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PPL’s Pursuit of an Integrated Physical Through Financial Supply Chain

Jim Abel

Vice President-Finance and Treasurer

PPL Corporation

January 28, 2008

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Topics to be Covered

• Review of the Traditional Physical/Financial Supply Chain model

• Current best practices and PPL’s progress to date• Future best practices - the Supply Chain Hub• Upping the “ante” with a settlement Hub and PPL’s

progress to date• Closing thoughts – Predictions of the future state and

how we will get there

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Overview of the Traditional Physical/Financial Supply Chain Model• A complex process involving multiple departments and systems internally,

and numerous contact points with external suppliers

Contract/Order

ReceiveProducts or

Services

Requisition

WorkFlow/ Approval

Products /Services

Financial Settlement

ExceptionHandling

MonitoringControlsAccounting

ChangeOrders

Buyer

DynamicDiscount

1099Reporting

ShipAcknowled

gement

Bank

Financial Supply ChainPhysical Supply Chain

Payable

Invoice

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Overview of the Traditional Physical/Financial Supply Chain Model• As the diagram is expanded to include the Seller, it’s easy to see the

opportunities for mistakes, errors and disagreements: plus, just the countless “touch points” where verifications are required

Contract/Order

ReceiveProducts or

Services

Requisition

WorkFlow/ Approval

Products /Services

Financial Settlement

ExceptionHandling

MonitoringControlsAccounting

ChangeOrders

Buyer

DynamicDiscount

1099Reporting

ShipAcknowled

gement

Contract/Order

Ship Productsor Services

Requisition

WorkFlow/ Approval

Products /Services

Financial Settlement

ExceptionHandling Monitoring

ControlsAccounting

Bank

ChangeOrders

Physical Supply Chain Financial Supply Chain

Seller

DynamicDiscount

ShipNotice

Financial Supply ChainPhysical Supply Chain

Receivable

Payable

Bill

Invoice

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Improving the Traditional Model

The types of improvements many of us have focused on in recent years regarding the Traditional Model can be lumped into two broad categories:

• Internally focused process improvements such as:– Interfacing (or even integrating) purchase order software with work management,

accounting, cash forecasting, and disbursement systems– Moving help desks and accounts payable functions into the Supply Chain group.– Improving the management of supplier payment terms– Centralizing invoice processing and using OCR technology to capture invoice data

• Buyer/Seller interface improvement such as:– Utilizing E-Market place providers to facilitate “many-to one-to many” interfaces for:

on-line auctions; PO’s; SO’s; change orders; shipping and receiving notices; etc.– Continuing to address all the above as “one-off” solutions by replacing paper with

electronic one-to-one communications

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PPL’s Progress to Date on Improving the Traditional Model

PPL has improved its internal processes in recent years in several ways:

• We’ve established a single point of contact for vendor calls by consolidating the Help Desk within Supply Chain• We followed up by moving all remaining Accounts Payable functions into the Supply Chain• We’ve eliminated “maverick” spend with strict policies around contract documentation, corporate card use, etc.

PPL has also made substantial improvements in its buyer/seller interfaces through the use of an E-Marketplace provider:

• Fully transitioned from one-to-one EDI interfaces to XML– E-enabled 32% of “high volume” PO suppliers and are targeting 85%– E-enabled 45% of total PO transactions and are targeting 80%

• Developing e-RFQ bidding functionality

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PPL’s Progress to Date on Improving the Traditional Model

Estimated savings:

• 1 hour of processing time for every 10 E-invoices

• 25-30% reduction in total costs of supporting the physical through financial Supply Chain by 2009

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Future Best Practices Will be Driven by the Use of a Single Supply Chain “Hub”

Contract/Order

Shipping/Receiving

Financial Settlement Bank

Supply Chain Hub

FinancialObligation

Buyer

Seller

Product/Service

Tra

nsactio

n I

nitia

tion

Tra

nsactio

n I

nitia

tion

Info

rmation

Info

rmation

Inf o

r mation

Info

rmation

• One “version of the truth” facilitated by an independent marketplace• Elimination of company maintained contract managers, procurement systems, etc.

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Benefits of a Supply Chain Hub

• One version of the truth (one record) facilitated by an independent E Market place provider

– Companies dedicated to this pursuit will drive the development of fully integrated and sophisticated “Physical through Financial” software

• The contract (implied or real) becomes the “traffic director” for all downstream commerce activity.

– Establishes standards for all required data through settlement

• Straight-thru transaction processing and information flow for majority of transactions from order thru settlement

• Exceptions identified electronically, HUB proactively alerts both parties of disputes through a single work flow process

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Upping the “ante” with a Settlement Hub

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Making the Case for a Settlement Hub

• The evolution of various so called ERP Systems over the years for different front office needs has resulted in “settlement silos” within virtually every major corporation

– The Supply Chain represents one settlement silo – for goods and services

– Other silos can include payroll, dividends and interest, miscellaneous billing systems, and other front offices such as energy trading and marketing

While Supply Chain Hubs have yet to fully materialize, PPL is currently developing and implementing a Settlement Hub

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Goods & Services Payments Payroll Interest & Dividends

SILOS – The Traditional Back-Office Settlement ModelPayment obligations processed within various front-office silos

Create back-office “hay piles” – i.e. siloed data bases and settlement instructions

With Treasurers manually ”bailing the hay” to create:

•Patchwork corporate data bases

•Last minute cash forecasts & disbursements

•Multiple settlement processes & related controls

Treasurer

Making the Case for a Settlement Hub

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Making the Case for a Settlement Hub

Problems resulting from settlement silos include:

• Needless duplication of typically inefficient settlement procedures– Multiple check, wire, ACH solutions tied to different ERP solutions

• Multiple (and different) exception processing procedures for resolving disputes, check returns, etc.

• Multiple controls to implement, monitor and evidence (for Sarbanes-Oxley)

• Lack of an integrated data base for pending or completed financial settlements

– Inability to effectively forecast cash flows, ensure discounts

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Settlement Hubs

A Settlement Hub yields a fully integrated, single solution for all internal corporate settlements– both receipts and disbursements

Key components of the value realized include:• Centralized receipt in Treasury of all billing and payable information with an

immediate conversion to digital data (no paper)– Significantly improved working capital management including improved cash

forecasts and discount “monitoring”

• Single data repository and “processing center” for all corporate payment obligations and receipts — i.e. All front offices feed into one single back office

– Significant improvement in processing efficiency, quality monitoring, etc.

• Single settlement system rather than multiple siloed settlement systems– One set of bank interfaces for wires, ACH, etc.

• Consolidated and simplified operational, compliance and financial reporting including SOX controls

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Settlement Hub

Treasury Back Office

Receipts/Disbursements

Receivables/Payables

Settled

Invo

ices

Pay

able

s

Pay

able

s/R

ecei

vab

les

Pay

able

s

Ch

ecks

Pap

er B

ills

Wir

es/A

CH

s

DigitalMail-room

Material/ServiceSupplierActivities

EmployeeActivities

VendorPayables

InvestorActivities

Other PPLFront Offices

OtherPayables/

Receivables

Interest/Dividends,

etc.Payroll

Pay

able

s

Invo

ices

&R

ecei

vab

les

BankU.S. Post Office

ElectronicBills

IncludingARCDeposits

Legend:

Front Office

Treasury Back Office

Check Remittances

Paper Invoices

Ele

ctro

nic

Rec

eip

ts

Ele

ctro

nic

Invo

ices

External

ElectronicInvoices

ElectronicReceipts

"E" CommerceData

A detailed picture of PPL’s planned Settlement Hub looks like this:

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It Serves as a Single Back-Office Supporting the Commerce Settlement Process for ALL Front-Office Needs

Contract

Product/Service

(Delivery-Receipt)

SettlementAmount/Terms

Customer

Settlement

Contract

Product/Service

(Delivery-Receipt)

SettlementAmount/Terms

Contract

Product/Service

(Delivery-Receipt)

SettlementAmount/Terms

Settlement Hub

Supply Chain HubHuman Resources

(Payroll)Financial (Dividends/Interest)

Contract

Product/Service

(Delivery-Receipt)

SettlementAmount/Terms

Other Front-Offices

Supplier Customer EmployeeEmployer InvestorSecurityIssuer

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PPL’s Progress to Date on Implementing a Settlement Hub

Accomplishments to Date:

• Business Model & IT Design were completed in 2007– Includes business friendly “rules engine” that allows Treasury to change

work flow rules in real time

• Digital mailroom actuated in 2007 with OCR data capture• Settlement Hub activated for miscellaneous bill issuance in January,

2008

Yet to Be Achieved:

• Settlement Hub software scheduled for final completion in April, 2008

• Phased in final implementation complete by 1st Quarter, 2009

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Closing Thoughts, Observations and Predictions

• Within 10 years Supply Chain business will be facilitated by a few “winning” National platform Hub providers.– Beware the imposters – most currently offer solutions that pave the cow

paths– Successful players must offer a comprehensive software package

• Effective contract Management Modules will help determine the winners from the losers

• Banks are an interesting “wild card” – if they can figure out your business, they’d love to provide a comprehensive Supply Chain Hub solution– Banks can offer comprehensive netting and Credit Risk Management

solutions

Your role is to think revolution, not evolution--and then maybe these predictions have a fighting chance!