supplier management strategy & best...

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PMAP September 11, 2008

Supplier Management Strategy & Best Practices

Kevin Giblin

September 11, 2008

Crowne Plaza Valley Forge

King of Prussia, PA

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“Inherently, each one of us has the substance within to achieve whatever our goals and dreams define. What is missing from each of us is the training, education, knowledge and insight to utilize what we already have.”

- Mark Twain

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Today’s Objectives

•Discuss trends in supplier management

• Identify best practice supplier management processes to bring value added solutions into your organization

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Business Pressures: How Do We…

Increasing Savings Targets• Drive year-over-year savings

with fewer resources?

• Outperform currency and inflation factors?

Improve Sourcing Execution• Reduce negotiation time and effort?

• Exploit the largest savings opportunities?

• Balance quality, cost and risk?

Drive Sustainable Savings• Leverage supplier knowledge

to improve price performance?

• Enforce negotiated terms?

Maximize Sourcing Influence• Consistently apply policy rules

enterprise-wide?

• Leverage expert sourcing practices across all commodities and divisions?

ProcurementOrganization

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Supplier Management

A formal and structured process by which organizations measure, analyze, and encourage supplier performance to drive continuous improvement.

“You can’t manage what you can’t measure.”

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Trends in Supplier Management

Past Current Future

Clear Procurement Vision and Initiatives

Team Driven

Supplier Integration

Supplier Development

Long Term Agreement

Metrics Development

Quarterly Review

Information Sharing

Inter-Division Synergy

Process Improvement

• Limited Procurement Vision / initiatives

• Large Pool of Vendors

• Random Audit

• Spot Purchases

• No Clear Metrics

• Sporadic Reviews

• Limited information

• Divisional Purchasing

• Little or no process Improvement Program

• World Class Function

• Integrated Commodities

• Supplier Partnerships

• Supplier Synergy

• Robust Metrics

• 360 Reviews

•Early Supplier Involvement

• Corporate Synergy

• BPM/Six Sigma Culture

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Supplier Management Challenges

• Coordinating Procurement activities resources

• Who do we need to focus our efforts on?

• Assessing supplier total cost impact

• What areas require top performance?

• Driving performance improvement

• How can we measure the areas that matter?

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Savings from Supplier Management?

PotentialSupplier Value

Wasted Resources

EfficienciesNot Leveraged

Performance Backsliding

Suppliers Misdirected

UntappedOpportunities

Net SupplierValue

Source: Corporate Executive Board. Driving Supplier Performance Improvement.

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Best Practices

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8-Step Supplier Management Program

1. Supplier Segmentation

2. Category Profiling

3. Organization

4. Governance

5. Supplier Development

6. Performance Management

7. Relationship Management Systems

8. Dynamic Service Level Agreements

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Supplier Segmentation

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What is Segmentation?

• Understanding the landscape of each commodity

• Creating visibility to the suppliers’ level of integration

• Performance measurement tool

• Opportunity to increase compliance

• Supplier rationalization

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Why is this important?

• Absence of process for quantifying how to manage supplier relationships makes it difficult to allocate staff resources accordingly

• Segmentation helps prioritize resources and assign tier-specific performance management

• Efficient performance will increase compliance

• Leverage supplier relationships to drive innovation

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Performance-Weighted Approach

Three dimensions:

1. Filter suppliers based on volume

2. Prioritize suppliers based on performance

3. Determine resource allocation based on value

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The Dimensions of Segmentation

Troubled Healthy

Non-Traditional New

Supplemental

Replaceable

Criticality

Fully Integrated

Critical

Fully IntegratedSupplementalSupplementalFully Integrated

Criticality

By recognizing relationships can shift between four different types of relationships (Healthy,

Troubled, New, and Non-Traditional), segmentation now occurs on a "three-dimensional" chart

that notices similarities between the four categories but as they become more aligned with MHP

both in criticality and cost of ownership, each type of relationship presents both its own

challenges and rewards.

Three-Dimensional Segmentation

SupplementalFully Integrated

Critical

Critical

Total Cost of

Ownership

Replaceable

Replaceable

Total Cost of

Ownership

Replaceable Critical

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Segmenting the Segmentation

Potential Based Chart

66, 80

0, 00, 00

10

20

30

40

50

60

70

80

90

100

0 10 20 30 40 50 60 70 80 90 100

Alignment with MGH

Su

pp

lie

r's

Ma

rke

t P

os

itio

n

Multi-Dimensional Chart

0, 00, 0

0, 0

0

10

20

30

40

50

60

70

80

90

100

0 10 20 30 40 50 60 70 80 90 100

Supplier Alignment

Supplier Im

po

rtan

ce

Growth-Focused

0 , 00 , 0

77, 84

0

10

20

30

40

50

60

70

80

90

100

0 10 20 30 40 50 60 70 80 90 100D rive Growt h

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Tier-Based Approach

Tier 0

Tier 1

Business Impact

Tier 0: Relationships that are critical to customer's long-

term success; Fully integrated activities

Su

pp

lie

r S

pe

nd

Tier 1: Key group of suppliers, difficult to replace;

Integrated involvement in each other's activities

Tier 2 Tier 2: Most common type of relationship; actives

coordinated on a limited basis

Tier 3: Arms-length relationship; easily replaceable

Tier 3

0

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Category Profiling

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Commodity Framework

Sourcing Group:

Commodity Overview:

Sub-commodity/Products:

Market Size in US Dollars:

Major Market Players:

Sourcing Manager:

Key Team Members:

Main User Groups:

MHP Purchasing Vol.:

Number of MHP Suppliers:

Top 5 MHP Suppliers

Total Spend:

Spend with Preferred Supplier:

Spend with Non-Preferred Supplier: EDI:

pCard: pCard:

Current Contract/ Define Requirements: tCard: tCard:

Preferred Supplier: Create RFP: Invoice: AP:

Create Competition: Order Method:

Analyze Suppliers: Approval Method:

Savings from Current Contract: Negotiation:

Contract History: Contract Awarded:

Begin Supplier Mgmt: Payment Method:

Supplier Mgmt Strategy: Required Receipt Acknowledgement?:

eProcurement Priority:

eProcurement Model:

Target eProcurement roll-out:

Spend

Action Plan Dates

Commodity Information Cost Structure Savings Summary

Current Transaction Count

Procure to Pay Statistics

Current State

Share

of Mkt

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1

Cost Break Down

Service

Capital Cost

Logistics

R&D

Labor

Material

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

Am

ount

Pro

jecte

d

Am

ount

Realized

Compliance

Sourcing

Demand

Management

Spend w ith

Preferred

Suppliers

Spend w ith

Non-Preferred

Suppliers

Spend on

pCard

Spend on tCard

AP Spend

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Organization

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Governance

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Why is this important?

• Many companies assume outsourcing will provide savings or efficiency

◘ Reality #1: These companies fail to measure internal costs, and cannot measure savings or efficiencies

◘ Reality #2: Nearly 10% of all companies that outsource bring activities back in-house after contract termination !!!

⇒ Procurement can: provide discipline and structure to establish consistent end-to-end outsourcing processes, measure internal TCO, and assess bids to determine savings. Ongoing supplier management adds governance to ensure sustainable value

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Quick Quiz…

• Only 53%* of organizations achieve cost savings from outsourcing because of……?

* Source: Oxford University Survey

Unexpected costs in transition and supplier management

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Outsourcing Risk Assessment

Financial and operational riskIncreased liquidity

Increased oversightAccess to world-class capabilities

Cultural differencesEconomies of scale

Loss of knowledge sharingReduce operating costs

ConfidentialityFocus on core competencies

RisksBenefits

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Building the Culture

• Internal Management Focus Outsource Management Focus

Internal goal setting

Informal communication

Focus on “How”

People management

Focus on “What”

Formal reports and escalations

Service level agreements

Management of complex contracts

Procurement Focus

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…Applying Governance and Structure

How do the suppliers align with our needs?

What do we want to measure the suppliers on?

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Communication of Overall Project Status

•Contracts

•Operational Readiness

•Customer Care

•Order Admin

••HR & Staffing

•Technical Readiness/IT

•Budget Schedule

••Project Schedule

•Comments•Status•Owner•Area

Manage the Effort

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Governance Impact

� Mitigate risks associated with outsourcing by providing visibility into activities

�Reduce sourcing costs by centralizing collective knowledge obtained through RFI, and enabling business units to concentrate on core tasks

�Enable more effective supplier management by giving day-to-day business owners a vehicle to communicate their supplier experience across the organization

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Supplier Development

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Trends in Supplier Collaboration

Company “A” Company “B”

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Supplier Collaboration – Keys to Success

• Partnering with a supplier to understand what could work best for both the company and the supplier.

• Needs to be positioned as a “win win” with the supplier, not a cost cutting exercise.

Assemble

Commodity

Team

Engage

Supplier

Solicit

Supplier

Input

Agree on

InitiativeImplement

• Target current preferred supplier BU stakeholder

• Sourcing Manager

• Supplier Management

• Face to face meeting with key supplier representatives

• Outline the supplier collaboration objectives

• Discuss Best Practices

• Develop key action plans

• Supplier presents initiatives / savings plans

• Evaluate initiatives

• Prioritize initiatives

• Company & Supplier agree on selected project

• Baseline current situation

• Agree on critical success factors and timeline

• Determine measurement factors

• Ongoing team updates

• Track performance to baseline

• Track savings achieved

• Re-engineering of current process

• Communicate

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Supplier Collaboration Initiative Generation Template

Date:

Sourcing Group:

Supplier: Initiative Number

Initiative Description

MGH Benefit

MGH Business Units

Involved

Implementation Timing

Critical Success Factors

Project Responsibility

Project Savings Potential

Savings Methodology

Capital Investment Yes Amount:

Required No

Supplier Benefit

Supplier MGH

Supplier Suggestions

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Supplier Relationship Management Maturity Model

ISM Supplier Management Group

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What is Supplier Relationship Management?

•a comprehensive approach to managing an enterprise's interactions with the organizations that supply the goods and services it uses.

• (searchSAP.com)

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What is the Maturity Model?

Mission

• To develop a maturity model that provides methods for assessing and developing capabilities that enhance an organization’s ability to manage suppliers successfully, consistently, and predictably in order to accomplish the mission of the organization and improve organizational effectiveness.

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SM3

• Strategic Intent of SM3:

• link the supplier management function of an organization with the execution of organization strategy

• describe how capabilities cause measurable outcomes

• an innovation to advance supplier management throughout the industry, because all organizations are not alike and their structures are contingent on varying environments

• identify contingency variables of different types of organizations, and the ways in which the pursuit of maturity differs for each type

• leverage the credibility of primary and secondary research

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Five Major Components Identified

•Spend Visibility

•Supplier Segmentation

•Collaboration

•Performance

•Risk Management

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Levels of Maturity

•Limited or No SRM program existing

•Need Identified to establish SRM program

• Implemented SRM Program

•Utilizing SRM Program

•Leveraging SRM Program (World Class)

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Supplier Capabilities Maturity

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Spend Visibility

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Segmentation

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Collaboration

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Performance

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Risk Management

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Performance Management

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Supplier Collaboration Initiative Evaluation Template

Sourcing Group:

Supplier:

1 2 3 4

Criteria

Max

Score

Initiative

Score

Initiative

Score

Initiative

Score

Initiative

Score

Potential Savings 20 The higher the savings potential the higher the score

Ease of Implementation 20 The easier the idea is to implement the higher the score

Risk to Business Operations 20 The lower the risk to operations the higher the score

Capital Investment Required 10 The lower the capital investment the higher the score

MGH BU Resource Requirement 10 The fewer BU resources needed the higher the score

Timing to Realize Benefit 10 The shorter the time to realize the benefits the higher the score

Level of Innovation 10 The more innovative the idea the higher the score

Total Score 100 0 0 0 0

Implementation Yes

No

Comments

Explanations for No Go Initiatives

MGH Team:

1.

2.3.

4.

Initiative Number

Score Methodology

Supplier Initiative Scorecard

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Relationship Management Systems

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Tools for Managing Suppliers

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Timeline for Implementation

�Step 1: Assess and Prioritize (4-6 Weeks)

Assess supplier management practices and create segmentation approach

�Step 2: Deploy Performance Management (12 Weeks)

Install use of scorecards, launch pilot of performance management tools, establish QBRs

�Step 3: Implement Supplier Management Process

(4 weeks and ongoing thereafter)

Roll out management tools and facilitate change

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Findings

The benefits of using analytics

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Measures of Success

Improve supplier performance by 26% on average

Risk Mitigation

75% of negotiated savings lost within 18 months without effective contract management

Compliance

Supplier development efforts improve prices by 3%

Collaboration and Innovation

Supplier performance management can save 5-15% over a 3 year period

Sourcing and Contracting

KEY FINDINGSMETRIC AREA

Sources: McKinsey Quarterly, PSC, Aberdeen

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Lessons Learned

1. Assess before acting

2. Create cross-functional governance

3. Select suppliers based on present and future capabilities

4. Document transition plans/results to develop internal best practices

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Keys to Supplier Continuous Improvement

Senior Leadership involvement

Data driven discussion and decision

Cross functional team data input

Identify Improvement opportunities and plan

Mutually establish future performance targets

Generate actions and commitments

Measure and reward improved performance

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Discussion

• Questions

• Feedback

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