BATCo document for Province of British Columbia 23
April 1999
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1995 KEY ARFA PAPER: PURCIRASINGIPROCURMENT
The purchasing environment facing BATCO has
changed dramatically during the Im
12 months. BATCo is now purchasing in an
enviroment that has the following issues:-
1. Substaritially rising commodity prices - e.g.
woodpulp prices rising
from S3 50/tonne to estimated levels ofover S I
000/tonne
2. Suppliers in a position where demand exceeds
supply from their
production
3. A hardening of the marketplace and the
suppliers' approach due to I
and 2 above.
In this environment the strategy for 1995 will be
1. Continue to have security of supply as the
primary imperative
2. Ensure the continuity and development ofthe
quality ofour suppliers
3. Reduce the Total Acquisition Costs of our
purchases.
In addition to this, three further areas will be
developed :-
1. To gain a closer relationship with core
suppliers in order to have a
proactive innovation between BATCo and its
suppliers
2. To have suppliers cornmitted to support ofBATCo
in the re-
socialisation of smoking
3. The identification and development ofBATCo
people to achive this.
Within the context of the above, the following
have been identified as
Purchasing/Procurement Primary Objectives:
1. To ensure that, within the bounds of commercial
viability the highest
available levels of security, quality and
consistency of materials are used
on our key brands. particulady Interriational
Brands.
2. To reduce BATCo's materials spend in real terms
agai~nst the market,
throughout the plan period by taking advantage
ofBATCo's and BAT
Industries annual material purchasing volumes.
3. To ensure that materials used minimise total
cost - taking into account
all costs incurred - ie purchase price. overhead
costs, delivery, packing.
storage, finance, import duties, machine
performance and actual
material wastage.
4. To understand the current level of competence
of BATCo Procurement
people against world class standards and develop a
change programme
to achieve this standard.
S. To mview purchasing of items other than
wrapping materials that may
offer Group wide benefit ifvolumes or negotiations
are co-ordinated Ln
and in order to perform this to develop a system
to collect and manage
appropriate data across BAT.
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BATCo document for Province of British Columbia 23
April 1999


To ensure that materials used meet all established
criteria and guidelines
laid down by the Additives and Materials Guidance
panel regarding
Health and Safety of our workforce, our
neighbours; and our customers
and that their manuhicture, pacidng. use or
disposal is in line with
BAT's Environmental policies and guidelines.
Specific strategies to achieve the above include:
a) In conjunction with the IBG, to develop,
implement and monitor
comprehensive Packaging Mate" Standards for each
brand.
b) To rationalise material specifications used
throughout the Group
without detriment to product quality, design
flexibility or manufacturing
efficiency, thereafter to fiffly document agreed
specifications.
c) To rationalise BATs suppliers for key materials
woridAhride in order to
focus our purchasing power with quality suppliers
who are able to
support our long term growth and development.
d) To use selected suppliers where practicable to
be the sole source of
particular materials to individual manufacturing
locations eg Single
sourcing of tow to any one company to improve
logistics and
stockholding.
e) To identify the structure and personnel
involved in all procurement
worldwide and from this group to manage an
assessentat and
development programme to achieve best-in-class'
standards.
To review, select and implement an appropriate
Procurement/
Purchasing/Order Processing system capable of
worldwide
implementation to support the above.
g) To verify, where appropriate with Additive and
Materials Guidance
Panel (AMGP - based at BATCo Technology Centre,
Southampton)
and Group Environmental management, all materials
that are used.
h) To agree and implement a BAT Tobacco Group wide
supplier rating
system.
In order for the strategies noted above to be
developed, BATCo has already initiated
wrapping material, fertiliserstagrochemicals and
vehicle surveys worldwide. The
responses to these surveys are currently being
reviewed. It is the intention, during
1995, that further Regional Purchasing Conferences
be held to identify specific
people, issues, suppliers and strategies
appropriate to each region. In parallel with
this, there are continued rationalisation projeas
underway for filter tow, cigarette Ln
paper, foil, tipping and board which should be
available during 1995. C>
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BATCo document for Province of BritiSh Columbia 23
April 1999


Accordingly, it is recommended that:
Pack2ging Quality standards for International
Brands should continue to be
verified to ensure conformance to international
brand standards. Arm of
doubt should be raised with IBGs or this
deparunent. Standards for local
brands should be developed to mirror those
ofInternational Brand manuals.
Rationalisa on opportunities between brands should
be sought to minimise
stock items and cost eg Tear tapes, Tippings etc.
AU locally soumed materials in contact with our
product should be confirmed
as approved by AMGF and other materials must
conform to local food and
health legislation or, if not available or
suitable, to US Food and Drug
legislation.
No new specifications or suppliers should be
introduced for key materials
sourced from international manufacrurers without
first discussing the proposal
with this department-
Current local suppliers of materials should be
assessed by Operating
Companies in terms of quality, service and cost.
Local rankings should be
developed to identify orders of preference.
Alternative suppliers should be
identified and investigated to determine
suitability. Local material supplies
should be reviewed to identify differences in
quality, service or cost with
current international standards.
From this, sourcing strategies for locaJ purchases
should be identified by
each Operating Company - identifying
specification, suppliers, percentage
split and reason for it; for the current year and
the plan period. These should
be discussed and agreed with local Production and
Quality management.
Within these strategies, the following should be
considered:
Rationalisation of sources should be sought
without compromising
material availability-
Stock durations ofmaterials should be reviewed to
eliminate
unnecessary buffer stock.
For locally sourced materials with established
supply lines, internally
held stock could be < 1 month.
Stock holding of internationally sourced materials
should be reviewed
with this department as possible common regional
stock points may be
created.
For locally sourced/negotiated materials a full
Supplier Costing Ansilysis
should be developed by Operating Companies, if
possible identifying:-
Raw material usage eg tonnes ofboard per million
cartons, source and
costs;
Conversion costs with breakdown into labour,
energy, depreciation,
wastage;
Ref misc 19 3
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BATCo document for Province of BritiSh Columbia 23
April 1999


Support costs for administration overhea4 stock
financing, credit
terms financing,
packaging, storage and freight;
Margin or profit.
Negotiations with suppliers should always be
supported by documentation to
identify what objectives were seta justification
for our stance, actual result
achieved.
It is strongly recommended that negotiations with
suppliers are attended, by a
minimum of two BAT personnel who are both RWy
briefed regarding strategy
and negotiation tactics and have the necessary
negotiation skills.
Negotiations must cover.
Quality requirements and any improvements needed-,
Volumes forecast and allowable variances;
Service levels cg lead times, supplier
stockholding, quality information,
deliveries scheduling and method, materials
packaging;
Price and validity - ideally I year or longer,
payment terms and interest
rates, handling of currency movements if
appropriate
NB Suppliers' prices and negotiations should
always be based on ex-works or
FOB with additional costs identified separately.
Negotiations by Operating Companies should aim to
reduce costs for our
business in real terms ie inflation adjusted.
Every opportunity should be sought
to reduce costs jointly with our suppliers and to
encourage them to undertake
longer-term quality or service improvements and
cost reduction prograimes
through investment or personnel changes.
Supplier relationships - BATCo must aim for the
highest possible business
ethics and professionalism in all our dealings
with suppliers. We should not
allow suppliers to influence us through
inappropriate gifts or entertainment.
We should insist on absolute integrity and honesty
from ourselves and the
supplier regarding information about each other.
We should never divulge their
pricing to their competitors.
Where possible we should aim to establish
long-term relationships with our
supply base that allow continuity and awareness of
each others needs and
future requirements.
Frworically, suppliers have taken the approach to
organisations like ourselves
of 'divide and conquer. We must ensure that
communication within our
Group is sufficiently good to prevent this
occurring and suppliers must be made
aware ofthis and your adherence to defined
corporate sourcing strategies.
Ret misc- 193
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BATCo document for Province of BritiSh Columbia 23
April 1999


Local suppliers must not be allowed to hide behind
barriers and tariffs which
preclude competitive imports. They must be
encouraged at every opportunity
to compare themselves with current international
standards.
Conversely, local suppliers who are competitive in
quality, service and price
my be of significant interest to other Group
members and should be
encouraged to contact this office after
discussion.
Ref. mL-193
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BATCo document for Province of BritiSh Columbia 23
April 1999