The Sourcing Revolution - Market Informed Sourcing

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Spend Matters UK/Europe

The Sourcing Revolution

Market Informed Sourcing

Peter Smith September 2013




Agenda

1. Introduction

2. Traditional Procurement and Category Management

3. What is Market Informed Sourcing?

4. How does it work – and why is it valuable?




Part 1 - Introduction

The Real World Sourcing Series is a series of 6 sessions covering hot topics for procurement professionals.

The Real World Sourcing Series is promoted and supported by BravoSolution, and developed by Peter Smith (Spend Matters) and Guy Allen (Real World Sourcing Ltd.)

Peter Smith started his procurement career with Mars Confectionery, then was CPO for Dun & Bradstreet Europe, the Department of Social Security and the NatWest Group. He is now a consultant, author, non-executive director and editor of the Spend Matters website. He was President of CIPS in 2002/3.




Part 2 - Traditional Procurement

• A requisition comes into the procurement department

OR

• The factory requires something, usually specified by the line manager or engineering, design, R & D...

In both cases, procurement is told – with some precision in most cases – what it should go out and source / buy from the market




Category Management • Procurement (maybe with stakeholders) defines a set of categories,

sub-categories

• Takes a pro-active approach to determining the best way of purchasing

each category

• Procurement analyses the market, relates that to the internal

requirement

• Procurement approaches the market – or a few suppliers – with a well-

defined requirement in terms of quantity, specification, etc.




Strengths : • Proactive

• Links business needs to market and suppliers

• Considers aggregation and leverage

• Well-structured and repeatable process

BUT...

• It assumes that the buyer understands how to frame the requirement

better than the market




Market informed sourcing - exercise • You are buying fresh tomatoes for Milano Foods, who use them in a

number of finished consumer products, made in a number of European

factories

• Production is all year round, but varies month by month in terms of

quantity

• What are the variables you might wish to consider in your specification

and in suppliers’ responses?




Buying tomatoes - What are the variables? • Volume needed

• Number and location of production sites

• Usage quantities / schedules

• Number of suppliers (is dis-aggregation allowed?)

• Shelf life

• Delivery dates / times – inc. collection options

• Quality – specification and substitution variables

• Price – basic, volume related, delivery size etc.

• Conditional price factors (“if / or”)




Buying tomatoes - What are the variables? • The complexity of the requirement is evident!

• That means we tend to drive towards a standard solution that the suppliers can make offers against

• That enables us to handle the multiple variables and make rational assessment of the alternatives




Why do we use Category Management? • If we allowed suppliers to suggest alternatives, we simply couldn’t cope

with the complexity in terms of the responses from multiple suppliers

• We would not be able to analyse the sheer amount of data, and the

options it would contain

• So we apply Category Management – we second guess the market

through research and strategising

• We then decide in advance how many suppliers we want, delivery

quantities, timings, the quality levels, specifications, max / min

volumes and other parameters




Why do we use Category Management? • But this is not the best way of doing things!

• It restricts suppliers’ flexibility to offer alternatives – part-offers,

alternative specifications, time constraints – which might provide value

• But we limit this because doing so is just the only way we can run

manageable and fair sourcing exercises

• BUT... There is now an alternative, which is generating savings of 20%+

even for firms who have done CatMan well for years!




Why do we use Category Management? Questions we may need to answer: • Insourced/outsource options

• How to define the scope of the category or the tender

• Whether to consider a prime contractor solution, or multiple suppliers, and how to bundle the total category requirement

• How many suppliers are required (or commercially ideal)

• The geographic spread of the requirement and of the market solution

• The phasing and any seasonality aspects to the requirement

• The length of contract, including any options for termination or extension

• The core product or service specification

• Acceptable options for bundling, volume discounts, or conditionality




Part 3 – What is Market Informed Sourcing? • I can supply 100 tonnes of tomatoes each month between March and

October but only to your two factories in Spain and France, at an “A”

quality level.

• I am happy to supply a minimum of three months (consecutively ) but I

will not contract for just one or two months.

• I can deliver and here are my rates depending on delivery size to each

factory – on top of my ex-farm price. OR you can organise shipment if

you prefer.

• If you contract for the whole 1600 tonnes I will offer an additional 2%

discount. If you buy 500 tonnes of peppers as well, there is an

additional 1% on the table.




What is Market Informed Sourcing?

• We close options down not because it is the best way of managing the

sourcing problem

• We do it because otherwise we just don’t know how to cope with the

complexity of the alternative





What is the lowest cost option to fulfill the requirement?

Supplier A Supplier B Supplier C Supplier D

Contract 1 100 114 113 108

Contract 2 100 114 110 No bid

Contract 3 100 115 108 110

Contract 4 100 115 110 108

Contract 5 100 110 112 98


Maximum no. of contracts 3 3 3 2

Discount for > one contract 0 10% 10% 5%





Answer: Contracts 1 and 6 to supplier B; contracts 2, 3 and 4 to supplier C, contract 5 to supplier D

Supplier A Supplier B Supplier C Supplier D

Contract 1 100 114 113 108


Contract 3 100 115 108 110

Contract 4 100 115 110 108

Contract 5 100 110 112 98


Maximum no. of contracts 3 3 3 2

Discount for > one contract 0 10% 10% 5%




Why is market informed sourcing different?

• Market informed sourcing / optimisation / advanced sourcing is perhaps the biggest advance in procurement since Category Management

• Allows the market (suppliers) to offer a whole range of alternative propositions. The technology then analyses and optimises the data to provide a best possible solution

• The buyer can they do “what if” analysis – and see what effect that has on the overall cost.

• The technology “instantly” assesses each option

Particularly powerful in complex sourcing situation with many variables




Defining complexity • The size and nature of the supply market - a greater number of suppliers, or a wider

geographic spread, will potentially increase the complexity of the process.

• The number of ‘lines’ or items that need to be purchased; so a finished product with many individual components, or a transport contract with many ‘lanes’, has intrinsic complexity.

• The scope or spread of the requirement in terms of the purchasing organization; so if we need the item delivered to 45 different company offices or factories situated in 47 various countries from Australia to Peru, then the activity is intrinsically more complex than a single delivery point.

• The number of users or stakeholders internally; as their numbers increase, so too will the likely complexity or breadth of the requirement, and the need to align a wide group of people with the process and the outcome of the procurement.




Defining complexity (continued) • The potential for dis-aggregation of the requirement i.e. whether suppliers can

offer some of the entire requirement rather than the totality; if there are multiple items, is it feasible for suppliers to offer a subset of the total package?

• The timescale over which the purchase is to be made. So a single one-off purchase is easier to source than an item or service that will be delivered in lots or continuously over an extended time period.

• The potential for substitution; can suppliers offer alternatives to the goods or services specified by the buying organisation?

• Supply chain dependencies or critical paths; if items A and B are needed in order to produce item C, then I may have to consider that critical path . There may also be the option to consider disaggregating that supply chain rather than going for an integrated single supplier approach.

• Supplier-created dependencies; situations in which a supplier can make conditional offers; for instance, ‘I can only offer you this price on item A if you also buy item C from me’.




Defining Complexity A major food company runs an annual European logistics tender.

The basic parameters are:

• 1,000 Routes

• 90,000 Movements

• 200 Hauliers

• 60 Factories

(Other criteria – quality, green issues, speed of response – also taken into account).




Another example…

A firm requires a complex printed product; a catalogue, brochure or similar perhaps. Assume the quantities are such that one or more major printing suppliers will be required. The product is required in large quantities across 30 countries; it then needs to be delivered in batches to over 100 locations in those countries.

So, while the product itself is relatively easy to specify, the supply chain has a number of different elements, principally:

• The base paper required for the product

• The printing process – ‘ink onto paper’

• Assembly and binding of the product

• Intermediate storage and stock-holding

• Delivery to the final customer locations

How would you approach the market?




Another example...

• So what is the best way of structuring the supply chain?

• How aggregated or dis-aggregated should it be?

• What is the right number of suppliers?

• How about location of suppliers?

A perfect problem for an optimisation / market-informed sourcing approach

Allow the market to suggest the “best” way of doing this




Part 4 - How does it work?

A request is presented to the market, with as many options and variables

as required.

That might include supply to different factories by month / quantity /

specification; or quotes for different routes (lanes) and load sizes / types in

a logistics situation.

Suppliers respond (electronically) and the platform then runs the

optimisation calculation using complex mathematical algorithms.

The optimal solution is calculated, which can then be further interrogated.




How does it work? After the initial optimisation analysis, the user can then look at different

scenarios. For instance:

• Reduce the number of suppliers

• Spread the geographic risk e.g. Country of origin

• Spread the supplier risk – maximum share of volume

• Maximum suppliers per country / site

• Preferential treatment for incumbents

• Preference for SMEs, minority owned businesses

In each case, the system can assess the premium that would be paid

against the initial optimal solution




The Results • Leading adopters have seen average 15-20% saving even where

category management has previously been well implemented

• Understanding of supply chain and opportunity to widen the supply

base e.g. SME participation

• Supplier perceptions improved – they feel they are being given the

chance to express different options and contribute their ideas

• So although it has some of the ‘toughness’ of auctions (and can even

be combined with elements of auctioning), it supports good

collaborative relationships and supplier innovation

• Transparency is also very strong




Market informed sourcing • Some users are going beyond “just” sourcing and using the technology

for wider issues

• That can include production planning, manufacturing optimisation,

supply chain and related issues

• For example, internal production capabilities can be built into the

calculations along with external providers so make / buy decisions can

be included in the analysis




Not suitable for... • Very simple contract requirements or categories may not justify the time or

effort needed to run a MIS process.

• If the requirement is very clear and there is no possible benefit in opening options up to the market, then clearly MIS is not justified.

• MIS may not be suitable if there may be reasons above and beyond the normal commercial objectives that mean, for instance, an organisation wishes to develop a partnering relationship with a particular supplier.

• Even where MIS is worth using, judgement still needs to be applied in terms of how many options are considered. So you wouldn’t look to dis-aggregate your FM requirement to the level where you asked for pricing per floor of every building for the cleaning element of the contract.

• There will need to be careful thought around how MIS can be used in the public sector, but we see no intrinsic reasons why that is not possible; for instance, within a Competitive Dialogue process.




The Role of Procurement • Skills needed by the procurement executive change

• Less focus on market analysis and structuring a very definite tender

• Identification of the key variables and understanding of the market in

order to know how to frame the enquiry and the alternative criteria for

responses is key

• Understanding of the “what if” questions post event and the ability to

look at options creatively whilst meeting business goals




Market informed sourcing – Summary

• MIS does not replace Category Management, but it changes the

fundamental nature of the CatMan / strategic sourcing process and

requires a different process to be adopted by buyers

• MIS allows the procuring organisation to open up options to the

market, instead of narrowing down which is the core of traditional

CatMan. That enables the market to reflect back true economic factors

in a manner that can benefit the buyer.

• Market-Informed Sourcing is the most significant development in core

procurement practice since Category Management




Exercise

• What other areas/ categories can you think of where this sort of

approach might be interesting?

• Can you think of any public sector examples where it would be

interesting?




THANK YOU!

Please feel free to contact me on

[email protected]

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The Sourcing Revolution - Market Informed Sourcing

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Transcript of The Sourcing Revolution - Market Informed Sourcing