strategic sourcing highlights (steps 1 5) · step 1 of the strategic sourcing process is to...
TRANSCRIPT
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Strategic Sourcing
Highlights
(Steps 1 – 5)
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What is Strategic Sourcing?
Strategic sourcing is a structured process to source large
recurring spend for the business.
Strategic sourcing is:
• Driven by a rigorous multi-step process
• A collaborative cross-functional team approach
• Driven by fact based analysis and market intelligence
• Focused on the total cost of ownership (TCO),
incorporating customer needs, organizational goals, and
market conditions vs. just price
• Time consuming and can be hard … however worth it!
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Perform sourcing portfolio analysis
Determine sourcing strategy, tactics, and actions
Define negotiations team & roles
Document negotiation strategy
Plan & conduct negotiations
Select supplier(s) for contract award
Conduct spend analysis
Identify opportunities for savings
Develop business case
Develop supplier long list
Develop selection criteria to screen suppliers
Assess supplier list using selection criteria
Develop & issue RFI, if necessary
Develop short-list of suppliers
Create RFx document(s) by category or sub-category
Communicate details to suppliers
Distribute RFx
Evaluate results
Develop short-list of suppliers for negotiations
Finalize & approve new supplier agreement(s)
Develop & execute communication & implementation plan based on impact assessment
Develop supplier performance metrics & tracking process
Determine category benefits tracking approach
Measure supplier performance & category benefits
Establish cross-
functional team
Profile Internally:
Map processes
Analyze detailed item level spend
Develop total cost of ownership (TCO)
Profile Externally:
Perform industry analysis
Develop Porter’s 5 Forces Model
Conduct supplier analysis
AssessOpportunities
Profile Internally & Externally
Develop the Sourcing Strategy
Screen Suppliers & Create Selection Criteria
Conduct Supplier Selection
Negotiate Agreements
Data Collection & Analysis Opportunity Development & Negotiation Implementation
Strategic Sourcing Process
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Implement Agreements & Manage Suppliers
Source: Accenture
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A spend analysis should answer the following questions:
• What did we spend our money on?
• With what suppliers did we do business?
• How did each division and/or geography spend their money?
• Are there opportunities to:
• combine volumes of spending from different businesses,
• standardize product or service requirements,
• reduce the number of suppliers, and/or
• exploit market conditions?
Step 1
Assess Opportunities
Step 1 of the strategic sourcing process is to “Assess Opportunities” which begins with completing a spend analysis.
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A spend analysis can be time consuming and laborious based on the data “cleanliness” and availability, however a critical starting point.
Estimate
Savings
Opportunity
Conduct
Interviews
Collect &
Analyze Data
Step 1 Step 2 Step 3
• Extract spend and
consolidate
• Create common
field descriptions
• Clean and
harmonize the data
• Create category
classifications down
to level 3
• From the spend analysis and interviews, saving opportunities can be identified and benefits estimated
• Conduct interviews with key stakeholders to learn more about the spend and validate the data and opportunities
Step 1
Assess Opportunities
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When the spend analysis is complete, start with the categories where the value is high and implementation easy.
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Ease of Implementation
• Quality of Specs• Time to Qualify Supplier
• Supplier Capability to Implement
• Auction Complexity• Number of Sites• Incumbent Suppliers
• Tooling Issues• Supplier Switching Risk
Benefit Potential• Leverage Potential• Spend • Work Done to Date• Quick Wins / Success
Difficult
Easy
HighLow
Adhesive -Seals-Tape - $6.5Adhesive -Seals-Tape - $6.5
Bearings - $12Bearings - $12
Fittings - $2.5Fittings - $2.5
Castings - $25Castings - $25
Electronics - $65Electronics - $65
Electricals - $60Electricals - $60
Fasteners - $25Fasteners - $25
Belts - $4Belts - $4
Gaskets&Seals - $20Gaskets&Seals - $20
Hardware - $.5Hardware - $.5Labeling&Plates - $10Labeling&Plates - $10
Trim - $45Trim - $45
Grease&Oil - $1.9Grease&Oil - $1.9
Ferrous Raw - $200Ferrous Raw - $200Non-Ferrous Raw - $8Non-Ferrous Raw - $8
Product Finish - $21Product Finish - $21
Chemicals - $22
Plastic Parts - $100Plastic Parts - $100
Wire Forms - $40Wire Forms - $40
Rubber - $14Rubber - $14
Stamping - $38Stamping - $38
Felts&Fabrics - $4Felts&Fabrics - $4
Tubing&Pipe - $8Tubing&Pipe - $8
Valves - $24Valves - $24
Floor Care Bags/Mat. - $14Floor Care Bags/Mat. - $14
Screw Mach. Parts - $5Screw Mach. Parts - $5
Powdered Metal Parts - $1.6Powdered Metal Parts - $1.6
Insulation - $16
Hoses - $10Hoses - $10
Spec. Parts&Acces. $98Spec. Parts&Acces. $98
Purch. Gas Appl. Comp. ^Purch. Gas Appl. Comp. ^
Finished Goods $112Finished Goods $112
Service & Repair $5
Outside Processing $64^
GRP Export - $.9; Filter - $.2GRP Export - $.9; Filter - $.2
Plastic Resins $110Plastic Resins $110
Thermostats - $14
Glass - $37
Packaging $60Packaging $60
= Reverse Auction
= Global Sourcing
= Global Auction
= Strategic Sourcing
= Contract Restricted^ = need more data
Sourcing Strategy
= Reverse Auction
= Global Sourcing
= Global Auction
= Strategic Sourcing
= Contract Restricted^ = need more data
Sourcing Strategy
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2
1
3
Step 1
Assess Opportunities
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Once a category is selected, a cross-functional team is formed to gain input, facilitate communication, and generate buy-in.
– Advantages of Using a CFT –
• Brings insights and experiences to better understand the internal spending patterns and usage (history) as well as the forecast (future), total cost considerations, and decision criteria for potential suppliers
• Trains team members on the strategic sourcing process while providing a more comprehensive view of the company’s operations and processes
• Balances skills and points of view to validate that issues are considered
• Gains buy-in from key stakeholders -across divisions, sites, and functions
• Fosters new ideas and supports the development of opportunities to reduce the Total Cost of Ownership (TCO)
Operations
Engineering
Buyer
IT
Directors
Finance
TeamLeader
InformationSpecialist
Cross Functional Sourcing Team Example
Step 2
Profile Internally and Externally
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Internal Profile
External Profile
Category Profile
Now we thoroughly research the category with the critical purpose of developing the sourcing strategy.
• Detailed Spend
• Processes
• Cost
• Requirements
• Constraints
• Industry Analysis
• Porter’s 5 Forces
• Supplier Analysis
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Step 2
Profile Internally and Externally
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Basic Category Characteristics
Detailed Spend
• By location, business unit, etc.
• By supplier• Seasonality• Addressable • Forecasted
Cost (TCO)
• Cost paid by location• Cost paid by business unit• Cost by supplier/ channel• Cost seasonality• Historical cost• Total system cost
Requirements
• Functional specs• Design specs• Quality specs• Level of customization• Level of standardization• Specification ownership
Constraints
• Self-imposed• Governmental/regulatory• Customer requirements• Current contracts
Creating the internal profile involves researching the category from within (internal to) the organization.
Process
• Standardization review• Supplier evaluation• Performance monitoring
-Quality -Delivery
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Step 2
Profile Internally
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Once the elements are analyzed, we can identify key opportunities to reduce TCO and improve performance.
Negotiate price/Conduct competitive event
• Spot buys occur across geographies, however a global competitive event has never been conducted.
Aggregate volume
• Many co-specs exist for product, aggregating these volumes from truckload to railcars should decrease the unit price.
Consolidate suppliers
• The supply base is highly fragmented –100 suppliers provide product to company, opportunity exists to rationalize the number of suppliers.
Rationalize specs
• Although the material specification may be the same the naming of the specs varies across geographies and Business Units.
Create contracts
• Almost no contracts exist putting company at risk for price increases.
Example High Impact Opportunities
Step 2
Profile Internally
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Composition
Trends
Competition
Supplier Capabilities
• What is the overall size and growth of industry?• What is the industry capacity?• What is global demand? • What is market share by supplier?
• What is the balance of power between industry participants and customers?• What is the nature of competition in this industry?• How big is the industry and who are the major players?
• What are the supplier’s product or service offerings?• What is the supplier’s financials: revenue, operating income, margins, etc.?• What are the supplier’s capacity?• What are the analyst’s comments about the supplier?
• What are the key trends in the industry?• What are the industry leading practices?• Who are the innovative suppliers?• Are there any new and solutions to existing challenges?
External research and analysis provides useful market information to develop the sourcing strategy and negotiation tactics.
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Step 2
Profile Externally
Develop Sourcing Strategy
Internal Profile
• Spend
• Requirements
• Processes
• Total Cost of
Ownership
• Constraints
External Profile
• Competition
• Composition
• Trends
• Supplier Capabilities
• Porter’s Five Forces
• Supplier Analysis
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Inputs to Develop Sourcing Strategy
Facts and analysis from previous steps are tied together as input for the sourcing strategy.
Opportunity Assessment
• Spend Analysis
• Opportunities
• Scope +
Step 3
Develop Sourcing Strategy
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The Sourcing Portfolio Analysis can be used to structure and segment the category/supply base to assist in determining the sourcing strategy.
High
Low
Low High
Bottleneck• Complex specifications
• Few alternative productions / sources
of supply
• New technologies or untested
processes
• Big impact on operations / maintenance
Value Potential
Complexity
/ Risk
Impact
Sourcing Portfolio Analysis
Critical• Critical to profitability and operations
• Few qualified sources of supply
• Large expenditures
• Design and quality critical
• Complex and/or rigid specifications
Leverage• High expenditures, commodity items
• Large marketplace capacity, ample
inventories
• Many alternative products and services
• Many qualified sources of supply• Market / price sensitive
Routine• Many alternative products and services
• Many sources of supply
• Low value; small individual transactions
• Everyday use• Anyone could buy it
Step 3
Develop Sourcing Strategy
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Focus, tactics, and potential actions vary by category and influence the sourcing strategy and negotiation tactics.
High
Low
Low High
BottleneckFocus: Supply continuityTactics: Decrease uniqueness, develop new sources, modify specsActions: Direct negotiations, medium term contracts
Value Potential
Complexity
/ Risk
Impact
Sourcing Portfolio Analysis
CriticalFocus: Strategic relationshipsTactics: Supply integration, reduce risks, minimize TCOActions: RFx or direct negotiations, win/win, long term contracts
LeverageFocus: Maximizing commercial advantage $Tactics: Concentrate business, competitionActions: RFx or eActions, short to medium term contracts
RoutineFocus: Simplify the acquisition processTactics: Rationalize supply base, minimize adm. costsActions: RFx or eActions, long-term contracts
Step 3
Develop Sourcing Strategy
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Several sourcing approaches can be pursued, either separately or together, based on the category and internal situation.
Best PriceAnalysis
Volume Leveraging
Strategic Relationship
ProcessImprove-ment
DemandManage-ment
CategorySourcingStrategy
STRATEGIC RELATIONSHIP
Establish integrated or close relationships with suppliers where both buyer and supplier work together to share information, collaborate, and further each partner’s goals.
PROCESS IMPROVEMENT
Identify opportunities to standardize and streamline business processes that will result in improved quality, reduced cycle times, and lower TCO.
BEST PRICE ANALYSIS
Evaluate and model costs and use negotiation tactics that increase transparency and maximize competition.
DEMAND MANAGEMENT
Address factors such as standards, requirements, and policies to reduce costs related to internal demand.
VOLUME LEVERAGING
Aggregate like goods and / or services across organizational units in order to increase negotiation leverage and negotiate better pricing, and terms and conditions.
Potential Sourcing Approaches
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Step 3
Develop Sourcing Strategy
Each of the sourcing approaches supports a number of objectives with varying degrees of effectiveness.
We can generalize the applicability of various sourcing approaches to the sourcing objectives – actual effectiveness is strongly influenced by
company-specific factors / internal situation16
High Value Medium Value Low Value
Category Positioning
Potential Sourcing
Approaches
Bottleneck Routine Critical Leverage
Best Price Analysis
Demand Management
Volume Leveraging
Process Improvement
Strategic Relationship
Key – Relative Value
Step 3
Develop Sourcing Strategy
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1. What type of sourcing event
should we execute?
2. With how many (range) suppliers
should we contract?
3. What should be the contract
length (range)?
4. Should these spend categories
be relationship based or should
they be managed as a
transactional category?
5. What is our area of focus?
High
Low
Low High
Bottleneck
Routine Leverage
Critical
Value Potential
Complexity
/ Risk
Impact
Sourcing Portfolio Analysis
Relationship
Focus
Transaction
Focus
Relationship
Focus
Transaction
Focus
Step 3
Develop Sourcing Strategy
You should consider the following questions when developing your sourcing strategy:
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Develop Sourcing Strategy
Class Exercise
Open Discussion: Which sourcing strategies and tactics might you
use? Why?
1. Office supplies for your company with numerous transactions, low value
2. Desktop computers for your administrative personnel with high spend and numerous suppliers
3. Custom valve used in production of some your product with 1 supplier and a patented product
4. High cost / high volume electronic components used in production with 2 suppliers
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Throughout the seven step process we continue to build on each step.
Key Outputs
• Supplier Selection Criteria & Weights
• RFI (if necessary)
• Supplier Short List
Key Activities
• Identify long list of suppliers
• Identify relevant selection criteria
• Rank and weight criteria
• Create evaluation scorecard
• Identify supplier short list
Key Inputs
• Category requirements and specifications (Internal Profile)
• External Profile• Sourcing Strategy• Typical category selection criteria
Strategic Sourcing Methodology
Implement Agreements & Manage Suppliers
Negotiate Agreements
Conduct Supplier Selection
Screen Suppliers & Create
Selection Factors
Develop Sourcing Strategy
Profile Internally & Externally
Assess Opportunity
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Step 4
Screen Suppliers & Create Selection Factors
Step 4
Screen Suppliers & Create Selection Factors
Brainstorm RFx evaluation criteria important to the specific category and situation then categorize into logical groupings.
Capabilities
Research and Development (R&D) New product development introductions Plant and equipment Capacity (total available for client) Multiple plants Quality system Financials Cost control Sub-suppliers Geographic locations, distance Planning flexibility Scope of product program Logistics integration Innovations (products, processes) Electronic communications
Cooperation / Service
Supplier’s management commitment Quality response Sales service Technical service Administrative service Organization Ethics Partnership
Others
Client’s percentage of supplier revenue Environmental programs Quantity fulfillment Labor stability Currency risk EDI and other communication systems Engineering/factory/scheduling system Transport/packaging quality Warranty/penalties Support for offer process Inspection services Local content
Total Cost of Ownership
Price stability Low-cost purchasing Inventory, JIT
Service
On-time Service response Lead time Cycle time reduction Delivery time/flexibility Bid on time
Quality
Rejections Preventive maintenance Quality-control of sub-suppliers Using ISO-standards
Supply
Market
Insights
Requirements
TCO
Quality program
On time delivery
Capacity available
Management
Product coverage
Sustainability
Labor structure
Geographic
coverage
Selected
Evaluation Criteria
Example
Criteria
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Scoring & Ranking Table Example
The team will then develop a RFx scoring / ranking table to convert the selection factor information to scores and weight the factors.
Step 4
Screen Suppliers & Create Selection Factors
1 3 5
Price 30-50%
Net Delivered Price Highest Middle Lowest
Delivery 15-30%
Lead Times > 3Weeks 2-3 Weeks 1 Week
On-Time Delivery Performance < 75% >= 75% >= 95%
Quality 15-30%
First-Time Quality < 80% >= 80% >= 90%
QS or ISO certified? No Yes
Quality Assessment Score < 80% >= 80% >= 90%
Service 10-30%
Customer Support? None Some Full
Product Development Support? None Some Full
Supplier Diversity 5-10%
Small business / MWBE No N/A
ScoreFactors
Guideline
Weight
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The purpose of the RFx process is to gather additional market intelligence and to score the supplier responses against a pre-determined set of decision criteria.
• Identify and give weight to decision criteria
• Develop calculation model
Selected Suppliers for Negotiations
Selection model
• Complete RFx template
• Issue RFx
Complete RFx
RFx document
Answer Questions
Q&A document
• Internal communication
• External communication
• Receive and analyze responses
• Selection score sum
• Clarification plan ( if needed)
• Determine approach to confirm capabilities
• Measure suppliers against standards and expectations
Identified & executed verification approach
Step 5
Conduct Supplier Selection
Develop RFx Selection
Model
Manage Communication
Review RFx Response
Verify and Analyze
Capabilities
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RFX Process
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Once the supplier responses are received the cross-functional scoring team scores and ranks the suppliers according to pre-established RFx selection criteria.
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List of Suppliers submitting proposal
Ranked List
Name Score1. ABC 872. DEF 863. GHI 81
4. JKL 75...
Short list of suppliers for verification
RFx Selection Model
Name Score1. ABC 872. DEF 863. GHI 814. JKL 75...
1 3 5
Price
Net Delivered Price Highest Middle Lowest
Delivery
Lead Times > 3Weeks 2-3 Weeks 1 Week
On-Time Delivery Performance < 75% >= 75% >= 95%
Quality
First-Time Quality < 80% >= 80% >= 90%
QS or ISO certified? No Yes
Quality Assessment Score < 80% >= 80% >= 90%
Service
Customer Support? None Some Full
Product Development Support? None Some Full
Supplier Diversity
Small business No N/A Yes
Score
Factors
Step 5
Conduct Supplier Selection
Next you should assess the ability of suppliers on the short list to deliver on their claims from their proposals through site visits, reference checks, and/or pilots.
Supplier Verification Approaches
Reference ChecksPros Cons
Small PilotPros Cons
Site VisitsPros Cons
• Get detailed information
• Visualize process• Provides an
opportunity to reduce costs
• Time consuming• Bias/supplier in “sell
make”
• Understand customer perspective
• Faster• Objective
• Won’t get detailed information
• Prove capability • Identify differences• Limit risk• Success builds
organizational momentum
• Does not reflect total scale of initiative
Identify and record:1. Goals of the visit2. Key questions/activities3. Identify supplier contact4. Schedule dates
Identify and record:1. Supplier name2. Contact name3. Date of contact4. Key comments, success, service, timing, etc.
Identify and record:1. Business unit2. Duration of pilot3. Resources (hrs)4. Projected benefits
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Step 5
Conduct Supplier Selection
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With capabilities confirmed, finalize short list of suppliers to proceed to fact based negotiations.
Confirm Capabilities
• Total Cost
• Customer Requirements
• Implementation Approach
• Financial Stability
• Operating Performance
Supplier I Supplier II
Key questions concerning capabilities
Not Capable
Capable
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Short list of suppliers for negotiations
Step 5
Conduct Supplier Selection
Q & A
• Questions?
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