal now is to tune up its systems to get better quality information, including the integration of a new business unit into the ERP system.

The current climate highlights the benefits of flexibility and the willingness to adapt to changing market conditions, coupled with an emphasis on sustainability. All of these factors inform that company’s collaborative relationship model, in which the clear, co-operative nature of communication between finance, operations and procurement is extended out towards suppliers.

‘We have a clear strategy for procurement based on long-term, sustainable relationships with our key suppliers. We have already prepared the ground for focusing on those relationships over the years. We’ve had dialogue with them and we share information, which puts us in a privileged position. Some contracts are being adapted now so that the market conditions don’t penalise either party,’ says Galazzo.

‘We treat our suppliers as we would want them to treat us. We have to weather the storm together,’ confirms Shook. Both finance and procurement teams are key to supporting these relationships.

‘We spend a lot of time looking at single supplier sourcing and how we can mitigate the risk. That is a crossfunctional project. We look at how to diversify our sources or reformulate products to change the inputs,’ Shook adds. He notes that Borealis approaches its banking relationships in a similar way.

‘We have a group of banks that believe in the relationship model and we work together while the storm lasts,’ says Shook. In identifying risks, hedge where possible, ringfencing budgets for necessary capital expenditure, spotting opportunities amid the market volatility and building real longterm value. Borealis is proof that finance and procurement working in tandem are a force to be reckoned with.