By K. Sashi Rao Management Teacher and Trainer K.Sashi Rao/May 2013.
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Transcript of By K. Sashi Rao Management Teacher and Trainer K.Sashi Rao/May 2013.
K.Sashi Rao/May 2013
Stages of Strategy Evolution
IV- Fully Integrated
Supply Chains
II - Moderate Development
I - Basic Beginnings
III - Limited Integration
Quality/cost teams
Longer -term contracts
Volume leveraging
Supply base
consolidation
Supplier quality focus
Ad hoc supplier alliances
Cross-functional sourcing teams
Supply base optimization
International sourcing
Cross-location sourcing teams
Global sourcing Strategic
supplier alliances
Supplier TQM development
Total cost of ownership
Non-traditional purchase focus
Parts/service standardization
Early supplier involvement
Dock to stock pull systems
Global supply chains with external customer focus
Cross-enterprise decision making
Full service suppliers
Early sourcing Insourcing/
outsourcing to maximize core competencies of firms throughout the supply chain
K.Sashi Rao/May 2013
Sourcing Strategies Basis All ‘strategic sourcing ’ initiatives can be
looked at from three broad angles: Volume concentration Vendor- related methods and
partnerships Process improvements and innovations Rest of this presentation goes into individual
details of these above recurrent themes Ultimately, all these are aimed to meet the
set objectives and goals of strategic sourcing- with the maximum bottom line impact
Page 4
The benefits of strategic sourcing and drivers of TCO are numerous and go far beyond simple reductions in unit costs
Primary Benefits of Strategic Sourcing
Primary Benefits of Strategic Sourcing
Reduction in Cost Per Unit
Reduction in Cost Per Unit
Change in Consumption/
Volume
Improved Operating Efficiency
Improved Operating Efficiency
Improved Focus on Socio-
economic Goals
Improved Focus on Socio-
economic Goals
Pricing Improvements• Lower unit price• Volume rebates• Payment term
discounts
Supply Chain Savings• Cost of capital• Warehousing costs• Shipping costs
Reduced Lifecycle Costs• Maintenance costs• Operating costs• Disposition costs
Reduced Procurement-Related Operating Expense
Reduced Non-Procurement Related Operating Expense
Change in Consumption/
Volume
Change in Consumption/
Volume
Socio-economic Goals • Structured analysis of
small/disadvantaged business opportunities
• PO Processing• Accounts Payable• Receipt/Warehousing• Standardized
procurement process
• Other operating efficiencies
Performance Monitoring• Structured metrics and
periodic review of contractor performance
Demand Management• Eliminate demand• Reduce consumption• Encourage substitution• Change product mix
Specification Review• Eliminate “gold-plating”• Simplify specifications• Alternative products
DRIVERS OF TCO
K.Sashi Rao/May 2013
Volume Concentration Methods Combining commodity items for various plants
and worldwide locations(to seek bulk quantity price discounts)
Rationalization of item specifications to promote standardization and variety reduction
Reduced procurement costs thro larger order sizes and thro ‘group buying’ or ‘centralized buying’ especially for commodity items
Transportation in full truck/full container loads to reduce logistics costs
Consolidation of supply base to enable larger individual order sizes
K.Sashi Rao/May 2013
Vendor Related Strategy Basics(1)
Fundamental realization that 70% or more of a product’s value could come from its raw materials and input suppliers
Development of high quality and reliable suppliers
Reduction of supplier base Proximate location of suppliers( auto
industry best example)
K.Sashi Rao/May 2013
Vendor Related Strategy Basics(2)
Treating suppliers as partners Early involvement in new
products/projects Building trust and long term relationships Collaborative relationship called for either
thro long term contracts, supplier agreements, partnership deals, strategic alliances, and even joint ventures
K.Sashi Rao/May 2013
Supplier Relationship Management (SRM)
SRM is a comprehensive approach to strategically manage an enterprise’s interactions with others who supply its goods and services
Its goal is to streamline the business processes between the firm and its suppliers
It is aimed to operate in a real-time on-line environment
It incorporates business practices and software that together form a part of the ‘information flow’ of their supply chain linkages
K.Sashi Rao/May 2013
SRM Features
Idea sourcing and value creation- using suppliers as idea sources for improvements duly rewarding them
Supplier development- wherein suppliers are helped to improve their technical-commercial resources and capabilities thro training, investments and any other help
Joint review of costs- to do value chain analysis and see how costs can be eliminated/reduced
Supplier performance valuation- by agreeing on standards to be met, their measures and specific goals
Information sharing- that is accurate, timely, relevant and meaningful in a transparent manner
Relationship nurturing- building trustful, respectful relationships and following ethical behavior and practices
K.Sashi Rao/May 2013
Multiple Sourcing
Multiple Sourcing (traditional approach) Have many suppliers for each item to avoid risks
of non-supply or short -supplies Set up competitive situations amongst suppliers Engage in pre negotiations every time Withhold information to get better prices Suppliers face uncertainty about future business
weakening them Buyer try to benefit from seller’s weaknesses,
confusion and fear Still useful where technology is evolving and can
derive upgraded benefits
K.Sashi Rao/May 2013
Single Sourcing
Single sourcing (Modern/Japanese approach) Deal with only one or two suppliers at most Avoid engaging in conflict with suppliers Engage in joint cost reduction to obtain lower costs Lower total costs due to economies of scale buying
and process, expedite, follow-up and certify Exchange relevant business information; obtain
better business gains Suppliers informed of future business prospects,
capacity and technology constraints Benefits from cooperation, mutual trust and
dependability Trust (contractual, competence and goodwill) is
the key to such relationships
Purchasing Cost Reduction
Thro’ superior negotiation skills to get lowest possible “total ownership cost” from suppliers
Adopting ‘strategic positioning’ models as covered in portfolio analysis
Supplier tie-ups to reduce inventory assets thro’ JIT supplies, vendor managed inventory, pooled/consolidated buying
Reduce all cycle times- in order processing, supplier lead times( using intermediaries, guaranteeing volume commitments and challenging supplier lead times); order to delivery times- all of which carefully measured and tracked for benchmarking
K.Sashi Rao/May 2013
Vendor Performance
Fundamentally: Performance = Capability x
Motivation
Capability = Vendor’s ability to meet your needs
Motivation= Vendor’s interest and potential commitment
K.Sashi Rao/May 2013
Vendor Capability
This is based on detailed assessment of his capability to meet procurement needs in terms of :
Product/item technical specifications Product/item quality parameters Capacity to meet quantity needs and over
foreseeable future Acceptable cost and price structure Delivery and schedule requirements Service and responsiveness expectations
criteria
K.Sashi Rao/May 2013
Vendor Motivation
Based on value of your business to the vendor (%of his turnover) CURRENTLY
Value of your expected business to the vendor (% of his turnover) in FUTURE ( next year, 3->5->10 years)
Overall attractiveness of your business to vendor- both as financial and non-financial benefits
K.Sashi Rao/May 2013
Vendor Capability and Motivation
100%
50%
Low Medium High
Motivation
Cap
abil
ity
N
B
L
A
M
H
H=High; M=Moderately high; L= Low; N= Negligible
C
K.Sashi Rao/May 2013
Vendor Commitment
High
Low
Capable but uncommitted
Ideal
To be avoided
Willing but incapable
Middle of The road
Motivation
Cap
abil
ity
High
K.Sashi Rao/May 2013
Vendor Evaluation
Vendor evaluation is an essential part of sourcing to select the best amongst many suppliers
Its basis is to first establish evaluation criteria, their importance and weightage in the overall supplier evaluation process
These criteria will have to be item-specific, be as objective/tangible as possible ; and also add subjective/intangible elements of customer service, communication effectiveness, flexibility etc
Vendor ratings is the outcome of such evaluations to make supplier comparisons absolutely objective
K.Sashi Rao/May 2013
Vendor Evaluation Criteria Set criteria should first clearly define the product
scope and technical specifications Evaluation criteria should cover technical,
commercial, logistical, financial and other organizational aspects
Rigor of such criteria can be decided based on ABC analysis and previous portfolio analysis
Building such an evaluation matrix of criteria is the fundamental basis of sound evaluation
These could be split into 4 broad categories under Quality, Price, Availability and Service Responsiveness
Such a matrix should serve purpose not only of vendor selection but also ongoing vendor performance linked to ‘promised/offered’ standards and actual ‘delivered’ performance
K.Sashi Rao/May 2013
Developing Evaluation Criteria Technical - product specifications/range, technology
used/development, product development/R&D Quality - product specifications range/tolerance, supply
variability , consistency; supply rejections rate Price - price basis, cost-price relationship, cost/price
history and development Commercial - credit terms/facilities, supply/delivery basis,
discount/rebates, excise/sales tax/octroi /other Financial - firm ownership/equity status, financial/working
capital/inventory performance Sales and customer service – sales history/performance,
growth plans/targets, capacity buildup/planning, customer responsiveness, complaint handling
Availability/delivery- lead times, speed of delivery, meeting schedules, global supply/logistics
Systems- information systems, transfer and dissemination, ERP/IT packages used, EDI etc
K.Sashi Rao/May 2013
Overall Performance Criteria
Competency- all round professional capability and performance, integrated SCM systems, ERP etc
Capacity- ability to meet quantitative and qualitative needs on sustaining basis
Control-effective management information and control systems
Commitment- suppliers willingness to invest in physical, intellectual and financial resources
Cash resources- financial resources , stability, profit generation, ROI, asset-turnover ratio
Cost- cost structure, cost management and cost reduction and control
Consistency- ability to show quality and reliability over time
K.Sashi Rao/May 2013
Vendor Ratings -example
FACTORS
Supply
Target
Weight
Supplie
r
Rating
Supp
lier Ranking
SUPPLIER
A B C A B C
Function Q 3 8 6 10 24 18 30
Cost C 3 3 5 9 9 15 27
Delivery A 2 7 9 4 14 18 8
Service support
R 2 5 3 8 10 6 16
TOTAL 10 67 57 81
Rank 2 3 1
K.Sashi Rao/May 2013
Vendor Development
Vendor Development is one of the important aspects of strategic sourcing
It is meant to continuously improve the value that is received by a firm from its suppliers
It is any activity that a firm undertakes to improve the supplier’s performance and capabilities to fully meet and satisfy its needs now and in the future
It takes a long term view of a key supplier’s capabilities and capacity as an ongoing and dynamic process
K.Sashi Rao/May 2013
Vendor Development Tools(1) Sharing common goals and building trust Periodic liaison with key suppliers Setting performance standards and metrics Offering long term purchasing contracts Joint problem-solving activities Aiming for supplier quality self certification Making them JIT ready thro tight inventory
controls
K.Sashi Rao/May 2013
Vendor Development Tools(2)
Creating dedicated supply development teams Helping them source their raw materials
competitively and be fully involved(especially for small scale vendors)
Teaching suppliers tactics of self-development Involving suppliers in new product and process
development Conducting frequent improvement-focused
seminars for suppliers Sharing the cost savings from supplier
development activities Overall, to help build and improve the supplier’s
supply management system
K.Sashi Rao/May 2013
Outsourcing and Sub-Contracting
Outsourcing is a key sourcing strategy to reduce overall costs( also refer to Make- versus Buy discussion in an earlier presentation)
In outsourcing , the vendor takes full responsibility for item/component manufacture and delivery to set quality standards in time
Outsourcing usually done for non-core functions like transportation, warehousing and logistics
Sub-contracting, a form of outsourcing, involves the same processes throughout, but for the fact that the required raw material inputs are supplied by the customer. This applies to big organizations getting small and standard type of components made by those in the medium to small sector
Sub-contracting work is also known as ‘jobbing’ or ‘pure conversion work’
In both cases, buying organizations derive organizational and cost benefits
K.Sashi Rao/May 2013
Outsourcing Programs
Outsourcing benefits: Concentrate on core capabilities Reduce staffing levels Accelerate reengineering efforts Reduce operational problems once system in place Improve manufacturing flexibility and capacity
management .
Outsourcing Risks: Possible loss of control Suppliers becoming potential competitors( Atul-Ciba case) Increased need for supplier and quality management Increased reliance on the outsourcing supplier
K.Sashi Rao/May 2013
Process Related Methods Procurement process improvements-
standardization, simplification and new methods like reverse auctions
Inventory planning and control(including EOQ, inventory modeling and vendor –managed inventory(VMI)
Technological innovations like GPS/GIS/Bar coding/RFI usage
Use of IT methods and broader approaches like ERP and CPFR
K.Sashi Rao/May 2013
E-Business Revolution
Supply chains and SCM now need to have enhanced cost control and provide improved customer value for gaining competitive advantage
E-supply chains have emerged as a powerful strategy to achieve these goals
Faster and accurate SCM information flows is its foundation
Finally, they result in lower transaction costs, speedier transactions , greater transparency in business transactions- all adding to organizational efficiency and effectiveness
K.Sashi Rao/May 2013
B2B Modes
FORWARDAUCTION
-Supplier cartels
EXCHANGES-on-line markets
-auctions-catalogues
BARGAIN/NEGOTIATE
-supplier side EDI-supplier centric
REVERSEAUCTION
-Buyer cartels
SELLERS
One/Few Many
One/Few
Many
BUYERS
K.Sashi Rao/May 2013
E-Procurement Functionalities E-sourcing- to find potential suppliers thro’ internet,
online trading B2B market places E-information- to obtain supplier/product information,
specs, quality, capacity/capability, supplier portals et al E-tendering- to send RFI/RFP/RFQ and enable vendor
short listing E-reverse auctions- to enable buying at lowest prices in
real-time with cut off times E-ordering- to integrate use of web tools for ordering
direct and indirect purchase items and receiving such goods including QA parameters
E-collaboration- to exchange latest/updated product data/specs, joint forecasting (CPFR) and use of latest tools like virtual meetings, bulletin boards and shared knowledge management systems
K.Sashi Rao/May 2013
E-CommerceLogistics Operations
Order processing- all web-based, real time, online transactions
Inventory management- order placement linked to stocks, delivery options/schedules and triggered stock replenishments
Order execution -order filling, packing, readiness for dispatch
Shipping-physical transportation links to service providers and dispatch details
Tracking and tracing- in-transit phase Payment cycle- by credit/debit card/cheque/e-transfer,
credit terms, payables management Transaction security -fraud checking/authentication
systems, confidentiality requirements Order changes/cancellations etc- systems flexibility to be
provided Reverse materials flows-physical returns and payment
reversal mechanisms
K.Sashi Rao/May 2013
Inventory and Inventory System
Inventory- Any physical resource (RM,WIP, FG, Spares) that a firm holds in stock with intent to transform and/use to make value-added form and sell
Inventory system- It is a set of policies and controls that monitors inventory levels, determines what levels to maintain, triggers when stocks should be replenished and helps set ordering size/volumes
K.Sashi Rao/May 2013
Why Inventory?
Inventory plays an important role in the operation/working capital/order to cash cycle
Cash Received Purchase Order
Raw Materialinventory
Other ProductionResources
Work-in-progressInventories
Other FactoryResources
FinishedGoods Inventories
DistributionAnd Retail
Debtors orReceivables
Operating Cycle
K.Sashi Rao/May 2013
Inventory Fundamentals— aggregate inventory
This deals with managing inventories according to classification( raw materials, work-in progress, consumables and spares and finished goods) based on their performed functions
It is financially oriented and concerned with the costs and benefits of holding different types of inventories and their flows
It takes into account the uncertain demand, production and supply patterns and conditions and the need to strike a balance
It has to be aligned with the organization’s business objectives and targets
K.Sashi Rao/May 2013
Inventory Fundamentals-item-wise inventory
This deals with managing inventories at individual item level
This calls for establishing decision rules about each and every item
Involves answers to following questions:
What individual items are most important? How individual item inventory is to be managed? How much to order at one time ? When to place an order?
K.Sashi Rao/May 2013
Inventory Fundamentals-ABC Analysis
As applied to inventories, it means that usually about 20% of items make up of 80% of the total inventory value, 30% of items for 15% value and 50% of items balance 5% value
This ABC classification of individual items helps to identify the inventory importance of each item
It also provides guidance as to setting item-wise ordering and inventory control policies and principles
K.Sashi Rao/May 2013
CPFR– a definition
CPFR is a set of business processes that helps to automate and improve sales forecasting and stock replenishment between two trading partners
Under CPFR, trading partners do the following:- agree on mutual business objectives and measures- develop joint sales and operational plans- electronically collaborate to generate and update sales forecasts and replenishment plans
K.Sashi Rao/May 2013
CPFR-origins
Original Wal-Mart (retailer) - Warner Lambert (manufacturer) project (1995) collaborating on joint demand forecasting and developing production schedules thro internet and EDI networks
Grew out of retail consumer goods industry Voluntary Inter-Industry Commerce Standards
(VICS) Group; first published guidelines in 1998 More than 100 Fortune 500 companies are now
participating in and refining CPFR; P&G and Wal-Mart world leaders in its use
CPFR software tools are available for this purpose
K.Sashi Rao/May 2013
Sourcing Strategy-a consolidated framework
Conduct product value analysis and engineering
Substitute materials Pursue system buying alternatives Optimize life cycle costs
• Reengineer joint processes• Share productivity gains• Integrate logistics• Support supplier operations improvement
Establish/develop key suppliers Employ strategic alliances/partnering Examine strategic make versus buy Develop integrated supply chain
Expand geographic supply base Develop new suppliers Profit from global supply/demand imbalances
Compare “total” costs Model “should-costs” Renegotiate prices Unbundle pricing
Consolidate number of suppliers Pool volume across units Redistribute volume among suppliers Combine volume from different
commodity categories
Exploit Buying Power Create an Advantage
ConsoldateSupplyBase
Best PriceEvaluation
VolumeConcentration
ProductSpecificationImprovement
JointProcess
Improvement
RelationshipRestructuring
StrategicSourcing
Profile OfSourcing Group
Sourcing Strategy ForSourcing Category
Supplier Portfolio Generation
Competitive Supplier Selection
Operational IntegrationWith Suppliers
Continuous Benchmarking OfSupply Market
Selection Of Implementation
Path
4
1
2
3
5
6
7
Online (“e”) RFPsInternet Negotiations (Reverse Actions)
New Tools