Sourcing

Richard

Norén

, MBA, M

Sc

1. Where we are

2. Saving potentials

3. Processes

4. Evaluations

5. Organizational skills and competencies

6. The relationship

7. How to get there

8. Compensations and benefits

9. Lean Sourcing, Backup slides

© Richard NorénRichard

Norén

, MBA, M

Sc


Norén

, MBA, M

Sc

Procurement is

getting thereProcurement has become increasingly sophisticated in order to drive margin improvements, tools, productivity and transparency is improving the approach

• Procurement function mainly contract administration function

• Procurement and contracting decisions highly decentralized

• Vendor base fragmented

• Vendor relationships “incestuous”

1st Wave Strategic Sourcing

• Centralized negotiations

• Fewer suppliers

• Competitive bidding process

Demand Management

• Standardized specs

• Policy/procedures outlined

• Some monitoring and tracking

2nd Wave Strategic Sourcing

• Abolition of “sacred cows” e.g., Marketing, IT functions, Legal

• Cost management imperative

Matrixed procurement function

• Procurement shares responsibilities with centers of competence

• Responsibilities by the various parts of the organization clearly defined

Effective “end to end” procurement management

• MIS allows unit/price tracking

• System allows “policing” of compliance

• Disbursement management

• Service and quality

improvement

Relative Efficiency

Up To Late 80s 90s New Millennium

Procurement(“In The Basement”)

Sourcing(Easier cost improvement lever)

Supply Chain Management(Source of sustainable total cost advantage)

> 2010

Close loop SCM(Dynamic sustainable total cost)

3d Wave Strategic Sourcing

• Establish “open season” on any function e.g., HR, R&D, Procurement, design

• TCO management focus

Functional procurement

• High level of communality, standardization and modular processes. Procurement shares responsibilities with centers of excellence (PMO)

• Organizational ”service threads” responsibilities clearly defined

Dynamic “in/outsourcing” management

• SLA/KPI allows service thread tracking

• System allows comparable “best practice” of sourcing

• Cash flow management

• Service, quality and added value (ex R&D) improvement

© Richard NorénRich

ard N

orén, M

BA, MSc

inter-dependenciesPurchasing comes down to three activities:

– Sourcing: includes all activities related to establishing and managing purchasing contracts

– Procurement: includes all activities related to identifying and fulfilling an actual purchasing need.

– Supply relationship management: Develop mutually beneficial relationships

Create

Requisition

Award

Payment &

Settlement

Sourcing

Procurement

Identify

Need

Create Purchase

Order

Shipping

Receive

Goods/

Services

Assess

OpportunityAssess Internal

Supply Chain

Assess Supply

Market

Execute

Sourcing Strategy

Define

Sourcing

Strategy

SupplierRelationshipManagement

Create/Refine

Supplier Groups

Initiate

Relationship

Define

Performance

Expectations

Manage

Performance

Assess

Relationship

Institutionalize

Sourcing Strategy

Go to tender and

evaluate


Norén

, MBA, M

Sc

Productivity

and transparency

• Lack of evaluation standards and common processes

• Limited vision

• No fostering of best practice

• Reinventing instead of re-using

RFQ

GLA

SLA

KPI

SQA

RFI


Norén

, MBA, M

Sc

Act in the presence

• Assure the right competencies at senior positions that foster and represent the new strategic sourcing

• Slamming the suppliers as hard as you can is old school, 0th wave, and will only cause organizational stress and reduce savings

0th

1st

2nd

3d


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orén, M

BA, MSc


Norén

, MBA, M

Sc

Not about winning its

about surviving

• Everyone is out there, they’ve read the same books, heard the same arguments, fighting the same demons

• Learning in action, Kaizen

• @ Managers, admit that you don’t have control, act accordingly. Increase span of control through procuring functions rather than components, master entire relationships, define service threads

• @ Skilled procurement officers, many times your insight is exactly what the suppliers need to excel, use it communicate, propose, change & think cross-functional


Norén

, MBA, M

Sc

Don’t gamble

• Make the strategy

• Make it stick

• Don't emphasize on short-term profits

• Don’t award business on price tag alone

• Break down barriers between staff areas © Richard NorénRich

ard N

orén, M

BA, MSc

Reach out and it will

materialize

• Approach the entire sourcing chain flow

• Justify your need

• Merge processes with supplier

• Its never about the price only

• 30-10% is likely to be found


Norén

, MBA, M

Sc


Norén

, MBA, M

Sc

The processes’•Get it right, unless you know, no one else will know.•Transparency with suppliers, change if necessary•Value mapping, spaghetti chart•Identify the entire process from the supplier•Define service threads boundaries

Simplicity

© Richard Norén

Richard

Norén

, MBA, M

Sc

Packet your processes

• Make your homework, map your process and needs, define service value threads

• Good packages and wrappings are like nice gifts, you can bring them easily anywhere & anytime.

• Mind your own business, suppliers are many times much better equipped in knowing their own supply chain, your common work is to find out how to optimize and integrate the entire processes.


Norén

, MBA, M

Sc

Value flow mapping

where do you add value?

• Assure that your SCM process are mapped, define ”service threads”

• Compare and match process flows and SLA/KPI.

• Transparency, evaluate & improve

• Focus on deliverables © Richard Norén

Richard

Norén

, MBA, M

Sc

All Pieces fits into TCO

• TCO is your procurement DNA

• Every link is needed and every part counts

• Use the precise supplier process at the right time

• Unnecessary links will suboptimize TCO


Norén

, MBA, M

Sc

No silo thinking,

Think ”service threads”

• ”Service threads” are the entire process from end-to-end

• Know your boundaries, facilitate and break out.

• The sourcing is rarely one silo only, pull strings too all departments and dependants

Accoun-ting

IT

Marketing

HRBranding

Communi-

cation

Industrial operations

DesignR&D

Purchasing

Lean sourcing


ard N

orén, M

BA, MSc

Cost is everywhere

stack savings

• Stack and aggregate savings

• Define where you add or destroy value

• Include even parts where you might is better of doing it on your own.

• It’s the entire service thread that will save your cost, parts of it will not be interesting for suppliers or not even be feasible to grab as it e.g doesn’t make logistical sense. Think it through


ard N

orén, M

BA, MSc

anchoring

• Everyone needs to be part of it

• Personal agenda, empowerment, political, hierarchical level is second nature

• Sourcing service treads is cross-functional


Norén

, MBA, M

Sc

modular processes

facilitates sourcing

• Make every function a separat process module, available for outsourcing

• String your processes as set of wild Strawberries into your own ”service thread”


ard N

orén, M

BA, MSc

Make sure that the

sourcing makes sense

• Work with anchoring, supplier transparency and modular processes, adopt yourself continuously

• Change process modules whenever needed without looking back


ard N

orén, M

BA, MSc


Norén

, MBA, M

Sc

Where are you going

• Transparency, establish common grounds of evaluations, compare, use best practice for forward movements


ard N

orén, M

BA, MSc

Are the trees in the way

of the forrest

• Simplicity

• Focus on the ”do’s”

• Reenginering, productivity enhancements...

• Stay upstreams, not downstreams


ard N

orén, M

BA, MSc

Leveranskedjans komplexitet

Aff

ärs

risk

Låg Hög

Hö

g

Inköps-kategori

StapelIcke kritisk

Strategisk Hävstång

Placera in den röda punkten, och anpassa storleken efter spendvolymen

Kraljics inköpsmatris

Flaskhals

HLLL

LH HH


ard N

orén, M

BA, MSc

FlaskhalsStapel

Icke kritisk


Låg Hög

Hö

g

Elektronik

LH

HL

HH

LL

Mekanik

Chassidelar

Montage-material

Kontors-material

Placera in samtliga inköpskategorier i kraljicsmatrisen

LeveransriskLeveranskedjans komplexitet

Aff

ärs

risk

Kraljics inköpsmatris – positionering av samtliga inköpskategorier


ard N

orén, M

BA, MSc

FlaskhalsStapel

Icke kritisk


Låg Hög

Hö

gLH

HL

HH

LL

Samtliga inköpskategorier ger oss en samlad bild, ofta benämnd ”fingeravtrycket”. Denna bild kan sedan ge oss en sammantagen uppfattning om hur företagets strategier bör se ut.

LeveransriskLeveranskedjans komplexitet

Aff

ärs

risk

Kraljics inköpsmatris – Företagets ”fingeravtryck”


ard N

orén, M

BA, MSc

FlaskhalsStapel

Icke kritisk


LH

HL

HH

LL

Kraljics inköpsmatris – Olika företag har olika ”fingeravtryck”

FlaskhalsStapel

Icke kritisk


LH

HL

HH

LL

FlaskhalsStapel

Icke kritisk


LH

HL

HH

LL

FlaskhalsStapel

Icke kritisk


LH

HL

HH

LL

Systemleverantör fordonsindustrin

Grossistföretag Medicinteknikföretag

Byggföretag

Exemplen är mycket hypotetiska, verkligheten kan skilja sig väsentligt© Richard Norén

Richard

Norén

, MBA, M

Sc

Kraljics inköpsmatris - inköpsstrategierna

Kraljicsfält Strategisk Hävstång Flaskhals Stapel

Strategi PartnerskapKonkurrensutsatta anbud

Säkra försörjningKategoriintegration

Mål•Skapa ömsesidiga åtaganden i lång-varig relation.

• Hitta bästa kort-siktiga anbud.

• Säkra kort & långsiktig försörjning

•Reducera försörjningsrisk

•Reducera logistik-komplexitet

•Öka effektivitet

•Reducera antal leverantörer

Aktiviteter

•Korrekt prognos

•Riskanalys

•Noggrant lever-antörsval

•Kostnadsanalys

•Rulland inköpsplan

•Effektiva processer

•Leverantörsranking

•Förbättra marknads- och produktkunskap

•Sök efter alternativ

•Förflytta inköpsvolymer

•Konsolidera inköp

•Optimera inköps-kvantiteter

•Target-pricing

•Korrekt prognos

•Riskanalys

•Bestäm kundranking

•Utveckla förebyggande skydd

•Sök efter alternativ

•Utveckla alternativ

•Samla köp för hela kategorier

•Standardisera kategorier och processer

•Utveckla effektiva orderprocesser

•Delegera order-hantering

Källa: van Weele 2005, sid 153

FlaskhalsStapel

Icke kritisk



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orén, M

BA, MSc

Inköpsmodeller 62009-09-25

Alternativa portföljstrategier - Bensaous modell

Marknadsrelation Leverantören fjättrad

Köparen fjättrad Strategiskt partnerskap

Låga Höga

Höga

Låga

Leverantörens specifika investeringar

Kö

pa

ren

s s

pe

cif

ika

in

ve

ste

rin

ga

r

Källa: Bensaou, 1999); samt Skjött-Larsen sid 246


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orén, M

BA, MSc


Alternativa portföljstrategier - Persons modell

Många leverantörer, kort ledtid, få kvalitetsproblemStrategi: Prispress, mark-nadsorientering, alternativa leverantörer

Standard Special

Repititiva

Engångs

Typ av produkt

Ty

p a

v k

öp

Källa: Persson 1998

Hårda krav på ledtid ochkvalitet. Köparen beroende.Strategi: Ram- och sam-arbetsavtal

Liknande ovan, samt prob-Lem att känna leverantörer och prisnivå. Köparen är beroende.Strategi: Prispress ochreferenser

Långa ledtider, hårda kval-itetskrav. StyrningsproblemStrategier: Förhandlingar och referenser


ard N

orén, M

BA, MSc


Alternativa portföljstrategier – Andra modeller och deras

egenskaper

Modell Utgångspunkt

Elliot-Shircore-Steel (1985) Vinst/värde vs. leveransens sårbarhet

Hadeler-Evans (1994) Produktvärde versus komplexitet

Lilliecreutz-Ydreskog (1999) Ekonomisk profil vs. Komplexitet/risk

Olsen-Ellram (1997) Strategisk vikt vs. Svårighet att leda

van Weele (2002) Vinstpåverkan vs. leveransrisk

Samtliga modeller liknar Kraljics modell.


ard N

orén, M

BA, MSc

Certification levels and the need to monitor suppliers

Process Performmance Expecctations *

Certification level

Total Business Assessment

(Management,

Quality system

(QPS)

Deliveryy Quality Affordability Customer Satisfaction

( g , quality, delivery, cost, technology, customer support)

(QPS)On time

(%)

Period

(Months)

Run.

average

Acceptance

(%)

Period

(Months)

Run.

average

Cost trends, cost reduction efforts, lean practices

Management, Schedule, Quality, Technical, Finance

Gold

Silver

Bronze

4,5-5.0 Min 4.0

> X, facility wide 100 12 100 12 4.0 or greater 4.4 or greater

3.5-4.4

Min 3.0

>Y, critical processes

97 12 99.5 12 3.4-3.9 3.8-4.3

2.5-3.4

Min 2.0

Basic

Initial

93 12 99 12 2.8-3.3 2.8-3.7

* May vary with product complexity

What are reasonable requirements to have?

How many certification levels does it make sense to have?

Monitor and improve

mutual expectations


ard N

orén, M

BA, MSc


ard N

orén, M

BA, MSc

Teamwork, teamwork,

teamwork...

• All reflections are valid in the corporates interest

• NO pride, NO bounderies, NO single voice

• Who is the owner of a issue? Focus on solutions


ard N

orén, M

BA, MSc


ard N

orén, M

BA, MSc

See the larger picture

• Recognise that the supplier is just a part in the value flow chain

• While a supplier may fit the requirement it may not fit the environment © Richard NorénRich

ard N

orén, M

BA, MSc

Trust the supplier to

fit in

• Give the supplier opportunity to fit into the picture

• The supplier is far better equipped in their area, appreciate it, listen and amend


ard N

orén, M

BA, MSc

TIME

Industralization

challange

Moduls

Approved supplier list

Outsourced

Lean manufacturing

Propriotority

manufacturing

Outsourced

manufacturing

Generationplanning

Plattforms

Features vs components

Pre assembly

© Richard Norén

Richard

Norén

, MBA, M

Sc

How mature is your

sourcing?

Finish or designIndicators or

control pannel

Tyre or wheel

Piston or engine

Lights or electrical system

Breaks or stearing system


Norén

, MBA, M

Sc

Cherrypicking

• Work tighter with suppliers

• Establish a set of real prefered or ”symbiotic” suppliers

• Move from component sourcing to conceptual cherry picking of ideas without loosing control

© Richard Norén

Richard

Norén

, MBA, M

Sc

Boeing defense

• Boeing started in already in the early 90s to outsource design of aircrafts to Russia

• They do not make flight simulators, they only label them Through symbiotic realtionship, Boeing

had indication of a large govermental order a few years ago. They discussed it with their core supplier, they were able to deliver the first simulator the day after reciving the order without engaging in any corporate financial risk or comittment

Through brave outsourcing of product entire design and then cherrypicking, they have been able move quicker into communality and plattform standards across products to lower cost

”Its never about

the money”


ard N

orén, M

BA, MSc


Norén

, MBA, M

Sc

step by stepLevel

of

Ad

ded

Valu

e

Time Line (potentially 3-5 Years)

Buying

Procurement

Partnership

Alliance

World Class

• Needs not anticipated, data not available or not used

• No Organizational wide procurement strategy, large supplier base• Transactional focus

• Procurement provides ad-hoc tactical support• Low skills and resource, little career planning

• Some category strategy creation, but not company wide, and not communicated effectively

• Volume leverage through effective use of competition across categories• Track commercial measure of performance, targets for savings

• Technology enables i.e. purchase to pay cycle improvement through automation• Selected supplier base consolidation

• Training and recognition of skills required

• Formal Planning processes

• Focus on SRM and sharing business plans• Longer term, bigger value contracts with fewer suppliers

• Collaboration on cost improvement, increased levels of risk sharing• Trained and qualified resources supporting all categories of spend

• Key Performance Indicators in place.

• Procurement strategy aligned to corporate strategy

• Suppliers selected for strategic fit and deliver continuous improvement• Data driven decision making

• Full support over purchasing cycle • Risk sharing higher with the Organizational co-located and jointly financed

• Business planning optimizes all commercial aspects, tax, investment, people

• Strategy fully supports the corporate goals and driven by corporate consensus

• Managing the supply risk while leveraging the competitive strengths• Nurturing supplier relationships

• Supplier base share improvement target for cost and innovation added value• Full visibility and trust across the external value chain

• Procurement maintains a rationalized supplier network that delivers technology, knowledge, products or service quality superior to competitors

Stage I: Reacting

Stage II: Developing

Stage III: Advancing

Stage IV: High Performing

Stage V:Pioneering

A procurement function needs to work through the defined stages to achieve world class procurement capabilities


Norén

, MBA, M

Sc

Its never about the

price

Total Acquisition Cost

(Actual Opportunity)

Demand Drivers

SpecificationsProcurement Practices

Inventory Practices

Operational Practices

Decommissioning/ Disposal

Internal Policies & Procedures

Internal Processes

Management Systems

PurchasePrice

Amount paid to the Supplier

Factors generateadditional costs to an organization once an item is

commissioned and in use

The scope of sourcing extends beyond supplier price negotiation and takes into account the total cost of ownership

© Richard Norén

Richard

Norén

, MBA, M

Sc

Identify weakness and

strengths

• Make weakness and strengths your loved companions

• Be frank and transparent about it

• Map the SCM process, mirror it with the supplier


Norén

, MBA, M

Sc

Impossible is not a fact

its a opinion

• Don’t listen to much on internal voices that claim that it cant be done, they may have different agenda or lack your insight

• Challenge; ask for process mapping; proofs of evidence for why it can’t be sourced

• Verify information from critical internal voices with themselves, analyse, summarize, propose a solution based on given information so that it cant be challenged © Richard NorénRich

ard N

orén, M

BA, MSc

The proposal

• Superimpose your processes, cut and paste, simplify, rethink

• Be frank about any expectancies, bad and good ones, NO one can read minds, not even your supplier

• Don’t use service KPI/SLA as punishments, it’s veichle for improvements and best practice dialogue

• Make it work, just make it. Never give up


ard N

orén, M

BA, MSc

Synchronize yourself

• Once the main mapping is done, continue with all sub processes if needed

• Let go of your own pride, your supplier is expected to deal with it, you’re sourcing a package, focus on: ”in and output”

© Richard Norén

Richard

Norén

, MBA, M

Sc

Get married

• Realize that true cost /quality advantages will only happens when you behave and act as there is no one else.

• Slapping the supplier only as hard as you can, will only dress you up for divorce.

• Never relax, measure and verify that you are doing the right thing to avoid competition.


Norén

, MBA, M

Sc


Norén

, MBA, M

Sc

How much cost

do you have?

• COGS, is typically in the range of 70-95% of revenue of most manufacturing firms. For those companies, net income is typically 3-8% of revenue.

• A representative company who's COGS is 80% of revenue and whose net income is 5% of revenue; if you can reduce COGS by 1% (to 79.2% of revenue), that savings goes directly to the bottom line, increasing net income to 5.8% of revenue thus increasing net income by 16%.

Agriculture, forestry and fishing

Mining

Construction

Manufacturing

Transportation

Communication

Electric, gas, and sanitary services

Wholesale

Retail

Insurance

0 20 40 60 80

Cost of operations


Norén

, MBA, M

Sc

you get what you pay

for, use it wisely

• If you want to save cost be ready to pay for it. Also, be willing to change processes and structures

• Many old school is low cost, emerging 3d sourcing wave is still rare in supply

• Empower employees to challenge concepts, top management needs to be part and support it.

• If you buy a Ferrari and then drive it on a dirt rode, don’t complain if you can’t reach full velocity


Norén

, MBA, M

Sc

Academical shift

• The number of specialised procurement education are avalanching

• More MBAs or people with dual education are entering the field, capable of dealing with multi dimensional and increasingly complex environment

• Multilingual with global experience, dressed for making sustainable savings. They’re skilled to be instrumental in increasing profit through saving cost

• Purchasing salaries of > £100,000 is becoming more common, moving towards financial industry wages


Norén

, MBA, M

Sc


Norén

, MBA, M

Sc

The 5s’

Step Name Action Catch Phrase

1Sort

(Seiri)

Remove unnecessary items from the workplace “When in doubt, throw it out”

2Straighten, Set in Order

(Seiton)

Locate everything at the point of use

“A place for everything, and everything in its place”

3Sweep, Shine

(Seiso)

Clean and eliminate the sources of filth

“The best cleaning is to not need cleaning”

4Standardize

(Seiketsu)

Make routine and standard for what good looks like

“See and recognize what needs to be done”

5Self-discipline, Sustain

(Shitsuke)

Sustain by making 5S second nature

“The less self-discipline you need, the better”


Norén

, MBA, M

Sc

Wastes’The 7 Wastes – Definition Examples Causes Countermeasures

Over-|production Producing more than the customer needs right now

Producing product to stock based on sales forecastsProducing more to avoid set-upsBatch process resulting in extra output

ForecastingLong set-ups“Just in case” for breakdowns

Pull system schedulingHeijunka – level loadingSet-up reductionTPM

Trans-portation

Movement of product that does not add value

Moving parts in and out of storageMoving material from one workstation to another

Batch productionPush productionStorageFunctional layout

Flow linesPull systemValue Stream organizationsKanban

Motion Movement of people that does not add value

Searching for parts, tools, prints, etc.Sorting through materialsReaching for toolsLifting boxes of parts

Workplace disorganizationMissing itemsPoor workstation designUnsafe work area

5S, Point of Use StorageWater SpiderOne-piece flowWorkstation design

Waiting Idle time created when material, information, people, or equipment is not ready

Waiting for partsWaiting for printsWaiting for inspectionWaiting for machinesWaiting for informationWaiting for machine repair

Push productionWork imbalanceCentralized inspectionOrder entry delaysLack of priorityLack of communication

Downstream pullTakt time productionIn-process gaugingJidokaOffice KaizenTPM

Processing Effort that adds no value from the customer’s viewpoint

Multiple cleaning of partsPaperworkOver-tight tolerancesAwkward tool or part design

Delay between processingPush systemCustomer voice not understoodDesigns “thrown over the wall”

Flow linesOne-piece pullOffice KaizenLean Design

Inventory More materials, parts, or products on hand than the customer needs right now

Raw materialsWork in processFinished goodsConsumable suppliesPurchased components

Supplier lead-timesLack of flow, Long set-upsLong lead-timesPaperwork in processLack of ordering procedure

External kanbanSupplier developmentOne-piece flow linesSet-up reductionInternal kanban

Defects Work that contains errors, rework, mistakes or lacks something necessary

Scrap, ReworkDefectsCorrectionField failureVariationMissing parts

Process failureMis-loaded partBatch processInspect-in qualityIncapable machines

GembaSigmaPokayokeOne-piece pullBuilt-in quality3PJidoka


ard N

orén, M

BA, MSc

Drivers of change

From To Driver

Improving

Productivity

Single dimensions, limited complexity

Several dimensions, higher complexity Practical thinking become more scientific

Flattening Partly sharing information Instant sharing with everyone that want to know as to enhance collaboration and accelerate corporate competitiveness

Resource usage

Strengthen teamwork

Learning and control, ”smartness”

Control &

real time

information

Spending time on collecting and aggregating historical information

Instant real time information access

Spending time on evaluating and reacting on real time information

Resource usage based on real time information

Transparency

Improved planning and reaction

Authoring

information

Few author their own content digitally accessible for everyone

Easy and convenient authoring of content digitally, accessible for anyone that want to know

Increased productivity

Time to market

Cost Unnecessary administrative work

Silo thinking

Sliding cost trend based on mutual needs and expectations

Holistic thinking and planning

Savings

Simplicity

Leverage on volume

Improvement Long reaction times to bottle necks

Identify bottle necks quickly and being able to prioritize planed reactions

General efficiency and cost cutting

Accelerated product and process improvement

Process Limited alignment between process and information flow

Alignment in-between process and its information flow

Better process control

Predictability


ard N

orén, M

BA, MSc

Sourcing

Documents

Transcript of Sourcing