Creating Additional Value in Procurement Today — Lessons from Disney Theme Parks

I had the chance to listen in on a presentation given by a Disney procurement executive Rick Wertsching, two weeks ago at CAPM in New Haven. Rick currently serves as Vice President, Sourcing and Procurement at Disney Theme Parks and Resorts. For those who don't know Disney, the organization is quite sophisticated from an overall procurement technology and process adoption perspective (I'll get to their environment in a minute). But what is Disney doing to create additional value in procurement in the downturn, looking both internally and externally? Their initiatives read like a textbook case of what to focus on given the overall market environment.

Among other areas, Disney is focusing on greater flexibility around payment terms to help themselves and their suppliers. They're also looking at rate relief in certain categories, contract extensions and contract compliance, supplier rationalization/consolidation, productivity improvements and internal demand management. In the productivity improvement area, he gave a great quote: "How do you get people who are not 'card-carrying members of procurement' but with buying power, to get spend religion?" Good question, but when you do get to them, it's an improvement. A big improvement.

Given the current climate, perhaps more interesting is Disney's newfound focus on market intelligence to drive better cost and risk reduction decisions, using onshore and offshore resources to better understand suppliers, supply markets, etc. As part of these efforts, they're attempting to better "understand the financial health of the supply chain" on a consistent basis, using the Altman Z-Score model to do so. In their words, the Altman Z-Score uses statistical techniques to measure a company's financial health. According to Wikipedia, the original score was based on the following equation: "Z = 1.2T1 + 1.4T2 + 3.3T3 + .6T4 + .999T5 with T1 = Working Capital / Total Assets (Measures liquid assets in relation to the size of the company), T2 = Retained Earnings / Total Assets (Measures profitability that reflects the company's age and earning power), T3 = Earnings Before Interest and Taxes / Total Assets (Measures operating efficiency apart from tax and leveraging factors; it recognizes operating earnings as being important to long-term viability), T4 = Market Value of Equity / Book Value of Total Liabilities (Adds market dimension that can show up security price fluctuation as a possible red flag), and T5 = Sales/ Total Assets -- standard measure for turnover (varies greatly from industry to industry)."

According to the Wikipedia entry, "Altman found that the ratio profile for the bankrupt group fell at -0.25 avg., and for the non-bankrupt group at +4.48 avg." This held consistent across manufacturing companies with assets over $1 million in revenue (for whom the score was originally intended to measure). However, later versions of the Altman Z-Score equation "take into account the book value of privately held shares, and the fact that turnover ratios vary widely in non-manufacturing industries". Is the model working for Disney? It's a recent entrant into their Spend Management arsenal, but with a 70%+ degree accuracy rate for supplier bankruptcies, it's certainly better than nothing for companies they can get information on (like D&B's DNBi rating, which claims a 90%+ degree of predicative accuracy when it comes to supplier bankruptcies, the model only works if underlying information is available to feed it).

Disney also understands the value of using multiple technologies to get the most from its overall environment. Rick talked about his current environment consisting of an SAP back-end, SAP requisitioning and PO invoicing. Disney is also using an Ariba "dashboard" to measure segments and report on results including savings initiative reporting. Other providers include Orion, for spend analysis (a vendor that I'm not familiar with personally). I also know Disney has used CVM Solutions in the past as well.

Regarding future initiatives, it's safe to say that Disney, like other companies, will tend to focus on areas that deliver results and currently keep executives up at night. These include, in Disney's words, "global sourcing (LCCS), right shoring, supplier relationship management, sourcing automation/enablement, and environmental compliance (in support of their goal to cut emissions in half by 2013 and to send nothing to landfills in the next 5 to 10 years)". But above all, the most pressing concern is the "financial tsunami" that continues to drift ashore in various and powerful waves. Still, I suspect it's nothing that Mickey and Minnie, with a good degree of Spend Management sensibility, can't tackle and emerge from on top. After all, Mickey is a recession baby -- or should I say teenager. Created in 1928, Mickey came of age during the last depression. And look where his empire is today.

Jason Busch

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