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Strategic sourcing – Deloitte bestpractices approach Tomi Šefman Head of Management Consulting Deloitte d.o.o. 17. maj 2007 The Procurement Process Procurement consists of cycles of sourcing and buying transactions, which depend on each other Money on the Table • Identify a need and negotiate and manage contracts • New or better contract creates the opportunity to save money Money in the Bank • Items are purchased based on existing contracts 2 Strategic Sourcing is a collaborative and systematic process The goal is to simultaneously: 1 2 3 4 5 Reducing total cost of materials and services for an organisation while increasing quality and service Leveraging internal expenditures while rationalising the supply base Optimising the internal and external supply chain while managing inventory levels on a commodity by commodity basis (not “one size” strategy fits all) Improving organisational awareness of the “Total Cost of Ownership” while reducing excessive levels of requisitioning and complexity Building the organisation’s competitive position through continuous improvement and supplier added-value 3 Strategic Sourcing addresses the “Total Cost” of products and services that a company procures Purchase Price Perceived Opportunity Demand Drivers Internal Policies & Procedures Specifications Actual Opportunity Procurement Practices Internal Processes Management Systems Retirement Practices Inventory Practices Operational Practices 4 Sourcing & Procurement Value Proposition Procurement improvements may offer a less disruptive, more effective opportunity to impact the bottom line. Four Methods to Increase Pretax Income by 25% * 20% % Change Required 10% 0% -10% Reduce Procurement Costs Reduce Labor Costs Reduce Other Costs +24%** Reducing total costs through more effective procurement may … require less effort and expense than increasing sales through traditional methods be more sustainable due to new contract agreements be less disruptive than reducing headcount Increase Sales -9% -27% -20% -30% -65% -40% -50% -60% -70% * Based on the following estimate of costs, as a percentage of revenue: 55% manufacturing materials & services; 18% labor; 7.5% other costs ** Assumes a 20% gross contribution margin 5 Significant opportunities have been identified in most industries Enterprises often derive significant savings from making small improvements in supplier-facing processes and spend management. Purchases $ % of sales Current profit average %of sales Approximate change in profitability* Aerospace/defense 40.77 2.45 16% Beverage 42.39 9.35 5% Chemical 49.47 4.16 12% Electronics 56.14 3.78 14% Engineering/construction 51.03 14.30 3% Mining 47.26 8.25 6% Petroleum 26.20 5.56 4% Pharmaceutical 34.76 17.54 2% Semiconductor 48.34 -0.99 51% Telecommunication service 40.46 1.44 28% Transportation 31.81 1.73 18% Utilities 22.13 5.53 4% Industry (year 2001) *Profitability Impact Based on 1-Percent Reduction in Expenditures Source: Gartner - Supplier Relationship Management Pushes Profitability in Dealing With Suppliers - 9/02 6 Strategic Sourcing delivers greater value than traditional purchasing approaches Category Example of Strategic Sourcing vs. Traditional Purchasing Sources of Savings Example: Commercial Printing ($7MM in Annual Savings Realized) Show tradeoffs of using unbranded paper, lower basis weights, fewer colours, etc. Lacking a comprehensive price tracking system, most vendors will find ways to charge more than negotiated rates Strategic Sourcing • strategic focus • microeconomic levers Traditional purchasing • tactical focus • traditional techniques 7% -4% Volume Consolidation 7% 27% 5% 5% 4% 6% 3% Eliminate "extra" charges and cherry pick components Plant level analysis of vendor margins and volume commitments for large jobs Eliminating agency directed work, brokers, etc. "Tough" Compliance Typical Elimination Unbundling Demand Vendor Vendor Issues Purchasing of Low-Value Price Management Margin Negotiations Result Intermediaries Analysis World Class Sourcing Result 7 World Class Procurement can be defined using the following seven dimensions Procurement Strategy: How procurement strategy is linked into overall corporate strategy Supplier Management Information Management Strategic Sourcing Strategic Sourcing: The systematic method by which products and suppliers are sourced Procurement Process: How the daily purchasing activities occur Supplier Management: How suppliers are managed, relationships created, and communications coordinated Procurement Strategy Performance Management Organisation and HR Purchasing Process Information Management: How IT and eProcurement tools are used to simplify and improve the overall process Organisation: How procurement is organised, resourced and trained Performance Management: How performance is measured and tracked Supporting material on the progression towards “World Class Procurement” can be supplied against each dimension 8 Cross functional teams therefore need to be employed to maximise benefit Traditional Approach Strategic Sourcing Approach Engineer CROSS-FUNCTIONAL SOURCING TEAM Purchasing Agent Engineer + Purchasing Agent + Finance End Users Marketing Logistics Info. Mgmt. Material Officer Characterised by: Functional Responsibilities No Common Focus Lengthy Cycle Time Characterised by: Joint Responsibilities Enhanced Communications Consistent Supplier Interface Short Cycle Time 9 The maturity of a procurement organisation can be defined using the model below Level of Added Value - Strategy fully supports the corporate goals and driven by corporate consensus Managing the supply risk while leveraging the competitive strengths Nurturing supplier relationships Supplier base share improvement target for cost and innovation added value Full visibility and trust across the external value chain Procurement maintains a rationalised supplier network that delivers technology, knowledge, products or service quality superior to competitors - Procurement strategy aligned to corporate strategy Suppliers selected for strategic fit and deliver continuous improvement Data driven decision making Full support over purchasing cycle Risk sharing higher with the organisations co-located and jointly financed - Business planning optimises all commercial aspects, tax, investment, people Stage 3: Advancing Partnership Stage 5: Pioneering World Class Procurement Stage 4: High Performing Alliance - Formal Planning processes - Focus on Supplier Relationship Management and sharing business plans - Longer term, bigger value contracts with fewer suppliers - Collaboration on cost improvement, increased levels of risk sharing - Trained and qualified resources supporting all categories of spend - Key Performance Indicators in place. Stage 2: Developing Purchasing Stage 1: Reacting Buying - - Some category strategy creation, but not company wide, and not communicated effectively Volume leverage through effective use of competition across categories Track commercial measure of performance, targets for savings Technology enables i.e. purchase to pay cycle improvement through automation Selected supplier base consolidation Training and recognition of skills required Needs not anticipated, data not available or not used No organisation wide procurement strategy, large supplier base Transactional focus Procurement provides ad-hoc tactical support Low skills and resource, little career planning Time Line 3-5 Years 10 Deloitte Consulting’s six-step methodology 1 Diagnose Opportunit y Design Program 2 Assess Opportunity 3 Assess Internal Supply Chain 4 Assess Supply Market 5 Develop Sourcing Strategy 6 Implement Sourcing Strategy Institutionalise Strategy Key Change Leadership fundamentals are necessary throughout implementation of the methodology to ensure successful results Develop vision and strategy Redesign infrastructure Measure performance Develop new values, skills, and behaviours CHANGE LEADERSHIP Enroll stakeholders Communicate vision and strategy 11 1 Actions • • • • • • Develop team charter Identify stakeholders Document size of buy Document inventory 4 5 6 Outcomes • • • Team Charter • Identification of specific sourcing opportunities and issues • Initial Sourcing Team Communication Plan • Stakeholder buy-in to program scope and opportunities Stratify the buy Communicate team scope 3 Assess Opportunity Assessing the Opportunity 1 2 Current stakeholders Overview of external spending/related costs 12 The data collected can lead the Strategic Sourcing Team to identify “Quick Hits” • 1 2 3 4 5 6 Assess Opportunity Quick Hits are the “Low hanging fruit” and can provide: Instant savings to the company Credibility to the work of the team Building support for further activity Early on in the process, opportunities may arise that can be acted upon by the Sourcing Team, or a separate initiative to capture cost and process savings right away. 13 1 2 3 4 5 6 Assess Internal Supply Chain Assess the Internal Supply Chain 2 Actions • • • • • • • • • • • Identify demand drivers Perform specification review Perform specification gap analysis Perform specification standardization review Perform supplier specification review Identify all related Total Cost activities Map current process steps Evaluate effectiveness of the current process Determine Total Cost of Process Benchmark Total Cost process Identify process opportunities Outcomes • List of customer expectations and requirements • List of current and future internal product and service requirements • List of successful practices being used outside the enterprise • • Detailed specifications review • Detailed process map of the internal supply chain process • Total Cost analysis Initial supplier interfaces that begin supplier selection process 14 1 2 3 4 5 6 Assess Internal Supply Chain Tips for process mapping When analysing process maps, look for rework, redundant activities, excessive work process handoffs and corrective actions as areas for improvement. MANUFACTURING STOCKROOM PURCHASING SUPPLIER PAYABLES Requesting Identify need Mapping Tips: In Stock? No • Always map process as it actually occurs, not as it should occur • Utilise direct observation when possible • There may be several maps to account for variations by location, commodity, etc. • You will often encounter subprocesses within larger processes • The flowchart should be understandable to non-users of the process. Ordering Place Order Yes Receive order Receive copy Receiving Receive product Deliver product Send invoice Receive invoice Disposition Use product Pay invoice Receive payment Note: Actual process maps are completed in greater detail. 15 1 2 3 4 5 6 Assess Supply Market Step 3 - Assess the Supply Markets 3 Actions • • • • • • Identify potential sources of supply Evaluate industry(ies) Identify viable sources of supply Perform supplier assessments Perform supplier comparisons Identify supplier opportunities Outcomes • List of successful procurement practices being used outside the enterprise • • List of viable suppliers • List best performing suppliers Initial supplier assessment and comparative analysis 16 Some key tools for supplier market evaluation • • Five forces model Supplier Value Chain analysis Useful for understanding relative bargaining power in a category Useful for understanding supplier position and potential savings levels Who sets the price – you or your supplier? Sources of data include suppliers, public financial data, industry reports, etc. Potential Entrants Supplier Value Chain Analysis: Example: Distributor Cost Breakdown Gross Margin £0.14 Industry Competitiveness Suppliers Sales and Marketing £0.19 Customers Purchase Price £1.22 Intensity of Rivalry Among Existing Firms Substitutes £0 £0.50 £1.00 £1.50 Overhead £0.09 Retail Price £1.64 17 1 2 3 4 5 6 Developing Sourcing Strategy Step 4 - Develop Sourcing Strategy 4 Actions Reconfirm scope Determine desired outcomes Compile opportunities Brainstorm process enhancement and supply strategies Test process strategies and solutions Test supply strategies and solutions Draft an action plan Communicate strategies Outcomes Finalised scope of work statement Enhanced internal supply chain process strategy Sourcing strategy to meet objectives and desired outcomes Understanding of how internal stakeholders will be impacted Management approval of process enhancement and supply strategies 18 1 Volume Concentration Ease of Implementation Consolidation of purchased volume to increase negotiation leverage (materials and business units) Demand Management Actions Policy changes that reduce demand for the product/ service or substitute lower price product/ service Best Price Evaluation Disciplined process for aggressively renegotiating all or selected supplier prices, contracts and agreements based on competitive bidding or other techniques Global Sourcing Expansion of supplier base on a broader, sometimes international scale 3 4 5 Developing Sourcing Strategy Spectrum of Procurement Strategies Less difficult 2 More difficult Product Specification Improvement Changing the relative market complexity of an item through standardization, substitution or value engineering Joint Process Improvement Relationship Restructuring Use of supplier/ customer teams to reengineer key supplier processes, joint processes and the supply chain for mutual advantage and cost reduction Structuring of long-term supplier/ customer partnerships or alliances to achieve integrated new approaches to the business 19 6 Methods for defining the sourcing strategy This sourcing strategy defines both the commercial relationships with the supply base and the internal supply management processes Sourcing Strategy Buy Market Manage risk Low High Difficulty of obtaining supply High Partner Low Leverage Supply management process Internal procedures Strategic importance High Low Strategic importance Supplier strategy Commercial relationship Centralise execution Cross Functional Decentralise ordering Simplify Low High Complexity of the buy 20 1 2 3 4 5 6 Implement Sourcing Strategy Step 5 - Implement Sourcing Strategy 5 Actions Develop supplier solicitation strategy Implement supplier solicitation strategy Conduct supplier negotiation Develop process enhancement strategy Obtain final approvals Award contract Outcomes Selection criteria and weightings for supplier selection Request for Proposal (RFP) to suppliers Short list of suppliers Comprehensive evaluation of short-listed suppliers Performance measure categories for supplier performance analysis Final selection of supplier(s) Finalised Standard Agreement, with negotiated pricing and terms Communication to all affected stakeholders 21 A list of key criteria and associated weights is required to assess the potential suppliers 1 2 3 4 5 6 Implement Sourcing Strategy The negotiating strategy will help form a list of key criteria and associated weights to assess the potential suppliers Topics Addressed Quality Weighting Factor 35% Issues Addressed 3rd party certification Evaluation of preventative maint. Evaluation of quality assurance procedures Service 20% Inventory management Electronic interface capabilities Value-added services Delivery 15% Order cycle-time Rush order procedures Cost 30% Price Discounts Total 100% 22 Based on market analysis and the supplier information collected, develop negotiation tactics for each supplier 1 2 3 Number of Suppliers Bottleneck Items Strategic inventory Focused management Move to strategic Collaborate Strategic Items Collaboration/partnership Best practice Exploit mutual dependency Non-Critical Items Standard products/commodities Monitor order volumes Spot market Leverage Items Establish vendor rating criteria Competitive bidding 1 2 3 4 5 6 Implement Sourcing Strategy 4 5 6 . . 20 0 5 10 % of Supplier’s Turnover 50 23 1 Step 6 - Institutionalise Sourcing Strategy 2 3 4 5 6 Institutionalize Sourcing Strategy 6 Actions Outcomes Transition to new process Develop supplier relationships Implement operational Implementation of new changes Establish joint supplier/Enterprise process improvement team Monitor and report savings Monitor and report performance processes Transition to the new supplier(s) New supplier relationship(s) focused on jointly achieving Total Quality Jointly developed process improvement and ongoing quality supplier relations Measures for internal compliance and track benefits 24 Sample Stratification Criteria Two key criteria determine a Supplier’s position within the Stratification: Market Complexity and Strategic Importance. Market Complexity (product/service uniqueness, inflexibility to switch suppliers) Stratification Framework Level 1 Core Partner Level 2 Strategic Partner Level 3 Supplier Strategic Importance of Product or Service 25 Importance of Team Work 26 Wrap-up 1. Think strategically 2. Measure Total Cost 3. Work as a Team 27 Contact information [email protected] 28