Strategic sourcing Deloitte best-practices approach

Tomi efmanHead of Management ConsultingDeloitte d.o.o.17. maj 2007

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The Procurement ProcessProcurement consists of cycles of sourcing and buying transactions, which depend on each otherMoney on the TableIdentify a need and negotiate and manage contractsNew or better contract creates the opportunity to save moneyMoney in the BankItems are purchased based on existing contracts

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Strategic Sourcing is a collaborative and systematic process

Reducing total cost of materials and services for an organisation while increasing quality and serviceLeveraging internal expenditures while rationalising the supply baseOptimising the internal and external supply chain while managing inventory levels on a commodity by commodity basis (not one size strategy fits all)Improving organisational awareness of the Total Cost of Ownership while reducing excessive levels of requisitioning and complexityBuilding the organisations competitive position through continuous improvement and supplier added-value12345The goal is to simultaneously:

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Strategic Sourcing addresses the Total Cost of products and services that a company procures

PurchasePriceDemand DriversSpecificationsProcurement PracticesInventory PracticesOperational PracticesRetirement PracticesPerceived OpportunityActual Opportunity

Internal Policies & ProceduresInternal ProcessesManagement Systems

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Sourcing & Procurement Value PropositionProcurement improvements may offer a less disruptive, more effective opportunity to impact the bottom line.* Based on the following estimate of costs, as a percentage of revenue: 55% manufacturing materials & services; 18% labor; 7.5% other costs** Assumes a 20% gross contribution margin

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Significant opportunities have been identified in most industriesEnterprises often derive significant savings from making small improvements in supplier-facing processes and spend management.*Profitability Impact Based on 1-Percent Reduction in ExpendituresSource: Gartner - Supplier Relationship Management Pushes Profitability in Dealing With Suppliers - 9/02

Industry (year 2001)Purchases $ % of salesCurrent profit average %of salesApproximate change in profitability*Aerospace/defense40.772.4516%Beverage42.399.355%Chemical49.474.1612%Electronics56.143.7814%Engineering/construction51.0314.303%Mining47.268.256%Petroleum26.205.564%Pharmaceutical34.7617.542%Semiconductor48.34-0.9951%Telecommunication service40.461.4428%Transportation31.811.7318%Utilities22.135.534%

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Strategic Sourcing delivers greater value than traditional purchasing approachesCategory Example of Strategic Sourcing vs. Traditional PurchasingSources of Savings

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World Class Procurement can be defined using the following seven dimensionsSupporting material on the progression towards World Class Procurement can be supplied against each dimension

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Cross functional teams therefore need to be employed to maximise benefit

Strategic Sourcing Approach

Traditional ApproachCharacterised by:Functional ResponsibilitiesNo Common FocusLengthy Cycle Time

CROSS-FUNCTIONALSOURCING TEAMFinanceLogisticsInfo. Mgmt.Joint ResponsibilitiesEnhanced CommunicationsConsistent Supplier InterfaceShort Cycle Time

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MarketingEngineerPurchasingAgentMaterialOfficer

EngineerPurchasingAgentEndUsersCharacterised by:

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The maturity of a procurement organisation can be defined using the model belowLevel of Added ValueTime Line 3-5 YearsBuyingPurchasingPartnershipAllianceWorld Class Procurement Needs not anticipated, data not available or not used No organisation 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 savingsTechnology enables i.e. purchase to pay cycle improvement through automationSelected supplier base consolidationTraining and recognition of skills required

Formal Planning processesFocus on Supplier Relationship Management and sharing business plansLonger term, bigger value contracts with fewer suppliersCollaboration on cost improvement, increased levels of risk sharingTrained and qualified resources supporting all categories of spendKey Performance Indicators in place.

Procurement strategy aligned to corporate strategySuppliers selected for strategic fit and deliver continuous improvementData driven decision makingFull support over purchasing cycle Risk sharing higher with the organisations co-located and jointly financedBusiness planning optimises all commercial aspects, tax, investment, people

Strategy fully supports the corporate goals and driven by corporate consensusManaging the supply risk while leveraging the competitive strengthsNurturing supplier relationships Supplier base share improvement target for cost and innovation added valueFull visibility and trust across the external value chainProcurement maintains a rationalised supplier network that delivers technology, knowledge, products or service quality superior to competitors

Stage 1: ReactingStage 2: DevelopingStage 3: AdvancingStage 4: High PerformingStage 5:Pioneering

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Deloitte Consultings six-step methodology

Develop vision and strategy

Enroll stakeholders

Develop new values, skills, and behaviours

Redesign infrastructure

Measure performance

Communicate vision and strategy

DiagnoseOpportunityDesign ProgramAssessOpportunityAssess Internal Supply ChainAssessSupplyMarketDevelopSourcingStrategyImplementSourcingStrategyInstitutionaliseStrategy

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6Key Change Leadership fundamentals are necessary throughout implementation of the methodology to ensure successful results

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Assessing the OpportunityDevelop team charterIdentify stakeholdersDocument size of buyDocument inventoryStratify the buyCommunicate team scope

OutcomesTeam CharterCurrent stakeholdersOverview of external spending/related costsIdentification of specific sourcing opportunities and issuesInitial Sourcing Team Communication PlanStakeholder buy-in to program scope and opportunities

Actions

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The data collected can lead the Strategic Sourcing Team to identify Quick HitsQuick Hits are the Low hanging fruitand can provide:

Instant savings to the company Credibility to the work of the teamBuilding support for further activityEarly on in the process, opportunities may arise that can be acted upon by the Sourcing Team, or a separate initiative to capture cost and process savings right away.

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Assess the Internal Supply ChainIdentify demand driversPerform specification review Perform specification gap analysisPerform specification standardization reviewPerform supplier specification reviewIdentify all related Total Cost activitiesMap current process stepsEvaluate effectiveness of the current processDetermine Total Cost of ProcessBenchmark Total Cost processIdentify process opportunities

ActionsOutcomesList of customer expectations and requirementsList of current and future internal product and service requirementsList of successful practices being used outside the enterpriseDetailed specifications reviewInitial supplier interfaces that begin supplier selection processDetailed process map of the internal supply chain process Total Cost analysis

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When analysing process maps, look for rework, redundant activities, excessive work process handoffs and corrective actions as areas for improvement.Mapping Tips:Always map process as it actually occurs, not as it should occurUtilise direct observation when possibleThere may be several maps to account for variations by location, commodity, etc.You will often encounter subprocesses within larger processesThe flowchart should be understandable to non-users of the process.

Note: Actual process maps are completed in greater detail.Tips for process mapping

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Step 3 - Assess the Supply Markets

ActionsOutcomesIdentify potential sources of supplyEvaluate industry(ies)Identify viable sources of supplyPerform supplier assessmentsPerform supplier comparisonsIdentify supplier opportunities

List of successful procurement practices being used outside the enterpriseList of viable suppliersInitial supplier assessment and comparative analysisList best performing suppliers

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Some key tools for supplier market evaluationFive forces model

Useful for understanding relative bargaining power in a category Who sets the price you or your supplier? Supplier Value Chain analysis

Useful for understanding supplier position and potential savings levels Sources of data include suppliers, public financial data, industry reports, etc. Supplier Value Chain Analysis: Example: Distributor Cost Breakdown00.501.001.50Sales and Marketing 0.19Overhead 0.09Gross Margin 0.14Purchase Price 1.22Retail Price 1.64Industry Competitiveness

Intensity of Rivalry AmongExisting FirmsSuppliersCustomersSubstitutesPotential Entrants

MJThere are two basic models to give structure to supplier market evaluationPorters 5 Forces can help identify where the balance of power lies between buyer and supplier Supplier Value Chain Analysis will reveal where savings could come from, help assess the level of savings and identify how much flexibility a supplier has around priceMikes Butter example

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Step 4 - Develop Sourcing Strategy

ActionsOutcomesReconfirm scopeDetermine desired outcomesCompile opportunitiesBrainstorm process enhancement and supply strategiesTest process strategies and solutionsTest supply strategies and solutionsDraft an action planCommunicate strategies

Finalised scope of work statementEnhanced internal supply chain process strategySourcing strategy to meet objectives and desired outcomesUnderstanding of how internal stakeholders will be impactedManagement approval of process enhancement and supply strategies

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Spectrum of Procurement Strategies Consolidation of purchased volume to increase negotiation leverage (materials and business units)Policy changes that reduce demand for the product/service or substitute lower price product/serviceExpansion of supplier base on a broader, sometimes international scaleChanging the relative market complexity of an item through standardiza-tion, substitution or value engineeringUse of supplier/ customer teams to reengineer key supplier processes, joint processes and the supply chain for mutual advantage and cost reductionStructuring of long-term supplier/ customer partnerships or alliances to achieve integrated new approaches to the businessVolume ConcentrationDemand Management ActionsBest Price EvaluationGlobal SourcingProduct Specification ImprovementJoint Process ImprovementRelationship RestructuringDisciplined process for aggressively renegotiating all or selected supplier prices, contracts and agreements based on competitive bidding or other techniquesEase of ImplementationLess difficultMore difficult

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Methods for defining the sourcing strategy

This sourcing strategy defines both the commercial relationships with the supply base and the internal supply management processesLeveragePartnerBuyMarketManageriskStrategic importanceLowHighDifficulty of obtaining supplyLowHigh

CentraliseexecutionCrossFunctionalDe-centraliseorderingSimplifyStrategic importanceLowHighComplexity of the buyLowHigh

Supplier strategyCommercial relationshipSupply management processInternal proceduresSourcing Strategy

MJStraight from Deloitte training pack any better examples ?

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Step 5 - Implement Sourcing Strategy

ActionsOutcomesDevelop supplier solicitation

strategyImplement supplier solicitation strategyConduct supplier negotiationDevelop process enhancement strategyObtain final approvalsAward contract

Selection criteria and weightings for supplier selection Request for Proposal (RFP) to suppliersShort list of suppliersComprehensive evaluation of short-listed suppliersPerformance measure categories for supplier performance analysisFinal selection of supplier(s) Finalised Standard Agreement, with negotiated pricing and termsCommunication to all affected stakeholders

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A list of key criteria and associated weights is required to assess the potential suppliers3rd party certificationEvaluation of preventative maint.Evaluation of quality assurance procedures

Topics AddressedWeighting FactorIssues AddressedQualityServiceDeliveryCost35%20%15%30%Inventory managementElectronic interface capabilitiesValue-added services

Order cycle-timeRush order procedures

PriceDiscounts

Total 100%The negotiating strategy will help form a list of key criteria and associated weights to assess the potential suppliers

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Based on market analysis and the supplier information collected, develop negotiation tactics for each supplierBottleneck ItemsStrategic inventoryFocused managementMove to strategicCollaborate

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456..205Non-Critical ItemsStandard products/commoditiesMonitor order volumesSpot market

Leverage ItemsEstablish vendor rating criteriaCompetitive bidding

Number of SuppliersStrategic ItemsCollaboration/partnershipBest practiceExploit mutual dependency

% of Suppliers Turnover

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Step 6 - Institutionalise Sourcing Strategy

ActionsOutcomesTransition to new processDevelop supplier relationshipsImplement operational changesEstablish joint supplier/Enterprise process improvement teamMonitor and report savingsMonitor and report performance

Implementation of new processes Transition to the new supplier(s)New supplier relationship(s) focused on jointly achieving Total QualityJointly developed process improvement and ongoing quality supplier relationsMeasures for internal compliance and track benefits

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Sample Stratification CriteriaTwo key criteria determine a Suppliers position within the Stratification: Market Complexity and Strategic Importance.Strategic Importanceof Product or ServiceMarket Complexity (product/service uniqueness, inflexibility to switch suppliers)

Level 2Level 1Level 3Stratification FrameworkSupplierStrategicPartnerCorePartner

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Importance of Team Work

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Wrap-up1. Think strategically2. Measure Total Cost3. Work as a Team

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Contact informationtsefman@deloitte.com

MJThere are two basic models to give structure to supplier market evaluationPorters 5 Forces can help identify where the balance of power lies between buyer and supplier Supplier Value Chain Analysis will reveal where savings could come from, help assess the level of savings and identify how much flexibility a supplier has around priceMikes Butter example

MJStraight from Deloitte training pack any better examples ?