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Presentation James Ball
- 1. Connectors A Cost Savings Plan James Ball
- 2. The Brief TE has been buying from the same local supplier for the past 5 years for the same price. The current supplier has an excellent reputation for quality, delivery & service. Volumes have been reducing as more low cost competition is eroding TE’s market share. The TE quality manager is reluctant to change supplier as any problems will damage TE’s reputation and could lead to costly claims. The TE engineering manager claims there are no resources to look at alternative solutions as he is working on other New Product Developments in other areas. The connectors mainly consist of copper bodies with injection moulded thermoplastic end caps. They are manually assembled. Demand for the connectors is relatively stable with volumes that are considered attractive in the industry.
- 3. Current Supplier and Business Needs It’s important to gather information on the current supplier. The evidence collated through benchmarking can be used as a powerful bargaining tool. It’s important for TE to re-evaluate their own business needs. Key performance indicators must be assessed. Assessing pricing arrangements is important.
- 4. What kind of supplier are they? What are the risks involved and importance of the supplier? Fig. 1 Kraljic Matrix
- 5. Master budget Coordinated Budget Preparation Fig. 2 Budget Preparation Sales budget Production budget Labour Cost of goods sold budget Raw materials Factory overhead Functional budgets Functional budgets Functional budgets Budgeted balance sheet Cash budget Budgeted profit and loss
- 6. Specification Requirements What is the specification? What does TE require for it’s connectors? Conformance specifications (technical specification and design specification) Performance specifications (functional specification) Service specifications (an intangible activity or benefits that one party can offer to another which does not result in ownership of anything)
- 7. Costs and Prices Primary and secondary market data on costs and prices can be collated in order to fully understand supplier pricing strategies. Costs, life cycle costing and cost budgets must be understood. Copper is a commodity driven by market forces and therefore the price can fluctuate.
- 8. Price and Cost Analysis When considering prices quoted by a supplier or offered in negotiation there are two basic approaches that the buyer can use to decide whether ‘the price is right’. Price analysis to determine if the price offered is a fair price and appropriate for the goods. Cost analysis is a more specialist technique, often used to support price negotiations where the supplier justifies its price by the need to cover its costs (cost based pricing).
- 9. Make Vs. Buy Analysis It would be important to consider whether the activity of manually assembling the connectors is strategically important or ‘core’ to the business. In-house: Availability of in-house competencies and capacity, whether TE’s supplier will support this decision, risks involved and human resource impacts. Straight buy: ownership of problems, capacity issues, risks involved due to lack of control. Outsourcing: Product turnaround, added value through industry expert skill base and knowledge, capacity issues, risks involved due to lack of control.
- 10. Supporting Factors in Make Vs. Buy Table 1 Factors in make/buy decisions FACTORS SUPPORTING MAKE/ DOING FACTORS SUPPORTING BUYING IN Opportunity to extract value from otherwise idle capacity and resources Quantities required are too small for economic production Potential for lead time reduction Avoid costs for labour Cost of work is known in advance if calculated correctly Reduced inventory costs Direct control over production and quality Financial risk is shared with supplier/ supply chain Protection of confidentiality Benefits of specialist research, expertise and knowledge Lowers supply risk (only if current supplier is unreliable) Greater production capacity if production facilities are limited Maintains a stable workforce if sales decline Maintains a stable workforce In periods of rising sales
- 11. Outsourcing TE can delegate the manual assembly of it’s connectors if it is seen as a non-core activity. The outsourcer can draw up a long term contract specifying the work to be performed and the service levels to be achieved by an outsource provider. The potential of outsourcing to control and decrease costs will help achieve a competitive advantage within the market.
- 12. Supporting Factors in Outsourcing Table 2 Risk/ benefit factors in outsourcing ADVANTAGES/ BENEFITS DISADVANTAGES/ RISKS Supports organisational rationalisation, reduction in costs of staffing, space and facilities Potentially higher cost of services which will need to be compared with in- house Allows more focus in other resources on the organisation's core activities which will in turn add value giving a competitive advantage May be a difficulty ensuring service quality and CSR (Corporate Social Responsibility) Specialist expertise in other areas can achieve more for the organisation Potential loss of in-house expertise/ knowledge which may be required in the future Adds competitive perfomance incentives where internal service providers may be complacent Added distance from TE customer by having a service provider which may weaken communication both internally and externally and weaken market knowledge Cost certainty/ negotiated contract price for activities where they may be fluctuating along with shared financial risk Risk of loss of control over confidential information
- 13. Defining Key Performance Indicators Contractual performance measures; developing KPI’s, KPI measures, service level agreements, measures of service quality. KPI’s should be re evaluated to reflect any business changes. The count (good or bad) typically refers to either the amount of product produced since the last machine changeover or the production sum for the entire shift or week. Production processes occasionally produce scrap, which is measured in terms of reject ratio. Machines and processes produce goods at variable rates. Many organizations display target values for output, rate and quality. Takt time is the amount of time, or cycle time, for the completion of a task.
- 14. Stages of Negotiation Fig. 3 The negotiation process Data gathering and analysis Bargaining power analysis Identifying key issues/ priorities Planning strategy and tactics Preparing the meeting Introductions Presenting of each parties position Identifying common ground Exchanging ideas Final offer/ position summary Agreement Written summary of agreement Gaining stakeholder acceptance Implementing agreed measures Monitoring/ evaluation Negotiation review Pre-negotiation preparation Negotiation/ interaction Post negotiation follow up
- 15. Approaches to Negotiation Table 3 Negotiation tactics DISTRIBUTIVE COMPETITIVE TACTICS INTEGRATIVE COLLABORATIVE TACTICS Presenting an exaggerated initial position or demand, in order to allow for movement and compromise Being open about needs and seeking to understand the needs of the other party Looking at conflicting viewpoints and concentrating on persuading the opponent that their position is unrealistic Collaboratively generating options and attempting to find mutual ground Withholding information that highlights areas of common ground or compromise Focussing on areas of common ground and mutual benefit to keep a positive collaborative atmosphere Using leverage to pressure or manipulate the other party Supporting the other party in accepting proposals with joint problem solving
- 16. Elements of Price Negotiation TE’s negotiation and agreement on price will include a range of matters. Type of pricing arrangement is important determining whether and how the supplier will possibly try to increase their prices through the life of the contract by adding extras e.g. consumables, overtime payments which are not included in the original pricing. The price or fee schedules on which the supplier will calculate the amounts charged. Methods of new prices or price changes will have to be jointly agreed. Available discounts and the conditions under which they will be applied. Terms of payment and credit (timescales and methods).
- 17. Pricing Arrangements Price arrangements or agreements in contracts can include: Fixed price agreements in which a schedule of fixed fees or payments is agreed in advance (and the supplier bears all risk of cost variances). Incentivised contracts such as bonus fees added to the fixed price on attainment of specific KPIs or a formulae for sharing cost savings against a negotiated target cost between buyer and supplier. Cost plus agreements where the buyer agrees to reimburse the supplier for allowable and reasonable costs incurred in performing the contract.
- 18. Contractual Arrangements/ Agreements for Supply Framework arrangements are becoming more popular as they represent a 'smarter' way of purchasing than placing 'one-off’ orders for recurrent contracts for works or supplies; by, for example, optimising volume purchasing discounts and minimising repetitive purchasing tasks. A key aim of a framework arrangement should be to establish a pricing structure; however this does not mean that actual prices should be fixed but rather that there should be a mechanism that will be applied to pricing particular requirements during the period of the framework. It should also be possible to establish the scope and types of goods/ services that will need to be called-off.
- 19. TE Streamlining and Lean Approach TE could take it upon themselves to streamline their activities and attempt a more lean approach cross functionally across various different departments within the organisation. Logistics and transportation. Reduce packaging and putting thought into what kind of packaging is used (environmentally friendly/recycled materials. Cheaper advertising through the use of the internet. Reducing installation costs and making the product more user friendly thus reducing time taken to install the product. Performance reviews on employees to encourage a leaner workforce within the organisation.
- 20. Summary Coordinated Budget Preparation Specification Requirements Costs and Prices/ Price Cost Analysis Make Vs. Buy/ Outsourcing Defining KPI’s Negotiation Pricing Arrangements/ Contractual Arrangements/ Agreements for Supply Streamlining and Lean
Editor's Notes
- The very fact that TE use a local supplier means they can continue to have a close supplier relationship as well as access to visit the supplier premises which all helps with supplier management and finding faster solutions to any problems which may arise. The current supplier’s reputation may be what TE need to succeed within the market and will help secure sales as customers may rely on reputable brands and feel comfortable using a high end brand with a decent reputation. This gives the customer confidence in what they are buying and what customers want most is performance and reliability. Reduction in volume due to low cost competition eroding TE’s market share will be the result of customers seeking a cheaper alternative in order to compete with market competition. It’s important to understand the market and other volumes which their competitors are dealing with as well as gain some sort of cost and price transparency so that TE can win back their market share. It looks like TE are set on negotiating with their current supplier and because of their good relationship and the reputation which comes with that. ……… The fact that the connectors consist of moulded end caps means it probably doesn’t cost much more for a larger batch run, whether the run is 5000 or 10,000 pieces the cost to set up tooling and labour involved can be greatly reduced if TE commit to larger batch sizes. Reducing the tooling set up costs per run by having larger batches all run at once may be a solution. An advantage of this may be that there are less parts likely to fail quality control as there will be less variation between runs as well as less waste. Rather than paying for smaller batches to satisfy current demand, TE could commit to purchase large amount of stock and have supplier store them ready for call off when required under a framework arrangement. Alternatively TE could have a reorder point set up which raises a demand for more to be purchased once stock levels drop below ‘x’ amount. TE could look into automatic assembly for the connectors to reduce manpower. The supplier could be encouraged to do this although there will be a set up cost for this. This would reduce human error and there would be less waste. Because demand for this type of connector is stable with attractive volumes, this means that TE can afford to commit to purchasing larger quantities as long as the relevant market research has been done in order to determine whether this connector may be on the edge of obsolescence or about to have any changes made to it’s structure and design due to any advancements in technology. There would be no added value in purchasing large quantities for stock not to be used and to remain on the shelf.
- It’s important to gather information on the current supplier and re-assess their position within the market. Sometimes it’s far too easy for a company to carry on using the same supplier out of pure habit without benchmarking against other suitable suppliers. The evidence collated through benchmarking can be used as a powerful bargaining tool during the negotiation process. It’s an important practice in order for TE to see where they stand within the market even if they are not in a suitable position to change supplier at this present time due to the other risks involved. It’s also important for TE to re-evaluate their own business needs so that they can be sure conformance and performance specification requirements have not changed within the market and most importantly with their customer base. Key performance indicators must be assessed. KPI measures, service level agreements and measures of service quality must be followed closely by the supplier with any changes that are made. Assessing pricing arrangements is important. Pricing schedules, fixed pricing arrangements and what is the right price for the goods?
- Budget preparation will usually flow from the forecasting of sales for the connectors. This can be used to determine what TE need to be working towards once negotiation takes place. TE can look at all of the stages in budget preparation and examine where cost savings can be made.
- What is the specification? What does TE require for it’s connectors? There might be room for movement within the specification TE requires for its connectors. By ensuring the connectors are not ‘over- specified’ for their use will reduce costs. There might be room to widen tolerances and achieve the same level of performance required within the product and so it remains fit for use. Conformance specifications (technical specification and design specification) must remain adequate for the scope of use in the way of materials, designs and processes. Performance specifications (functional specification) must also remain adequate and reliable for use in the way of capabilities and outputs to be achieved within specific tolerances which are required for use. Service specifications (an intangible activity or benefits that one party can offer to another which does not result in ownership of anything). As mentioned in the brief the connectors are manually assembled. Can this service be carried out in house or outsourced to produce a cost saving? TE could have a ‘Make Vs Buy’ analysis to determine the most cost effective path. Sustainable specification known as ‘Triple Bottom Line’ must also be considered to ensure economic sustainability (profit), environmental sustainability (planet) and social sustainability (people).
- Primary and secondary market data on costs and prices can be collated in order to fully understand supplier pricing strategies. Various price and cost research can include: general price enquiries, price list information, networking at trade conferences/ exhibitions, gaining access to historical records of supplier prices and cost schedules, informal networking with colleagues and other industry professionals, financial and industry press or published economic indices. Costs, life cycle costing and cost budgets must be understood but attention must be paid to data which may become swiftly outdated, inaccurate or irrelevant due to unforeseen changes in the internal/ external environment. Copper is a commodity driven by market forces and therefore the price can fluctuate. It would be preferable that the copper was purchased when prices are low. Bulk buying copper at low prices will help achieve a cost saving. This could be free issued to the manufacturer so that the cost of the copper is removed from the manufacturing process to create a more stable and lower price.
- When considering prices quoted by a supplier or offered in negotiation there are two basic approaches that the buyer can use to decide whether ‘the price is right’. Price analysis to determine if the price offered is a fair price and appropriate for the goods. This can be measured by comparing competitive tenders or quotations offered by other suppliers within the market. This can help establish the ‘going rate’. Cost analysis is a more specialist technique, often used to support price negotiations where the supplier justifies its price by the need to cover its costs (cost based pricing). TE can look at how the quoted price relates to the supplier’s cost of production. The supplier can be asked to provide a cost breakdown with their quotations. The buyer can calculate a target price or price range for use in negotiation. This would be based on the supplier covering their costs plus a reasonable profit margin. This will help the buyer to establish how much leverage to apply to force the prices down. This will help eliminate any unethical or irresponsible prices and estimate the lowest possible price the supplier can sustainably afford to charge.
- It would be important to consider whether the activity of manually assembling the connectors is strategically important or ‘core’ to the business. TE can look at the effects on total costs of production of buying in or incurring costs in-house and whether in-house provision is competitive with the straight buy option direct from the supplier against outsourcing. The following will need to be considered for each option: In-house: Availability of in-house competencies and capacity, whether TE’s supplier will support this decision, risks involved and human resource impacts. Straight buy: ownership of problems, capacity issues, risks involved due to lack of control. Outsourcing: Product turnaround, added value through industry expert skill base and knowledge, capacity issues, risks involved due to lack of control.
- Procurement can play a key role in the implementation and control of the make or buy decision when it comes to the manual assembly of the connectors.
- TE can delegate the manual assembly of it’s connectors if it is seen as a non-core activity. It can be used as an extension of in-house resources. The functions which could be carried out in-house can be delegated to external contractors/ service providers who will work closely with TE. The outsourcer can draw up a long term contract specifying the work to be performed and the service levels to be achieved by an outsource provider. The outsourcer remains responsible for the satisfactory completion of the work through relationship management but delegates the day to day operations/ assembly to the outsource provider. The potential of outsourcing to control and decrease costs will help achieve a competitive advantage within the market. This will help build TE’s market share.
- This is a brief overview of the risks and benefits in outsourcing. The following will need to be considered with this option.
- Contractual performance measures; developing KPI’s, KPI measures, service level agreements, measures of service quality. KPI’s should be re evaluated to reflect any business changes. The count (good or bad) typically refers to either the amount of product produced since the last machine changeover or the production sum for the entire shift or week. Many companies will compare individual worker and shift output to invoke a competitive spirit among employees. Production processes occasionally produce scrap, which is measured in terms of reject ratio. Minimizing scrap helps organisations meet profitability goals so it is important to track whether or not the amount being produced is within tolerable limits. Machines and processes produce goods at variable rates. When speeds differ, slow rates typically result in dropped profits while faster speeds affect quality control. It is important for operating speeds to remain consistent. Many organizations display target values for output, rate and quality. This KPI helps motivate employees to meet specific performance targets. Takt time is the amount of time, or cycle time, for the completion of a task. This could be the time it takes to produce a product, but it more likely relates to the cycle time of specific operations. By displaying this KPI, manufacturers can quickly determine where the constraints or bottlenecks are within a process.
- The process of negotiation can be broken down into distinct stages or steps. The following model shows the negotiation process in its broadest form, including some of the activities undertaken by negotiators at each stage.
- There are two main approaches to negotiation which reflect different tactics. Due to the relationship TE has with its supplier a integrative/ collaborative approach would not be unreasonable.
- TE’s negotiation and agreement on price will include a range of matters. Type of pricing arrangement is important determining whether and how the supplier will possibly try to increase their prices through the life of the contract by adding extras e.g. consumables, overtime payments which are not included in the original pricing. The price or fee schedules on which the supplier will calculate the amounts charged. Methods of new prices or price changes will have to be jointly agreed. Available discounts and the conditions under which they will be applied. Terms of payment and credit (timescales and methods).
- Price arrangements or agreements in contracts can include. Fixed price agreements in which a schedule of fixed fees or payments is agreed in advance (and the supplier bears all risk of cost variances). More flexible variants may include the use of cost price adjustment clause, stating that price adjustments are allowed on the basis of actual increases in materials or labour costs. The use of a price review clause stating that the fixed price will be opened for review and re-negotiation at the end of a specific period. Incentivised contracts such as bonus fees added to the fixed price on attainment of specific KPIs or a formulae for sharing cost savings against a negotiated target cost between buyer and supplier. Cost plus agreements where the buyer agrees to reimburse the supplier for allowable and reasonable costs incurred in performing the contract. This could be capped and have limitations. These fixed price agreements can help with cash flow management and lessen financial risk, since the total price commitment is known in advance. This can help create a cost saving.
- Framework arrangements are becoming more popular as they represent a 'smarter' way of purchasing than placing 'one-off’ orders for recurrent contracts for works or supplies; by, for example, optimising volume purchasing discounts and minimising repetitive purchasing tasks. A key aim of a framework arrangement should be to establish a pricing structure; however this does not mean that actual prices should be fixed but rather that there should be a mechanism that will be applied to pricing particular requirements during the period of the framework. It should also be possible to establish the scope and types of goods/ services that will need to be called-off.
- TE could take it upon themselves to streamline their activities and attempt a more lean approach cross functionally across various different departments within the organisation. This could be achieved by looking at the following. Logistics and transportation. Reduce packaging and putting thought into what kind of packaging is used (environmentally friendly/recycled materials. Cheaper advertising through the use of the internet. Reducing installation costs and making the product more user friendly thus reducing time taken to install the product. Performance reviews on employees to encourage a leaner workforce within the organisation.
- This is an overview of what the slideshow contains and areas that have been explored.