Vendor Management In FMCG Companies

K.S.Srinivasa Murty

17th July 2004

Agenda

• Changing role of purchasing, its implications to purchase strategy and vendor management practices

• Reinventing Supplier Relationships

Changing Role of Purchasing Function

Period Business Environment Role of Procurement

1970’s Under Developed Markets Focus on availability Severe import restrictions & best Price

1980’s Developing Markets Focus on quality Easing of import restrictions Improvement & Economic Growth Inventory Management

1990’s Liberalization Focus on SC Efficiencies

Increased Competition (JIT,VMI), ISO 9000, reduction of Total

system cost

2000s Global Competition Focus on elimination of Defects (Six Sigma)

Bottomline Growth Driver

Changing Role of Purchasing Function

1 ObjectiveCost Competitive-ness

Business CompetitiveAdvantage

Now a days - Much Different and More

Difficult Role

2 Price & Operational Costs

Value Creation for the firm

Focus

Skill3 Buying and Operational Control

Supply Market Strategist

Earlier Current

Adopt A Segmented Purchasing Strategy

(SPS)

SPS Provides a framework to redirect

purchasing resources in a strategic way

so as to maximizes economic gains

while minimizing risk.

Bottleneck items Places heavy emphasis

on negotiating longerterm contracts ( 2 / 3year horizon)

(Lock in security throughcontracts for theseImportant, low-volumematerials.)

Critical items Develop strategic

partnership withsuppliers for thesehigh risk – high impactitems

Nuisance items

Automate purchasing Minimize required

attention

(Minimize attentionthrough mechanization orout sourcing for these -office supplies and otherlow cost items.)

Commodities

Emphasis on bidding Drive for sharp bargain

(Leverage volumes formaximum cost advantagefor these High availability &low risk items.)

Exp

osu

re t

o M

ark

et

Ri s

k

Economic Opportunity

High

Low

Low High

Segmented Purchasing Strategy

Deep understanding of -

• What We Buy & • Supply Market

Establish -• Right Positioning

Right Positioning

Example : Fabric wash products business

High

High

Impact on Business

Economic Opportunity

Technology/MarketConstraints

(Market Risk)

DecentralizeNuisance items

Leverage ScaleCommodities

Strategic Alliance

Critical items

Critical/UniqueBottleneck items

LAB

Soda ashpackaging

PerfumesEnzymes

SaltMinerals

The specific vendor management

approach

depends on whether the vendor

supplies critical items or bottleneck

items or commodities. It is important

to develop strategic partnerships with

vendors of critical items and

bottleneck items.

The Strategic Vendor Management

Aims At Win-Win through ….

• Consolidation

– Leverage on scale for materials by

rationalizing suppliers and concentration of

volumes with a

few, capable suppliers. ( Conformance to CSR -

Corporate Social Responsibility)

– Build Strategic Alliances with key Vendors -

Long term view.

• Consolidation

– Leverage Strategic alliances to facilitate

successful rollout of innovation process and

contain costs

– Transparent profit sharing with suppliers.

Transparency through common understanding

of the cost drivers through agreed cost models

and providing a fair return to the vendor.

– Win- Win - share knowledge, grow together,

with fair returns.

• Consolidation / Strategic partnership : An

illustrative example of Perfume purchase at

HLL

• Globally 4 vendors selected.

• These vendors are assigned to different business

categories - 2 vendors to each category.

• The Guardian and the challenger.

• Both the vendors allocated to a business category

work closely with the business group, they

understand the products/ customer likes & dislikes

( do own market research), invest in research and

relevant technology.

• Coordination – Synchronize the full range of supply chain

activities of the supplier and the customer. Integrate their operations where ever feasible, while eliminating duplication and waste in areas such as order processing, materials planning, inventory management, distribution and transportation.

– This is the point at which companies using Strategic Vendor Management do supplier quality supplier quality certificationscertifications, , so that receiving can be streamlined so that receiving can be streamlined and inbound inspection eliminated.and inbound inspection eliminated. They also shorten their delivery lead times as much as possible to reduce costs and enhance flexibility.

• HLL’S Vendor Network

Management approach:

•Regionalized supplier base

– quick response to changes in plans

– close interactions with units

•Vendor Managed Inventory (VMI) system

between unit and supplier ( for packaging

materials only )

• Involvement of suppliers at launch /

Product packaging development stage

• VMI Systems have helped reduce delivery

lead times and improved flexibility.

•One supplier allocated to one unit

•Unit shares plans, stocks and weekly

production with supplier

•Supplier plans replenishment based on the

available information

Benefits Achieved in some of the packaging materials :

Reduction in lead times by 2 weeksreduction in stock levels by 2 weeks

Supplier Connectivity

SupplierNet

Factories

Banks Suppliers

Purchasing

Not yet implemented

Leveraging Information and Communication Technologies

• Effective use of reverse auctions for standard ( not custom made) materials.

• Supplier net for transparent communication between factories, buyers and suppliers. ( Implementation in progress)

• Use of internet for Collaborative product development and to send the suppliers purchase orders / indents, transport documents,QC reports etc.

• Cooperation

– Enhanced cooperation particularly in product

development, manufacturing and logistics.

Customers and suppliers work as an integrated

team to leverage their combined knowledgeleverage their combined knowledge.

– For example, together they can redesign the

component parts of a product in order to reduce

production and assembly costs, or closely

coordinate new product introductions to

minimize start up costs and to assure a fast

learning curve.

– Pursue where appropriate with focussed suppliers,

upgrading manufacturing and QC facilities.

– While setting up new vendor capacities, where

relevant, participate in machinery / technology

selection, leveraging in -house / parent company

knowledge.

– Work closely with suppliers and pursue

Value Analysis / engineering.

– Kaizen productivity improvement

techniques for cycle time reduction and in

process inventory reduction.

– Work with suppliers’ suppliers where

appropriate to ensure right quality and cost

– Capitalize scale economies by working with

feedstock suppliers (paper,polymers etc) to

your suppliers, to get competitive costs

– Maximize the fiscal benefits

– Conduct periodic vendor rating. Some of the key

criteria are - on-time deliveries, quality ( Level of

rejects), SCORE contribution level, improvement

in order processing lead time ( responsiveness)

and contribution to innovation projects etc.

– Conduct regular supplier audits, linked to specific

concern areas / vendor rating reports.

– Motivate , recognize high performance of

vendors - “Star Suppliers”

Managing Synergy in Multi - Profit Center / Multi Locational Companies,

through …..• Harmonization of specifications across

regions bringing common materials across

different businesses under a single buying

system

• Global / Regional buying - aggregation of

regional / global volume wherever

possible.

• Strategic vendors are identified keeping in

view their ability to become global or

regional vendors.

Managing Synergy in Multi - Profit Center / Multi Locational Companies,

through …..• Establishing “Lead buyer” for each

category of materials to fully exploit synergies across business categories / regions.

– Single face with suppliers

– Aggregation of volumes to get cost benefits

– Using common cost systems

• Quick rollouts of best practices across regions/ businesses.

Suppliers are “value levers” - focus on using

supply markets for both innovation and cost

reduction.