Travel Strategic Sourcing Kathy Briski, C.P.M., CCTE June 24, 2013 Global Procurement Processes Day-to-Day Purchasing Process Generate Requisition Approve/ Submit Requisition Process/ Submit Order Receive Goods & Services Approve Invoice Process Invoice & Generate Payment Strategic Sourcing Process Access Opportunity & Establish Team Profile Category Internally & Externally Develop Sourcing Strategy Conduct Competitive Exercise w/ Approved Suppliers Create Selection Factors & Evaluate Suppliers Negotiate & Develop Sourcing Recommendaction Implement Agreements Supplier Relationship Management Process Define Supplier Evaluation Criteria Collect Data Conduct Performance Evaluation Develop Improvement Strategy Continuous Improvement Core Supporting Capabilities Supplier Scorecard Savings Management Spend Analysis Knowledge Management Page: 1 Contract Management Catalog Management Strategic Sourcing Process Overview ANALYSIS STRATEGY SUPPLIER SELECTION IMPLEMENTATION Strategic Sourcing Methodology Assess Opportunity & Establish Team Activities Assess Opportunity Obtain Sponsorship & ID Team Deliverables or Tools Create Project Plan Project Plan Analyze Current Spend Document Requirements Profile Category Internally & Externally Validate Internal Requirements & Profile Category Develop Sourcing Strategy Develop Sourcing Objectives Create Selection Factors & Evaluate Suppliers Create Supplier Selection Criteria Fast Track for Quick Savings Build TCO Model Conduct Industry Analysis Internal Category Profile TCO Model Cost Reduction Ideas Industry Profile Conduct Competitive Exercise w/ Approved Suppliers Complete Traditional RFP Process - AND/OR Conduct eAuction(s) Develop Sourcing Strategies & Tactics Conduct Supplier Analysis - AND/OR Collaborate w/ Incumbent Supplier(s) Sourcing Strategy Plan: Competitive Supplier Selection or Existing Supplier Development Supplier Selection Decision Matrix RFPs / RFQs RFIs (optional) “Short List” of Suppliers Page: 2 eAuctions Collaborative Discussions Negotiate & Develop Sourcing Recommendaction Implement Agreements Prepare FactBased Negotiation Packages Implement Agreements and Monitor KPIs Negotiate Agreements Evaluate Performance and Develop Suppliers Fact-Based Negotiation Packages Finalized Agreements Supplier Negotiations Presentation Benefits Realization Sourcing Recommendation Continual Supplier Improvement Strategic Sourcing Process Overview ANALYSIS STRATEGY SUPPLIER SELECTION IMPLEMENTATION Strategic Sourcing Methodology Assess Opportunity & Establish Team Profile Category Internally & Externally Develop Sourcing Strategy Create Selection Factors & Evaluate Suppliers Activities Assess Opportunity Obtain Sponsorship & ID Team Deliverables or Tools Create Project Plan Project Plan Analyze Current Spend Document Requirements Page: 3 Conduct Competitive Exercise w/ Approved Suppliers Negotiate & Develop Sourcing Recommendaction Implement Agreements SAMPLE High Level Travel Project Plan Travel Workplan Review April May June July August September Mobilization & Kick-Off Category Profile Internally & Externally Develop Strategy Screen Suppliers & Selection Factors Conduct Competitive Exercise Negotiate & Develop Sourcing Recommendation Implement Agreement 4 SAMPLE Travel Category Opportunity Confirmation of Sourceable Spend Category Opportunity Baseline – Travel Sourcing Group Category Sub-Category Addressable Spend % Addressable Sourceable Spend Est. Mid Saving % Est. Mid Savings $ Travel Airline $6,000,000 100% $5,500,000 3% $165,000 Travel Car Rental $1,000,000 100% $925,000 5% $46,250 Travel Hotel $4,500,000 100% $4,400,000 5% $220,000 Travel Agency - Agency Fees $170,000 100% $0 0% $0 Travel Demand Management (Compliance) N/A SAMPLE N/A Key Travel Contracts and Expiration Dates Preliminary Opportunities to Drive Accelerated Benefit •Hertz Car Rental Agreement – Expiration Date: July 31, 2010 •Northwest Airlines Agreement – Expiration Date: November 30, 2010 •American Express Travel Agency Agreement – Expiration Date: September 30, 2009 – Currently Extended until September 30, 2010, with an additional 1 year extension (2011). •Mandated Travel & Entertainment Policy •Drive Demand Management (Compliance Behavior): •On-Line Booking Tool •Advance Ticket Purchase •Non-Refundable Tickets •Preferred Hotel usage •Preferred Car Rental usage •Hotel Competitive Bid •Negotiate American Airlines contract •Car Rental Competitive Bid Page: 5 $700,000 Strategic Sourcing Process Overview ANALYSIS STRATEGY SUPPLIER SELECTION IMPLEMENTATION Strategic Sourcing Methodology Activities Assess Opportunity & Establish Team Profile Category Internally & Externally Develop Sourcing Strategy Create Selection Factors & Evaluate Suppliers Validate Internal Requirements & Profile Category Build TCO Model Deliverables or Tools Conduct Industry Analysis Internal Category Profile TCO Model Cost Reduction Ideas Industry Profile Page: 6 Conduct Competitive Exercise w/ Approved Suppliers Negotiate & Develop Sourcing Recommendation Implement Agreements SAMPLE Total Cost of Ownership – Elements Price for airfare, room rates and rental rates make up a portion of the TCO for Travel with cost drivers laying hidden in process. Air Ticket Cost • Air Ticket Cost • Fuel Surcharges • Taxes • Security Fees Ancillary Fees • Baggage Fees • In Flight Internet • Change Fees • Status Level Airfare Cost Nightly Room Rate Price Hotel Cost Misc. Charges Daily Rate Total Cost of Ownership Travel Rental Car Cost Fuel Misc. Charges • Upgrade Fees • Energy Surcharge • Internet • Meals • Parking • Phone • Fitness Center • Daily Rate • Taxes • Self fill • Fuel and Service Charges • Fuel Purchase Options • • • • Mileage Charge • Insurance • Airport Fees Vehicle Fees • City Surcharge GPS Concession Fee Recovery Labor Costs • Time to register new online users on Cliqbook • Time to train new online users Travel Policy • Policy Enforcement • Advance Booking • Preferred Suppliers Procurement Process Management Fees Agency Cost Copyright © 2007 Accenture All Rights Reserved. • Room Rate • Taxes Support • Online Booking • Agent Assisted Booking • Client Negotiated Airfare Transaction Fee • Emergency Travel Services • Change Requests 7 SAMPLE Industry Profile - Objective & Key Questions Objective Provide a detailed understanding of the current corporate travel industry as well as the forces shaping future travel services. The results of this profile will shape Comerica’s travel Sourcing Strategy. Key Questions How big is the industry? Who are the major players? How competitive is the market? What are the key cost drivers? Is the industry in a state of growth or decline? What are the current pricing trends? Page: 8 SAMPLE Travel Scope The travel industry encompasses a variety of different categories each grouped with an NAICS (North American Industry Classification System) code. In Scope NAICS 481 – Transportation by Air Key Points 4811 – Scheduled Air Transportation 481111 – Scheduled Passenger Air Transportation NAICS 721 – Accommodation 7211 – Traveler Accommodation 721110 – Hotels and Motels 721110.1 Guestroom Rental NAICS 5321 – Automotive Equipment Rental 53211 – Passenger Car Rental and Leasing 532111 – Passenger Car Rental (for business travel) NAICS 561 – Administrative and Support Services 5615 – Travel Arrangement and Reservation Services 561510 – Travel Agencies (including Meetings & Events) Source: http://www.bls.gov Page: 9 • Scheduled passenger air transportation, hotel, passenger car rentals and meeting/event planning services are in scope for travel sourcing. • Because of the existing relationship with current travel agency and the subsequent process standardization, it does not make sense to fully source the travel agency component of travel at this time. However, there may be components of the contract to reevaluate. • Meeting/Event Planning Services are categorized under the same NAICS code as Travel Agencies. AIRLINE INDUSTRY – US Airline Mergers • In 2000, 10 airlines accounted for slightly more than 90% of available seat-mile capacity in the United States. By early 2012, those 10 airlines, through mergers, were reduced to 5 airlines controlling about 85% of the domestic passenger market. Moreover, American and US Airways is currently merging —which would further reduce the number of airlines controlling the vast majority of passenger ridership to only four. 2012 US Airlines Shares Delta United Southwest American US Airways JetBlue Alaska AirTran Corporation SkyWest ExpressJet Other 16.3% 15.1% 15.0% 12.9% 8.1% 4.9% 3.8% 2.9% 2.3% 2.2% 16.5% Source: Office of Inspector General, AVIATION INDUSTRY PERFORMANCE, A Review of the Aviation Industry, 2008–2011, Number: CC-2012-029 , Date Issued: September 24, 2012 RITA, Bureau of Transportation Statistics BOEING PROPRIETARY SAMPLE Airline Industry: Overview 2012 Global Airline Industry Revenue reached $636 Billion. North America is the industry's revenue leader, generating about 44.3% of industry revenue. Key Points Revenue in Billions Annual Airline Industry Revenue $538 $582 $493 $561 $590 $636 • • $660 • • 2007 2008 2009 2010 2011 2012 2013F • • 2012 Revenues (in Billions) $40 $35 • $30 $25 • $20 $15 • $10 $5 $0 Source: Airlines for America: airlines.org, Airline Financials.com, IATA, Wikipedia Page: 11 2012 Airline Industry Revenue reached $636 Billion. North America is the industry's revenue leader, generating about 44.3% of industry revenue. United, Delta, and American are the market leaders based on revenue In 2012, United’s net income was $589M and Delta earned $854M, while American lost $1.87 Billion. Alaska Air earned $245M, Southwest $417M, US Airways $637M and Jet Blue earned $376M. Business travel represents 35% of airline’s revenue From 2000 – 2010, US Airlines improved their ontime arrivals from 72.6% to 79.8%. From 2000 – 2010, airlines reduced greenhouse gas emissions by 10%, while transporting 15% more passengers and cargo. Federal taxes constitutes $61 or 20% of a typical $300 domestic round trip ticket. In 2013, Airfare Average Ticket Prices are expected to be: − Up 2-4% in the US − Up 1-3% in Europe − Up -1 to 4 % in Asia-Pacific (5-10% in India) − Up 5-10% in Latin America − Up 2-4% in Africa − Up 2-4% in Middle East Airline Industry: PPI (Producer Price Index) – Scheduled Passenger Air Transportation The PPI (measures average change in prices over time) for passenger air transportation. For 2012 the average amounted to 285.0 which represents a gain of 9.5% from 2011. 2013 Data 300 286.6 285.0 282.0 Producer Price Index 280 273.5 278.7 281.2 276.9 257.1 260 254.6 240 234.5 235.9 229.6 220 205.7 205.8 217.1 200.6 200 200.4 180 186.5 NAICS 481111 February– Mary 2013 Preliminary. All indexes are subject to revision four months after original publication. Source: http://www.bls.gov/ppi/ SAMPLE Airline Industry: Cost Drivers Top 3 Drivers Account For 64.3% of Total Airline Costs. Key Points 2012 Cost Drivers • The top three cost drivers for ninety five percent of the world’s airlines, are: fuel, personnel and the cost of aircraft, which together account for an average of 64.3% of an airline’s total cost structure. • Dependence on oil production, labor agreements and a duopoly in aircraft manufacturing prevent airlines from having any substantive impact on these cost drivers. • With revenues fixed by competitive ticket pricing and the majority of their costs out of their control, airlines are challenged to maintain earnings and gain competitive advantage by controlling less than 35% of their cost structure. Source: www.rajcoaviation.com Page: 13 SAMPLE Airline Industry: Jet Fuel Costs Fuel is one of the largest cost contributor to airlines’ operating costs. Key Points Increasing Jet Fuel Costs • $140 $130 $129 $120 Average Price Per Barrel $120 $100 $83 $80 • $91 $88 $80 $70 $60 • $49 $40 $33 $34 $20 $36 $30 • $0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 • • Sources: Airlines for America: www.airlines.org, www.bts.gov, www.iata.org Page: 14 Historically jet fuel expenses have ranged between 10% and 15% of U.S passenger airline operating costs, but in 2008 the cost of fuel was between 30% – 40% of total operating expenses for most carriers. For 2012, average price of jet fuel was $129.60 per barrel. The most reasonable explanation for such high prices is tight supply and counteracting the weak economic conditions In 2008 and now in 2013, every dollar increase per barrel (42 gallons) drove an additional $448M in fuel expenses to carriers’ bottom lines From 2000 – 2010, US airlines carried 15% more traffic while using 2.1 Billion fewer gallons of fuel. In 2011, US passenger and cargo airlines spent $50.5 Billion on fuel, up $11.7 Billion from 2010. For 2013 jet fuel prices averaging $124.60 per barrel Airline Industry: Air Travel Price Index SAMPLE The cost of air travel have been very volatile over the past several years. The cost of airfare flying into Chicago – O’Hare has been consistent with the U.S. average while Chicago – Midway has been consistently lower than the U. S. average. Air Travel Price Index for Chicago1 Key Points • U.S.-Origin ATPI Chicago - O'Hare Chicago - Midway $430 • Average Air Fares $380 $330 $280 • $230 $180 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 • 1 The air travel price index measures the percents change over time in prices paid by travelers. • Sources: Bureau of Transportation Statistics, AMEX 2013 Forecast, CWT 2013 Forecast, Advito’s 2013 Forecast, Airlines for America: www.airlines.org Page: 15 The cost of air flying into Chicago – O’Hare has been consistent with the U.S. average while Chicago – Midway has been consistently lower than the U.S. average. In 2013, Airfare Average Ticket Prices are expected to be: −Up 2-4% in the US −Up 1-3% in Europe −Up -1 to 4 % in Asia-Pacific (5-10% in India) −Up 5-10% in Latin America −Up 2-4% in Africa −Up 2-4% in Middle East Airlines found several ways to grow revenue without raising fares – a la carte pricing: from charging for select coach seat assignments, boarding after elite status members, baggage fees and fuel surcharges and possibly using restrooms! In 2011, US airlines posted the lowest annual rate of mishandled baggage ever recorded. In 2012, the airline industry earned approx. $36.1 billion in additional ancillary fees, an increase of 11.3% from 2011 SAMPLE Airline Industry: Baggage Fees Ranking * Airline 2007 2008 2009 2010 2011 2012 1 Delta 96,546 177,063 481,719 952,250 863,608 865,879 2 United 52,002 132,994 268,977 313,207 276,817 705,547 3 American 124,538 277,991 475,184 580,663 563,465 557,385 4 US Airways 27,738 187,082 432,280 513,623 506,339 516,206 5 Spirit 46,848 81,503 133,970 168,229 6 Alaska 16,151 22,028 58,669 108,997 157,013 151,475 7 Southwest 20,799 25,266 26,983 29,787 32,035 144,475 8 Allegiant Air 44,095 55,325 53,562 89,556 9 JetBlue 16,416 35,308 53,267 57,019 64,078 70,788 10 Frontier 4,618 15,156 55,160 62,115 54,862 70,173 11 Hawaiian 4,505 11,627 38,186 54,008 56,590 67,829 12 Virgin America 231 2,569 19,364 36,075 33,482 57,410 13 Continental 42,844 97,524 254,488 341,585 353,416 14 Air Tran 9,168 29,401 145,983 152,148 164,670 TOTAL 415,556 1,014,009 2,401,203 3,338,305 3,313,907 Source: www.bts.gov Page: 16 3,464,952 SAMPLE Airline Industry: Cancellation/Change Fees Ranking * Airline 2007 2008 2009 2010 2011 2012 1 Delta 16,331 18,927 406,039 698,611 766,795 778,398 2 United 331,193 354,471 309,866 321,539 324,129 660,943 3 American 469,883 449,899 471,369 495,158 517,708 4 US Airways 68,304 248,840 253,077 275,643 297,693 5 JetBlue 123,468 121,273 113,997 124,536 133,771 6 Southwest 7 Virgin America 8 Spirit 9 Alaska 10 74,472 32,470 9,761 12,866 18,151 15,851 30,644 21,514 23,561 23,120 25,927 27,763 54,700 67,077 60,590 50,357 10,598 23,210 Hawaiian 21,801 25,159 23,546 18,192 17,356 18,285 11 Frontier 33,081 34,279 21,494 16,685 16,562 14,217 12 Air Tran 20,820 24,339 42,766 50,416 49,964 10,400 13 Continental 227,868 237,446 249,831 1,948,608 2,272,960 2,372,350 TOTAL 943 553,341 1,217,182 * Airlines ranked by 2012 reservation cancellation/change fee revenue, dollars in thousands (000) Source: www.bts.gov Page: 17 2,545,502 Airline Industry: Price of Air Travel versus Other Goods & Services SAMPLE Shown in their original values, facilitating comparisons with other goods & services versus the price of air travel and with movements in the U.S. Consumer Price Index (CPI). CPI is defined as a measure that examines the weighted average of prices of a basket of consumer goods and services. Price of Air Travel Versus Other Goods and Services Product (Unit) 2000 2012 2012 vs 2000 Prescription Drugs (Index) 2 Major League Baseball (MLB) Game Ticket 9 Unleaded Gasoline (Gallon) 3 New Single Family Home 4 CPI (All items) 2 $3,508 $16,072 $49.35 285.4 $8,655 $29,056 $78.38 440.2 147% 81% 59% 54% $16.22 $1.51 $169,000 172.2 $25.98 $3.64 $240,000 229.6 66% 141% 45% 33% Movie Ticket 5 First-class Domestic Stamp 6 Whole Milk 2 Grade-A Large Eggs (Dozen) 2 Air Travel: Round Trip Domestic Fare 7 Air Travel: Round Trip International Fare 7 $5.39 $0.33 156.9 $0.91 $314.46 $935.26 $7.96 $0.45 211.27 $1.84 $357 $1,209 48% 36% 35% 102% 14% 29% 129.6 49.9 126.3 5.4 -3% -89% College Tuition: Public (Year) 1 College Tuition: Private (Year) 1 National Football League (NFL) Game Ticket 8 Apparel: Clothing/Footwear/Jewery (Index) 2 Television (Index) 2 1 The College Board - based on beginning of academic year 2 U.S. Bureau of Labor Statistics - including hedonic "quality-change' adjustments 3 U.S. Department of Energy - Monthly Energy Review, Table 9.4 4 U.S. Census Bureau - median value 5 National Association of Theatre Owners 6 U.S. Postal Service - Publication 100 7 ATA via U.S. bureau of Transportation Statistics - exludes taxes; first column reflects 1979 (1978 data not available) 8 National Football League, average nonpremium ticket 9 Major League Baseball, average nonpremium ticket Sources: Airlines for America: www.airlines.org Page: 18 SAMPLE Hotel Industry: Overview 2012 Global Hotel Industry Revenue reached $580 Billion. The US Hotel Industry Revenue reached $128 Billion in 2012. Key Points 2012 Global Revenue (in billions) $14.00 $12.00 • $10.00 $8.00 • $6.00 $4.00 $2.00 $0.00 • • US Market Segmentation Personal or f amily travelers 25% 21% • Business travelers Vacation travelers 26% 28% Source: www.IBISWorld.com, Smith Travel Research • Conf erence travelers Page: 19 2012 Global Hotel Industry Revenue reached $580 Billion. The US Hotel Industry Revenue reached $128 Billion in 2012 In 2013 global hotel revenues are estimated to grow 2.2 % to $592.6 billion. Over the five years to 2017, revenue is projected to increase at an average annual rate of 2.3% to $650.9 billion. This will result from growth in business and pleasure travel, and rising room rates. In 2013, US industry revenue is expected to increase 3.5% to $127.8 billion. Global industry profit is estimated to account for 10.8% of total industry revenue in 2012, up from an estimated 6.5% in 2009, and similar to pre-2008 levels. US industry profits in 2013 are expected to be 9%. Smith Travel Research is projecting increases in all three key performance metrics during 2013: Occupancy is expected to rise 0.8% to 61.9%, Average Daily Rate (ADR) will increase 4.6% to $111.27 and Revenue Per Available Room (RevPAR) is expected to grow 5.7% to $68.86. Major US market segmentation: 28% transient business travelers and 25% conference travelers. Hotel Industry: Chains / Brands SAMPLE The majority of the global branded properties and revenue are mostly located in North America, Chain Portfolio by Hotels & Rooms Key Points Total Network (Rooms/Hotels) Main Footprint Brands & Segment 647,161 R Americas: 68% 7 brands from midscale to luxury Americas: 83% 12 brands from budget to upscale Americas: 85% 15 brands from midscale to luxury Americas: 86% 10 brands from economy to luxury EMEA: 56% 10 brands from budget to luxury Americas: 87% 11 brands from budget to luxury Americas: 61% 9 brands from midscale to luxury 4,437 H 612,735 R 7,207 H 605,141 R 3,474 H ~ 600,000 R ~ 3,600 H 507,306 R 4,229 H 495,145 R 6,142 H 301,700 R 1,027 H • • • • Brands by Service Level • Source: PWC Hospitality Directions, Smith Travel Research, CWT Hotel Solutions, Business Travel News, IBISWorld Page: 20 The majority of the global branded properties and revenue are mostly located in North American Major revenue for global chains (such as Marriott, Hilton, etc) is from franchise and management fees. Business travelers, including executives, are shifting from luxury hotels to more moderate mid-priced hotels Hotel taxes, usually a combination of sales and occupancy taxes along with the occasional flat fee, range from 10% to more than 18%. Hotel costs represent the single largest component of non-air expenses, about 43% of the travel dollar Hotel Chain Scales Chain Scale Brand Name Luxury Upper Upscale Upscale Midscale For Domestic Hotel Bookings (2012) : Economy Ex-Upscale Ex-Midscale Ex-Economy Total Tracked Spend: $XXM 46% of spend in Upper Upscale. Average Nightly Rate: $XXX 21% of spend in Upscale. Average Nightly Rate: $XXX Hotel Industry: PPI – Hotels & Motels, Guestroom Rentals The PPI for hotel rooms have fluctuated during 2012 due to pressures from both buyers and sellers. The 2012 average ended at 131.4 indicating rates are raising. 140.0 2013 Data 134.8 135.0 131.4 130.2 Producer Price Index 129.7 130.0 126.8 124.1 124.3 125.0 125.1 120.0 116.4 115.0 111.7 110.0 105.0 100.0 104.5 100.0 NAICS 721110.1 February – May Preliminary. All indexes are subject to revision four months after original publication. Source: http://www.bls.gov/ppi/ 126.7 123.5 130.2 Hotel Industry: Cost Drivers SAMPLE Over 80% of costs in the hotel industry is distributed among four categories: (1) administrative overhead, (2) labor, (3) repairs and maintenance, and (4) food and beverage. Operating Cost Drivers 2013 US Cost Structure 2012 Global Cost Structure 100% 100% 9.0% 10.8% 90% 90% 80% 11.6% 13.1% 80% 2.0% 4.8% 70% 7.6% 2.1% 4.8% 4.9% Prof it 70% 60% 6.7% Advertising 60% Depreciation 50% 50% Other Other 32.3% Rent & Utilities Purchases 30% Wages Wages 20% 20% 10% Depreciation 40% Rent Purchases 30% Advertising 38.1% Utilities 40% Prof it 25.3% 10% 0% 0% Source: www.IBISWorld.com Page: 23 26.9% Hotel Industry: 2013 Expected Changes in Room Rates Expected Changes in Hotel Prices Expected Changes in Hotel Prices Mid-Range Hotel Forecast Upper-Range Hotel Forecast Mid-Range Hotel Forecast North America 2-7% 4-9% UAE USA 3-7% 4-9% South Africa Canada 0-4% 0-4% Mid-Range Hotel Forecast Upper-Range Hotel Forecast Upper-Range Hotel Forecast -3 to 6.5% -3 to 6.5% 3-6% 3-7% Mid-Range Hotel Forecast Upper-Range Hotel Forecast Asia Pacific 0-4% 2-7% Latin America 4-7.5% 3-6.5% Australia 0-5% 0-5% Brazil 4.5-8.5% 5-9% China 0-5% 2-7% Argentina 4-6.5% 3-6.5% Hong Kong 3-8% 3-8% Mexico -1 to 3% -1 to 3% India 0-5% 0-5% Chile 1.5-5.5% 1.5-5.5% Japan -1 to 2% -1 to 2% Singapore 3-7% 3-7% South Korea 3-8% 3-8% Mid-Range Hotel Forecast Germany France 1.5-4.5% Upper-Range Hotel Forecast 1.5-3.5% 2-5.5% 2-4.5% UK 0-5% -2 to 4% Italy -0.5 to 2.5% -3 to 2% Netherlands 2-6% 1-6% Sweden 0-4.5% 1-5.5% Norway 1.5-4.5% 1.5-5% Finland 3.5-6.5% 3-5% Denmark 0-2.5% 0.5-2.5% Russia 6.5-11% 6.5-12% SAMPLE Car Rental Industry: Overview Global industry spend is $30.5 billion of which 34% is business travel Key Points • • • • • • • Source: IBISWORLD, Auto Rental News, Business Travel News Page: 25 Global industry spend is $30.5 Billion of which 34% is business travel The industry is segmented by business travelers, leisure travelers, car leasing and car sharing Leisure market has grown larger than corporate business market Industry revenue is forecasted to increase 2% for the next 5 years High fuel cost is impacting industry as customers, especially leisure travelers, are finding other alternatives (public transportation) Hertz and Avis expanding off-airport locations to compete with Enterprise Car rental industry adjusted to global recession better than other travel industry categories. They can “right” size fleet to meet demand by disposing vehicles quickly and reduce costs. Rental Car Industry: PPI – Passenger Car Rental The PPI for passenger car rentals has gone up 22% from 2005 to 2008 indicating increased fleet and fuel cost. In 2008 and 2009, prices have slightly increased and in 2011 and 2012 prices dropped significantly. Producer Price Index 125.0 119.3 120.0 117.8 116.8 118.1 115.0 2013 Data 111.5 110.0 109.6 106.9 108.8 106.0 104.8 104.4 105.0 105.4 102.6 100.0 NAICS 532111 February – May 2013 Preliminary. All indexes are subject to revision four months after original publication. Source: http://www.bls.gov/ppi/ 102.9 104.6 102.9 103.0 US Car Rental Industry - Segmentation Services Segmentation Key Findings Car sharing 6% Car leasing 19% • Leisure car rentals have been making up a larger portion of industry revenue over the last few years, largely in response the sizeable drop in business travel, which happened as a result of the economic downturn. • Car leasing involves paying an upfront lease fee plus fixed monthly payments in return for taking possession of and operating a car for 12 months or more. This industry does not include cars leased to purchase or leased to own. • The off-airport market, sometimes called the local market, includes car sharing; insurance replacement, and leisure and business rentals independent of the airport market. Leisure car rental 41% Business car rental 34% Market Segmentation Leisure travelers at airports 35% Business travelers at airports 30% Off-airport market 35% Page: 27 SAMPLE Car Rental Industry: Market Share The U.S. car rental market is highly consolidated among a small number of major players and is getting smaller. Key Points Top 4 Car Rental Companies By Revenue • $18.0 800,000 $16.0 700,000 $14.0 600,000 $12.0 500,000 $10.0 400,000 $8.0 300,000 $6.0 $4.0 200,000 $2.0 100,000 $0.0 0 Enterprise Hertz Avis 2012 Revenue ($B) After Hertz’s purchase of Dollar Thrifty, the top three rental car companies will make up 95% of the total on-airport US car rental industry revenues Suppliers offer different brands that focus on specialized markets: • Corporate Traveler – On-airport convenience – Hertz, Avis and National • Leisure Market – On/Off-airport Budget, Dollar Thrifty, and Enterprise Additional Non-US regional players include: • Europcar (Europe and Asia Pacific) • Sixt (Germany and EMEA) In high risk countries such as India, China, Thailand, Latin America, etc. the business model is to rent a car with driver. Cost is less than a chauffer / limo as a typical rental vehicle is used In the past 4 years, major car rental companies trimmed fleets from a total of about 2 million cars to about 1.3 million Car rental companies have implemented a variety of new ancillary fees to help preserve some of the lost revenue in recent times, such as tacking on fees to extend a reservation, eliminating 60 minute grace period, or increasing the cost of a two-day rental “Virtual rental technology” – enables customers to reserve, rent, access and return cars just about anywhere. ZipCar, WeCar, Connect. • Cars in Service (K) 2012 Revenue ($B) 2012 US Revenue & Cars in Service • • Dollar Thrif ty • Cars in Service • US Market Share by Revenue 2% 7% Hertz 47% 18% • Enterprise 6% Avis • Dollar Thrifty 20% Independents Other Source: www.autorentalnews.com, Business Travel News Corporate Travel Index 2012 Page: 28 It is forecasted that that base rates will decline on average between -1.5% to -2% for business travel rental cars in the U.S. next year. However, ADR will increase by 1% to 2%, due to slight increases in ancillary fees, taxes, other fees, vehicle license fees (VLFs), and energy recovery fees. Car Rental Industry: Cost Drivers SAMPLE Over 90% of costs in the car rental industry is distributed among four categories: (1) Purchases, (2) Other, (3) Depreciation, and (4) Wages. Operating Cost Drivers Key Findings • The industry have slowly recovered as the demand for air travel, which is the industry’s primary revenue source, started to increase as of 2010: • Profit margins turned positive again in 2010, growing to 3.5% in 2012. • It is estimated that in 2012 the industry grew 5.6% and reached a revenue level of $33.7 billion. • In 2013, industry revenue is expected to grow 3% to $34.7 billion. Car rental companies are forecast to purchase more new cars in 2013 for two reasons. • The anticipated increase in the number of rental customers will force companies to field a larger rental fleet. • Companies will likely replace older cars with new cars after letting the average age of their fleets rise to save money. • Although the industry’s future looks brighter, rising gas prices may slow the recovery. As such, revenue is forecast to grow at an annualized rate of 2.8% from 2012 to 2017 to $38.6 billion. Source: www.ibisworld.com, Auto Rental News Page: 29 Travel Management Industry: Overview The Top 50 travel management companies represent over $155 billion in sale revenue 2011 Top 5 (over $1B in revenue) Travel Management Co’s By Revenues Key Points • $30 • 2011 Revenues (in Billions) $25 $20 • $15 $10 $5 • • $0 • • Source: www.travelweekly.com Travel Weekly Power List 2012, www.bts.gov The top 50 travel management companies represent over $160 billion in sales revenue in 2011. Five companies registered more than $20 billion in sales, including a snowballing Priceline, which showed significant increases each year. There were 16 listees with sales of more than $1 billion, up from 14 last year. Expedia, Orbitz, Priceline, AAA Travel, and Travelong receive 90% or more sales revenue from the leisure market. Many of the listees registered surges in year-over-year sales, a couple by acquisitions but most by generating additional revenue from existing clients or winning new clients. AMEX regained top stop over Expedia in 2011 by a slim margin. It was just announced that BCD was purchasing Travelocity TMC Industry: PPI – Travel Agencies The PPI for travel agencies has gone down 13% since its high in 2001 (due to 9/11 and the commencement of the on-line booking tool), but has risen since and has hit its 2007 high once again.. 125.0 Produceer Price Index 123.3 121.8 120.0 2013 Data 114.3 115.0 113.2 113.0 114.0 111.5 111.5 112.5 111.7 113.8 112.4 110.0 108.6 107.4 105.0 NAICS 561510 February– May 2013 Preliminary. All indexes are subject to revision four months after original publication. Source: http://www.bls.gov/ppi/ 113.4 113.0 114.6 113.8 SAMPLE Appendix: Data Sources • • • • • • • • • • • • • • • • • • • • • • • • • • • • Advito’s 2013 Forecast Airlines for America, www.airlines.org AirlineFinancials.om AMEX Business Travel 2013 Forecast and Trends ATWOnline, www.atwonline.com Auto Rental News Bureau of Labor Statistics, www.bls.gov Bureau of Transportation Statistics, www.bts.gov Business Travel News CWT Hotel Solutions CWT 2013 Forecast Egencia 2013 Forecast Forbes, www.forbes.com Hoovers Online, www.hoovers.com IATA (International Air Transport Association) & World Air Transport Statistics (WATS 2006) www.ibisworld.com Global Business Travel Association, www.gbta.org OneSource Inc., www.onesource.com Power List 2012, www.travelweekly.com Pwc Hospitality Directions Rajcoaviation.com Smith Travel Research Data The Transnational.travel Travel Daily News, www.traveldailynews.com Travel Procurement Travel Weekly, www.travelweekly.com Wikipedia Wikiinvest Page: 32 Strategic Sourcing Process Overview ANALYSIS STRATEGY SUPPLIER SELECTION IMPLEMENTATION Strategic Sourcing Methodology Assess Opportunity & Establish Team Profile Category Internally & Externally Develop Sourcing Strategy Create Selection Factors & Evaluate Suppliers Deliverables or Tools Activities Develop Sourcing Objectives Develop Sourcing Strategies & Tactics Sourcing Strategy Plan: Competitive Supplier Selection or Existing Supplier Development Page: 33 Conduct Competitive Exercise w/ Approved Suppliers Negotiate & Develop Sourcing Recommendation Implement Agreements Sourcing Strategies & Tactics Several sourcing strategies can be pursued, either separately or together. — Possible Sourcing Strategies — STRATEGIC RELATIONSHIP Establish integrated or close relationships with suppliers where both buyer and supplier work together to share information, collaborate, and further each partner’s goals PROCESS IMPROVEMENT Identify opportunities to standardize and streamline business processes that will result in improved quality, reduced cycle times, and lower total cost of ownership Strategic Relationship Process Improvement Best Price Analysis Commodity Sourcing Strategy Evaluate and model all costs and use negotiation tactics that increase transparency and maximize competition Demand Management Volume Leveraging VOLUME CONCENTRATION Aggregate like goods and/or services across organizational units in order to increase negotiation leverage and negotiate better pricing, and terms and conditions Page: 34 BEST PRICE ANALYSIS DEMAND MANAGEMENT Address factors such as standards, requirements, and policies to reduce costs related to internal demand SAMPLE Strategy Considerations • Company should examine current travel policies. Enforcement of on-line booking tool, advance booking, preferred hotels and other travel guidelines will result in significant savings. • Because of the relative small air travel spend compared to other companies, in addition to moving corporate headquarters to Dallas while still maintaining their Detroit area locations, Company should consider focusing hard dollar airline discounts with one or two major carriers supporting both markets. Furthermore, Company should consider exploring additional benefits for their secondary markets • Company should re-examine their current preferred hotel program and consolidate markets and room nights to leverage buying power • Company should leverage hotel spend for meetings/events in negotiating hotel rates for transient travel • Preferred car rental utilization is “best in class”, therefore consider a competitive bid to leverage utilization • Company may consider utilizing teleconferencing as an alternative to reduce their overall travel usage Page: 35 SAMPLE Sourcing Strategy: Airlines • • • • • • • • Current State Travel policies located in Accounts Payable Expenditure Manual – No enforcement All departments using one travel agency, however suspect that some Southwest bookings are going directly to Southwest.com Travel compliance is not be monitored Recently moved corporate headquarters from Detroit, MI to Dallas, TX Top 3 airline spend: Northwest, American and Southwest Current contract with Northwest only (no discount in Tier 3 and high market share commitment) 70% of air spend in Tier 3 Some international air spend – about 15% Sourcing Recommendation • Create separate travel policy with management enforcement • Enter into negotiations with Northwest (current contracted supplier) and American Airlines. In addition, pursue possible corporate deal with Southwest Airlines. • Stimulate competition between Northwest and American Airlines in multi-hub city pairs • Stimulate competition between Northwest and American Airlines for international air spend • Negotiate with Southwest and determine if market share can support a formal corporate agreement • Market dynamics suggest a 2 year contract Results • Separate travel policy resulting in improved compliance • Discount in Tier 3 level pricing • Capture all Southwest spend Page: 36 SAMPLE Sourcing Strategy: Hotels • • • • • Current State Travel policies located in Accounts Payable Expenditure Manual – No enforcement All departments using one travel agency, however suspect that some hotel bookings are being booked directly with hotel Travel Agency manages and negotiates hotel program Large number of properties are being utilized in top city markets (e.g. 75 hotels were utilized in the Detroit (and surrounding) area in the last 12 months) Cities are classified as Room Nights per City: • Tier 1 (approx. 200+ Nights): 45% of hotel spend in 12 market areas • Tier 2 (<200 Nights): 55% of hotel spend in the rest of the market area Sourcing Recommendation • Create separate travel policy and enforcement of policy • Tier 1: Issue a Request for Proposal to the existing supply base as well as comparable properties in defined geographies. • Consolidate volume to increase bargaining power • Minimize number of options available in each geography • Pursue value-added amenities at no additional cost • Tier 2: Utilize Travel Agency rates and drive volume to those properties with the lowest rates Results • Separate travel policy and enforcement which will result in improved compliance • Competitive room rates in preferred cities • Strategically selected properties by geography which will increase preferred property usage Page: 37 SAMPLE Sourcing Strategy: Car Rentals • • • • • Current State Travel policies located in Accounts Payable Expenditure Manual – No enforcement All departments using one travel agency for booking car rentals, however some spend is being booked via another source 97% of the car rental spend is with one preferred supplier Over 75% of car rental returns are subject to refueling charges The top 15 cities, by volume, represent 78% of the rental car spend Sourcing Recommendation • Develop and implement one travel policy for all departments • Issue a Request for Proposal to the top 5 rental car companies • Consolidate volume from all sources to increase bargaining power • Request pricing for one primary and one primary and one secondary supplier relationship • Negotiate refueling charges, if possible • Negotiate city surcharges for the top 15 cities, by volume • Market dynamics suggest a 2 year contract with the option for a 1 year extension Results • One travel policy for all departments resulting in capturing the non-compliance that is being done • Award contract to one primary or one primary and one secondary supplier, whichever is more advantageous Page: 38 Category Strategy Deliverable SAMPLE Perform pricing exercise to include primary and primary/secondary considerations, include cargo van/truck rental spend and negotiate additional concessions such as better rebate terms, lower city surcharges and flat rate refueling charge. Savings Opportunity Proposed Strategy Expected Outcome Volume Concentration Consolidate all OpCo car rental spend. Leveraging buying power across all OpCo’s to maximize savings. Primary and Secondary Considerations Pricing exercise to include using one primary vendor only or having one primary and one secondary vendor for car rentals. Award business to one primary only, or one primary and one secondary vendor, whichever is more advantageous. Service Consolidations Increase total spend to include cargo van/truck rental business to leverage buying power with Enterprise and Budget. Enterprise to acknowledge additional spend with cargo van/truck business which could help achieve additional savings. Show Budget total spend across their business units to obtain best pricing. Additional Concessions Ask for additional concessions, including higher rebate, lower city surcharges, lower refueling charges, lower one-way and weekly rentals, and lower GPS rental fee. Better rebate terms, possible lower city surcharges, and flat rate refueling charge which amounts to additional savings. Demand Management – Global Policy Develop a global travel policy for all OpCo’s to follow. Consistency across all OpCo’s leads to demand management savings. Demand Management – Enforcement Mechanism Empower Global Travel Department to enforce global travel policy with key OpCo team members. Demand management savings in all areas, airline, hotel and car rental. Demand Management – Class of Service Standardization Standardize car rental class of service to “intermediate” size car only. Average daily car rental rate to decrease, providing incremental cost savings to the program. Page: 39 Strategic Sourcing Process Overview ANALYSIS STRATEGY SUPPLIER SELECTION IMPLEMENTATION Strategic Sourcing Methodology Deliverables or Tools Activities Assess Opportunity & Establish Team Profile Category Internally & Externally Develop Sourcing Strategy Create Selection Factors & Evaluate Suppliers Create Supplier Selection Criteria Conduct Supplier Analysis Supplier Selection Decision Matrix RFIs (optional) “Short List” of Suppliers Page: 40 Conduct Competitive Exercise w/ Approved Suppliers Negotiate & Develop Sourcing Recommendation Implement Agreements SAMPLE Car Rental Scorecard Car Rental Company 37% 0% 2% 7% 9% 1% 12% 7% 63% 10% 33% 20% Maximum Points 572 0 35 100 131 21 185 100 954 154 500 300 100% 1526 Weight Evaluation Criteria I. A. B. D. E. F. G. H. II. C. Non-Pricing Components Company Information Rental Locations Safety & Fleet Services & Amenities Billing Top 15 Cities - Rental Locations Top 15 Cities - Trans Method from Airport Pricing Components Additional Pricing Questions National Daily Rental Rate City Surcharge Rate Page: 41 Person A Score 549 0 35 78 130 21 185 100 666 92 437 136 Person B Score 526 0 35 88 121 21 185 76 667 93 437 136 Person C Score 538 0 35 76 121 21 185 100 671 97 437 136 1215 1193 1209 Total Score 538 0 35 81 124 21 185 92 668 94 437 136 1206 Strategic Sourcing Process Overview ANALYSIS STRATEGY SUPPLIER SELECTION IMPLEMENTATION Strategic Sourcing Methodology Assess Opportunity & Establish Team Profile Category Internally & Externally Develop Sourcing Strategy Create Selection Factors & Evaluate Suppliers Conduct Competitive Exercise w/ Approved Suppliers Complete Traditional RFP Process Activities - AND/OR Conduct eAuction(s) Deliverables or Tools - AND/OR Collaborate w/ Incumbent Supplier(s) RFPs / RFQs eAuctions Collaborative Discussions Page: 42 Negotiate & Develop Sourcing Recommendation Implement Agreements Supplier Engagement Options There are many ways to initially exchange information. While RFPs are often appropriate, they are one of many means of engaging suppliers. Direct Negotiations with an Incumbent Supplier Direct Negotiations with a Target Supplier Brainstorm with a Group of Trusted Suppliers Pre-Negotiation Information Exchange On-Line Auctions RFPs / RFQs Should choose the method(s) that best meets both the Strategic Sourcing objective and the team resource capacity Page: 43 Strategic Sourcing Process Overview ANALYSIS STRATEGY SUPPLIER SELECTION IMPLEMENTATION Strategic Sourcing Methodology Profile Category Internally & Externally Develop Sourcing Strategy Create Selection Factors & Evaluate Suppliers Conduct Competitive Exercise w/ Approved Suppliers Negotiate & Develop Sourcing Recommendation Prepare FactBased Negotiation Packages Activities Assess Opportunity & Establish Team Deliverables or Tools Negotiate Agreements Fact-Based Negotiation Packages Supplier Negotiations Presentation Sourcing Recommendation Page: 44 Implement Agreements Negotiations Approach – Discussion Points SAMPLE Based on a review of Company’s current program, contract terms, and stakeholder requirements, the following improvement areas have been identified to maximize the annual incentive rebate. Negotiation Point Description Supplier Pricing, Incentive Rebate Structure • Size down the gap between rebate tiers to reduce the risk associated with dropping to a lower tier. Closing the gap between tiers will inset Company to drive more spend to Amex. • Ensure incentive BPS earned at each tier are best in class for domestic and nondomestic spend. • ABC Pricing, Signing Bonus • Reduce/eliminate minimum signing bonus *NACV thresholds (claw back clause) to avoid refunding any portion of the $1M signing bonus paid to Company in 2008. • Take a position which suggest Company is doing Amex a favor by offering them other potential business. ABC should fight to keep this business considering transition cost will be minimal for them, thus their margin will not be adversely be effected. • ABC Pricing, Performance Bonus • Establish a realistic performance target based on the post spin *NACV, the current (pre spin) performance target is too aggressive. • Maximize the annual performance bonus. • ABC Pricing, Deductions • Minimize consulting assessment expenses (hourly rate) and Membership Reward (MR) fees which are deducted directly from the incentive rebate. • Negotiate an annual credit which can be applied to consulting and MR expenses. • ABC Pricing, High ROC Transactions • Reduce the 50 BSP reduction on P-card transactions > $10K (Hi-ROC volume). • Negotiate a buffer which can be applied to the Hi-ROC volume, i.e. request that the BSP penalty apply only to Hi-ROC volume which exceeds a specified amount. • ABC *NACV – Net Annual Charge Volume (i.e. annual spend with Amex) Page: 45 Negotiations Approach – Projected Targets SAMPLE Below are the projected results should Company be successful in driving ABC to the negotiation points proposed. Total Savings is projected to be approximately $300-$600K. SAMPLE Strategy Expected Benefits Type Savings ($) LAS / BATNA Key Enablers Incentive Rebate Structure – fine tune the incentive BSP tiers to maximize the rebate received post spin-off. Financial $200-$400K • Focus on sizing down the gap between rebate tires. • Put business out to bid • Stakeholder buy-in • Executive sponsorship • Procurement Support Performance & Signing Bonus – adjust bonus targets to align with the post spin-off spend portfolio. The current targets are far to aggressive. Financial $100-$150K • Concede to a reduction in the performance bonus if the target is simultaneously reduced • Mandate a reduction in minimum thresholds for signing bonus retention • Stakeholder buy-in • Executive sponsorship • Procurement Support Deductions – reduce the expense subtracted from the *NACV and deductions from the base incentive rebate. Financial $0-$50K • Focus on improving the rebate earned on HighROC volume • Dedicate a resource to handle ad-hoc assessment activities • Stakeholder buy-in • Executive sponsorship • Procurement Support Total $300-$600K *NACV – Net Annual Charge Volume (i.e. annual spend with Amex) Page: 46 Strategic Sourcing Process Overview ANALYSIS STRATEGY SUPPLIER SELECTION IMPLEMENTATION Strategic Sourcing Methodology Assess Opportunity & Establish Team Activities Assess Opportunity Obtain Sponsorship & ID Team Deliverables or Tools Create Project Plan Project Plan Analyze Current Spend Document Requirements Profile Category Internally & Externally Validate Internal Requirements & Profile Category Develop Sourcing Strategy Develop Sourcing Objectives Create Selection Factors & Evaluate Suppliers Create Supplier Selection Criteria Fast Track for Quick Savings Build TCO Model Conduct Industry Analysis Internal Category Profile TCO Model Cost Reduction Ideas Industry Profile Conduct Competitive Exercise w/ Approved Suppliers Complete Traditional RFP Process - AND/OR Conduct eAuction(s) Develop Sourcing Strategies & Tactics Conduct Supplier Analysis - AND/OR Collaborate w/ Incumbent Supplier(s) Sourcing Strategy Plan: Competitive Supplier Selection or Existing Supplier Development Supplier Selection Decision Matrix RFPs / RFQs RFIs (optional) “Short List” of Suppliers Page: 47 eAuctions Collaborative Discussions Negotiate & Develop Sourcing Recommendation Implement Agreements Prepare FactBased Negotiation Packages Implement Agreements and Monitor KPIs Negotiate Agreements Evaluate Performance and Develop Suppliers Fact-Based Negotiation Packages Finalized Agreements Supplier Negotiations Presentation Benefits Realization Sourcing Recommendation Continual Supplier Improvement SAMPLE Implementation Plan Overview An effective implementation plan consists of several key components necessary to ensure rapid and complete benefits realization from the new supply arrangement(s), and to follow through on agreed to parameters during contract negotiations. – Overview of Implementation Plan Components – Plan Component Description Transition Plan Shift from old supply agreements to new ones. May or may not involve switching suppliers. Communication Plan Inform the user community of the outcome of the strategic sourcing effort. Specify to users how they are impacted and what actions they are required to take as a result of the strategic sourcing effort. Highlight all benefits that users may derive from the new supply arrangements. Compliance Plan Determine how compliance to new supply arrangements will be enforced (if possible). Closely linked to the “Communication Plan”. Benefits Tracking & Reporting Plan Measure benefits resulting from new supply arrangements relative to targets Report to senior management on both status and any necessary actions required to improve benefits realization. Performance Management Plan Ensure that suppliers are performing along key metrics as required by the contract. Put in place a regular communication vehicle with suppliers to drive improvements in supplier performance. Page: 48