bravoconnect 2014: sourcing a complex category

Sourcing a Complex CategoryPeter Hodgkinson | BravoSolution

Welcome

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Peter Hodgkinson

• 11 Years Supply Chain and Procurement experience

• Proven ability to define and deliver savings and efficiency programmes for clients

• MCIPS qualified and MBA, Strategy and Procurement Management, led by Professor Andrew Cox at Birmingham University Business School

• Proven ability to implement solutions which evolve with clients requirements

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Sourcing a Complex CategoryWhat, Why, How, When & Who?

Peter Smith | Spend Matters UK & Europe

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About Peter Smith

• Managing Editor of Spend Matters

UK/Europe• Procurement Director for Dun &

Bradstreet Europe, the Department

of Social Security, and the NatWest

Group.• Fellow and 2003 President of CIPS • MA in Mathematics from

Cambridge University• Co-authored book, “Buying

Professional Services”, published

in June 2010.

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1. Introduction

2. Traditional Procurement and Category Management

3. Sourcing a Complex Category with Market Informed Sourcing?

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

The Sourcing Revolution

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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

Traditional Procurement

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• 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.

Category Management

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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

Category Management

• 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?

Exercise

• 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

Buying tomatoes - What are the variables?

• 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?

• 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 Market Informed Sourcing?

Exercise

Answers

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.

• 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 (continued)

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 take

into account)

Defining complexity (continued)

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

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.

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

How does it work?

• 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

The Results

• 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

The Results

• 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 Results

• 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

The Role of Procurement

In Summary

• Market Informed Sourcing 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

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Sourcing Complex CategoriesCase Studies

Jeff Ryan | BravoSolution

• Thought leader for advanced sourcing techniques for over 15 years

• Broad supply chain expertise across a range of industries and categories

• Proven ability to apply complex problem solving skills to specific customer challenges

• Thought leader and developer of applied optimization techniques to strategic sourcing and many other supply chain solutions

• Proven ability to design and implement customized category management programs

Jeff Ryan

Client

Project

Company Background

One of the largest meat processors in the world with a network of 51 distribution centers reaching supermarkets, retail and wholesale markets, food service and other institutional clients in more than 110 countries

Over 100 year old, American retailer, representing largest supermarket chain in the US; employs 343,000 associates with sales close to $100 billion

Project HQ San Paulo, Brazil Cincinnati, Ohio

Scope $R 254 million ($150 million) 2,124 items

$93 million annually 158 SKUs

Flexible Films Personal Hygiene



Requested pricing on existing structures

Structures were historically custom-engineered by supplier to reduce competition

Avoided being in the market due to regular resin increases

Expectation: 7% to 8% price INCREASE

Merchandizing mentality / Fragmented spend

Many costs buried for convenience (e.g. artwork, plates, promotional expectation, transportation)

Onerous terms (e.g. two year fixed price, finished good inventory demands)

Recent direct negotiations yielded 0%

Savings Prayer: Flat Savings Hope: 5%


Enabler – Sourcing Optimization

OptimizationEngine

OptimizationEngine

Complete proposal complexity Includes all expressive offers (disparate bundles,

discounts, alternates, etc.) Multiple levels of conditional pricing

Optimal Award

Allocation

Optimal Award

Allocation

Real-world business rules Team models buyer’s constraints

and hypotheses Scenarios submitted through web

interface Ensures feasibility of solution

Scenario Analytics

Scenario Comparisons Solution Summaries Solution Details Operational Impacts Negotiation Preparation Implementation Support

Optimization technology embedded into a versatile scenario generation tool to removes historical limitations on analysis

Supplier Proposals

Buyer’s

Demand

Profiles

Buyer’s

Demand

Profiles

Don’t tell the supply base the answer; tell them the needs

Develop deeper understanding of supplier economics

Focus on supplier capabilities and interests

Lean on suppliers for creativity and innovation

Let proposal collection be expressive

RFPs are simply a study of the marketplace; decide later which solutions make the most sense

Collaborative Principles

Expressive Features

Suppliers are given the capability to demonstrate more efficient approaches and put their best foot forward

Flexible Films Personal Hygiene Design alternate structures Substitute supplier preferred components

(resins/films)

Propose various process capabilities (printing, extrusion, lamination)

Generate more efficient run economics (setup cost in many cases effectively reduced to zero)

Provide additional incentives (Bundle discounts, volume discounts, payment terms)

Un-bury hidden costs (artwork, plates, displays, freight)

Focus on commercial approach Share risk on volatile cost components

(price Indexing)

Offer conditional strategic expansion (proposed facilities, proposed equipment)

Propose more meaningful contract duration (3, 4, 5 years)

Consider full lifecycle and TCO Order frequency/size

Distribution route (regional DC, local DC)

Freight cost alternatives (LTL, TL, IM)

Inbound terms (Delivered, Collect)

More proposals…less supplier effort; e.g.. from Flexible Films

Suppliers enter economic drivers; BCS creates the proposals

2,124 Items

123 Functional Spec Items

Supplier input Collected at most appropriate level:

• 40 material components

• 8 conversion facilities• 20 machine level

pricing• 32 freight costs----------------------- 100 inputs

~25 Structures

per supplier

For each structure (eg.)

• 2 material set choices

• 3 conversion facilities / processes

• Shipping cost to 4 end locations

2 x 3 x 4 = 24 proposals

Each structure could satisfy eight (8) functional spec items

8 X 24 = 192 proposals

Each function spec item maps to 20 items

20 x 192 = 3,840 proposals

Times 25 proposed structures

25 x 3840 = 96,000 proposals

World of Opportunity: 96,000 proposals x 47 suppliers = 4.5 million proposals

Proposal collection is the single biggest differentiator in advance sourcing; better solutions from better proposals

Materials Process Packaging Final CostTransportation

692 305 573 Result: >2.5M proposals

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# of options provided across supply base


Results

Project


Expected Savings 0% 5%

Savings

Unconstrained 45% 20%

Short-term Implementable

25%$37.5 million

15%$14 million

Looking Forward

Selected items with greatest savings and least change for immediate implementation

Chose to work on harder implementations after PMI activities slowed

Stuck with status quo in a few valuable area to reduce implementation challenges

Professing to work on artwork and plate handling, brokerage, distribution options, and inbound freight terms conversion