the purchasing highway: under construction

The Purchasing Highway: Under Construction

Achieving supply chain efficiency through robust commodity strategies

Mary Alice Kuhn, C.P.M.Manager-Strategic Sourcing & Design

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Timken at a glance

Technical centers

Manufacturing facilities

Sales offices

$4.5 billion sales 26,000 associates in 27

countries Manufacturing plants:

– 54 bearing– 12 joint-venture

bearing– 12 steel

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Timken at a glance

Automotive35%

Steel27%

Industrial38%

Fortune 500 Forbes Platinum 400 –

America’s Best Big Companies in 2005

Forbes Global 2000 Named one of the

“100 Best Corporate Citizens for 2004” by Business Ethics magazine

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Timken at a glance

(a) Company estimates, Freedonia Group and external financial reports.

Timken: #3 Global Bearing #1 North American

Bearing #1 Global Tapered

Bearing #2 Global Needle Bearing #2 Global Industrial

Bearing Aftermarket

Global bearing market - $25 Billion(a)

NTN8%

Other30%

NSK10%

Koyo8%

INA-FAG16%

SKF17%

Timken11%

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Supply Chain Complexity

Customer

Customer

Customer

Customer

Customer

DistributionCenter

Assembly Plant

Steel Plant

Supplier

Component Plant

Two-lane highways…

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Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier Supplier

Comp Plant

Assy, Comp Plant

Assy, Comp Plant

Tier 1

Tier 1

Tier 1

Tier 1

Customer

Customer

Customer

Customer

Customer

Customer

Customer


…become four and six-lane interstates

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“Competition is no longer company to company. It’s supply chain to supply chain.”

Sr. Vice President-Supply Chain Management

Cessna Aircraft Company

The Purchasing Highway: Under Construction

Achieving supply chain efficiency through robust commodity strategies

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Move away from buying parts (go fetch) Embrace long-term thinking Institute KPI other than price reduction Integrate Purchasing in Supply Chain; Break

down Supply Chain silos Elevate professional development Shorten time to productivity; improve cultural

assimilation

Objectives

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Learn about and understand available practices related to creating and implementing strategies

Understand how to link business strategies to Purchasing strategies

How to connect strategies to reality (over time)

How to change mentalities from tactical to strategic

KPIs for current and future measurement

Benchmarking

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Industrial Customers Automotive Customers Industry-specific organizations: ISM (Institute for Supply Management), Corporate Strategy Board, Procurement Strategy Board Academia: Eli Broad School of Management – U of Michigan, PSU, etc. Consultants Trade publications, internet Key/strategic suppliers Research firms: CAPS (Center for Advanced Purchasing Studies)

Candidate List

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Tremendous amount of information: Many articles, websites, etc. – no documented process of “how to” develop a strategic process resulting in a commodity strategy; company spec’d

There is no rule book/play book “How to” needs to be adaptable to “what”

“How to” becomes SOP (standard operating procedure)

SOP example: “What” > Who are the leaders? Target

companies, equipment manufacturers, suppliers, customers, academia/best in class > Line of questioning based on specific process that creates “what” > Contact & dialogue > Apply learnings to commodity strategy in conjunction with business & market analysis

To get cost out of “what” CM needs to be teacher & facilitator to share practices with supplier

Findings ~ general

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Every commodity: TCO analysis High emphasis on cross functional team ownership Strategic plans – at least 5 years out with specific

data on spend, supply base, key processes, resource process maps, KPIs, objectives

Rationalized supply base; more time spent on key suppliers and less time on poor performers

Long term agreements covering 80%+ of spend Supplier relationship management, emphasis on L6S,

VAVE Aligned staffs to support transactional to strategic

work Supplier integration – advisory boards, conferences,

trust, focus on future (not past)

Findings ~ general

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Current Steps in Sourcing

Identify Select CertifyEvaluate ManageBusiness Need

?What is it?

Who can make it?

How consistent can they make it?

Pick 1 (or 2)

PPAP, approval

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Value to the business

Time

Create aCompetitiveAdvantage

Supply base value opportunities

What does this mean?

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Supply Base Rationalization & Relationship Management: Develop supplier strategies, categorize and establish appropriate relationships

Process Adherence: Develop and document standard operating procedures to integrate sourcing processes into an end-to-end supply chain

Data assessibility: Robust information systems to enable immediate access to data for analysis and decision making (ONE) as well as provide data visibility between customer~Timken~supply base

Professional Development: Create an associate community reflective of current talent pool and future needs via skills assessments, clearly defined roles & responsibilities; provide training to close gaps; offer to supply base

Strategies

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The Strategic Sourcing Council Process is the Framework for Development and Implementation of Robust Commodity Strategies

Analysis & Decision Making Manage & Measure

Relationship Structure & ContractBusiness Need Transition &

Implementation Strategy Planning (Profile)

Council Objectives:1) Resource allocation and accountability; Alignment2) Process management (adherence to SOPs)3) Timely implementation5) Risk mitigation6) Profitable success

Council Composition:- Each commodity has at least 2 executive sponsors of which 1 is the GM-Purchasing-Indirect, Direct/Auto or Direct/Ind + business unit front end and/or manufacturing director/VP- Each commodity has a cross functional team of which the owner(s) of the resource(s) are decision makers (“gatekeepers”)

Decision making process:- Executive sponsors and gatekeepers have voting priviledges. When there is not consensus or a “tie”, the executive sponsors have final decision.

1 2 3 4 5

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“Best-in-Class” Steps in Sourcing



Implementation Strategy

Planning (Profile)

Commodity Understanding

Supply Market Analysis

Business Understanding

OBJECTIVE OF PROFILE PLANNING STEP:-Systematic process-Executive consensus-Clear direction; rationale-Less “firefighting” (because of better planning and understanding of the supply base’s capabilities & capacities)

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Commodity UnderstandingWhat is it we want to buy?•Specs - relevant, market appropriate, competition’s spec•Raw material - availability, source, Timken/customer directed•Manufacture - process, machines, technology•Product – order frequency, inventory levels, supply chain map/path•Current – source, history, OTD, etc•Application – how is part used, where, who




Planning (Profile)




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Supply Market AnalysisWho makes up the supply base and what are the trends?•Location-Ease of doing business, location of sub contractors & material source, length of supply chain•Capability, Capacity-development & investment requirements•Quality processes-minimum requirements•Technology-state of art?•Market share, customer base, competitors•Cost drivers, cost structure




Planning (Profile)




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Business UnderstandingWhat is Timken’s supply chain stream and vision to get to the marketplace?•Status – growth or receding, life expectancy, market price•Technical – substitutions, replacements,•Competition – what are they doing? Make or buy? Where is source?•Goals – history of use, main drivers, current/future scenarios•Supply base – internal, external, who, capability, capacity, core competency, contract obligations




Planning (Profile)




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Purchasing measures

Current• Price downs to plant level verification

Future•Total Cost of Ownership (TCO)

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Purchase cost

Internal company costs

Joint supplier/customer costs

TCO

+

+

=

Source: McKinsey Supply Management Practice

Purchaseprice

Transportation Warehousing

Inventorycarrying costs

Factory yield/ process efficiency

Purchasingadministration

Damagedfield product

Productioncapacity

Expediting

Specifications

R&D

Operating costs

Maintenance costs

Inventory management costs

Set-up costs

Total Cost of Ownership (TCO)

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Total Cost of Ownership (TCO)




Planning (Profile)




– Cost drivers and related factors, sensitivity to change

– Spend management over time• Buying strategy (hand-to-mouth,

buy to requirements, forward buying, life-of-product, JIT, etc.)

• Implementation strategy (hedging, spot buy, contract/PO basis, multi-year, capacity, life of product, etc.)

– Estimated TCO vs Actual

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Purchasing measures

Current• Price downs to plant level verification

Future ~ TCO ~ identify cost drivers• Price downs • Cost of quality• Cost avoidance• Customer satisfaction• Inventory levels• OTD• Supply chain cycle time reduction•Etc.

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Cost Drivers

Cost drivers were identified based on:> survey analysis on buyers and suppliers> industry best practices

Apart from “piece price”, the most important cost drivers were found to be:> Quality> Supplier reliability and capacity> Logistics, Warehousing, Transportation> Transaction costs

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> Subjective (Choose from 1-5; 1=poor, 5=excellent)> Access to TSN: Complete/restricted/No access;Accordingly a 5/3/1, respectively!> EDI/ERS capability: a yes/no answer; hence

excellent/poor ; i.e. 5/1 respectively> Back office enterprise system availability: level of

ERP applications, access to “knowledge”; value-added> Ease of payment terms: Do you want payment in

USD? Is payment in USD? Yes (4,5); No (1/2/3, based on strength of dollar! Refer purchasing training), payment terms in days (30- 90), technical expertise of suppliers aligned to Timken technologies

> How much is the quality control being applied real time (measured from Rapid plant assessment tool)

Transaction Costs

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Preparation for the Trip

Benchmark – internally and externally Identify gaps; Prioritize needs Establish framework: SOPs, guidelines, common

terminology, etc. Cross-functionality and executive sponsorship –

purchasing doesn’t own the supply chain or the supplier or the problems associated with the supplier

Set milestones and achieve the dates Balance - short and long term activities (put out fires

while establishing a fire prevention plan)

Review YOUR construction plans:

1)Something you heard you will apply immediately in your work, and

2) An “a-ha!”

the purchasing highway: under construction

Business

supplier strategies

supplier findings

supply management

supply chain efficiency

supply chain silos

supply chainbreak

supply basemore time

business strategies