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21 . 22 MAIO | 2013

CENESP - SP

inbrasc.org.br/maratona

Palestra Internacional: Total Cost Management

Frank Wilhelm President of International

Supply Chain Solutions, Inc.

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• To understand the power and

potential of statistics and the role that

it plays within the purchasing

organization of today and the future.

• Explore several specific statistically

based processes.

TOPIC

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Administrative Transactional Tactical Knowledge Based

Integrated Strategic Global

Leverage Collaborative Statistically Based, Technology Driven

Process Paperwork

Administrivia Low Level

Reporting Data poor Overhead

burden

Process Transactions

Low Level Reporting

Data poor Overhead

burden Bottom line

neutral

React to requisitions

Purchase price only

Fixated on negotiations

Place orders Expediting

TCO Demand

aggregation Systems Commodity

focused Professional Sourcing

Cross functional

Team approach

Bottom line impact

Higher reporting

Supply chain enabler

New product introduction

Shared strategic partner

End of life Supply base

management Relationship

management

Global reach Knowledge

expansion Risk

management Network

alliances Systems

sophistication

Suppliers as partners

Internal integration

Strategic driver Replenishment Collaborative

processes

Perfect quality “0” variation SPC Data mining tools Strategic owner Valued

enterprise function

Statistically driven

Technology savvy

EVOLUTION OF THE PURCHASING FUNCTION

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Traditional Emerging Leading World Class Sourcing

Supplier Selection

Sourcing & Commodity Strategy

Agreement Development

Length of Contract

Cost Benchmarking

Cost Performance Tracking

Supplier Management

Relationship Management

Supplier Classification

Supplier Performance

Business Planning

Organization Capability

Information Mgmt.

Reliance on past experience

Multiple sourcing

Order related

Multiple RFQ’s

Minimize unit price

Based on initial purchase

No specific relationships

Interchangeable suppliers

Some evaluations

Communication by exception

Reaction to internal stimuli

Functional silos

Transaction accounting

Reputation based

Multiple and dual sourcing

Yearly contract negotiations

Minimum total acquisition price

Savings projections

Preferred suppliers

Limited relationship structure

Subjective ratings

Reaction to external stimuli

Building purchasing database

Supplier partnerships

Single source by standard commodities

Multi-year contracts

Total cost criteria

Jointly managed performance criteria

Suppler certification

Single blue-print for relationships

Some performance metrics & evaluations

Strategic and long term procurement planning

Central Management, local administration of purchasing

Paperless info exchange

Strategic Sourcing

Strategic Alliances; Co-located suppliers

Life cycle agreements

Continual cost benchmarking

Performance measures linked to business cycles, transaction timeliness and total cost management

Key Supplier Account Management

Systematic ratings

Proactively change

Functional and process orientation

Enhanced info sharing throughout value chain

= A general practice or characteristic exhibited

= A general practice or characteristic exhibited to a lesser degree

= A general practice or characteristic not exhibited

STAGES OF PROCUREMENT EXCELLENCE

Process

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Supply Base Management

Strategic Sourcing

Commodity Pricing

Vendor Management

Quality Control

Performance Reporting

Market Analysis

Global Price Trending

Currency Fluctuations

Economic Trends Value

Analysis

Cost Profiling

Supplier Ranking

POTENTIAL USE OF STATISTICS WITHIN THE PURCHASING FUNCTION

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Supply Base Management

Vendor Management

Performance Reporting

Market Analysis

Currency Fluctuations

Economic Trends Value

Analysis

Strategic Sourcing

Quality Control

Supplier Ranking

Commodity Pricing

Global PRICE Trending Cost

Profiling

POTENTIAL USE OF STATISTICS WITHIN THE PURCHASING FUNCTION

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IMPACT OF STATISTICS ON BUSINESS GENERALLY

Track Trends &

Probabilities

Control Behavior & Processes

Technology & Process improvement techniques such

as six sigma

Mid 80’s

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IMPACT OF STATISTICS ON PURCHASING COMMUNITY

Prior to 1985

Too many suppliers totally Too many component parts Too many suppliers for each component High degree of variability in every respect Difficult to measure performance Difficult to communicate quality requirements Could not understand suppliers processes No basis for collaboration No Common language with supply base Supplier performance reporting and ranking

was difficult Too much subjectivity

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1985

A new process called six sigma was created at Motorola . This breakthrough Statistical process methodology was created by Bill Smith and the impact was profound and adopted by companies throughout the globe. The concept was applied not only to quality management but to virtually every business process within the enterprise. Variability can now effectively be eliminated.

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Post 1985

In Purchasing, the introduction of this concept Created a common language Provided a universal measurement system Facilitated the internal integration of the purchasing function Allowed for sophisticated supplier partnerships and programs to occur Eliminated incoming inspection Greatly enabled cost reduction Allowed for remote viewing of the suppliers process Established a scientific method of measuring and controlling supplier

performance Elevated the status of the purchasing function Created an environment for establishing advanced replenishment techniques Create quantifiable score cards to ensure sustainability

IMPACT OF STATISTICS ON PURCHASING COMMUNITY

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PROCUREMENT HAS ACCESS TO AN ARRAY OF STATISTICALLY BASED OPTIONS

TECHNIQUES Scatter plots Histograms Pareto charts Control charts Run charts Correlation coefficients Factor analysis Regression analysis

PROCESSES Score card Six sigma DMAIC (Define, Measure, Analyze,

Improve, Control) DPMO ( Defects Per Million

Opportunities) Process control Performance measurement Supplier ranking

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SUPPLIER SCORE CARD

IMPORTANT SUPPLIER CONTROL MECHANISM

SELF MOTIVATES THE SUPPLIER

INVOLVES MOST OF THE PRIMARY FUNCTIONS OF YOUR ENTERPRISE

SPRINGBOARD FOR INNOVATION AND CONTROL

FOSTERS PRO-ACTIVE SUPPLIER COMMUNICATION

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SELECTING SUPPLIER SCORECARD CATEGORIES

Supplier Scorecard

Quality

Delivery

Cost

Responsiveness

Innovation

Sustainability Risk

Scorecard category Metrics

Quality

Delivery

Cost

Responsiveness

Innovation

• PPM Performance • RMA cost & frequency • Lot Failure • Problem resolution rate • Replacement responsiveness

• % on time delivery • % late delivery • % early delivery • Actual v. quoted lead time

• % total cost reduction year over year • Actual cost reduction year over year

• Response to expedited orders • Response to emergency parts change • Reaction to schedule change • RFQ response time

• Tech & process responsiveness • Best practice sharing

• Financial soundness • Ownership status • Strategic partnership

Sustainability

ENTERPRISE WIDE ACTIVITY

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MONTHLY

WEEKLY

REAL TIME

FREQUENCY

QUARTERLY PAPER

SUPPLIER PORTAL

EMAIL

MEDIA

ACTUAL SUPPLIER SCORE CARD

4 25 1.00

5 25 1.25

2 15 0.30

1 10 0.10

5 25 1.25

RANK CATEGORY GRADE WEIGHT % TOTAL

A

A

A

B

B

Product quality

On-time-delivery

Cost

Responsiveness

Innovation

TOTAL GRADE 3.9

Supplier: Technology INC. Category: Electronic Components Contact Person: Bob Swanson Rated By: BH, TF,JW

Rating: 1. Excellent 2. Good 3. Average 4. Unsatisfactory 5. Unacceptable

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SUPPLIER RANKING

SELF MOTIVATES THE SUPPLIER

CAUSES PROACTIVE COMMUNICATION WITH

PRIMARY SUPPLIERS

BASIS FOR STRATEGIC PARTNERING

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SUPPLIER RANKING WORKSHEET

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SUPPLIER RANKING REPORT

87.9

ZENITH CONTROLS 76.3

RANK SUPPLIER SCORE

1

2

ACME TECHNOLOGY

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GENERAL STEPS IN IMPLEMENTING AN SPC PROCESS

1. Train your people

2. Pareto the opportunities

3. Key control points

4. Understand the key measurement

5. Control charts

6. Data transmittal and archiving

7. Corrective action

8. Communication protocols

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Through statistically based supplier evaluation Boeing achieves annual purchase price reductions of 3-6%

Through the implementation of a comprehensive 6 sigma project Humana: Achieved an 800% increase in procurement savings over a six year period Reduced the number of suppliers by 50% over a six year period

The Oncology Care division embarked on a statistically based scorecard program along with a six sigma vendor oversight program that: Achieved an 80 % improvement in supplier performance Resulted in a 6.7% decrease in Purchase price Created a 100% elevation in incoming quality

SPC SUCCESS STORIES

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A statistically driven supplier selection and scorecard process for the City of Seattle saved an initial $11mm and continues to generate and additional $2 million per year. Other benefits include consolidation of vendor contracts, leveraging larger discounts; transactional simplification, decreases in cycle time, clarification of relationships between buyers, end-users and vendors resulting in process efficiencies and improved contract administration.

Banner implement a six sigma based global commodity management process. As a result, we now have a fully functional commodity management process that is ingrained into our culture and standard operating procedures. Savings of seven figures dropped to the bottom line almost immediately. Inspection costs have disappeared, quality has improved dramatically and the purchasing function is now viewed as a strategically important asset.

SPC SUCCESS STORIES

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SPC PITFALLS

Not a transportable process (the China experience)

People dependence

Vigilance is required

Results can be misinterpreted

Bias can be “built in”

Flawed methodology

Measures only the result, not the cause

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High Tech Aerospace Pharmaceuticals Telecommunications Complex

Manufacturing Automotive Process industries Energy Oil and Gas Extraction industries Service industries ( SECTORS)

THE NEED AND CAPABILITY VARIES GREATLY AMONG BUSINESS SECTORS

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As purchasing organizations reach around the globe, it is wise to remember that infrastructure and capability varies greatly from region to region, limiting potential

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COST BENEFIT

TOTAL COST OF OWNERSHIP

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Estimate of all direct and indirect costs associated with an asset or acquisition over its entire life cycle. DO: Consult and involve Stakeholders internal and external Involve technologists and other specialists Be thorough DON’T: Drive cost to the point of sacrificing value or benefit

COST BENEFIT

TOTAL COST OF OWNWERSHIP IS:

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THE TCO ANALYSIS IS MEANT TO:

Bring out so-called "hidden" costs of ownership and display

Put the spotlight on potential cost problems before

they become problems

Reveal key dependencies

Serve as a good basis for supplier cost collaboration

Facilitate technical innovation

Establish cost accountability

Reveal the true total cost

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EXAMPLES OF COST CATEGORIES

Purchase price

Transportation inbound Planning Effort Packaging Inspection Transaction costs Interplant movement Storage Cost of money Materials organization overhead Obsolescence Taxes

COMPUTER HARDWARE AND SOFTWARE

Server hardware and software

Workstation hardware and software Installation and integration of hardware

and software Purchasing research Warranties and licenses License tracking - compliance Migration expenses Risks: susceptibility to vulnerabilities,

availability of upgrades, patches and future licensing policies,

Purchase Price

COMPONENT

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THE PROCESS BEGINS WITH AN ANALYSIS / MATRIX WHICH SHOULD:

Identify Every Detailed Cost Component Identify Internal / External Ownership Assign Risk Potential Consider Life Cycle Identify Indirect Costs Perform Pareto Ranking Assign Targets

AND THEN:

Establish highly focused cost optimization team to work within existing management structure

Plan & execute advanced cost optimization

practices

Ensure implementation & Sustainability

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THE PROCESS BEGINS WITH AN ANALYSIS / MATRIX “Example”

Cost Element Ranking (Pareto)

% of Total

Internal External Target Risk Owner Comments

Design A 15% X 12% High J.D. Need MGT. approval

Inbound Freight B 7% X 5% High P.L

Packaging B 5% X 3% Med. L.B

Storage B 3% X 1.5% Low D.M Operations cooperation

Purchase Price A 63% X 58% High C.V.

Inspection A 7% X 3% High R.F. Quality organization

Part: .01 MFD capacitor Part # 10-1610-01 Used on: synchronous transponder

Current cost: $67 Target cost: $52 Vendor: United Electronic Buyer: Charles Ventura

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WHY TOTAL COST EFFORTS TYPICALLY FAIL

1. Lack of budget ownership and management

2. Lack of technical category expertise

3. Supply Chain function disconnect to

business operations

4. No influence over the application

5. Inadequate sourcing process

6. Poor supplier management

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WHAT LEADING COMPANIES DO TO CONTROL TOTAL COST

1. Advanced strategic sourcing

2. Advanced supplier relationship management

3. Advanced contracting processes

4. Advanced category management practices

5. Re-specification

6. Service level optimization

7. Commodity indexing

8. Value engineering

9. Supplier exploitation

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PITFALLS OF TCO

Not supported by traditional accounting methods

Not within normal reporting structure, achievements may not be noticed

Cost take out in the design or pre-procurement phase will go unheralded and must be paraded

Accountability for some cost activity may be obscure.

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Frank Wilhelm President of International Supply Chain Solutions, Inc. fwilhelm@iscsglobal.com http://www.iscsglobal.com

PALESTRANTE

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