Tips and tools for improving buying process!28/01/2017

So what is Strategic Sourcing?

What it is NOT

• Focused ONLY on cost• Getting the cheapest product/service• Ad-hoc activities involving only purchasing• Focused on “beating on suppliers”• Decisions based on opinion, unjustified preference or

complacency• A one-time project or decision

So what is Strategic Sourcing?

What it is

• Focused on Total Cost of Ownership (TCO)• Getting the best product/service at the best value• Driven by a rigorous & collaborative approach• Addresses all levers for savings• Decisions based on fact based analysis & market

intelligence• A continuous process

What is TCO?-Iceberg always tells us the truth

Purchase Cost

Handling

Opportunity CostLabor

CostLogisti

csOrder Processing Cost

Physical Characteristics

Inventory holding costs

Inspection Cost

Rejection CostProduct Life

Cycle

Hypothetical Scenario-Easiest one there is...Car A

Initial cost: $20,0005 years of repairs, plus normal maintenance: $7,500Value after 5 years when you sell it: $10,000

Car BInitial cost: $20,0005 years of repairs, plus normal maintenance: $2,000Value after 5 years when you sell it: $10,000

This is hypothetical so don’t worry about the depreciation cost and how the third variable came into existence.

Can Insurance be part of TCO?“We always take an insurance on ordered shipment/owned/rented stuff. Without an insurance policy we cannot ensure recovery of financial loss, therefore I think the insurance cost can be capitalized as it’s inevitable”.

Do you agree?: Yes!

Why?Because financial loss will affect your total cost of ownership. And you might have to pay again for the same product.

Complicated Hypothetical Scenario-Cloud Solutions

Cloud Solutions and SaaS.

SoftwareSoftware

Maintenance

Hardware

Hardware Support

Backup HardwareNetwork

Backup Power

Installation Support

Ongoing IT support

So complicated. Should we do it?

Frankly, we don’t have a choice.

Why? Because being a startup, we even sweep our own floor and wash our own toilet!

So what is TCO?

PRICE

Acquisition Cost

Operating Cost

Disposal Cost

SalvageCost

TCOCos t

Attributable Costs

So what is TCO?TCO = Purchase Price + ∑ attributable expenses –

salvage price

OR Qualification of “All Costs” associated with the purchasing process throughout the value chain

OR

In simpler managerial terms:Approx. of the most significant cost elements

Q: Which one do you prefer as a TCO definiton?

Cost elements to TCO Item value (EASY) Physical Characteristics (FAIRLY) Lead time (FAIRLY) Freight & Logistics (FAIRLY) Economic Order Quantity (HARD) Product Life Cycle (FAIRLY) Order Processing Costs (HARD) Opportunity Costs (HARD)

And the above are just some elements and will differ with different businesses.

Why is Economic Order Value (EOQ) difficult to calculate?

EOQ= √2(Annual usage in units)(Order Cost)/Annual carrying cost per unit

Order Cost: (Not associated with quantity

ordered)

1. Cost of PO2. Approval Steps3. Cost to process the receipt4. Incoming inspection5. Invoice processing6. Vendor Payment

Annual Carrying cost/unit

(Associated with inventor in hand)

1. Interest2. Insurance3. Taxes4. Storage Costs

Q: Is it worth the time to do such a rigorous exercise?

Identifying the TCO ElementsWith so many industries and elements, how do you bring

down those that matter?

Use the Pareto Principle80/20 Rule

“Only 20% of all elements that matters for 80% of the value”

Select the types of attributable costs.

Get a pen. Paper is coming

through. Its an exercise!

Should you always use TCO? No!

Total Cost of Ownership Differential Cost

Total Value of Ownership Differential Value

No

No

Yes

Yes

Does the Revenue

effect differ between

alternatives?

Is there a simple choice between

alternatives?

How about Differential Cost?

Cost Driver 1

Cost Driver 2

Cost Driver 3

Cost Driver 4

Cost Driver 5

Price

Cost Driver 1

Cost Driver 2

Cost Driver 3

Cost Driver 4

Cost Driver 5

PriceDifferential Cost

The reason I say that L1, L2, L3 process is obsolete.

How about Total Value of Ownership (TVO)?

Supplier

Packaging Machine Manufacturer

Customer

Customer’s Customer

Sells a new component at a significant high price

(Enhances Wrapping Possibilities)Manufacturer gains higher

revenue

A better shipped product.

Less damage/Less complaints

Sells the machine a higher price

TCO/Differential Cost Analysis

Brand in turns receives a better value. That’s

Customer Perception.

So in short… Price is not the right indicator of overall

purchase cost. List the elements that affect the total cost

of ownership. Create value in the process at the extreme

end. Devise a competitive negotiation strategy.

6 Bad Signs for Unethical Suppliers1. The price of the product/service is significantly lower

than the competition. 2. Documentation is absent (or questionable).3. There are complaints or controversies over the quality

of the product/service. 4. The environmental impact of the item is overlooked or

minimized. 5. Gifts are offered as a "token of appreciation".6. Any conflicts of interest.

YOU CAN DO THIS!

Thank You!