the (new) role of modern procurement · lower costs, and business model threats from upstarts in...

Procurement 2020

The (new) Role of Modern Procurement

PRI/200229/A | nv

Roberto Crippa

Verona, 14.03.20

Not the same thing!

2

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The process of

identifying and

obtaining goods

and services in the

most profitable way

for the organization

Procurement

The process of

identifying and

working with the

appropriate

suppliers

Sourcing

The process of

buying goods and

services from

suppliers

Purchasing

Sourcing defined

3

The institutional procurement process that continuously improves andre-evaluates the supply landscape of a company.

Is part of Supply Chain Network Design.

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Company’s spend assessment(What/where is bought?)

1

Total Cost Analysis(How much does it cost to provide neededgoods or services?)

3

Suitable Suppliers identification4

Sourcing strategy development(Where to buy, minimizing costs and risks?)

5

Supplier Negotiation(Products, service levels, prices,geographical coverage…)

6

(Renewed) Supplier Baseimplementation

7

Result Tracking8

Supply Market assessment(Who offers what?)

2

Purchasing defined

4

The organized

acquisition of goods and

services on behalf of the

buying entity, to ensure

that needed items are

obtained in a timely

manner and at a

reasonable cost.

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Key Tasks

buy goods/services that meet the specifications

create a stream of deliveries that ensuresgoods/services are available as needed

minimize the amount of cash invested in inventory

optimize the Total Cost of Acquisition/Total Lifecycle Cost

manage Supplier Relationships

Procurement: main business processes

5

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Operational

• Purchase Order Management

• Call –off Management

• Order retrieving & inspection

• Warehousing & Logistics

• Administration

Tactical

• Negotiation

• Contract Management

• Compliance Management

• Supplier Performance Mgmt

• Supplier communication

• Interaction with users

• Planning & Inventory Mgmt

• Spend Management

Strategic

• Stakeholders management

• Category strategy development

• Process optimization

• Team & skills development

• Supply Market screening

• Supplier Portfolio Management

• Supplier Selection

• Supplier Relationship Mgmt

Getting started…

6

The Modern Procurement Role

Why Supply Chain Management?

Supply Chain defined

7

The network of organizations

that are involved, trough

upstream and downstream

linkages, in the different

processes and activities that

produce value in the form of

products and services in the

hands of the ultimate

consumer

Supply chains are not simply linear chains:they are complex networks

network

upstream and downstream visibility

products and services

key concepts:

value to the customer

Source: Christopher M, Peck H, Building the Resilient Supply Chain, Int’l Journal of Logistics Management, vol. 15, No 2, 2004

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Behind every product…

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… a fit-for-purposeSupply Chain

… a Customer Value Propositionto be met

Bridging Innovation and Operations

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Innovation processes(New Product Development)

OfferedVariety

Operations processes(Supply Chain Management)

DeliveredVariety

CustomerSatisfaction

BusinessSustainability

The way Product (service) Variety is generated heavily influences the Operations capability to deliver Variety while achieving key Business Sustainability goals.

Innovations and Operations alignment is key for minimizing and managing supply chain complexity and risk

Source: Crippa R, Larghi L, Pero M, Sianesi A, The impact of new product introduction on supply chain ability to match supply and demand, JIEST, 2010

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What is a complex system?

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Edward Lorenz’s Water Wheel (Amsterdam, Nemo Museum)

A complex System is onewhose properties are not fullyexplained by an understandingof its component parts

relationship effects relevance

non-linearity in relationships

unpredictability

history debatable relevance

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X01]

More than complexity…

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We live in a VUCA Environment!

“Our world is an interconnected system straining under the burden of its own complexity”

(World Economic Forum)

Welcome to VUCA!

12

VUCA tries to capture the uncertain anddynamically changing situation of a militaryengagement where there is lack of information.VUCA is the realm of “unknown unknowns”.It was developed by the US military and describesand explains the increasingly chaotic world thathas developed after the end of the Second WorldWar when the US military found itself in situationlike Vietnam and the Gulf wars that challenged theconcepts of traditional warfare.

In a VUCA world, companies face increasingdemands from Customers they’ve never served withneeds they’ve never had to meet, relentlessproductivity pressure thanks to competitors withlower costs, and business model threats fromupstarts in new sectors.VUCA is the realm of shifting geo-politicallandscape; the rapid adoption of social, mobile, andcloud- based technologies; and the changingdemographics of Customers and employees.

In War In Business

Source: U.S. Army War College, 1991 Source: www.cfoinnovation.com

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Getting started…

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The Modern Procurement Role

Why Supply Chain Management?

Easier said than done…

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To compete effectively in the global marketplace, a firm

must have competent and strategically integrated

Procurement Organization.

Suppliers must have the capability

to meet the Company’s

strategic

priorities.

A crucial point

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Choosing the right Vendors is as importantas developing new Products

one of the key issues in current, complex Supply Chains

a cross-functional, multi-criteria, structured approach

a typical “Lifecycle” problem

The purchasing paradigm shift

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[PO

W01]

Purchasing

must become

Supply Management

Peter Kraljic

Purchase Price defined

17

The price at which

something is

actually purchased,

especially from the

point of view of the

purchaser

the price becomes the cost basis for calculating

gain or loss when selling the goods.

The bare cost of the good or service tobe purchased

Generally considered in the cost build-upcalculations

[FIN

01]

May include transportation costs, accordingTo the delivery (INCOTERMS) conditionsagreed between the Parties

Total Cost of Acquisition defined

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A managerial accounting concept that includes all the costs associated with buying goods, services, or assets

TCA is the net price plus other costs neededto purchase the item and get it to the point of use

Includes commissions, legal fees

Includes transportation costs andCustoms duties

Includes Preparation and Installationcosts

Excludes Training and System Integration

[FIN

01]

Total Lifecycle Cost defined

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Sum of all recurring and one-time (non-recurring) costs over the full life span or a specified period of a good, service, structure, or system.

All the costs are usually discounted and total to apresent-day value known as net present value (NPV).

Includes Total Cost of Acquisition (TCA)

Includes operating costs

Includes Maintenance and Upgrading

Includes salvage/disposal value at the endof ownership, or useful, life

[FIN

01]

Modern Procurement: the Ultimate Goal

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[ST

R02]

Purchase price FOB 1 supplier

factory

Purchase price - DDP Customer factory

•I/B Logistics•Customs•Duties & Taxes•Insurance

Inventory M’gmt.

costs

•Receiving•Storage•Handling•Inspection•Cost of capital

Inbound freight costs

Cost of Quality

•Line rejects•Factory failures•Field failures•Pro-active field recalls•Warranty costs

Purchase price - VMI basis

Development costs

•R&D support•Test support•Pilot support•Manufacturing

support•Supplier management

Total Lifecycle costs

Total Lifecycle Cost of Materials/Components

Remarks:VMI – Vendor Managed InventoryFOB – Free on board (…named port of shipment)DDP – Delivered duty paid (…named place of destination)

Look at Total Lifecycle Costs, not just Piece Part Purchase Price

Modern Procurement: the Cornerstones (1/2)

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Integration of Procurement in the End-to-End Value Chain Develop and grow long-term partnerships with key Suppliers. Monitor joint success

1

Integration of Procurement in Product Development and Large Projects

Involve Procurement at key stage gates of the product development process and early large scale projects to ensure cost efficiency

2

Procurement is Driver of Complexity Reduction and Standardization Initiatives

Procurement drives the efforts to reduce procurement andtransformation cost and to reduce offered variants

3

Modern Procurement: the Cornerstones (2/2)

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Establishment of Best-in-classSupplier Management

Involve Procurement since the very beginning of strategic initiatives in orderTo make Customer Value Proposition actionable

4

Development of External, or Intercompany,Procurement Alliances

Bundle procurement volume and Sourcing expertise with external alliance Partners to maximize procurement savings

5

Establishment of Tax Efficient Procurement Organizations

Develop Procurement Organization designed to optimize taxes and regulatory requirements on global basis

6

From Tactics to Strategy

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ProcurementPurchasing

Organizational structure Center-led

Tools & Technologies Business IntelligenceSC Visibility/collaboration

Risk Management Supply Continuityand Resilience

Focus Value BasedProcurement

Category/spend management Tight Price, Legal &Business coordination

Source-To-Pay process Integrated workflow

Skills and competencies Seize the “Big Picture”

Contract Management Linked to businessValue Proposition

Supplier Relationship ManagementSupply ChainPartnership

Scattered

Spreadsheets

Product safetyPrice

TransactionalPurchasing

Stand-aloneprocess

Manual, fragmented

“On The FieldExperience”

Purchasingtransaction

Tacticalrelationship

The required skill portfolio (1/2)

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Analyticalskills

Negotiationskills

Technicalknowledge

Businessknowledge

Knowledge

The required skill portfolio (2/2)

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• Learn to take the corporate plan and dissect it so as to understand how you could bring value to it

• Learn to write good, workable strategies, policies and processes

• Learn to give a reasoned argument

• Learn to give effective presentations

• Develop communication and interpersonal skills (e.g.: persuasion)

• Learn how to segment, target and position communication within the organization

• Learn what interests to the Board

• Learn how to impress and influence the Board

• Understand how to interpret messages from the Top

Knowledge

Relation

The Pillars

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Industry (Business) Clockspeed

Procurement Strategy

Customer Value Proposition

Customer Value Proposition defined

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A clear and credible expression of the value that the (potential) customer will get from buying one particular product or service.It is the cornerstone for defining a business strategy.

Business/Market segmentation(For which market is the Value Propositionbeing created ?)

Customer experience(What do Customers value most?)

Offering(Which products/services would best fitcustomer experience?)

Benefits(What are the benefits customers will derivefrom the offering?)

1

2

3

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Strategy and Customer Value Proposition

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No firm can compete successfully on all dimensions of customer value.A business strategy is about taking a market position with respect to the Customer Value Proposition

David Simchi-Levi

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At the Root of Supply Chain Strategies

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Sources:• Simchi-Levi D, Operations Rules: Delivering Customer Value Through Flexible Operations, MIT Press, 2010• MIT-PwC’s TruEconomy, A Research into European Supply Chains 2010-2011, Noordwijk, June 2nd, 2010

A Company’s Supply Chain Strategy is determined by the type of services it offers and the Value of various elements

of its Offering to the Customers

Supply Chain Strategy

Cost Efficient

Flexible Response

Innovation/Differentiation

Cost of Ownership

Brand/Corporate Image

Service

Relationship/Experience

Quality


Customer Value Proposition building blocks

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Innovation/Differentiation• Product functionalities• Technologies/processes• Aesthetics• Ergonomics• …

Brand/Corporate Image• Brand/Corporate notoriety• Brand identification• …

Cost of Ownership• Purchasing Price• Payment Terms• Operating Run Costs• Maintenance Costs• …

Quality• Quality in product/service• Quality in supporting processes (admin, delivery,…)• …

Service• Responsiveness of delivery/distribution• Reliability of delivery/distribution• “In full” delivery/distribution• …

Relationship/Experience• Lifestyle community • Collaboration in Engineering• Collaboration in SC processes• Comprehensiveness of supporting information• …

Customer Value Proposition: example (1/3)

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CVP : Business Segment “A” CVP : Business Segment “B”

The Customer Value Proposition structure (i.e. the relative relevance of its building blocks) may exhibit significant differences according to the Business Segment/Offering Type…

One size does not fil all.. (1/2)


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One size does not fil all.. (2/2)

CVP : Germany CVP : United Kingdom CVP : United States

CVP : Business Segment “A” (Overall)

…as well as according to different geographies.This can be influenced either by the Customer habits, either by the Market Share/perceived positioning.


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Demand and Sales Planning

Master Planning

Materials Planning

Nothing lasts forever

Every Competitive advantage is temporary, and its evolution is influenced by the Industry clockspeed.Likewise a Product, also the Customer Value Proposition has its own Lifecycle.

This has significant implications on the Supply Chain and SCM processes.

Relationship Cost ofownership

Service

Innovation

Quality

The Pillars

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The Clockspeed concept

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Fast Clockspeed Slow Clockspeed

In In

du

stry

Fruit Fly Galapagos Turtle

In n

atu

re

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Industry clockspeed: Products

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Products

Processes

Technologies

CostEfficiency

Functionalproducts

Time To Market,Responsiveness

Innovativeproducts

-

+

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Industry clockspeed: position along the SC

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Products

Processes

Technologies

-

+

Raw materials,Basic components

Sub-assemblies

Finished Goods

Services andadd-ons

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Industry clockspeed: shared technologies

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Products

Processes

Technologies

Demand

Inn

ova

tio

n

Ind

ust

ry “

B”

Demand

Inn

ova

tio

n

Ind

ust

ry “

A”

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The Pillars

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Procurement strategy defined

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The process of defining what, where, from whom and how to buy in order to best contribute to the fulfillment of the Organization's vision and business strategic objectives

Corporate strategies

Business strategies

Risk


It spans the whole product/service lifecycle, embracing the end-to-end Supply Chain

Resilience

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Corporate Strategy

Supplier Relationship Management7

6 Vendor Evaluation & Rating

5 Vendor Scouting

Supplier Portfolio Strategy4

Category Strategy3

The Reference Framework

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Procurement Strategy2

1

Ta

cti

ca

l L

eve

lS

tra

teg

ic L

eve

l

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The Key Procurement Processes

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ScoutingSpace

RatingScouting Evaluation

ScoutingList

Vendor List

SupplyApproval

PurchaseManagement

SupplySpecs

SupplyAgreements

The Procurement (main) Toolbox

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The Kralijc Matrix

Category Management

The Cross-Relationship Matrix

Spend Analysis

Paving Procurement Strategies

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Spend Analysis

StrategicSourcing

SupplierRationalization

CategoryManagement

PartsStandardization

& reuse

InventoryOptimization

• Disparate data sources

• Inaccurate coding/naming conventions

• Insufficient data manipulation capabilities

• Insufficient commodity expertise

• Insufficient time/resources availability

Pitfalls

Spend analysis defined

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The process of collecting, cleansing, classifying and analyzing expenditure data with the purpose of reducing procurement costs, improving efficiency and monitoring compliance

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Identify(map available Data Sources)

1

Cleanse(cleanse raw data)

3

Group(group Data along Suppliers)

4

Categorize(Set the relevant Spend Categories)

5

Analyze(Analyze Spend by concerned Categories)

6

Repeat(Keep Spend Analysis up-to-date)

7

Gather(gather and consolidate Data Sources)

2

Spend Analysis: Key Steps (1/2)

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IdentifyIdentify all the sources available for your spend data, from all of your departments, plants and business units. This includes accounts payable, general ledger, pCard, eProcurement systems, etc.

1

Source: Jaggaer

GatherGather and consolidate all of your spend data into one central database.This can be difficult if your data is in different formats, different languages anddifferent currencies.There are programs available specifically designed to accomplish this.

2

CleanseCleanse your data. This includes finding and correcting errors in descriptions andtransactions, as well as standardizing the spend data for easy viewing.

3

GroupGroup, or link, your Suppliers and Items for better supplier management.Purchases made from Supplier and/or Item aliases should all be grouped together,since they’re the same thing.

4

Spend Analysis: Key Steps (2/2)

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Source: Jaggaer

CategorizeCategorize your spend. Whether you use UNSPSC, eClass, or your own company-specificCategories, you need to be able to determine where your money is being spent.Office supplies, marketing travel, legal, direct and indirect spend should all becategorized appropriately.

5

AnalyzeAnalyze your spend data. Ensure that you have negotiated the best contract dealsper supplier now that all of your spend is identified per supplier. Ensure that all ofyour buyers are purchasing from preferred suppliers.Reduce the number of Suppliers per Category.

6

RepeatPerforming a spend analysis once is a great start to identifying savings, however you need tocontinually update your data to ensure that contract terms are being adhered to,that buyers are purchasing from preferred suppliers and that savings opportunities are being identified.

7


48

The Kralijc Matrix

Category Management


Spend Analysis

Category management defined

49

The organizational approach in which procurement is broken down into clusters of similar or related products, in order to manage them like Strategic Business Units

[SC

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Define categories1

Define the positioning of each category2

Assess current performances3

Set objectives/targets for each category4

Set (revise) category strategies5

Set specific tactics and action plans6

Implement action plans7

Category management

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Benefits

• Better value for money

• Standardized requirement in terms of specifications and purchasing authorization

• Better market watching and analysis

Requirements

• Ability to isolate sourcing categories whilst keeping coordination

• Ability to classify spend data to sourcing categories

• Skilled Procurement Personnel (Category Manager)

Making category management work

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Category Management

Supply MarketIntelligence

Sourcing Strategies

SRMPrograms

UNSPSC defined

52

A taxonomy of products and services for use in Enterprise Resource Planning, Sourcing and eCommerce.

www.unspsc.org

An open standard

A hierarchical tree structure

Supports end-to-end Supply ChainOptimization and collaboration processes,

as well as variety management

A practical business tool, responsiveto user needs

United Nations Standard Products and Services Code

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The UNSPSC hierarchy (1/3)

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Level Structure Example

L1 Segment

L2 Family

L3 Class

L4 Commodity

Tecniplast mainly makes use of the Level 3 UNSPSC hierarchy

31 Manufacturing Components & Supplies

3116 Hardware

311615 Screws

31161506 Sheet Metal Screws


54

[SC

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Key features

The UNSPSC Categories are unambiguous and mutually exclusive

Products appear in one, and only one, Category

There is a strict 1:n relationship between Level (n) and Level (n+1)

Products are grouped according to their dominant usage in the world Market

In case of need, new Category proposals can be submitted to the UNSPSC Organization


55

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The Segments structure

For End-use Products (Finished Goods), the suggestion is to make use of your own Product Line Structure

IndustrialEquipment(20-27)

RawMaterials

(10-15)

Componentsand Supplies

(30-41)

End-useProducts(42-60)

Services(70-94)

Company’s Product Lines

UNSPSC advantages and value

56

[SC

M02]

Automate gathering and analysis of procurement dynamics

Identify opportunities for strategic vendor relationships

Leverage volume for better pricing

Enable supply chain collaboration

The UNSPSC Classification supports proactive Category Management and Materials Planning

Control maverick spend and optimize the sourcing landscape

Control and optimize inventory through materials and supply rationalization

UNSPSC application: example

57

[SC

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http://product.item24.it


58

The Kralijc Matrix

Category Management


Spend Analysis

Kraljic Category Portfolio Matrix defined

59

A procurement management tool that supports the Category analysis and Category strategic decisions

Procurement Categories(Supply Market)

Spend relevance

Helps Companies to minimize the vulnerabilityof their supply chain while maximizing the

Company’s buying power.

Category (Supply Market)criticality

[SC

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Impact on Business strategy

The Kraljic Category Portfolio Matrix (1/5)

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Cat

ego

ry R

ele

van

ce

Lo

Hi

How relevant for the Company’s spend and Offering is the concerned Category?

Category Criticality Hi

How Critical is managing the concerned Category (Supply Market)?

LEVERAGE

• Leverage buying power

• Rationalize the Supply Base

• Optimize ordering lots

STRATEGIC

• Develop long-term relationships

• Mitigate SC Risk

• Evaluate “Make” options (if possible)

NON-CRITICAL

• Rationalize and standardize

• Monitor and/or optimize ordering

• Optimize inventory

BOTTLENECK


• Over-order when the item is available

• Look for ways to control Vendors


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Cat

ego

ry r

elev

ance

Category relevance

Spend relevance

Contribution to the Company’s Customer Value Proposition

How relevant is the concerned Category's spend within theCompany’s total Spend?

How much does the concerned Category contribute to the Customer Value Proposition?

[ME

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The Category RelevanceSp

end

Rel

evan

ce

Lo

Hi


How relevant for the Company’s spend and Offering is the concerned Category?

LEVERAGE STRATEGIC

NON-CRITICAL BOTTLENECK

The Kralijc Matric REL = a*SR + b*CC

SR = Spend RelevanceCC = Contribution to the Customer Value

Proposition

Where:0 <= a <= 10 <= b <= 1a + b = 1

[ME

T01]


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Category criticality

Category criticality

Competitiveness

Technological Content

Applicable Regulations

Access, Communication & Relationship

How competitive (i.e. fragmented) is the Sourcing Marketfor the concerned Category?

How strong is the intrinsic technological content for the concerned Category?

How complex, and binding, are the applicable (*) regulations for the concerned Category?(*) concerning the Company’s target applications

How difficult, complex, and cumbersome is the Supplier Relationship Management for theconcerned Category?

[ME

T01]


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The Category CriticalitySp

end

Rel

evan

ce

Lo

Hi


How Critical is managing the concerned Category (Supply Market)?

LEVERAGE STRATEGIC

NON-CRITICAL BOTTLENECK

The Kralijc Matric CRIT = a*CO + b*TE + c*RG + d*CR

CO = CompetitivenessTE = Technological ContentRG = Applicable RegulationsCR = Access, Communication, and

Relationships

Where:0 <= a <= 10 <= b <= 10 <= c <= 10 <= d <= 1a + b + c + d = 1

[ME

T01]

The Kraljic Category Portfolio Matrix

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[ST

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Cat

ego

ry R

ele

van

ce

Lo

Hi


Leverage Strategic

Non-Critical Bottleneck• Rationalize and standardize

• Monitor and/or optimize ordering

• Optimize inventory


• Over-order when the item is available

• Look for ways to control Vendors

• Develop long-term relationships


• Evaluate “Make” options (if possible)

• Leverage buying power


• Optimize ordering lots


66

The Kralijc Matrix

Category Management


Spend Analysis

The Cross-Relationship Matrix (1/3)

67

De

man

d D

ep

en

de

ncy

Lo

Hi

Supply Dependency Hi

How much is the Company depending from the Supplier?

BARNACLES

Demand-biased relationship

• Leverage strength• Rationalize the Supply

Base• Mitigate SC Risk

PALS

Mutual, strong relationship

• Exploit SC collaboration

STRANGERSMutual, weakrelationship


JAILERSSupply-biased relationship


How much is the Supplier depending from the Company’s concerned purchase?

[SC

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Demand DependencyD

em

and

De

pen

den

cy

Lo

Hi


BARNACLES PALS

STRANGERS JAILERS

The Cross-Relationship Matrix DDEP = a*OT + b*BT + c*DS

OT = Impact on the Supplier’s Overall Turnover

BT = Impact on the Supplier’s concerned Business Area Turnover

DS = Demand Stickiness Rate (difficulty for the Supplier in finding alternative Customers)

Where:0 <= a <= 10 <= b <= 10 <= c <= 1a + b + c = 1

How much is the Supplier depending from the Company?

[ME

T01]


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Supply DependencyD

eman

d D

epen

den

cy

Lo

Hi


How much is the Company depending from the Supplier?

BARNACLES PALS

STRANGERS JAILERS

The Cross-Relationship Matrix SDEP = a*IT + b*IS+ c*SS

IT = Impact on Turnover (Supply Chain Risk)

IS = Impact on the Company’s SpendSS = Supply Stickiness Rate (difficulty in

finding alternative Suppliers)

Where:0 <= a <= 10 <= b <= 10 <= c <= 1a + b + c = 1

[ME

T01]


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De

man

d D

ep

en

de

ncy

Lo

Hi


How much is the Company’s concerned purchase depending from the Supplier?

Barnacles Pals

Strangers Jailers

How much is the Supplier’s turnover depending from the Company’s concerned purchase?

Suppliers: 28Spend: 1.806 k€





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Relationship Strategy Guidelines

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De

man

d D

ep

en

de

ncy

Lo

Hi


BARNACLES PALS

STRANGERS JAILERS

First Choice Strategy

Second Choice Strategy

Putting Tools to Work

72

Supplier’s Role definition

Category Strategy set-up

Scouting, Evaluation & Rating

Vendor List set-up

Setting the Category Strategy

73

CategoryStrategy

• How is the concerned Category currentlyshaped?

• How the concerned Category impacts theCompany’s Business?

• What is the intended procurement goal forthe concerned Category?

Understanding of theCategory’s Role

Category StrategySet-up

• Facts & Figures• Positioning in the Karaljic Matrix• Procurement Mission• Current Supply Base structure

• How will the future state of the concernedCategory look like?

• What strategies should be put in place?• What is the course of action to achieve the

future state?

• Applicable Category strategies• Action Plan

[ST

R02]

Procurement Strategy Topics

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[ST

R02]

“Buy” technology portfolio landscape and

trends

What are the elements of the Customer Value proposition

Statement where Procurement Strategies should bring their

contribution, and how

What are the Procurement Categories one should focus on,

and how they are positioned within their lifecycle. Includes

the Supply Market landscape analysis and drives Category

Strategies

How Procurement Strategies will integrate and comply with

the Company’s financial goals (e.g. Cash-To-Cash Cycle and

Inventory Carrying Costs)

Where the required Goods and Services should be sourced,

including offshoring/nearshoring policies. In conjunction with

the above, this topic will drive Supplier Portfolio Strategies.

What are the best-fit SCM tools & processes, as well the

Organization Structure and skills required to fully accomplish

the above goals

What is the optimal Procurement Risk profile to comply with

the Enterprise Risk Management policy

Customer Value Proposition support

Sourcing guidelines

Financial Strategy support

Procurement Risk Management guidelines

Supporting Systems and planning process

landscape

Organization structure and skills

The Category Profile (1/2)

75

[ME

T01]

Category• Concerned (UNSPSC) Category• Reference Buyer and Materials Planner

Category at-a-glance• Current Spend and ABC statistics• Kraljic Matrix positioning• Supply Base outlook

Main impact on the Company’s Offering

Applicable Certifications

Facts & Figures• Category Spend Outlook• Category spend Outlook by Key Suppliers

The Category Profile (2/2)

76

[ME

T01]

Applicable Category Strategies• Network-related• Relationship-related• Specs-related• Cost-related

Action Plan• Action Item• Owner• Deadline


77




Vendor List set-up

The Soccer metaphor

78

Gaming Strategies…

…driving the Team set-up……and the Team bench.

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M02]

The Assessment Space (Vendor Profile) (1/4)

79

[SC

M02]

Prospective Core Missionwithin the Supply Chain

• Know How• Materials• Capacity• Competitiveness• Flexibility• Generic

Prospective Main Rolewithin the SCM process

ProspectiveSupplier Type

• Pure Subcontractor• Supplier/Subcontractor• Pure Supplier• Business Process Outsourcer• Generic

• Sole Source• Single Source• Main Source• Alternative Source• Ancillary Source• Generic

Concerned “in scope”Categories


80

• Know HowThe Supplier provides one, or more, technologies(or non-commercial-off-the-shelf productsembedding them) that are not available within theCompany, or beyond its current reach (includingQuality standards and specs).

• MaterialsThe Supplier provides one, or more, products thatare not available within the Company, or beyond itscurrent reach.From the technology perspective, internalmanufacturing is not an alternative.

• CompetitivenessThe Supplier provides manufacturing capacity thatthe Company can provide only at a higher TotalCost of Ownership.From the technology perspective, internalmanufacturing can be an alternative.

• CapacityThe Supplier provides manufacturing capacity formedium-to-long term volumes that are beyondCompany’s reach, or outside its Operation Strategicplans (i.e. Strategic Make vs. Buy). From thetechnology perspective, internal manufacturing canbe an alternative.

• FlexibilityThe Supplier provides manufacturing capacity thatis needed to compensate short-to-medium termvolume fluctuations (i.e. Tactical Make vs. Buy).From the technology perspective, internalmanufacturing is an alternative.

• GenericThis is the default Value for supporting internal V-Tool mechanics, or simplified Evaluations. Thesuggestion is to minimize its intentional use.

Core MissionThe strategic “reason for being” of the Supplier within the end-to-end supply chain

[ME

T01]


81

• Sole Source

The Supplier is the only one available, or reachable,for the concerned goods, or services.

• Single SourceThe Supplier is the only one providing theconcerned procurement, or the one providing thevast majority of the concerned goods, or services,procured.

• Main SourceThe Supplier provides a significant portion (i.e. 40%< P < 90%) of the concerned goods, or services,procured.

• Alternative SourceThe Supplier provides an appreciable minority (i.e.10% < P <= 40%) of the concerned goods, orservices, procured.

• Ancillary SourceThe Supplier provides manufacturing capacity thatis needed to compensate short-to-medium termvolume fluctuations (i.e. Tactical Make vs. Buy).


Supplier TypeThe nature of the Supply Relationship towards the Company

[ME

T01]


82

• Pure SubcontractorThe Supplier provides manufacturing capacity fortransforming materials provided by the Companyfor more than 90% of the materials value content.

• Supplier/SubcontractorThe Supplier provides manufacturing capacity fortransforming materials provided by the Companyfor less than, or equal to 90% of the materials valuecontent. The Supplier itself provides the rest of thematerials.

• Pure SupplierThe Supplier provides materials for more than 90%of the procurement value and does not receive anymaterial form the Company. The rest of theprocurement value (if any) consists of non-manufacturing related services (e.g. delivery,distribution)

• Business Process OutsourcerThe Supplier provides materials for less than, orequal to 90% of procurement value, and does notreceive any material form the Company. The rest ofthe procurement value (if any) consists of value-added, non-manufacturing related services (e.g.postponement, replenishment, vendor managedinventory).


Supplier Main RoleThe way the Supplier mainly operates in the end-to-end SCM process

[ME

T01]

Mapping the Vendor Profile

83

More on Subcontracting

[ME

T01]

Operation 1 Operation 2

PHS –Peripheral Subcontracting

The Subcontractor’s activity is somehow decoupled from the internal manufacturing process. Appreciable buffer inventories are kept.

The Subcontractor can be viewed as a normal Supplier

Buf Buf

Operation 3

Internal Mfg.

Subcontr. Mfg.

Operation 1 Operation 3Operation 2

The Subcontractor’s activity is tightly related to the internal manufacturing process. No, or limited buffer inventories are kept.

The Subcontractor can be viewed as an Internal Manufacturing Shop

Buf BufInternal Mfg.

Subcontr. Mfg.

IPS –In process Subcontracting


84




Vendor List set-up

Four key definitions

85

[SC

M02]

The process of identifying potential Suppliers, starting from a clear statement of strategic, or specific, needs SCOUTING

The process of qualifying current and prospective Suppliers by means of a structured and multi-dimensional assessmentEVALUATION

The result of a formal Vendor assessment process, meant to encourage high standards in the Vendor-to-Customer relationshipRATING

A structured and certified list of Vendors assessed in terms of their capability to support the Company’s Value Proposition fulfillment

VENDOR LIST

A multi-stage, integrated process

86

[SC

M02]

Needs definitionand goals setting

Evaluation

Scouting

Selection

Rating

• Unclear needs

• Lacking, or unclear specs

• Narrow scouting space

• Info and data gathering

• Lack of methodologies

• Missing info and/or data

• Biased selection (gut feeling)

• Late involvement of

Procurement

• Lack of methodologies

• Missing info and/or data

Major Pitfalls

The Vendor Assessment Framework

87

[SC

M02]

VendorScouting

VendorEvaluation

VendorList

• 1st Choice• 2nd Choice• Rejected

ScoutingFile

• Committed• Preferred• Approved• Rejected • Green List

• Gray List• Red List• Black List

• Category

• Core Mission

• Supplier Type

• SCM Main Role

VendorRating

QualifiedSuppliers

Assessment Space

EvaluationFile

The Assessment dimensions (1/2)

88

[SC

M02]

May be used for:• Supplier Rating purposes• Tendering purposes

Linked to:• Strategic Network Design• Enterprise Risk Management

Economics & Financials

Capabilities

Business processes & practices

Performances

Behavior, Relationships & Culture

Risk Exposure & Management

The Assessment dimensions (2/2)

89

[SC

M02]

Economics & FinancialsThis dimension assesses the Vendor’s capability of generating sound, balanced and sustainable business results.Purpose: secure a good Supply Base robustness from the economic and financial perspectives.

CapabilitiesThis dimension assesses the Vendor’s Innovation and Operations capabilities in terms of expertise, workforce, manufacturing processes and assets.Purpose: ensure that the assigned supply goals are in reach from a technical perspective.

Business Processes and PracticesThis dimension assesses the Vendor’s Organization robustness, as well as Operations Management and Supply Chain collaboration maturity.Purpose: ensure that the assigned supply goals are in reach from a process management perspective.

PerformancesThis dimension assesses the Vendor’s proven capability of delivering the requested supplies with the appropriate quality standards, at the appropriate time, and at a competitive Total Cost of Ownership.Purpose: ensure that the assigned supply goals achieved, or potentially achievable.

Behavior, Relationships & CultureThis dimension assesses the Vendor’s way of running its business (ethics, reputation, relationships) and fit with the Company’s culture and values.Purpose: ensure that the business partnership is based on sound ethical and cultural groundings.

Risk Exposure & ManagementThis dimension assesses the Vendor’s exposure to business, socio-political, and natural risks, as well as the appropriateness of

the countermeasures put in place.Purpose: ensure that procurement risks (supply continuity on top) are duly managed and mitigated.

Vendor Assessment

90

[ME

T01]

Economics & Financials

Capabilities

Business Processes & Practices

Performances

Behavior, Relationships & Culture

Risk Exposure & Management

VE = a*EF + b*CA + c*BP + d*PE+ e*RC + f*RM

EF = Economics & FinancialsCA = CapabilitiesBP = Business Processes & PracticesPE = PerformancesRC = Behavior, Relationship & CultureRM = Risk Exposure & Management

Where:0 <= a <= 10 <= b <= 10 <= c <= 10 <= d <= 10 <= e <= 10 <= f <= 1a + b + c +d +e +f = 1

Vendor Scouting defined

91

The process of identifying potential Suppliers, starting from a clear statement of strategic, or specific, needs

Requires the preliminary definition of thedesired Supplier Profile, and/or technical& business specs

Vendor Scouting is a key attribution of theProcurement Organization, and is part of the

Category Management process.

Can be active, or passive

[SC

M02]

Precedes the Vendor Evaluation and Rating processes

Requires a structured approach

Vendor Scouting: preliminary to-do list

92

[SC

M02]

Approach choice• Active Scouting• Passive Scouting

Category status evaluation• Kraljic Matrix• Cross-relationship Matrix

Scouting target setting• Need identification• Suppler Profile creation

Scouting planning• Required information• Information sources• Data processing criteria• Deliverable (Long List) structure definition

Supplier Profile: example (1/2)

93

[SC

M02]

Scouting scope• Concerned Categories• Required additional services• Estimated volumes involved

Scouting space• Listed Suppliers• New Suppliers

Supplier Identikit• Positioning within the Supply Chain Network• Geographical location• Economics and size

Business relationships• Upstream Business Relationships• Downstream Business Relationships• Vendor/Buyer Business Relationships

Supplier Profile: example (2/2)

94

[SC

M02]

Processes and performances• Manufacturing and Quality capabilities• Logistics capabilities• Operations Maturity level• Supply Chain performances

RemarkThe Supplier Profile level of detail may vary according to:• The Scouting scope• The Scouting space type

The Vendor Scouting Outcome

95

The result of a

preliminary and formal

Vendor assessment on

their potential capability

of providing the

concerned Category’s

goods, or services

• aims at setting a

judgement of the

Supplier in terms of its

capability to be part of

the Supply Base with

regards to the

concerned Categories.

• supports a robust

Supply Chain strategic

design since its early

steps

Category Core Mission Supplier Type Supplier Role

Assessment Space

[SC

M02]

Vendor Evaluation defined

96

The process of qualifying current and prospective Suppliers by means of a structured and multi-dimensional assessment

Supports a robust Supply Chain strategic designContributes to Supply Chain Risk Management

Quantitative and qualitative criteria can be included

[SC

M02]

Requires a structured approach (Assessment dimensions, and criteria)

Linked to the specific Supplier’sRole (Assessment Space) within the Supply Base (Supplied Categories, Core Mission,

Supplier Type, and Main Role)

The Vendor Evaluation Outcome

97

The result of a

comprehensive and

formal Vendor

assessment on their

capability of providing

the concerned

Category’s goods, or

services

• aims at setting a

judgement of the

Supplier in terms of its

capability to play a

given role in the Supply

Base with regards to

the concerned

Categories.

• supports a robust

Supply Chain strategic

design

• contributes to

appropriately managing

Supply Chain Risks

[SC

M02]

Category Core Mission Supplier Type Supplier Role

Assessment Space

Vendor Rating defined

98

The result of a formal Vendor assessment process, meant to encourage high standards in the Vendor-to-Customer relationship.

Applied to current Suppliers

Helps minimizing judgement subjectivitySupports continuous improvement

Must be coherently linked to Vendor Evaluation

Could be numeric, or Likert-type scale

[SC

M02]

Requires the appropriate definition of the matching criteria between the Evaluation and Rating scales

Requires a structured approach(rating dimensions, and criteria)

The Vendor Rating Outcome (1/3)

99

The result of a

comprehensive and

formal Vendor

assessment process,

meant to encourage high

standards in the Vendor-

to-Customer relationship

• aims at setting, and

systematically revising,

the Vendor overall

adequacy for the

Company’s Operations,

and ultimate business

goals.

• complements the

Evaluation

• supports the continuous

improvement process

entailing the Supply

Side

[SC

M02]

(to be continued)

S Category Core Mission Supplier Type Supplier Role

Assessment Space

The Vendor Rating Outcome (2/3)

100

• makes use of all

information available

(no matter the

Assessment Spaces)

[SC

M02]

(follows)

The Vendor Rating outcome (3/3)

101

Non-Relationship

Grade

[SC

M02]


102




Vendor List set-up

Vendor List defined

103

A structured and

certified list of Vendors

assessed in terms of

their capability to

support the Company’s

Customer Value

Proposition fulfillment.

Structured‐ Category‐ Supply Chain Core mission and role‐ Supplier Type

Vendor List is a cornerstone asset ofSupply Chain Management and Procurement

Strategy and Tactics.

[SC

M02]

Certified‐ Vendor Evaluation criteria‐ Vendor Rating criteria

Systematically updated

The Vendor List (Supplier Special Lists)

104

Supplier Special Lists are strictly related to the Vendor

Rating Exercise.

• Green Listed Suppliers are the Procurement’s most

valuable asset

• Red Listed Suppliers need to be addressed by the

Procurement Risk Management program

• Black Listed Suppliers are to be banned from any kind of

business relationship

• Gray Listed Suppliers can be used in an opportunistic

fashion

Green and Gray Listed Suppliers form the “Approved”

Supply Base

Preferred Suppliers (Green-Listed)Suppliers with superior performances, capabilities,

and/or Company's fit.

Procurement strategies should be directed in their

favor.

At Risk Suppliers (Red-Listed)Suppliers with poor performances, capabilities,

and/or Company's fit, but currently not

replaceable/not yet replaced.

Procurement strategies should limit as much as

possible their use.

Ongoing replacement activities.

Banned Suppliers (Black-Listed)Suppliers with unacceptable performances,

capabilities, and/or Company's fit.

Procurement strategies prohibit their future use.

[SC

M02]

Commingling The Tiles

105

[SC

M02]

KraljicMatrix

Category Portfolio & RelationshipAnalysis

CrossRelationship

Matrix

CategoryProfile

Category Strategies

supports

iter

ate

drives

ScoutingProfile

Vendor Scouting

ScoutingAssessment

SupplierProfile

Vendor Evaluation & Rating

AdvancedVendor

Evaluationprecedes

VendorList(s) determines

Finance and Procurement

106

Procurement Trade-offs

A simple maths

A simple maths

107

Revenues

Procurement Costs

Oth. Oper. Costs

Gross Margin

(+)

(-)

(-)

100,0

60,0

20,0

20,0

130,0

78,0

26,0

26,0

100,0

54,0

20,0

26,0

+30%

+30%

-10%

[FIN

01]

Finance and Procurement

108

Procurement Trade-offs

A simple maths

Cash-To-Cash Cycle defined

109

The length of time (in days) that it takes to a company to convert resource inputs into Cash Flow

How quickly a company can convert its products into cash through sales.

The shorter the cycle, the less time capital is tied upin the business process, and thus

the better for the company's bottom line

C2C = DIO + DSO - DPO

C2C = Cash-To-Cash CycleDIO = Days of Inventory On HandDSO = Days Sales OutstandingDPO = Days Payable Outstanding

[FIN

01]

Improving C2C: the Procurement contribution

110

[FIN

01]

C2C

Days InventoryOn Hand

Days SalesOutstanding

Days PayableOutstanding

+

-

+

SCM influence on Cash-To-Cash Cycle Lo Me Hi

Key

• Reduce Purchased Goods Inventory• Reduce Obsolescent Inventory• Outsource Inventory at Supplier’s Premises

• Increase Service Level (trough Materials availability)

• Improve Payment Terms conditions• Establish Supply Chain Collaboration “Rules of the Game”

111

Trade-Offs: financial evaluation

Payment

Terms

Critical

Mass

Inventory

Price

Cash-To-Cash Cycle Working Capital Cost Of Goods Sold. .

Payment Terms Critical Mass

Price Critical Mass

Payment Terms Inventory

Payment Terms Price

C2C WC COGS

vs.

The Payment Terms Effect

112

[FIN

01]

PTB = WACC / FYD * PT

NYS = EYS * (1 – PTB)

Where:

PTB = Payment Terms Benefit

WACC = Weighted Average Cost of Capital

FYD = Fiscal Year Days

PT = Payment Terms (days)

NYS = Net Yearly Spend (including the Payment Terms Effect)

EYS = (Estimated) Yearly Spend

The Payment Terms Effect measures how much Payment Terms

affect the Total Cost of Acquisition

Computing the Payment Terms effect

113

[FIN

01]

WACC / FY days * P.T.1

2% / 365 * 60 = 0,33%

YPV * (100% - PTB)

500.000 * (100% - 0,33%) = 498.356,16

Example calculation

What benefit brings shifting Payment Terms from 60 to 90 days?

The Financial benefit is 821,92 EUR/Year

Trading Payment Terms with Inventory

114

[FIN

01]

Inventory red. * ICC

20.000 * 4% = 800

PT2 = PT1 – (365*IRB) / (WACC*SPEND)

90 - (365*800) / (2%* 500.000) = 61

Example calculation

What are the Payment Terms that compensate an Inventory reduction?

Shifting Payment Terms

from 90 to 60 days

compensates an

Inventory Reduction of

20.000 EUR

Trading Payment Terms with Discount

115

[FIN

01]

Discount Effect

500.000 * 1% = 5.000

Net Yearly Spend with new conditions

(500.000 – 5.000) * (100% - 0,33%) = 493.372,60

Example calculation

Is it convenient to trade 1% Price Discount vs. 30 days Payment Terms delay?

The new Purchase

Conditions (P.T. +

Discount) bring a

benefit of 4.162 EUR/Year

Takeaways

116

Challenges for today’s Procurement

117

[SC

M02]

How to realize sustainable margin improvement and cost reduction to maintain competitive advantage?

How to develop high-performing processes that drive growth in today’s economy?

How to balance risk and growth in a fast evolving innovation driven environment?

How to realize and sustain value from mergers, acquisitions and Joint Ventures?

How to increase revenue and profitability through enhanced customer value?

How to increase shareholder value through sustainable cost efficiency measures?

Business

What exactly is my spend profile and are there opportunities for further savings ?

How do I realize most value from the relationship with Suppliers?

What is the best structure for tax optimised procurement?

How do I achieve optimal contract compliance in my organization?

Have I realized the maximum benefits from the post-merger integration?

What are my priorities and which steps do I have to take to achieve maximum results?

What is the most suitable organization structure?

How can my Company ensure that identified procurement savings are sustainable?

Procurement

The common law of business balance

118

[PO

W01]

“It’s unwise to pay too much, but it’s worse to pay too little. When you pay too much, you lose a little money — that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot — it can’t be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that you will have enough to pay for something better.

John Ruskin

The Law of the Instrument

119

[PO

W01]

If all you haveis a hammer, everything looks like a nail

Abraham Maslow

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