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Strategic Sourcing Critical Elements & Keys to Success

ISM International Conference April 2004

Ernest G. Gabbard, C.P.M.,CPCM

Strategic Sourcing - Critical Elements for Success

Agenda

What is “Strategic Sourcing”? – what is tactical or transactional sourcing?

Why bother with Strategic Sourcing?

What skill sets are needed for Strategic Sourcing? - how do we obtain the requisite skill sets?

The transition from tactical to strategic sourcing - building a step-by-step methodology/plan

Where does e-Procurement fit with Strategic Sourcing?

Allegheny Technologies Inc. (ATI)

• $2.1 billion sales ($1.1 B spend)

• 7 diverse divisions (domestic & international)

• 48 manufacturing locations

• metals and metal forming/cutting

• stainless steel, titanium, tungsten, exotic alloys

• decentralized management; center-led sourcing

• also represent Teledyne Technologies & WaterPik Technologies in a procurement consortium

Tactical vs. Strategic - Why?

outside materials/services account for almost 70% of average corporate expenditures

decrease cost of outside material/services

– comprehensive analysis of strategic expenditures

– aggregate spend with fewer suppliers

– leverage volume across the organization

increase efficiency of procurement process(es)

– eliminate redundancies

– streamline each process

establish foundation for e-procurement initiatives

ensure your organization’s competitive position!

Strategic Sourcing - What is it?

• It’s NOT reacting to short-term organizational requirements!

• Development and application of a carefully crafted strategy for procurement of quality supplies & services at the lowest total cost

• May be applied to most commodities and/or services, from office supplies to direct materials

Strategic Sourcing - What is it?

It is a methodical PROCESS, which includes:

Understanding every element of company spend; Evaluating current and potential sourcing relationships and opportunities; Formulating and applying strategy(ies) for effectively sourcing each commodity and/or service.

It’s systematic; cross-functional; cross enterprise!

Strategic Sourcing Methodology Identify Internal Requirements n ID overall needs n ID specialized needs n
Strategic Sourcing
Methodology
Identify Internal
Requirements
n
ID overall needs
n
ID specialized needs
n
Clarify lead times
No
n
Review item spec’s
Define
Collect,
Verify
Obtain
n
Objectives and
Cleanse, &
Resources
Pursue opportunities
for standardization
Develop
Strategy
Yes
Scope
Analyze Data
Strategy
Meets
n
Evaluate process
alternatives
(streamline)
Objective

n

Select

commodity

group(s)

n

Articulate

objectives

n

Align business

strategies and

operational goals

n

Identify critical

success factors

n

Develop team’s

preliminary plan

n

Obtain senior

management

commitment

n

Define internal/

external people

requirements

n

Select project

team members

n

Finalize

training

material

n

Train team

n

Clean-up descriptions

n

Clean-up u/m &

quantity

n

Sort into sub- commodities

n

Clean-up prices

n

Establish baseline

prices

n n Understand n Supply Market n n Evaluate market trends n n ID new
n
n
Understand
n
Supply Market
n
n
Evaluate market trends
n
n
ID new suppliers
n
Conduct market survey
n
Review impact of
consolidation
n
Review impact of LTAs
n
ID possible value
added services

Identify supplier/ Commodity groupings

Develop total cost model

Determine pricing groupings

Affirm historical baseline/spend

Validate

geographic

coverage

n

Verify strategy with users/sites

n

Validate anticipated

outcome with original objective

n

Determine risks and appropriate

actions to mitigate

n

n

n

n

n

Strategic Sourcing

Methodology

Contract Process

Sourcing M e t h o d o l o g y Contract Process Negotiation Content
Negotiation Content Implementation Administration Process Formulation
Negotiation
Content
Implementation
Administration
Process
Formulation

Identify

n

critical issues

Develop prime

objective

n

Determine

risks and

appropriate

actions to

mitigate

n

Develop and

execute

negotiation

n

strategy

Identify vital

n

Meet with the

internal

sites and

requirements

communicate

Define

business

performance

imperative

parameters

n

Develop

and

implementation

guarantees

process and

Develop

obtain site buy-in

pricing model

n

Develop internal

and schedule

compliance

Document

management

specifications/

process,

requirements

including reporting

 

n

Develop supplier performance resolution process

Sourcing Negotiate Approach RFX Strong existing RFX Process supplier relationship?
Sourcing
Negotiate
Approach
RFX
Strong existing
RFX Process
supplier
relationship?

Limited number

of suppliers?

Many

suppliers?

Commodity or

supplier

specific

requirements?

Internal cost

considerations

(switch costs?)

n n Obtain Proposal n RFX’s Proposals Analysis
n
n
Obtain
Proposal
n
RFX’s
Proposals
Analysis

n

Form item sub-

groups for RFX

n

Develop RFX template

n

ID commodity specific terms

n

Incorporate proposal spreadsheet format for each commodity

n

Follow-up

n

Load proposals

RFXs with

into analysis

phone calls

spreadsheet

n

Respond to

n

Calculate cost &

supplier

savings for

questions

various

n

Follow

alternatives

proposal

n

Select lowest

control

total cost option

process

n

Supplier

conference?

n

n

Establish single point of contact

n

Refine performance review requirements

n

Follow process to

identify and resolve performance problems

n

Track milestone

progress defined in contract

n

Senior management awareness of critical performance failures

n

Manage contracts

8
8

Enabling The Transformation

From “Purchasing”… to “Strategic Sourcing” Tactical •Tactical Buying PERFORMANCE •Purchase Order
From “Purchasing”…
to “Strategic Sourcing”
Tactical
•Tactical Buying
PERFORMANCE
•Purchase Order
METRICS AND
TALENT
OGRANIZATION
TECHNOLOGY
SUPPLIER
Execution
MANAGEMENT
PROFILE
STRUCTURE
TOOLS
RELATIONSHIPS
From Narrow and
Process-Based to
Broad and Value
Based
From Tactical
Buyers to Strategic
Sourcers
From Decentralized
to Center-Led
From Labor-and
Paper-Intensive to
•Reactive to
Digitally Enabled
Business Unit
From Adversarial
and Zero-Sum to
Collaborative and
Mutually Beneficial
Demand
•Beyond buyer
•Enterprise-wide
•Automation of
•Co-dependence
•Focused on
productivity and
visibility and
transactions for
from consolidated
Purchase Price
process efficiency
involvement
efficiency
spend
to enterprise
value creation
•Broader business
background and
general
management
aspirations
•Clerical Talent
•Financial and
Profile
•Beyond supplier
metrics to end-
customer value
creation
analytical
•Coordination of
policy and
contracts to reap
volume benefits
capabilities
•Analysis of data
for opportunity
identification and
compliance
monitoring
•Mutual benefits
from shared cost
reduction
opportunities
•Maintenance of
•Innovation and
•Marginalized
•Project, people
local flexibility
•e-Auctions and
revenue
Function
•Beyond purchase
price to total cost
of ownership
and relationship
exchanges with
enhanced by
management
real payback
supplier
skills
collaboration

Sources: Evaluation of the Procurement Function/Role (Procurement Strategy Council, 2002)

Strategic •Strategic sourcing •Supplier Relationship Management •Proactive Procurement-Led Initiatives
Strategic
•Strategic
sourcing
•Supplier
Relationship
Management
•Proactive
Procurement-Led
Initiatives
•Focused on
Bottom-Line
Value (TCO)
•Well-Rounded
Business
Management
Skills
•Core Strategic
Function

9

Tactical to Strategic - What’s needed?

Team members with:

Passion for change Strategic mind-set Progressive skill set Extensive people skills

Procurement process redesign Executive management support – cross-functional commitment Grass roots participation (it’s about people!) BALANCE between tactical and strategic

10

Strategic Skill Sets

Looks to the future; asks “what if …” Thinks like a CEO; moves beyond assigned functions/tasks

• Understands the business; not just procurement aspects

• Aligns procurement efforts with organizational business goals

Continuously learning and growing Challenges paradigms; changes & progresses the organization Obtains support by persuasion - not by mandate Integrates personnel with technology Views the supply chain holistically, as a continuum Creates a clear vision/plan to guide the organization

Source: Forbes

Strategic Sourcing Evolution Elements

Key

Evolution Stage 1 Stage 2 Stage 3 Stage 4 Fragmented Integrated Processes Integrated Suppliers Virtual
Evolution
Stage 1
Stage 2
Stage 3
Stage 4
Fragmented
Integrated Processes
Integrated Suppliers
Virtual Company
Attribute
Strategy
Sourcing mostly at local
level
Regional/Division level
sourcing
Supplier's spend included
in corporate sourcing
model; Supply markets
assessed globally
Global/consortium level
assessment;
Real-time, global opportunity
assessment.
People
Clerical focus
Transactional skills
Cross-functionally trained,
basics of sourcing
strategy; supplier
evaluation; knowledge of
materials/services to
investigate supply markets
Creative at developing
sourcing strategies; impact
customer cost; develop and
integrate suppliers; deep
material/service
requirements knowledge;
requirements consolidation
and supplier qualification.
Add direct value to customer
products; form consortiums; drive
outsourcing decisions; expert in
material/service requirements;
influences supply markets.
Technology
Independent Systems;
Islands of Automation
Integrated Applications;
Process Automation
Electronic Commerce
enabled;
Scaleable; portable; cross-
platform
Electronic marketplace enabled;
Virtual links between customers,
company and supplier(s)
Process
Product sourcing;
Planning,
Requisitioning,
Receiving and payment
are fragmented;
Processes are integrated -
transactional procurement
is no longer a focus;
Sourcing & consolidation
are dominant; growing
interest in supplier
development.
Supplier processes are
improved and interfaced;
sourcing process includes
supplier buys; suppliers
assist in consolidation;
suppliers involved in
product development.
Rapid supplier process integration;
suppliers design and develop
customized product manufacturing;
suppliers assist in data-warehouse;
web-driven sourcing strategy
Emphasis is on
transactional processes
Negotiates prices, P.O.
to P.O.
Negotiates contract prices
for some commodity
groupings.
Negotiates contract prices
for most commodity
groupings.
Long term supplier partnerships
committed to continuously drive
down total cost.
No controls in place to
monitor "maverick" buying.
Controls in place to
measure and enforce
compliance to contract
buying.
System enabled ordering and high
supplier service levels eliminates
the need and opportunity for
"maverick" buying.

ATI/KPMG

12

Strategic Sourcing Evolution Elements

Key

Evolution Stage 1 Stage 2 Stage 3 Stage 4 Fragmented Integrated Processes Integrated Suppliers Virtual
Evolution
Stage 1
Stage 2
Stage 3
Stage 4
Fragmented
Integrated Processes
Integrated Suppliers
Virtual Company
Attribute
Culture
Purchasing considered
a low-value function.
Purchasing gets some
recognition as a means to
reduce costs.
Procurement becomes an
integral part of the supply
chain team.
Strategic Sourcing viewed as
a
key facilitator of the
networked enterprise.
Structure
Buyer reports to
Purchasing Dept. at
Business Unit level,
with limited cross
Business Unit
interaction
Centralized co-ordination
of leveraged commodities;
decentralized
order/receipt; centralized
settlement
Centralized co-ordination of
leveraged, competency
related materials/services.
Rule-based systems/processes
enable decentralized but
coordinated sourcing and
transactions.
Consortium based
purchase of non-
competency related
materials and services
Measurements
Mostly functional;
Purchasing measures
mostly related to
purchasing price from
fragmented supplier
base.
Measures more process
based; mostly internal
focus.
Processes extend into
supply base; suppliers
measured and accountable
for process outcomes.
Supply base is an integral
stakeholder; measured so that
success directly impacts supplier
profitability.
Supplier performance
metrics established but are
difficult to obtain.
No formal supplier
performance
measurement process
Real-time supplier performance
measurements are available to
buyer and supplier via internet.
Spend data available but
fragmented.
Supplier performance
measurements are readily
available to buyer and are
shared with suppliers on a
periodic basis.
Real-time, comprehensive material
& supplier spend data analyzed on
Material & supplier spend
data analyzed periodically.
a regular basis.

ATI/KPMG

13

BALANCING Transactional & Strategic

“I am so busy keeping up with the sheer volume of P.R./P.O./Receipts that I can’t focus on a strategic plan.”

FIRST - get the transactional volume under control - how can we “get rid of” transactions?

ABC Analysis - General Categorization

Category

% of Transactions

$ Dollars

A

8-10%

80-85%

B

10-15%

12-15%

C

70-80%

4 - 6%

Where should you focus your time & company resources??

Balancing Central Strategy with Local Flexibility

( Finding the Balance - center-led, not centralized)

Decentralized

Procurement

HQ P Div A Div B Div C R O C U R E M
HQ
P
Div A
Div B
Div C
R
O
C
U
R
E
M
E
N
T
For success, structure requires supporting: Tools Processes Talent
For success,
structure requires
supporting:
Tools
Processes
Talent

Centralized

Procurement

HQ Procurement Procurement Div A Div B Div C Procurement
HQ
Procurement
Procurement
Div A
Div B
Div C
Procurement
Procurement HQ Div A Div B Div C
Procurement
HQ
Div A
Div B
Div C

16

Source: Evolution of the Procurement Function/Role (Procurement Strategy Council, 2002)

Balancing Central Strategy with Local Flexibility

( Finding the Balance - center-led, not centralized)

• Center-led strategic sourcing requires different:

measurement – reward/incentive

“What gets measured, gets done!”

• If you can’t measure it, you can’t manage it (if you don’t measure it, you won’t manage it)

• What to measure with consolidated procurement

– supplier base reduction

– spend consolidation

– reduced total cost per unit

• Measurement must be at lowest possible level for credibility (not by Corporate Strategic

18

“What gets rewarded, gets done well!”

• May need to revise compensation (incentive) system to recognize support for Strategic Sourcing and Corporate efforts

• What’s in it for me? (WIIFM)

DON’T FORGET NON-TRADITIONAL SPEND

Travel Energy Fleet vehicles Security Services Freight audit/payment Courier services Telecommunications Payroll processing H.R. Benefits Services

- Medical, dental, vision, prescription

International Logistics

Strategic Sourcing Methodology Identify Internal Requirements n ID overall needs n ID specialized needs n
Strategic Sourcing
Methodology
Identify Internal
Requirements
n
ID overall needs
n
ID specialized needs
n
Clarify lead times
No
n
Review item spec’s
Define
Collect,
Verify
Obtain
n
Objectives and
Cleanse, &
Resources
Pursue opportunities
for standardization
Develop
Strategy
Yes
Scope
Analyze Data
Strategy
Meets
n
Evaluate process
alternatives
(streamline)
Objective

n

Select

commodity

group(s)

n

Articulate

objectives

n

Align business

strategies and

operational goals

n

Identify critical

success factors

n

Develop team’s

preliminary plan

n

Obtain senior

management

commitment

n

Define internal/

external people

requirements

n

Select project

team members

n

Finalize

training

document

n

Train team

n

Clean-up descriptions

n

Clean-up u/m &

quantity

n

Sort into sub- commodities

n

Clean-up prices

n

Establish baseline

prices

n n Understand n Supply Market n n Evaluate market trends n n ID new
n
n
Understand
n
Supply Market
n
n
Evaluate market trends
n
n
ID new suppliers
n
Conduct market survey
n
Review impact of
consolidation
n
Review impact of LTAs
n
ID possible value
added services

Identify supplier/ Commodity groupings

Develop total cost model

Determine pricing groupings

Affirm historical baseline/spend

Validate

geographic

coverage

n

Verify strategy with users/sites

n

Validate anticipated

outcome with original objective

n

Determine risks and appropriate

actions to mitigate

n

n

n

n

n

Strategic Sourcing

Methodology

Contract Process

Sourcing M e t h o d o l o g y Contract Process Negotiation Content
Negotiation Content Implementation Administration Process Formulation
Negotiation
Content
Implementation
Administration
Process
Formulation

Identify

n

critical issues

Develop prime

objective

n

Determine

risks and

appropriate

actions to

mitigate

n

Develop and

execute

negotiation

n

strategy

Identify vital

n

Meet with the

internal

sites and

requirements

communicate

Define

business

performance

imperative

parameters

n

Develop

and

implementation

guarantees

process and

Develop

obtain site buy-in

pricing model

n

Develop internal

and schedule

compliance

Document

management

specifications/

process,

requirements

including reporting

 

n

Develop supplier performance resolution process

Sourcing Negotiate Approach RFX Strong existing RFX Process supplier relationship?
Sourcing
Negotiate
Approach
RFX
Strong existing
RFX Process
supplier
relationship?

Limited number

of suppliers?

Many

suppliers?

Commodity or

supplier

specific

requirements?

Internal cost

considerations

(switch costs?)

n n Obtain Proposal n RFX’s Proposals Analysis
n
n
Obtain
Proposal
n
RFX’s
Proposals
Analysis

n

Form item sub-

groups for RFX

n

Develop RFX template

n

ID commodity specific terms

n

Incorporate proposal spreadsheet format for each commodity

n

Follow-up

n

Load proposals

RFXs with

into analysis

phone calls

spreadsheet

n

Respond to

n

Calculate cost &

supplier

savings for

questions

various

n

Follow

alternatives

proposal

n

Select lowest

control

total cost option

process

n

Supplier

conference?

n

n

Establish single point of contact

n

Refine performance review requirements

n

Follow process to

identify and resolve performance problems

n

Track milestone

progress defined in contract

n

Senior management awareness of critical performance failures

n

Manage contracts

22
22

Strategic Spend Analysis - What is it?

“Spending analysis is the process of aggregating, cleansing, and analyzing corporate spending data for the purposes of reducing costs and improving operational performance.”

“Lack of spend visibility is a corporate epidemic”

Source: Aberdeen Group, 2003

Strategic Spend Analysis - What is it?

• Understanding:

– how much?

– for what?

– with whom?

– why?

– how?

• Details needed for:

– strategic spend analysis - category adequate?

– preparation of RFx - part number/description?

Strategic Sourcing Process

Strategic Sourcing Process Understand Spend - Major issues or barriers - Multiple sources of data are

Understand Spend - Major issues or barriers

- Multiple sources of data are required

• data is stored in many places

- Item identification is inconsistent and/or erroneous

• should standardization come first?

• utilize UNSPSC system?

- Supplier identification/naming is inconsistent and often redundant

• utilize DUNS numbering?

- Resources are not available to analyze detailed data

• is this just an extra duty for team members?

Strategic Sourcing Process

Strategic Sourcing Process Strategic Spend Management (continual analysis) - Spend analysis is only the first step

Strategic Spend Management (continual analysis)

- Spend analysis is only the first step

- Must ensure that spend continues to be visible, and managed

• repeatable & cost-effective availability of data

- Ensure that strategic suppliers ARE being utilized

• control maverick spend

- Continue to look for patterns or trends in spend

- Establish comprehensive reporting process

• “if it’s not measured, it’s not managed”

- Spend visibility & spend management provide continued opportunity to analyze and shift transactional workload

Strategic Sourcing -Understand Supply Markets

Strategic Sourcing -Understand Supply Markets HIGH LOW Characteristics Strategic Approaches Characteristics

HIGH

LOW

Characteristics Strategic Approaches

Characteristics

Strategic Approaches

Characteristics Strategic Approaches

Characteristics

Strategic Approaches

Characteristics Strategic Approaches

Characteristics

Strategic Approaches

Characteristics

Many options

Strategic Approaches

Characteristics Strategic Approaches Characteristics • Many options Strategic Approaches HIGH 27

HIGH

Strategic Sourcing - Understand Supply Markets

Strategic Sourcing - Understand Supply Markets HIGH $ LOW StrategicStrategic SpendSpend Characteristics • Vital

HIGH

$

LOW

StrategicStrategic SpendSpend

Characteristics

• Vital to operations

• Vital in market

• Few sources

• High value

• High volume

Strategic Approaches

• Strive for high value- added relationships

• Partnerships

RiskRisk MitigationMitigation

Characteristics

• One or restricted sources

• Few options

Strategic Approaches

• Ensure supply continuity

• Long-Term contracts

LeverageLeverage SpendSpend

Characteristics

• Many alternatives

• Many sources

• High value

• Large market capacity

Strategic Approaches

• Maximize commercial advantage

• Competition

Buyer’sBuyer’s MarketMarket

Characteristics

• Many options

• Many sources

• Low value

• Little brand preference

Strategic Approaches

• Simplify acquisition process

• Blanket Agreements

Strategic Approaches • Simplify acquisition process • Blanket Agreements Number of Suppliers HIGH 28

Number of Suppliers

HIGH

Strategic Sourcing

Strategic Sourcing HIGH $ LOW Risk Risk Mitigation Mitigation Characteristics • One or restricted sources

HIGH

$

LOW

Strategic Sourcing HIGH $ LOW Risk Risk Mitigation Mitigation Characteristics • One or restricted sources
Strategic Sourcing HIGH $ LOW Risk Risk Mitigation Mitigation Characteristics • One or restricted sources

RiskRisk MitigationMitigation

Characteristics

• One or restricted sources

• Few options

Strategic Approaches

• Ensure supply continuity

• Long-Term contracts

options Strategic Approaches • Ensure supply continuity • Long-Term contracts Number of Suppliers HIGH 29
options Strategic Approaches • Ensure supply continuity • Long-Term contracts Number of Suppliers HIGH 29
options Strategic Approaches • Ensure supply continuity • Long-Term contracts Number of Suppliers HIGH 29
options Strategic Approaches • Ensure supply continuity • Long-Term contracts Number of Suppliers HIGH 29
options Strategic Approaches • Ensure supply continuity • Long-Term contracts Number of Suppliers HIGH 29

Number of Suppliers

HIGH

Understand Supply Markets

Understand Supply Markets • Few suppliers, and a minimal amount of dollars – Characteristics • Generally

Few suppliers, and a minimal amount of dollars

– Characteristics

Generally less than 5% of the spend.

Few options available

– Supply management - Risk Mitigation

Managed by multi-year contracts to minimize effort and ensure continuity of supplies

Large safety stocks/inventory may be appropriate, due to the typically small expenditure for these items

Develop contingency plans for alternate sources

Strategic Sourcing

Strategic Sourcing HIGH $ LOW StrategicStrategic SpendSpend Characteristics • Vital to operations • Vital

HIGH

$

LOW

StrategicStrategic SpendSpend

Characteristics

• Vital to operations

• Vital in market

• Few sources

• High value

• High volume

Strategic Approaches

• Strive for high value- added relationships

• Partnerships

Strategic Approaches • Strive for high value- added relationships • Partnerships Number of Suppliers HIGH 31
Strategic Approaches • Strive for high value- added relationships • Partnerships Number of Suppliers HIGH 31
Strategic Approaches • Strive for high value- added relationships • Partnerships Number of Suppliers HIGH 31
Strategic Approaches • Strive for high value- added relationships • Partnerships Number of Suppliers HIGH 31
Strategic Approaches • Strive for high value- added relationships • Partnerships Number of Suppliers HIGH 31
Strategic Approaches • Strive for high value- added relationships • Partnerships Number of Suppliers HIGH 31
Strategic Approaches • Strive for high value- added relationships • Partnerships Number of Suppliers HIGH 31

Number of Suppliers

HIGH

Understand Supply Markets

Understand Supply Markets • Few suppliers and large expenditures – Characteristics • Typically 20% of the

Few suppliers and large expenditures

– Characteristics

Typically 20% of the spend.

Vital to the operations

Significant to the market

– Supply management - Strategic Spend

Manage with multi-year contracts

Could require larger inventories, perhaps having the supplier carry

Items should move to the category of “many suppliers”, by redesigning/re-specifying the materials

Backup plan may be required to assure continued supply if items are key components

Strategic Sourcing - Understand Supply Markets

Strategic Sourcing - Understand Supply Markets HIGH $ Buyer’s Buyer’s Market Market Characteristics • Many

HIGH

$

Strategic Sourcing - Understand Supply Markets HIGH $ Buyer’s Buyer’s Market Market Characteristics • Many
Strategic Sourcing - Understand Supply Markets HIGH $ Buyer’s Buyer’s Market Market Characteristics • Many
Strategic Sourcing - Understand Supply Markets HIGH $ Buyer’s Buyer’s Market Market Characteristics • Many
Strategic Sourcing - Understand Supply Markets HIGH $ Buyer’s Buyer’s Market Market Characteristics • Many
Strategic Sourcing - Understand Supply Markets HIGH $ Buyer’s Buyer’s Market Market Characteristics • Many
Strategic Sourcing - Understand Supply Markets HIGH $ Buyer’s Buyer’s Market Market Characteristics • Many

Buyer’sBuyer’s MarketMarket

Characteristics

• Many options

• Many sources

• Low value

• Little brand preference

Strategic Approaches

• Simplify acquisition

process

• Blanket Agreements

LOW

Approaches • Simplify acquisition process • Blanket Agreements LOW Number of Suppliers H I G H

Number of Suppliers

HIGH

Understand Supply Markets

Understand Supply Markets • Many suppliers, but small amount of dollars expended. – Characteristics • Typically

Many suppliers, but small amount of dollars expended.

– Characteristics

Typically constitute only 5% of the dollars expended by a company

Little brand preference

– Supply management - Buyer’s Market

Expend minimal efforts; payback will be low

May not require long-term contracts

Distributors utilized for lead-time and inventory considerations

Consolidate with suppliers of larger purchases for price leverage, e.g.: integrated supplier

Strategic Sourcing

Strategic Sourcing HIGH $ LOW Leverage Leverage Spend Spend Characteristics • Many alternatives • Many

HIGH

$

LOW

Strategic Sourcing HIGH $ LOW Leverage Leverage Spend Spend Characteristics • Many alternatives • Many
Strategic Sourcing HIGH $ LOW Leverage Leverage Spend Spend Characteristics • Many alternatives • Many
Strategic Sourcing HIGH $ LOW Leverage Leverage Spend Spend Characteristics • Many alternatives • Many
Strategic Sourcing HIGH $ LOW Leverage Leverage Spend Spend Characteristics • Many alternatives • Many

LeverageLeverage SpendSpend

Characteristics

• Many alternatives

• Many sources

• High value

• Large market capacity

Strategic Approaches

• Maximize commercial advantage

• Competition

capacity Strategic Approaches • Maximize commercial advantage • Competition Number of Suppliers HIGH 35
capacity Strategic Approaches • Maximize commercial advantage • Competition Number of Suppliers HIGH 35
capacity Strategic Approaches • Maximize commercial advantage • Competition Number of Suppliers HIGH 35

Number of Suppliers

HIGH

Understand Supply Markets

Understand Supply Markets • Many suppliers and large total dollar expenditure – Characteristics • Typically ~

Many suppliers and large total dollar expenditure

– Characteristics

Typically ~ 70% of a company's expenditures

Many alternatives

Large market capacity

– Supply management - Leverage Spend

Primary area to focus; payback is large

Partnerships and quality supplier programs beneficial

Utilize target costs of the item(s); understand supplier cost drivers

help drive supplier costs down

Small percentage cost improvements can lead to large dollar savings

Strategic Sourcing

Strategic Sourcing HIGH Spend Volume/ Leverage LOW Characteristics Characteristics Commodity Purchase High

HIGH

Spend Volume/

Leverage

LOW

Characteristics

Characteristics

Commodity Purchase

High Impact Purchase

Strategic Approaches

Strategic Approaches

Leverage purchasing power

Leverage purchasing power AND understand supplier cost drivers

Involve supplier in product design

Characteristics

Characteristics

Odd & Ends

Speciality Item

Strategic Approaches

Strategic Approaches

Ensure obtaining best price

Reduce administrative/procurement costs

Gain access to technology and cost info

costs Gain access to technology and cost info Source: CSC - 2003 Product or Service Complexity

Source: CSC - 2003

Product or Service

Complexity

Source: CSC 2003

HIGH

37

Strategic Sourcing & e-Supply Management

Both Necessary?

e-Supply Management has limited impact, if not preceded by Strategic Sourcing.

- need to aggregate spend with fewer suppliers;

- electronic ordering only speeds up process (faulty process = faulty orders);

- still need underlying supplier relationship.

Strategic Sourcing cannot be sustained over long term without e-Supply Management

- can’t control supplier used

- can’t control price paid

- can’t track “maverick” spend

Strategic Sourcing & e-Supply Management

Definitions

e-Supply Management - utilization of electronic tools to plan

e-tools

(e-SCM)

and execute a comprehensive procurement strategy.

- it’s not just electronic transaction;

- it’s not simply automation!

- electronic enablers of P.R., P.O. RFx, reverse auction, catalog search, internet ordering, receipt, payment, contract preparation etc.

E-Supply Management Environment

e-design Collaboration (R&D Process)

•Needs

identification

•Technology

Planning

•Design &

Engineering

•Project

Management

e-Sourcing

(Enablement)

•Market Analysis •Supplier RFx •e-Auction •Savings Tracking •Project Management

e-Ordering

(Transactions)

•EDI transactions •Internet & ERP:

•Request

•Order

•Receive

•Pay

e-Category Management (Contract Mgt)

•Purchase analysis •Spend visibility •Spend management •Contracting •Compliance tracking •Performance Scorecards •Project Mgt.

e-Logistics

Collaboration

(Supply Chain

Coordination)

•Shipping and receiving •Demand planning •Capacity Planning •Visibility and monitoring •Exception management

Strategic Sourcing & e-Supply Management - How do they fit together?

Business Incorporate Data Initiate Integrate Strategic Process Strategic Normalization e-Procure e-Procure
Business
Incorporate
Data
Initiate
Integrate
Strategic
Process
Strategic
Normalization
e-Procure
e-Procure
Sourcing
Redesign
Contracts
Process
Decision
Solution(s) into
Process
(BPR)
into BPR
(use e-tools?)
(select tools)
Processes
Repeat?
Repeat?

It’s NOT simply automation!

Strategic Sourcing and e-Supply Management

$

Savings

Capture

Strategic Sourcing without e-SCM
Strategic Sourcing
without e-SCM
Management $ Savings Capture Strategic Sourcing without e-SCM Strategic Sourcing Contract Compliance T i m e

Strategic Sourcing

Management $ Savings Capture Strategic Sourcing without e-SCM Strategic Sourcing Contract Compliance T i m e

Contract Compliance Time

Strategic Sourcing and e-Supply Management

$

Savings

Capture

Strategic Sourcing with e-SCM Strategic Sourcing without e-SCM
Strategic Sourcing with e-SCM
Strategic Sourcing
without e-SCM
Capture Strategic Sourcing with e-SCM Strategic Sourcing without e-SCM Strategic Sourcing Contract Compliance Time 43

Strategic Sourcing

Capture Strategic Sourcing with e-SCM Strategic Sourcing without e-SCM Strategic Sourcing Contract Compliance Time 43

Contract Compliance Time

43

Strategic Sourcing & e-Supply Management

e-tools can provide:

•Visibility of organizational spend

• how much?

• for what?

• with whom?

• Leverage organizational spend

• aggregation of select commodities/services

• selection of appropriate suppliers •Control of organizational spend

• ensure utilization of selected suppliers

• ensure contract prices are being obtained

•track both contract and off-contract spend

Exceptional strategic sourcing requires e-tools!

44

Bridge from Tactical to Strategic Sourcing

CONCLUSION/SUMMARY

Transition from Tactical to Strategic Sourcing requires comprehensive plan with disciplined implementation

Comprehensive analysis of spend is critical element

- requires segmentation of spend into categories/strategies

Should NOT be about headcount reduction!

Will require non-traditional procurement skills.

- necessitates training and experience

e-SCM tools may be needed to sustain strategic sourcing benefits

- ensure appropriate chronology for use of e-tools

Cultural barriers could present the greatest challenge!

Strategic Sourcing Resources

Selected Internet Bookmarks

http://www.bbb.org

The Better Business Bureau…info about business and consumer alerts, the BBB’s research library, and business reports

http://www.thomasregional.com

The Thomas Regional Directory Company…listings of over 400,000 industrial & commercial suppliers, organized by products and services or by company name

http://finance.yahoo.com/m3?u

Currency Exchange Rates…info on daily and historical exchange rates

http://www.stat-usa.gov

U.S. Department of Commerce…daily economic news, statistical releases, data bases, and selected publications

http://www.usitc.gov

U.S. International Trade Commission…news releases, reports and publications, and trade resources

http://www.wto.org

World Trade Organization…press releases, trade policy reviews, info on international trade, and publications

http://www.dnb.com

Dunn & Bradstreet Information Services…short reports on over 10 million U.S. organizations

http://www.sec.gov/edgarhp.htm

EDGAR Database of Corporate Information…the SEC maintains the EDGAR database which provides security commission reports (i.e. 10K) on publicly traded organizations

http://www.inc.com

Inc. 500…info on thousands of privately held organizations; includes revenue info, profit and loss percentages, number of employees, etc.

http://www.doc.gov

U.S. Department of Commerce…info on demographics and industry market data that is collected by the gov’t

http://www.apqc.org

American Productivity and Quality Center…mgmt info including benchmarking, best practices, reengineering, and total quality mgmt http://stats.bls.gov/blshome.htm Bureau of Labor Statistics…The principal fact-finding agency for the Federal Government in the broad field of labor economics and statistics

46

Strategic Sourcing Resources

Purchasing Industry Organizations

Aluminum Association

(202) 862-5100

http://www.aluminum.org

American Chemical Society

(202) 872-4600

http://www.chemcenter.org

American Iron & Steel Institute

(202) 452-7100

http://www.steel.org

American National Standards Institute

(212) 624-4900

http://www.ansi.org

APICS (Amer Prod’n & Inv Control Society)

(703)237-8344

http://www.apics.org

American Society for Quality Control

(414) 272-8575

http://www.asqc.org

American Society of Transportation and Logistics

(717) 748-8515

http://www.astl.org

Benchmarking Network Association

(281) 440-5044 http://www.benchmar@well.com

Contract Manufacturers Association

(810) 643-6807

Council of Logistics Management

(630) 574-0985

http://www.clm1.org

Electronics Industry Association

(703) 907-7500

http://www.eia.org

Electronic Commerce Assoc.

http://www.eca.org.uk

ISM (Institute for Supply Management)

(602) 752-6276

http://www.ism.ws

Institute of Packaging Professionals

(703) 318-8970 world.org

http://www.packinfo-

Institute of Scrap Recycling Industries

(202) 737-1770

http://www.isri.org

International Warehouse Logistics Assoc.

(847) 292-1891

http://www.iwla.com

National Contract Management Assoc.

(703)-448-9231

http://www.ncmahq.org

Outsourcing Institute

(800) 421-6767

http://www.outsourcing.com

Strategic Sourcing Resources

Purchasing Related Periodicals

APICS: The Performance Advantage

500 W. Annandale Road

Falls Church, VA 22046 (703) 237-8344 http://www.apics.org

Contract Management Magazine

NCMA (National Contract Management Assoc.)

1912 Woodford Road

Vienna, VA 22182 (703) 448-9231 http://www.nacmhq.org

Electronic Buyers News

CMP Publications, Inc.

600 Community Drive

Manhasset, NY 11030 (847) 291-5215 http://www.ebnonline.com

Inside Supply Management

Institute for Supply Management

2055 E. Centennial Circle

Tempe, AZ 85285

480-752-6276

International Journal of Purchasing and Materials Management

PO Box 22160 Tempe, AZ 85285 (602) 752-6276 ext. 401 http://www.napm.org

Supplier Selection & Management Report

29 West 35th Street New York, NY 10001

212-564-0465

http://www.ioma.com

Purchasing Magazine

Cahners Publishing PO Box 7610 Highlands Ranch, CO 80163-7610 (303) 470-4445 http://www.purchasing.com

Transportation and Distribution

Penton Publishing, Inc. 1100 Superior Avenue Cleveland, OH 44114 (216) 696-7000

48

Ernest G. Gabbard, C.P.M., CPCM

412-252-3168

egabbard@alleghenytechnologies.com