sourcing slide 1 © the delos partnership 2005 supplier relationship management module 3 –...

Sourcing Slide 1 © The Delos Partnership 2005

Supplier Relationship Management Supplier Relationship Management Module 3 – Sourcing / Supplier Management Process

• Supply Planning for the future• Internal & External Challenges • Improved Supply Strategy• Improved Sourcing Process• Six Sigma and Lean Suppliers


Supply Side Planning is dedicated to preparing the future;

• Current Year – Delivery & the starting point for analysis / assessment for the future

• Next Three Years – Current / +1 Year / +2 Years• Purchasing Strategy, Focus & Priorities for the Current Year• What needs to be done in the current year to prepare for next year • Purchasing Strategy for next year • Plans in the current and next year for 2 years time

• Preparing the Supply Side future is made up of five key elements;• Supply and Purchasing People - Strategy and Education• Demand & Innovation Alignment (S&OP – IEP) • Manufacturing, Facilities and Process Alignment (including ERP)• Quality First & H.S.E. • Supply Chain, Procurement & Finance Integration

Supply Side Planning Approach Supply Side Planning Supply Side Planning


Internal Business Challenges

• Pressure for short term savings / fast results

• Demanding Customers

• No / Limited Resources

• Lack of Know-How & Deal Closing

• Sole / Single Source Approvals

• Maverick Spenders (CEO downwards)

• Interference - Roadblocks - Resistance

• No / Limited Budget

External Supply Challenges

Cost Up

• Company Reputation / Perception

• Suppliers Strategy and Penetration

• Lengthening Supply Chains

• Shortages

• Reluctance to engage in Supply Chain Mgt.

• Competition

• Regulation

Supply Side Key ChallengesSupply Side Key Challenges


ROCEROCE

ProfitProfit CapitalCapital

SalesSales CostsCosts

MaterialsMaterials LabourLabour OverheadOverhead

FixedFixed CurrentCurrent

InventoryInventory CreditorsCreditors DebtorsDebtorsProjectsProjects

SUPPLIER MANAGEMENT FOCUS

Supplier ROCE Focus Supplier ROCE Focus


Scenario1. Product A2. Product B3. Service C 4. Service D5. Supplier E

Risk Map Key Severity

Likelihood

Major

Medium

Low

Minimal

Medium Priority

High Priority

Low Priority Medium Priority

1

4

3

2

5

Supply Risk Map – Month YTD Supply Risk Map – Month YTD

Major Risks - Commentary Example

Risk Focus is on single source suppliers & increasing energy costs

Minimal Low Medium Major


Commentary Example – Costs and Cash are ahead of prior year. Improvement projects underway

2003 2004 2005 2006 2007 2008 2004 - 2008

£m £m £m £m £m £m £m

000

0 0 0 0 0 0 0

% #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!£m 0

Raw Materials cost £mPackaging £mProduct Testing £mLogistics £mPeople Costs £mLicencing & Royalities £m

% #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!£m

Raw Materials cost £mPackaging £mProduct Testing £mLogistics £mPeople Costs £mLicencing & Royalities £m

Sales & Marketing Sales & Marketing £mGeneral Admin General Admin £m

£m 0 0 0 0 0 0 0

SGA

COSTS TOTAL

SALES TOTAL

ManufacturingExisting Market

Product and Services

Manufacturing Total

R&DUnder Development and Pipeline

Development

R&D Total

BUSINESS COST ANALYSIS

Sales

Overall BusinessRoyaltiesMajor New Development Product or Services

© The Delos Partnership 2005

Supply Cost & Cash Focus - YTD Supply Cost & Cash Focus - YTD


Cost & Cash

Business A or Product A

Business B or Product B

Business C or Product C

Past Month YTD

Current Month YTD

Past Month YTD

Current Month YTD

Past Month YTD

Current Month YTD

% Variable Cost/Sales 60% 59% 56% 56% 64% 63%

% Fixed Cost/Sales 34% 35% 35% 34% 33% 34%

Raw Materials Inventory (days or €)

12 12 23 22 23 17

Creditor Days 51 51 74 71 55 55

Cost of Non Quality € (RFTQ100%OTIF) 100,00 15,000 7,000 4,000 25,000 35,000

Commentary Example Month on month improving for both Cost & Cash but % costs on sales far too

high

Cost & Cash K.P.I.’s Cost & Cash K.P.I.’s


Cost ElementBusiness A or Product A


Business C or Product C

Group

Down • Chemical A down • Photocopier Charges • Metal price down

Opportunities• RFQ for Alternative sources• Second sourcing (cost avoidance)

• Energy usage• Third party suppliers • Consignment or VMI

• Packaging • Car Hire

• Legal Fees • Logistics• Warehouses•Travel

Hits • Energy • Supplier Stock Out - Strike • Raw Materials Price increase

•

Threats

• Oil price at $60/barrel• Gas/Oil/Electricity Impact• Supply (Insolvency)• More increases

• Oil price at $60/barrel• Energy Costs • Feedstock prices

• China supply • Energy prices

Commentary Example - If $60 Oil maintained major cost hit will result on Energy, Feedstocks & Freight

Cost OverviewCost Overview


Savings Category Business A Product A

Business B Product B

Business C Product C

Group Total

Finished Products – Toll Conversions

Raw Materials & Consumables

Packaging

Capital, Engineering, MRO

Energy & Utilities

Logistics (Warehouse & Freight)

Technical & HSE

Goods & Services

People

Cash Improvement

TOTAL

Current Year Cost Savings Goal

Net Savings – Month YTD

Commentary Example Cost savings are not being properly reported by Business C

Cost – Savings Cost – Savings


Supply Performance Measurement

Business A or Product

A


Business C

or Product C

RFTQ100%OTIFNot being reported by

suppliers Not being reported by

suppliersNot being reported by

suppliers

Supplier Lead Time (Calendar days) Has not been negotiated & therefore not part of supplier service level

performance KPI’s

Vendor Managed Inventory / Forecasts

Supply Side Inventory Reduction Programme in place across all businesses

Total Net Value DeliveredNo system in place to track net total value (Total net cost). No data on

savings achieved YTD from each business.

Supplier Schedule Achievement No tracking system in place today

On Time New ProductsNo system to record/report supplier led new products and innovation

value.

Business Supply/Procurement Reporting

No reports being made/ sent by the businesses. Only Business A tracking system exists/seen.

Commentary Example The right supply performance measures are still

not in place

Supply – Performance MeasuresSupply – Performance Measures


P2P KPI America Centre Europe Centre Asia Centre Total / Comment

Invoices Received (last 12 months)

95,000 (12m Trend is

Up)

150,000 (12m Trend

is Down

110,000 (12m Trend is

Up)355, 000

Matched 1st Time (Current Month)

95% (88% prior

month)

86% (84% prior

month)

71% (61% prior

month)

No PO, Wrong Price, Quantity

variance

Creditor Days

46 – Category A

77 – Category B

56 – Category C

31 – Category A

45 – Category B

70 – Category C

90 – Category A

100 – Category B

85 – Category C

Standard terms are 60 days from date of invoice plus 5 working days

Commentary Example Invoice numbers are not acceptable & match

first time rate far too low

Process Improvement Process Improvement


Global Purchasing – 12

Business A – 7

Business B – 6

Business C – 4

Temporary / Interims – 2

* Supply Chain / Operations / Functions contain a number of people with a high procurement content to their name;

Business A Business B Business C Functions – I.T., Legal, HR, Engineering

Commentary Example Increased Spend Category

coverage and more capability is required in Purchasing

Headcount Focus Headcount Focus


Feedstocks & Exchange Rates

Oil up at $60+ dollars (+$10 from June)

Energy and Gas prices increasing

Metals prices down

Petrochemical Index dropped by 9% – soft pricing in petrochemicals.

Revaluation of Yuan – Cost Hit

Key Raw Materials & Services

Price increase paid on Product A

Product B – 2006 Price Increase announced

Product C – Price Stable

Product D – China opportunity

Product F – Just moved into VMI

Product G – Improved pricing. Commentary example

The external supply environment for Oil based products

& Key Materials is continuing to worsen

External Supply Environment External Supply Environment


Questions ?Questions ?


Strategic Sourcing DefinitionStrategic Sourcing Definition

#4#4The Strategic Sourcing process consists of a number of stages that are designed to assess business risks and supply needs – reduce these risks, define supply needs, strengthen supply performance, improve business profit and safeguard customer value and service. The output of the process is a defined number of potential best value suppliers for the subsequent Dealmaking & SRM stage


Supplier & Results

Management

Risk & Value Risk & Value Analysis Analysis

Cost & Cash Cost & Cash Data CaptureData Capture

Scope, Scope, URS, URS,

Market Market TestingTesting

Supplier(s) Supplier(s) RFI, RFI, RFQ, & RFQ, &

PerformancePerformance

Leverage & Leverage & Dealmaking Dealmaking

Supplier & Supplier & Results Results

Management Management

Delos Sourcing ProcessDelos Sourcing Process

•The Delos Sourcing process is the 4th of the Delos Six Procurement Dimensions

• This sourcing process should be used for all Strategic and Critical spends and provides a robust methodology for reducing / eliminating supply risk and improving the total cost and cash of externally purchased products and services and business assets, inventory and processes.

• The process stages ensures there is gathering of the complete spend (cost & cash), project scoping and boundaries, user requirements are defined and embedded into the RFQ, leverage is maximized and supplier

The 4th of the Six Procurement Dimensions


• Used for Strategic / Critical Spend Items & Key Projects

• Required where there is a risk of loss / dislocation to supply

• Involves significant time / resource investment

• Involves business critical issues

• Board awareness and/or approval

• Global Market Evaluation needed

• Risk Management analysis required

• Can involve Intellectual Property & Multi Year Deal

• Cost of internal / external customer change may be high

Strategic Sourcing – ImplicationsStrategic Sourcing – Implications


Innovation & Sourcing CyclesInnovation & Sourcing Cycles

Strategic Strategic SourcingSourcing

- - InnovationInnovation

CycleCycle

Strategic Strategic SourcingSourcing

--ProductProduct

ManufacturingManufacturingor Outsourcingor Outsourcing

CycleCycle

Strategic Strategic Sourcing Sourcing

- Internal Internal

& External & External Customer DrivenCustomer Driven


Customer ExpectationsCustomer Expectations

• Cost (Price) & Speed

• Innovation that works

• Uninterrupted supply RFTQ100%OTIF

• Awareness of supply strategy & risks

To manage these customer imperatives, the procurement vision, focus and goals must include Strategic Sourcing leadership.


Risk Map Key Severity

Likelihood

Major

Medium

Low

Minimal

Medium Priority

High Priority

Low Priority Medium Priority

1

4

3

2

5

Urgent Customer ProblemsUrgent Customer Problems


Scenario1. Shortage of a major Raw Material 2. Third source financially insecure3. Customer urgent demand to change to a new product

4. Key Supplier has only one factory 5. Key Raw Material price is about to treble


1. Product with 4 / 5 suppliers – example Freight2. Product specified by the customer in a technical application3. A major service with complexity and one supplier4. Photocopier Audit5. Newspapers and Journals

Profit Opportunity Key Ease of Implementation

Spend Value – Profit Opportunity

Hard

Average

Easy

14

32

5

Supply Leverage MapSupply Leverage Map


STRATEGICSTRATEGICSTRATEGICSTRATEGICCRITICAL CRITICAL

NUISANCENUISANCENUISANCENUISANCE LEVERAGELEVERAGELEVERAGELEVERAGE5


Definition Description

Sole Source

• A single supplier who meets 100% of requirements.• The product and service is only available from limited Suppliers • Bargaining power is reduced due to the limited sources of supply.

Single Source

• Procurement has selected one specific supplier for 100% of requirements.• Leverage is focused on one supplier.• Other sources exist.

Dual Source• Two suppliers are fully approved to meet buyers specifications.• A decision has been made to split the value between two active suppliers.

Multi Source• Several suppliers are actively supplying • Leverage is reduced but competition increased

Second Source

• A second source of supply has been identified & fully approved• Purchasing value is still focused on the single source supplier.• The second source is used as a contingency or backup source.

Strategic Sourcing Definitions


Exact second sourcing• Product or service is identical• Meets exactly the same specifications. • There is no variation in subsequent lot or batch size.

Alternative second sourcing • Product or service are not identical • However they can be qualified to be equivalent• Fit for use in a process with no impact on finished product or

service quality or process performance.

Product Matching Choices Product Matching Choices

Statistical process control and six sigma tools can be used to determine how critical a process is to product variation. Spoilage monitoring is also essential.


• Use Certificate of Analysis comparisons

• For critical products or services experimental qualification may be necessary Agree Protocol Perform Experimental work Summary report of findings Implement via change control procedure (three equivalent

results)

• Assessment and Audit of Supplier is needed

• Batch to batch variation must be minimized and deliveries across multiple batches avoided.

Example – Critical Raw MaterialsExample – Critical Raw Materials


ProblemsOpportunities

Risks & Concerns

•

•

•

•

CustomerCustomerNeedNeed

AssessmentEducation

ToolsBenchmarking

•

•

•

•

Assessment & Definition of Total Value

ImprovementTargets

•

•

•

•

Joint ProjectJoint ProjectTeam Team

Agreed Customer Projects

• Sponsor

• Definition & Assessment

• Education, Projects and Timescales

• Defined Value goals

• Selection of Tools

• Deliverables & Measurement system

Team in place and projects Team in place and projects underwayunderway

Team in place and projects Team in place and projects underwayunderway

Sourcing Sourcing Team Team

Joint Customer Strategic SourcingJoint Customer Strategic Sourcing


• Value

• Risk

• Ease of Implementing

• Resources

• Teams

• Other Priorities

• Current State

Risk & ValueRisk & ValueTargeting Targeting

• Spend Category

• Local or Group

• Cost, Cash & Sourcing Methodology

• Cost & Spend Addressed

• Planned Net Savings

• Results delivered

• Scope

• Current QCDI Performance

• Realistic Goals

• New performance levels

• Market Assessment

• Supplier Testing, Status and Leverage

Scope. URS, Scope. URS, Market AssessmentMarket Assessment

Focussed RFI and RFQ

• Clear Targets

• Degree of Project difficulty and risk

• Resource Allocation & Teams

• Defined balanced Risk & Value Improvement goals

• Specific RFQ

• Leverage Tools

• Performance Measures

• Deliverables

• Project Benefits Tracking

SOURCING PROJECT MANAGEMENT SOURCING PROJECT MANAGEMENT SOURCING PROJECT MANAGEMENT SOURCING PROJECT MANAGEMENT

Cost & CashCost & CashPlanPlan

Strategic Sourcing SummaryStrategic Sourcing Summary


• Requires dedicated team to focus 100% on strategic sourcing

• Customers need educating on the benefits of strategic sourcing, benefits must be agreed and communication of project goals must be thorough.

• Confidentiality is essential to ensure that sole suppliers are not aware of the threat and deals must be in place with second and third sources before engaging the sole supplier.

• The marketplace is dynamic and change is constant e.g. – second source could be acquired by the sole, technology changes, supply worsens...

• Share the sourcing strategy at the earliest opportunity with customers and be prepared for shared outcomes, roadblocks, the cost of second sourcing and more complexity to manage.

Strategic Sourcing Ground Rules Strategic Sourcing Ground Rules


Supplier & Results Management…

Involves the implementation of a formal program which will focus on current performance and continuous supplier improvement. Formality ensures;

• Key Performance measures are defined

• There is focus on what is important to the customer

• The deliverables in the agreement are defined

• There is continuous improvement in service as well as additional savings

• Customer and Supplier partnership is developed and quantified.

Supplier & Results

Management

Supplier Management Supplier Management


Sales complete Customer forecasts. Customers place forecast & unforecast orders for existing/new products.

Bill of Materials exist or are created to determine raw materials and services required. Inventory levels are regularly checked,

Production is planned for dates when all required products and services will be available.

Sourcing create plan by raw material part number for each product family in the sales forecast.

Sourcing completes agreements with quality, cost, price and OTIF performance confirmed.

Bills of Materials (Products and sometimes services) are created and requisitions & orders placed.

Sourcing ensure suppliers are identified with the capacity and capability to deliver the raw materials forecast

Two Integrated ProcessesTwo Integrated Processes

Supply Chain ProcessSupply Chain Process

Sourcing Process Sourcing Process

All products and services are available and production commences.

Finished products are completed, pass Q.C. and are delivered direct or via stocks.

Supply Chain plans and executes commitments and measures supplier performance.

Sourcing, SC and the Business evaluate product and supplier performance

Sourcing & the business feed back to suppliers and resource if required.


RFTQ 100% On Time in Full RFTQ 100% On Time in Full

• Has a major impact on profit and capacity planning

• Is a major factor in customer retention and growth

• Is critical to the manufacturing process and performance

• Is a key component of supply agreements with penalties applying

• Requires an integrated Supply Chain & Sourcing Process


• Eye of the Customer

• Voice of the Customer

• Customer Product & Market

• 5S

• Quality Status & Accreditation

• Zero Defects (RFT100%OTIF)

• Lean & Agile

Centric & Lean SuppliersCentric & Lean Suppliers

• Management of Customer Complaints

• Management of their Suppliers

• HSE & Process Capability

• Training of employees

• Performance Management / Measures

• Market / Benchmarking Data

Making suppliers Customer Centric & Lean


Sourcing (Customer) & Supply (Supplier) (Plan)

Order Management (Do)

Planning & Verification (Check)

Expediting, Supplying and Receiving (Re-Act)

PP DD

CCAA

The causes apply to both the customer placing The causes apply to both the customer placing the order and supplier supplying the order. the order and supplier supplying the order.

Causes of OTIF FailureCauses of OTIF Failure


Supplier Process ComplexitySupplier Process Complexity

Supplier to

Suppliers Supplier


Lean O.T.I.F. SupplierLean O.T.I.F. Supplier

IN

OUT

IN

OUT

IN OUT

Future StateCurrent State

The aim in "lean" is to get one process to deliver only what the next process needs, when it needs it. The goal is to link all processes in a smooth flow, without detours that generates the shortest lead time, highest quality and the lowest cost.


Specify Value - What does the process customer want /need

Identify Value Streams - Sequence of Processes

Make Value FlowPull - Process only what the customer wants

Perfection - Pursue zero waste and Continuous Improvement

Supplier 5 Lean Principles Supplier 5 Lean Principles


Six Sigma Suppliers Six Sigma Suppliers

Quality % PPM Sigma99.99966 3 6

99.9 1,000 4.698 20,000 3.6

93.3 67,000 370 300,000 240 600,000 1.3

30.9 700,000 1

1500 ppm would mean that there are 1500 quality defects per million deliveries. That means 1.5 quality defects in every 1000 parts delivered. Is this good enough?

WHAT QUALITY IN PPM MEANS

99.9% vs. Six Sigma

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

99.99966 99.9 98 93.3 70 40 30.9

% Quality

Qu

ali

ty D

efe

cts

pp

m

0

1

2

3

4

5

6

Degree of Six Sigma


Workshop Task Workshop Task

How does the Source Planning process and Lean / Six Sigma approach that you have seen in the workshop compare to what you are doing today?

sourcing slide 1 © the delos partnership 2005 supplier relationship management module 3 –...

Documents

years current

planning approach supply

key elements supply

future current year

competition regulation

current yearwhat

year plans

prior year