proc.ppt
Upcoming SlideShare
Loading in...5
×
 

proc.ppt

on

  • 1,626 views

 

Statistics

Views

Total Views
1,626
Views on SlideShare
1,623
Embed Views
3

Actions

Likes
0
Downloads
40
Comments
0

2 Embeds 3

http://www.slideshare.net 2
http://www.health.medicbd.com 1

Accessibility

Categories

Upload Details

Uploaded via as Microsoft PowerPoint

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment
  • To the left, when the chances of selling the product are close to 100%, reserving an extra unit of the product means that instead of paying H we will be paying L thus the difference is the slope. To the right, when there is no chance of selling the product, we incur a cost of L when we reserve it (it would be zero cost otherwise) – we should not reserve anything there.

proc.ppt proc.ppt Presentation Transcript

  • Modern Procurement Yossi Sheffi Yossi Sheffi MIT Engineering Systems Division
  • Outline
    • Role of procurement
    • “ Make vs. buy”
    • Strategic considerations
    • Commitment vs. variable buy
    • e-Procurement
    • Combinatorial procurement
    • Example: transportation
      • RFP – system
      • RFP – lane
      • Spot market
  •  
  • Components of US Corporate Purchases
  • The Leaders
    • Leading companies have unique business design requiring innovative procurement capabilities
    • linking suppliers into its build-to-order system creating a responsive, virtually working-capital-free supply chain
    • uses a total systems costs approach, minimizing the sum of the supplier’s and its own costs
    • relies on value-added suppliers to deliver industry leading products and services, yet a leader in Internet-based procurement
    • capitalized on supplier relationships to extract >20% cost reduction in external purchases for the 1998 Accord
  • The Leverage Fortune, February 20, 1995 Strategic sourcing efforts can have a significant impact on the financial performance and shareholder value of a company Revenue COGS - Material Labor & OH Gross Margin Operating Expenses Net Income (pretax) % Improvement “ When the goal is boosting profits by dramatically lowering costs, a business should look first to what it buys.” Baseline $1,000M 390M 275M $335M 200M $135M 5% $1,000M 371M 275M $354M 200M $154M 14% 10% $1,000M 351M 275M $374M 200M $174M 29% 15% $1,000M 332M 275M $393M 200M $193M 43% Percent cost reduction in Direct Materials ILLUSTRATIVE EXAMPLE
  • The Leverage Required cost reduction to achieve 20% increase in profitability: 6% 2% Electronics 4% 1% Automotive 11% 3% Electrical Equipment 5% 1% Computer Manufacturing Purchasing Industry
  • Procurement Trends
    • Parts => partners
      • Increased outsourcing across the value chain
    • Purchased components => subassemblies
    • More highly engineered technical purchases in the mix of the buy
    • Increasing reliance on global supply chain
    • Use of the net for RFP/RFQ and public/private exchanges
  • The Decisions: ? Make Buy ? Committed amount/capacity “ As needed” procurement
  • “Make” vs. “Buy” From River Rouge to Resende
  • “Make” vs. “Buy” From River Rouge to Resende Overhead functions Lochpe-Maxion Meritor (Rockwell) Remon PowerTrain VDO Delga Carese Internal logistics Union Manten VolksWagen Chasis Wheels Engines Pax Cabins Body Paint Shop Axles
  • Advantages of Outsourcing
    • Flexibility: convert fixed costs to variable costs
      • Providing flexibility in adjusting capacity (both up and down)Balance work force requirement
    • Reduce capital investment requirements
    • Accelerate new product development
    • Reduce costs via suppliers’ economies of scale and lower wage structure
    • Gain access to invention and innovations from suppliers
    • Focus resources on high value-added activities (core competencies)
  • Problems with Outsourcing
    • Labor advantages shrink as countries mature and as direct labor continues to become a smaller part of the total cost
    • Supply chain management is more difficult with off-shore suppliers
    • Lead time may be a problem with suppliers
  • The Strategic Risk
    • Creating a competitor
      • 1914 – The Dodge Brothers turn from a Ford engine supplier to a competitor
      • Japanese consumer electronic industry – started with contracting for US firms for radio receivers (also adopted transistors faster)
      • Japanese aircraft industries?
    • Losing control of the channel to a supplier
      • IBM in 1980 designed the PC, the manufacturing process and the value chain
      • Contracted to Microsoft and Intel
      • “ Window Machine” and “Intel Inside”
    • Losing control of the channel to a customer
      • P&G and Wal-Mart => “Wal-Mart Outside”?
  • Relationships Evolution From “lowest price” public-auction-based buying To long term partnership-based sourcing To a portfolio approach
  • Example
    • A manufacturer is facing uncertain demand
    • Supplier is offering:
      • Low price for committed capacity (pay whether it is used or not)
      • Higher price for contracted capacity (use as much as needed)
    • Given demand distribution, the question is how much to commit to?
  • Demand Distribution Mean = 8,000 units/mo. Std Deviation = 1,500 units/mo .
  • H = $800 L = $500 H-L L
  • Optimal Capacity Reservation
    • The optimal capacity reserved, Q * , will be at a point where the expected cost from an additional unit of capacity reserved will be approximately zero, -- One unit more or less will both increase the expected costs
    • The expected cost resulting from reserving the ( Q * +1) st unit is H if it is sold and 0 for if it is unsold
    • The probability of needing the ( Q * +1) st unit is the probability that the demand will be higher than Q * , Pr (X  Q * ) , and the probability of not selling it is Pr (X  Q * )
    • The expected cost resulting from reserving the ( Q * +1) st unit is: H  Pr (X  Q * ) + 0  Pr (X  Q * )
    • Optimality conditions: H  Pr (X  Q * ) = L
    • Solving for optimality: Pr (X  Q * ) = (H – L)/H
  • Levels of Procurement Development 1. Leveraged Buy - Volume consolidation - Supply chain optimization 2. Linked Buy - Buyer-supplier integration - Channel cost minimization 3. Value Buy - Value management - Channel optimization 4. Integrated sell - Commercial synergy 0. User Buy - Independent actions
  • Levels of Procurement Development
    • User departments establish their own requirement
    • Procurement organization handles the transactions
    • High prices, questionable terms
    • Little strategic value
    1. Leveraged Buy - Volume consolidation - Supply chain optimization 2. Linked Buy - Buyer-supplier integration - Channel cost minimization 3. Value Buy - Value management - Channel optimization 4. Integrated sell - Commercial synergy 0. User Buy - Independent actions
  • Levels of Procurement Development
    • Utilize supplier’s fixed costs more effectively
    • Exploit competitive supply base structure
    • Leveraged buy
    • Enhanced negotiation & contracting
    • Enterprise-wide view of terms and conditions
    1. Leveraged Buy - Volume consolidation - Supply chain optimization 2. Linked Buy - Buyer-supplier integration - Channel cost minimization 3. Value Buy - Value management - Channel optimization 4. Integrated sell - Commercial synergy 0. User Buy - Independent actions
  • Levels of Procurement Development
    • Leverage points:
    • Improved coordination, forecast accuracy and predictability
    • Optimized logistics flow
    • Value added services
    • Streamlined transactional information and cash flows
    • Elimination of non-value-added activities
    1. Leveraged Buy - Volume consolidation - Supply chain optimization 2. Linked Buy - Buyer-supplier integration - Channel cost minimization 3. Value Buy - Value management - Channel optimization 4. Integrated sell - Commercial synergy 0. User Buy - Independent actions
  • Levels of Procurement Development
    • Leverage points:
    • Increased and early supplier involvement in solution design
    • Reduced complexity and simplified specifications
    • Increased standardization
    • Clarified response time objectives
    • Rationalized requirements
    • Controlled consumption rates
    • Performance incentives to achieve total cost productivity
    1. Leveraged Buy - Volume consolidation - Supply chain optimization 2. Linked Buy - Buyer-supplier integration - Channel cost minimization 3. Value Buy - Value management - Channel optimization 4. Integrated sell - Commercial synergy 0. User Buy - Independent actions
  • Levels of Procurement Development
    • Leverage points:
    • Integrate multi-company products/services and channel portfolio
    • Introduce creative risk sharing
    • Exploit suppliers’ capability and potential
    • Manage complex channel relationships
    • Cross-utilize infrastructure and operating resources among multiple parties in the value chain
    1. Leveraged Buy - Volume consolidation - Supply chain optimization 2. Linked Buy - Buyer-supplier integration - Channel cost minimization 3. Value Buy - Value management - Channel optimization 4. Integrated sell - Commercial synergy 0. User Buy - Independent actions
  • Levels of Procurement Development 1. Leveraged Buy - Volume consolidation - Supply chain optimization 2. Linked Buy - Buyer-supplier integration - Channel cost minimization 3. Value Buy - Value management - Channel optimization 4. Integrated sell - Commercial synergy 0. User Buy - Independent actions Consume better Buy better Buy for less Sell better
  • Segmenting the Buy High Low Low High Procurement Complexity Revenue Impact/ Business Risk How much impact could the purchase have on corporate revenue over time?
  • Segmenting the Buy High Low Low High Procurement Complexity Revenue Impact/ Business Risk
    • How complex are the cost driver of the purchase?
    • Technology/design
    • Supply chain integration
    • Life cycle management
  • Segmenting the Buy High Low Low High Procurement Complexity Revenue Impact/ Business Risk
    • Materials
    • logistics services
    • Benefits programs
    • Professional services
    • Office supplies
    • Travel
    • Critical components
    • High-technology products and services
    • Outsourced manufacturing functions
    • Advertising
    • Telemarketing
    • Branded finished goods
    Highest Customer Value impact
  • Sourcing Process Goals & focus for next year (by category and totals) Item requirements by category across the user base Strategy to leverage buying power and minimize total costs by category Target suppliers, negotiations and contracting Systems, procedures, & skills to support strategy and execute well Performance metrics, benchmarks, and improvement programs Develop requirements Create Annual plan Develop Sourcing strategy Evaluate & select suppliers Procure material Manage Supplier relationships
  • Procurement: The Killer B2B App .
    • Main idea: consolidate the buying power
    • Centralize control
    • Increase reach
    • Automate processes
    • Players:
      • Application providers (Ariba, C1, Netscape…)
      • Consulting services (FreeMarkets, ICGCommerce…)
      • The consortia (Covisint, Transora, e2open…)
  • e-Procurement extends capabilities to business users to self-service their operating resource requirements via approved suppliers and products. Many purchasing transactions bypass Procurement entirely, going directly to suppliers E-Procurement: Automation Internal Customers Demand Management Enablers Supplier Network Internal Systems Corporate Intranet Procurement Professionals Internal Systems Department A Department B INTERNET Payments Order Status Orders Information Catalogues Suppliers
    • PCs/Technology
    • Office Supplies
    • Copiers
    • Telecom
    • Forms
    • Temp Services
  • e-Procurement: Main benefit:Improved Compliance Time
    • Initial excitement
    • Early adopters happy
    • Management support at its greatest
    • Little to no administration required
    • System limitations and administrative issues surface
    • First user complaints
    • Performance tracking systems installed
    • Ease of use and reporting become critical
    • Significant administration required
    • Dismayed users may resort to old methods and sources
    Benefits Captured Benefits are sustainable with eProcurement Phase of Contract: Negotiate Deal Implement Contract Manage Compliance Contract savings decline over time due to compliance and measurement problems
  • e-Procurement Applications Landscape
  • IBM Case
  • IBM Fortunes AAA AA+ AA AA- A+ A A- BBB BB 6/90: $117 90 91 92 93 6/93: $41
  • The Turnaround
  •  
  • Procurement 1990 - 1994 Number of Procurement Organizations – Hundreds! Country Division Business Units Number of contracts per supplier – Average 5 Procurement Population 5% Sourcing 75% Fulfillment 20% Contracts/Others Transactions Production “Automated” Purchase Order/Invoice General Procurement – “Manual” Purchase Order/Invoice Business Metrics Early 1990’s Savings/Competitiveness ? Escapes (By Pass) 45% Audit Satisfaction 47% Client Satisfaction 40% P.O. Processing 30 days Cycle Time Contract Cycle Time 6-12 months Length 40 (+) pages
  • The Transformation Transaction Automation Process Optimization Strategic Procurement ROI TECHNOLOGY
  • e-Procurement PROCUREMENT STRATEGY, PLANNING, PROCESS IMPROVEMENT Information Warehouse Network & Topology MARKET INTELLIGENCE SUPPLIER INTELLIGENCE QUOTING SOURCE SELECTION CONTRACT NEGOTIATION CATALOGS FORECAST PLANNING REQUISITION APPROVAL PURCHASE ORDER INVOICE ACCOUNTS PAYABLE PAYMENT BANKS
    • D&B
    • Connect’ns
    • Market
    • Basket
    • Analysis
    • Supplier
    • Profiles
    • Industry
    • Scoring
    • Sys
    • Internet
    • Links
    • Auto-Bid
    • Cycles
    • Internet
    • Quoting
    • Internet
    • Quoting
    • Integ.
    • W/Frong
    • End App
    • Contract
    • Lead Client
    • Global
    • Accessibility
    • Contract
    • On Line
    • Tool
    • WEB
    • Access
    • Identify
    • Required
    • Catalogs
    • 3 rd Party
    • Hosting
    • Buyerless
    • Options
    • OBI/XML
    • Capability
    • Punchout
    • Integrated
    • With ERP,
    • Trading
    • Network
    • Expanded
    • Automation
    • Buyerless
    • Skills
    • Matching
    • Workflow
    • WEB
    • Enabled
    • Electronic
    • Approvals
    • ERP
    • Integrated
    • Throughout
    • Company
    • EDI/XML
    • Capability
    • Workflow
    • Enabled
    • Trading
    • Network
    • Chart of
    • Accounts
    • Lead Client
    • Electronic
    • Invoices
    • EDI/XML
    • Workflow
    • WEB
    • Enabled
    • Positive &
    • Negative
    • Confirmation
    • ERP, SAP, I2
    • Electronic
    • Bank
    • Payments
    • Ledger
    • Taxes
    • Multi-Currency
    • EURO
    • WEB Enabled
    • ERP, SAP, I2
  • Application Portfolio (2001) IBM has established a single, WWAP organization on a common SAP platform and consolidated vendor master file. At year end 2000, 96% of invoices received were electronically. World Wide Accounts Payable (WWAP) Web-based repository of travel information for IBM travelers before and after travel. Travel Web Site Web-based global application used by internal IBM to source Technical Services subcontractors. Skills Matching Manages the comparative bid/quote process of bill of materials (BOM) to be built by contract manufacturers A-Source Provides capability to do open and directed RFQ/RFI activity over the Internet Internet Quoting A single point of entry for suppliers and internal IBM personnel to access procurement Supply Portal Description Application
  • Application Portfolio (2001) Provide supplier access to procurement applications and general communications. Electronic Supply Chain Interface Suite of applications (ESI) The IBM & Contract Manufacturer Order Book application is a procurement datamart that is used by the commodity councils and Outsourced Supply Chain organization for data collection and analysis of IBM’s Contract Manufacturer orders and Outsourced Supply Chain organization for data collection and analysis of IBM’s Contract Manufacturer orders and forecasts and IBM’s component supplier capacity and order coverage. Order Book This is a web tool designed to be the common tool for direct materials replenishment from suppliers for all IBM manufacturing sites globally. It will provide collaboration function supporting demand and supply planning and will converge the replenishment and collaboration functions. Replenishment and Supply Collaboration (RSC) Description Application
  • Application Portfolio (2001) A worldwide central repository of supplier contracts that generates contract documents and manages contract activity. Contract On-Line Tool An electronic requisition/catalog system deployed globally. Req/Cat A procurement information warehouse fed by ERP, contract, and material information systems. Business Data Warehouse Provides a consolidated store of production price data to maximize leverage opportunities. Purchase Contract Mgt. System Allows IBM to share technical design information (from “hard copy” drawings to CAD files) over the Internet. Graphics Exchange (EGI-Net) An application that facilitates the processing of parts orders from IBM by contract manufacturers. Outsourced Supply Chain Converts SAP and EDI PO’s to web-based e-forms that allows suppliers to process with a web browser and invoice IBM. Web Ordering & Invoicing Description Application
  • Application Portfolio (2001) Development engineering tool that provides technology roadmap data, with detailed technical analysis documenting supplier technical capabilities via e-surveys. Development Toolkit Network (DTN) Proactive supplier quality solution that measures quality as the supplier ‘makes’ and as IBM ‘uses’ the part. Generates charts and reports for both supplier and IBM. Supplier Quality Management System (SQMS) Supplier audit repository providing a common view of IBM audit activity and results allowing for a consolidated view of audit data, audit results, schedules and supplier action items. Quality Information Network (QIN) Collaboration tool that allows for the ‘sharing’ of quality problem data among engineers, commodity chairs, and management. Supplier Problem Log (SPL) Checklist qualification data repository tool that insures proper qualification procedures are followed. Allows for automatic notification of product engineer and review capability. Technology Qualification Application (TQA) Manage supplier PCN/EOL (end of life) issues through centralized IBM approach that allows for integration of Dev/Mfg/Proc in a common report format. Process Change Notification (PCN) Description Application
  • Segmenting Suppliers Long Term Strategic Importance $ Value of Purchases
    • Emerging Opportunity
    • Characteristics
      • New Technology / Product Differentiation
      • Undeveloped Relationship
      • Uncertain Risk
      • Track Record to be Established
    • Non-Strategic
    • Characteristics
      • Low Impact/$ Value
      • Regional or Local Supplier
      • Minimal value to mitigate purchased goods/services to other suppliers
      • Defined duration
    • Enterprise/Core/Strategic
    • Characteristics
      • Self Sufficient, World Class Service Provider
      • Source of Innovation and Leadership in Both Technical and Business Areas
      • Long-Term, Value-add Relationship with Shared Goals / Objectives
      • Capable Industry Provider
      • Price/T’s & C’s Differentiation
    • Regional/Niche
    • Characteristics
      • Single Commodity Specialist
      • Capable Industry Provider
      • Price/T’s & C’s Differentiation
    Low High Low High 35% 50% 5% 10%
  • Exploiting the Leverage of the Web Trade Deep Trade Broad Trade New
    • Extending the reach to niche suppliers
    • Leverage existing suppliers
    5% Emerging
    • Building critical mass and extending the reach
    15% Commodity
    • Enabling greater collaboration and integration with key partners
    80% Core Web Value Percent of Spend Type of Supplier
  • Trading Communities Seller Centric – Motivation is to increase revenues and reach a wider market than the seller currently serves. Driven to realize greater returns on investment as web site battles with noise on the web. Buyer Centric – Motivation is to reduce procurement costs and increase efficiency of procurement processes. Trading Community – Motivation is to generate revenues by providing value to members of a specific market by introducing new efficiencies and new ways of buying and selling. B B B B B Seller Solution S S S S S Buyer Solution B B B B B S S S S S e-Market Solution
  • Portal Strategy: One Customer – One IBM
    • Single Point of Entry to IBM Global Procurement Applications
    • Procurement Value
      • Long term cost savings through cycle time reduction, reduction in applications administration cost
      • Increase the speed to deploy applications to customers/business partners
      • Maximize shared procurement information
      • Standards compliance from a single platform (security, data definition)
    • Supplier Value
      • Easier to do business with IBM
      • Register once, be recognized everywhere
      • Receive relevant content, messages, and offers
      • Increase our guests’ experience
  • Results 5% >30% Ledger Miscodes 27,000 0 Suppliers Connected via Web $330M 0 Savings via Web 30 days 6 pages 6-12 months 40 (+) pages
    • Contracts
      • Cycle Time
      • Length
    95% +80% ?? 20% e-Transaction: Invoice Hands Free 1 hourly 30 days P.O. Processing Cycle Time >80% 40% Client Satisfaction +90% 40-50% Acceptable Business Controls <1% 30% Maverick buying 2001 Mid 1990’s Business Metrics
  • Any Questions? ? ? ? Yossi Sheffi [email_address] ? ? ?