mim 524 global sourcing class four. sourcing strategies supplier selection total cost outsourcing...
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Sourcing StrategiesSupplier SelectionTotal CostOutsourcingScott Case PresentationsCurrent Events/Next Class Review
Agenda
The purchasing process
- Establish expediting routine
- Expediting- 'Trouble- shooting'
- Vendor rating- Vendor
- EstablishOrder routine
- Developorderroutines
- Orderhandling
Order
Proc. Role
Elements
Documents
- Prepare contract
- Contractingexpertise
- Negotiatingexpertise
Contract
- Assure adequatesupplier selection
- Prequalification of suppliers
- Request forquotation
Supplier selectionproposal
Get specification
-
FunctionalspecificationTechnicalchanges Bring supplier
knowledge toengineering
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-
-
-
-
FunctionalspecificationNorm/spec.control
Definespecification
Selectsupplier
Contractagreement
Ordering Expediting EvaluationFollow up
Overdue list
- Vendor performanceevaluation
- Settling contractproblems
evaluation
- Vendor balanced score card- Vendor profile- Vendor ranking
Major bottlenecks and problemsSupplier or brand specifications: most buyers are
involved only to a minor extent in the specification phase, so the specifications of the user are often designed ‘towards’ a particular supplier
Inadequate supplier selection: Insufficient screening of suppliers on financial strengths and technical capabilities leading to discontinuities of supply in delivery stage
Insufficient contracting expertise: leading to misunderstandings on how supplier should perform and difficulties in solving delivery and quality problems
Too much emphasis on price: Decisions need to be based upon total-cost-of- ownership (TCO) rather than price only
Administrative organization: lack of clear procedures with regard to procurement or authorization of orders, leads to lack of control on purchasing expenditure and costs
Definition of concepts
purchasing function
tactical / initial ordering/ operational
Sourcing Supply
Buying
Procurement
Internal customer
Supplier Ordering
Follow up/
evaluation
Expediting
/evaluation
Speci-
fication Contracting Selecting
Collect and Analyze
Internal Requirements
• Identify Global Stakeholders
• Establish global source team
• Collect Internal Requirements
• Analyze Internal Requirements
• Validate with Source Team
Converge Internal &
Supplier Data
• ID, Analyze and Evaluate current supply base
• Analyze current strategy
• Collect Market Intelligence
• Assess Market Conditions
• ID savings opportunities
• Establish internal goals and objectives
• Prepare RFI
Develop SourceStrategy
• Commodity categorization
• Commodity Strategy components
• Commodity Strategy details
• Develop implementation plan
• Get approval / alignment & communicate
Manage SupplierRelationship
• Establish clear expectations on both sides
• Track & Report on major Performance metrics
• Regular performance feedback sessions
• Continuous improvement sessions
• Agreement on new goals & metrics
• Develop continuous process by going to Track & Report …..
Execute Strategy& Implementation
Plan
• RFQ / RFP Process• Receive, Evaluate
and Rank RFP Responses
• Supplier Qualification / Selection
• Review & Approval of Neg. Plan
• Conduct Negotiations.
• Develop Contract and Secure Internal Management Approval / stakeholder buy-in
Five Step Sourcing Process
Source Team Formation
SSPMarket
Intelligence
Supplier Selection /
Contracting / Auctions / Catalogs
Continue MISBR, SCQI /
PQS etc.
Step 1
InternalRequirements
Market Dynamics
Develop Strategy(SSP)
Strategy Execution
Supplier Perf.Management
1 2
3
4
5
PURPOSEEstablish a global/cross functional team to gather / analyze and validate internal
requirements prior to forming sourcing strategies
KEY ELEMENTS•Global Source Team Formation•Gather Internal Requirements•Analyze / Validate Internal Requirements
PURPOSEThis step augments the internal requirements from Step 1 with industry, supply base
information and overall goals
KEY ELEMENTS•Supply Base Assessment•Assessment of Market Conditions / Intelligence•Assessment of Current Strategy•RFx•Identify Cost Savings Opportunities
InternalRequirements
Market Dynamics
Develop Strategy(SSP)
Strategy Execution
Supplier Perf.Management
1 2
3
4
5
Determining the size of the marketplace, # major suppliers The financial condition of this “industry” Barriers to entry / Which suppliers are entering/leaving? Substitute products available now or in the future The suppliers to this “industry” and their leverage or lack thereof Are there any activities in progress between two or more suppliers,
or customers and suppliers, (development, collaboration, merger, etc.) that impact the overall supply base?
What combination of the following characterizes top suppliers in the industry?Technology, Cost, Quality, Capacity, Manufacturing process
capability, Capital expenditures, R/D expenditures, Proprietary products/processes, IP, Market development focus, Global reach / presence, Procurement services
Who Buys and Sells to Whom??• Direct • Distributor/Agents (Wholly Owed, Independent)• Brokers
Market Dynamics
InternalRequirements
Market Dynamics
Develop Strategy(SSP)
Strategy Execution
Supplier Perf.Management
1 2
3
4
5
Financial Analysis/RatiosQuick Ratio = Current Assets – Inv/Current
Liability You would want this greater than 1.0
Inventory Turns = COGS/Inventory Higher is better but Industry specific
Debt to Equity Ratio = Total Debt/Total Owners Equity Generally lower is better
Net Profit Margin = Net Income/Net Sales Higher is indication of health
Return on Equity = Net Income/Total Owners Equity Low might be another “red flag”
Financial Analysis Summary Financial Ratios measure the supplier’s
financial health & performance No single ratio alone should drive your
conclusion. Use various ratios as needed to perform
comparisons: Within Company: Trend Analysis over time Within Industry: Comparison to like companies
Audits/Verification Beyond the Paper….
Manufacturing AlignmentHVM, Job Shop, etc.
Manufacturing Capability Process Controls/SPC Capacity Planning (Capital equipment, labor, etc.) Technology/Capability
Sample assessment? Training and resource productivity EHS considerations – OSHA audits?
Quality Operating Systems Yield analysis/reliability Metrology/Inspection
Materials Management Planning/Scheduling/Forecasting Supplier Management Programs MRP Tool Suite Inventory Mgt Processes (cycle counting, replenishment Models,
etc.)Locations and support infrastructure
Where, how much, channels, global presence
Step 3 PURPOSEUtilize internal data and external information to develop a source strategy (Strategic
Sourcing Plan – SSP)
KEY ELEMENTS•Commodity Categorization•Strategy Development
InternalRequirements
Market Dynamics
Develop Strategy(SSP)
Strategy Execution
Supplier Perf.Management
1 2
3
4
5
LEVERAGEEnvironment
High Value to IntelHigh Volume productsMany Suppliers
ObjectiveCost Management
StrategyLeverage Suppliers AlliancesSRM to Cost Drivers
STRATEGICEnvironmentCustom/Unique parts
Limited # SuppliersBarriers to Entry
ObjectiveSupply Flow Assurance
StrategyAllianceCapacity Purchase
COMMODITYEnvironmentNon Critical ItemsMany SuppliersEasily Substitutable
ObjectiveEfficient R to S processFew Suppliers
StrategyConcentrate on StandardizationConsider Contract
BOTTLENECKEnvironment
Low Volume ItemsCustom/Unique ItemsNew/Old Technology
ObjectiveSolid Relationship w Suppliers
StrategyConsolidate ContractManage
Criticality
to In
tel
Low
High
Low Complexity of Supply Market High
Material/Service CategorizationMaterial/Service Categorization
Categorization Categorization may help identify a baseline strategy
InternalRequirements
Market Dynamics
Develop Strategy(SSP)
Strategy Execution
Supplier Perf.Management
1 2
3
4
5
a. Supplier Selection: What key supplier selections will be made this year & what gaps will they fill (e.g. capacity, technology, global, LCG etc.)b. Supplier negotiation: What are the key negotiation strategies (Alliance, Preferred, JDA, Collaboration Agreement, Licensing, tools such as eAuction)c. Supplier management: How will the team change the way they manage the supply base (SBR, SCQI, SRC, etc…)? Supplier Consolidation Opportunities?
How will the new technologies be developed and/or sourced to gain or retain one-generation ahead competitiveness?Is the global sourcing team well engaged with the supply base in order to understand and influence technology improvements?
What changes in quality performance and how it is managed will be made to improve the quality in the commodity, goods, capital, or services? How does Industry requirements and supplier performance in this category compare with other industries, customers, and competitors? What benchmarks/requirements validate these goals?
Strategy Components
Supplier Engagement
Technology
Quality
InternalRequirements
Market Dynamics
Develop Strategy(SSP)
Strategy Execution
Supplier Perf.Management
1 2
3
4
5
How will the team change the current models for inventory, upside - downside, flexibility, liability, business continuity, service level agreements, on-time delivery, hold time, uptime, downtime, lead time, queue time, freight, logistics, etc…. to ensure uninterrupted supply/service at a lower total cost?Does the commodity have a robust business continuity plan?
What changes will be made to the cost management strategies to ensure a competitive advantage (increase negotiation frequency, e-auction, outsourcing, cost models, benchmarking, buying consortium, etc…)? What new technologies and/or quality changes can be made to reduce lowest total cost of ownership?
How will the Fulfillment methods in the commodity’s sourcing strategy change (PO, e-Payment (non-PO), p-Card, Catalogs, web scheduling, internet, intranet, p-Card, etc…) to lower total cost and improve service?
Strategy Components
Availability
Cost
Fulfillment
InternalRequirements
Market Dynamics
Develop Strategy(SSP)
Strategy Execution
Supplier Perf.Management
1 2
3
4
5
PURPOSEThis step entails execution of Strategic Sourcing Plan including supplier selection,
negotiations, contracting.
KEY ELEMENTS•RFx•Supplier Selection•Negotiations•Contracting
InternalRequirements
Market Dynamics
Develop Strategy(SSP)
Strategy Execution
Supplier Perf.Management
1 2
3
4
5
Request for…Request for Information (RFI)
High Level Budgetary estimates Preliminary schedules Feasibility
Request for Quote (RFQ) Defined Scope of Work (SOW) – Clear what is needed High Confidence Pricing and schedule commitments
Request for Proposal (RFP) Clear on expected outcome or value add needed Asking for suggestions on how to fullfill Possible to respond with different scenerios High Confidence Pricing and schedule commitments
Supplier SelectionSupplier Need
Identified
Supplier Selection
Team Formed
Material / Service
Requirements Available
Documenta-tion in Place (e.g. CNDA,
SOW)
Conduct Supplier Analysis /
Qualification & Negotiate
Selection Scorecard Finalized
Supplier Selection / Validation
Supplier Debrief
Some other factors to consider: Low-Cost Geography Supply Base USE TQRDCE EHS Compliance AS THE MODEL Supplier Diversity Legal Considerations e-biz Capabilities
InternalRequirements
Market Dynamics
Develop Strategy(SSP)
Strategy Execution
Supplier Perf.Management
1 2
3
4
5
PURPOSEGlobal Sourcing team focuses on supplier management and improvements once the
strategy (SSP) is defined and executed to.
KEY ELEMENTS•Contract Mgmt•Control of Excursions •Supplier Ranking & Rating •Supplier Biz Reviews•Benchmarking •Continuous Improvement
InternalRequirements
Market Dynamics
Develop Strategy(SSP)
Strategy Execution
Supplier Perf.Management
1 2
3
4
5
Total Cost of Ownership
KNOWN
ASSUMEDParking
SpeedingTickets
PurchasePrice
Tax & License
LoanInterest Fees
ResaleValue
LubeAlign
Inspect
WindshieldsMufflers
Polish Filters
Drive TrainReplacements
Insurance
BatteriesBrakes Clutches
BodyWork
GasOil
Tires
4 DR
BMW
FORD
HYUNDAI
TOYOTA
2 DR.
DODGE
What is the Total Cost of PC Ownership?
KNOWN
ASSUMED
SHOULD COST
(Material + Equipment Depreciation + Labor + Factory Depreciation)/Yield)/1 - Gross Margin = Price
Is benchmark data available?
PurchasePrice
Taxes
LoanInterest Fees
ResaleValue
Hard Drive
UpgradeProductivity Costof Slow System
Service Contract
Modem
Internet Connectivity CostsRepairs
AdditionalSoftware
MemoryUpgrade
Commodity Study
Linkages
How do you know you are getting a good price?
Should cost models – bottoms up approachMust cost models – tops down approachCompetitive Analysis
Tear downsMarket analysisCompetitive Quotes
BenchmarksIndustry indicators and Trending
Why Outsource?80% of the top 400 US companies operate on a global scale
SHANGHAI, CHINA
PHILIPPINES
U.K.
HONG KONG
KOREA
JORDAN
HONDURAS
DOM. REPUBLIC
LOS ANGELES, CAL.
SAIPAN
LEGEND Chanels & PRODUCTION SERVICES (ODMs)
PRODUCTION SERVICES
US - Hayward
SRI LANKA
DHAKA, BANGLADESH
NEW YORK, NY
F I J I
TAIWAN
MAURITIUS
SWAZILAND
ISRAEL
EGYPT
PORTUGAL
SPAIN
MINNEAPOLIS, MINN.
HAYWARD CAL.
GUADALAJARA, MEXICO
GUATEMALA
NICARAGUA
LAHORE, PAKISTAN
NEW DELHI, INDIA
FRANCE
CHITTAGONG, BANGLADESH
MALAYSIA
MADRAS, INDIA
BANGALORE, INDIA
BOMBAY, INDIA
GUANGZHOU, CHINA
DONGGUAN, CHINA
QINGDAO, CHINA
TIANJIN, CHINA
MEXICO CITY, MEXICO
THAILAND
SINGAPORE
POLAND
INDONESIA
DUBAI
KENYA
Madagascar
MILAN, ITALY
FLORENCE, ITALYTURKEY
SHENZHEN, CHINA
EL SALVADOR
BRAZIL
LESOTHO
DURBAN
VIETNAM
BAHRAIN
KARACHI, PAKISTAN
Outsourcing - Industry Trends – 3PLs
Description Savings RealizedRoute Design & Optimization
Closed Loop Dedicated Operations
Mode Conversion
Core Carrier Management
Rate Negotiation & Audit
Inbound Consolidation
Reverse Logistics
DC Location Realignments
Reduced Inventory
10-15%
15%
10-15%
5-10%
4-5%
20-25%
10-15%
10-12%
7-10%
Contract Logistics Savings Potential
In-source or Outsource..In-source
Buyer has cost advantageTechnology is strategic – value addIntellectual Property & Trade SecretsSunk cost of existing overhead/capacityLack of capable suppliersCore Competencies – aligned with long term strategiesOrganized Labor, Governmental or other that restricts outsourcing
OutsourceHigh capital start up or expansion costsCost advantage by scale to outsourcer & pooled purchaseVolume fluctuations and long term riskGood/Service is readily available in the marketCapacity and labor constraints with BuyerSpecialized skills/focused developmentLimited technical resources
Design and
Product
Concept
Technology
New MarketsCapacity
NPI
Geography
People Capital
Equipment
Intellectual Property
Design Flexibility and Cost of Design Changes
Cost of Design Changes
Flexibility in Design
Time
High
Low
Idea Generation
Bus. / Tech.Assessment
ConceptDevelopment
Eng. AndDesign
Prototype/Ramp-up
Full Scale Operations
Spectrum of Supplier Integration
No supplier involvement.
Supplier “makes to print.”
None
Formalized supplier
integration. Joint development
activity between buyer and supplier.
“Gray Box”
Informal supplier integration.
Buyer “consults” with supplier on buyer’s design.
“White Box”
Design is primarily supplier driven, based on
buyer’s performance
specifications.
“Black Box”
Shifting of Risk/AccountabilityWho Owns?
Design of the product? Manufacturability?Product Roadmaps and families?NPI to Low Cost Geo transfer?Test the product? Who’s test plan?Management of the material and AML*?Ownership of the supply chain?Ownership of Tax/License/Customs and Logistics?Branded Packaging/Collateral?Post Sales Support/Warranty/Repair?Market Analysis & Feedback?
* AML- Approved Manufacture List
Systems Outsourcing StrategiesOEM-in
Take a competitive of the shelf product, modify industrial design to create specific ‘look and feel’, distribute to market placeManufacturer, by definition, makes similar product
Manufacturer owns AML (Approved Manufacture List)Manufacturer owns Quality
ODM (Original Design Manufacturer)Find Manufacturer with technical/process expertise, co-develop
product according to internal spec. Manufacturer does not have similar product in production or it must
be significantly alteredIP (Intellectual Property) may be jointly owned or owned singularly
by Intel or ManufacturerAML (Approved Manufacture List) is jointly owned/developed
Intel may specify particular components of the BOM, may do pass through pricing or consignment
Hardware Outsourcing Strategies
CEM – Contract Electronic Manufacture Model Buyer owned IP (Intellectual Property) Buyer and supplier jointly own AML (Approved Manufacture
List)
PTP (Pass Thru Pricing) and Consignment are used Focus is on conversion Supplier does not market products or services to consumers
Pro’s & Con’sOEM-In Model
Pro’s – TTM, min. investment, costCon’s – Licensing, limited flex to mfg, bundle, change, reconfigure,
limited WW capability
ODM ModelPro’s – DFM (Design for Mfg), flexibility in design/configure, mfg
solutions, IP ownershipCon’s – Slower TTM than OEM-In, more investment –
operationally/supply management, limited WW capability (Ex: Taiwan)
CEM ModelPro’s – Design Control, cost at volume, WW capability, supply chainCon’s – TTM, cost with lower volumes, heavier investment
Contract Electronics Manufacturing (CEM) companies provide a range of services including traditional Printed Wiring Assembly (PWA) along with a growing suite of integrated services and business solutions
TraditionalCore Business
OEMs and ODMs continue to close the gap between services
Repair And Maintenance
DistributionAnd
Logistics
System Assembly And
IntegrationPWA
Materials Management
PrototypingDesign(PCB)
Design(Product)
Expanded Service Offering
Industry Analysis: CEM’s Vs. ODM’s
Repair And Maintenance
DistributionAnd
Logistics
System Assembly And
Integration
Design(Product)
Design
(PCB)PWAPrototyping
MaterialsManagement
Original Design Manufacturing (ODM) companies provide a range of services including traditional Product Design to basic Printed Wiring Assembly (PWA) along with a growing suite of integrated services
TraditionalCore Business