Purchasing ~Sourcing


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Moving from purchasing to strategic sourcing

Published in: Business, Economy & Finance

Purchasing ~Sourcing

  1. 1. Sourcing & Optimising Strategies Managing Strategic Supplier Relationship & Collaboration Anand Subramaniam
  2. 2. <ul><li>“The most difficult thing in the world is to know how to do a thing and to watch somebody else doing it wrong, without comment.” </li></ul><ul><ul><li>- T. H. White </li></ul></ul>
  3. 3. Highlights <ul><li>Drivers for Change </li></ul><ul><li>Buyer / Chief Purchasing Officer - Challenge </li></ul><ul><li>Supplier Base Optimisation </li></ul><ul><li>Strategic Sourcing Process </li></ul><ul><li>Supplier – Financial Analysis </li></ul><ul><li>Risk Management </li></ul><ul><li>Supplier Evaluation (Performance Audits) </li></ul>
  4. 4. Drivers for Change
  5. 5. Today… <ul><li>Re-focus on process capabilities </li></ul><ul><li>Organisations are / need changing </li></ul><ul><li>Supply Market and Sourcing Strategies are changing </li></ul><ul><li>Warehousing & Transportation are getting sophisticated </li></ul><ul><li>Increased use of technology and suppliers’ capabilities - to obtain visibility of the supply chain </li></ul>
  6. 6. Chief Purchasing Officer / Buyers
  7. 7. Do you know… <ul><li>Who are your key suppliers? </li></ul><ul><li>What is your organisation total spend each year? </li></ul><ul><li>What is the spend by category / supplier? (Eg. raw materials, IT) </li></ul><ul><li>What is the total acquisition cost (TAC) & the life cycle cost of capital purchases? </li></ul><ul><li>What is the value your suppliers provide towards your organisation’s success and reputation? </li></ul><ul><li>How to manage vendor performance? </li></ul><ul><li>What are the purchasing risks and how to manage it? </li></ul><ul><li>What are you Out / In-sourcing? </li></ul><ul><li>Whether your purchasing strategies are aligned with business strategies? </li></ul><ul><li>What percentage of your external spend is managed by purchasing? </li></ul><ul><li>Do you assess the outcome of your negotiations? </li></ul><ul><li>How do you develop your key suppliers? </li></ul><ul><li>What financial metrics to focus on? </li></ul>
  8. 8. Supplier Base Optimisation
  9. 9. 80 / 20 - Rule <ul><li>Analysis to identify, 20% of suppliers receiving the majority of purchase dollars </li></ul><ul><li>Identify the minority of suppliers causing the majority of problems </li></ul><ul><li>80/20 rule assumes the best suppliers receive the majority of purchase dollars </li></ul>
  10. 10. Optimisation - Why & What <ul><li>With too large a supply base, the challenges </li></ul><ul><ul><li>Supplier integration </li></ul></ul><ul><ul><li>Collaborative agreements </li></ul></ul><ul><ul><li>Supplier development </li></ul></ul><ul><ul><li>Joint total quality/cost reduction efforts </li></ul></ul><ul><li>To determine the right mix of capable suppliers </li></ul><ul><ul><li>Optimisation does not only mean adding or reducing suppliers. It can mean switching suppliers, also !! </li></ul></ul><ul><ul><li>Optimisation does not mean supply base reduction </li></ul></ul><ul><li>As companies continue to rely on fewer total suppliers, the selection process takes on even greater importance </li></ul>
  11. 11. Optimisation - Benefits <ul><li>Reduced supply base risk </li></ul><ul><li>Lower transactions costs </li></ul><ul><li>Leverage leading to lower purchase costs </li></ul><ul><li>Ability to pursue value-added activities </li></ul><ul><li>Opportunity to work with world-class suppliers, which leads to improved value chain performance </li></ul>
  12. 12. Optimisation - Critical Success Factors <ul><li>Time </li></ul><ul><li>Cross-functional teams </li></ul><ul><li>Supplier measurement system </li></ul><ul><li>Strategy development process that considers optimisation goals </li></ul><ul><li>Overall supply base vision with Senior Management support </li></ul>
  13. 13. Strategic Sourcing Process
  14. 14. Evolution of Sourcing Cross-functional teams Global Commodity Teams, Center-led or centralised Decentralised Buyers People Technology enablement across all strategic sourcing processes Auctions, eSourcing, Basic optimisation Spreadsheets Technology Global; Highly collaborative across the enterprise and visible at executive levels Multi-regional, Some collaboration with related functions Local; Many suppliers Reach Balancing Total System Cost; Maximising shareholder value; Enabling product innovation Supplier rationalisation, Spend consolidation, Cycle-time reduction, Standardisation Price, Transaction management, Compliance Focus Enablement Project Transaction Paradigm Adapted from FreeMarkets Supply Evolution Traditional Purchasing Strategic Sourcing Global Supply Management
  15. 15. Strategic Sourcing Process Analyse Spend Identify Requirements Analyse Market Implement Strategy Manage Negotiations Award & Contract Develop Strategy Traditional Procurement Strategic Sourcing Supplier Evaluation and Selection Supplier Management Supplier Development
  16. 16. Analyse Spend <ul><li>Buyer </li></ul><ul><li>Buying analysis across all divisions </li></ul><ul><li>Total number of suppliers used </li></ul><ul><li>Compare pricing across divisions </li></ul><ul><li>Consolidate spend, reduce suppliers and obtain better pricing </li></ul><ul><li>Tools </li></ul><ul><li>Spend Analysis </li></ul>
  17. 17. Identify Requirements <ul><li>Buyer </li></ul><ul><li>Users - product and service requirements </li></ul><ul><ul><li>Quality requirements </li></ul></ul><ul><ul><li>Product specifications </li></ul></ul><ul><ul><li>Service performance expectations </li></ul></ul><ul><li>Identify different requirements across divisions </li></ul><ul><ul><li>Consolidate opportunities </li></ul></ul><ul><li>Tools </li></ul><ul><li>Specifications </li></ul><ul><li>Surveys </li></ul><ul><li>Interviews </li></ul>
  18. 18. Analyse Market <ul><li>Buyer </li></ul><ul><li>Specific market conditions </li></ul><ul><ul><li>Rising input costs, capacity constraints, barriers to entry </li></ul></ul><ul><li>Supply base constituents </li></ul><ul><ul><li>Many players, dominant players </li></ul></ul><ul><li>Analyse new products, services or diverse suppliers </li></ul><ul><li>Tools </li></ul><ul><li>Internet research </li></ul><ul><li>Benchmarking </li></ul>
  19. 19. Develop Strategy <ul><li>Buyer </li></ul><ul><li>Based on the internal requirements, industry dynamics </li></ul><ul><ul><li>Negotiate with current supplier(s) </li></ul></ul><ul><ul><li>Bring in new suppliers </li></ul></ul><ul><ul><li>Bid </li></ul></ul><ul><ul><ul><li>Reverse Auction </li></ul></ul></ul><ul><ul><ul><li>Traditional RFI, RFP, RFQ </li></ul></ul></ul><ul><li>Tools </li></ul><ul><li>eSourcing tools </li></ul><ul><li>Cross functional teams </li></ul><ul><li>Project Management </li></ul>
  20. 20. Manage Negotiation <ul><li>Buyer </li></ul><ul><li>Develop criteria for evaluating proposals based on internal requirements </li></ul><ul><li>Initiate negotiations under chosen strategy </li></ul><ul><li>Compare and rank results based on key criteria </li></ul><ul><li>Tools </li></ul><ul><li>Online RFX </li></ul><ul><li>Weights / Scoring Models </li></ul><ul><li>Standard templates </li></ul><ul><li>Reverse Auction </li></ul>
  21. 21. Award Contract <ul><li>Buyer </li></ul><ul><li>Based on results, determine best overall supplier(s) </li></ul><ul><ul><li>Cross-functional team decision </li></ul></ul><ul><li>Finalise contract terms and conditions with suppliers </li></ul><ul><ul><li>Involve finance and legal </li></ul></ul><ul><li>Tools </li></ul><ul><li>Automated weights / scoring </li></ul><ul><li>Online contract management </li></ul><ul><li>Cross functional teams </li></ul>
  22. 22. Implementation Strategy <ul><li>Buyer </li></ul><ul><li>Determine how contract will be rolled out </li></ul><ul><ul><li>Change management strategy </li></ul></ul><ul><li>Identify and track performance metrics </li></ul><ul><li>Communicate value to stakeholders </li></ul><ul><li>Tools </li></ul><ul><li>Supplier Performance </li></ul><ul><li>Supplier Portals </li></ul><ul><li>Spend / Diversity Reporting </li></ul>
  23. 23. Supplier Financial Analysis
  24. 24. Financial Analysis - When & Why.. <ul><li>When do it? </li></ul><ul><li>For critical items </li></ul><ul><li>For new suppliers </li></ul><ul><li>When pursuing longer-term agreements </li></ul><ul><li>For purchase requirements involving significant dollars </li></ul><ul><li>Why do it? </li></ul><ul><li>To manage business risk </li></ul><ul><li>To eliminate marginal suppliers early in the evaluation process </li></ul>
  25. 25. Ratio Analysis <ul><li>Profitability </li></ul><ul><li>How profitable is the supplier ? What rate of return is the supplier earning? </li></ul><ul><ul><li>Gross and net profit margin </li></ul></ul><ul><ul><li>Return on equity </li></ul></ul><ul><ul><li>Return on investment </li></ul></ul><ul><li>Liquidity </li></ul><ul><li>How capable is the supplier of meeting short-term cash needs? </li></ul><ul><ul><li>Current ratio </li></ul></ul><ul><ul><li>Quick ratio </li></ul></ul>
  26. 26. Ratio Analysis (Contd.) <ul><li>Leverage </li></ul><ul><li>Is the supplier over-leveraged and capable of paying long-term obligations? </li></ul><ul><ul><li>Debt to assets </li></ul></ul><ul><ul><li>Time interest earned </li></ul></ul><ul><ul><li>Fixed charge coverage </li></ul></ul><ul><li>Activity </li></ul><ul><li>How effectively is the supplier managing assets? </li></ul><ul><ul><li>Inventory turnover </li></ul></ul><ul><ul><li>Average collection period </li></ul></ul><ul><ul><li>Return on net assets </li></ul></ul>
  27. 27. Contract Management <ul><li>Termination (Escape) clauses </li></ul><ul><li>Service Level Agreement (SLA’s) </li></ul><ul><li>Clear communicated specifications </li></ul><ul><li>Key Performance Indicators (KPI’s) </li></ul><ul><li>Feedback and review on a regular basis </li></ul><ul><li>Liquidated damages for poor performance </li></ul>
  28. 28. Risk Management
  29. 29. Risk Minimisation
  30. 30. Supplier Performance
  31. 31. Improvement Action Plan
  32. 32. Supplier Audit Check Sheet
  33. 33. <ul><li>“If you want to make enemies, try to change something.” </li></ul><ul><ul><li>- Woodrow Wilson (1856-1924) </li></ul></ul>
  34. 34. <ul><li>Good Luck </li></ul><ul><li>http://www.linkedin.com/in/anandsubramaniam </li></ul>
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