Accenture Effective Direct Material Sourcing


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The manufacturing industry continues to feel the strain of a saturated western market and competition from emerging markets, particularly those in Asia. As a result, leading companies have adopted new procurement strategies such as supplier collaboration, in an effort to cut costs. Our experience with shows that companies at all levels of the supply chain could collaborate more to reap the benefits of a global supply chain, and they should take a varied approach to sourcing different categories of parts.

This paper examines current challenges in direct material sourcing, such as increasing technological complexity, a strain on raw materials, and the need for better procurement risk management. It then outlines procurement best practices in general and for specific categories of goods, as well as discussing procurement risk management strategies.

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Accenture Effective Direct Material Sourcing

  1. 1. Gaining Competitive Advantage throughMore Effective Direct Material SourcingHow Industrial Equipment Suppliers Can ImplementProcurement Best Practices to Reduce Risk andImprove Cost StructuresBy Florian Kache, Lars Bettermann and Ralf Mägerle
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  3. 3. IntroductionThe manufacturing industry continues to feel the strain of a saturated westernmarket and competition from emerging markets, particularly those in Asia. Asa result, tier-one suppliers have adopted new procurement strategies such assupplier collaboration, in an effort to cut costs. Tier-two suppliers are followingsuit and discovering that optimized and transformed procurement organizationscan help them beat the competition.This report examines current challenges low-tech parts from best-cost countries, In some cases, a supplier should considerin Direct Material Sourcing, including having them assembled in the region they acquiring a raw materials company inincreasing technological complexity, a are purchased. And they manage a base order to secure the supply. By doing so,strain on raw materials, and the need for of suppliers of complex parts from the supplier has the opportunity to gainbetter procurement risk management. developed countries. Suppliers of complex a vital advantage for some commodities,It outlines procurement best practices in parts should meet requirements regarding particularly the rare earth compoundsgeneral and for specific categories of flexibility, and they are usually asked to that are vital for the electronics industry.goods, and the paper covers procurement contribute ideas for design andrisk management strategies. Primarily functionality.focused on the automotive sector, these Procurement Riskfindings and insights are applicable in Managementother industries that involve industrial Information Sharing in theequipment. Supply Chain Procurement risk management processes are a must-have for suppliers to achieveAccenture’s experience with Direct As the number of players in the supply higher procurement performance. To beMaterial Sourcing shows that suppliers chain increases, so does its complexity. successful in the market it is critical forat all levels should collaborate more to Often suppliers are scattered across a buyers to anticipate and rapidly react toreap the benefits of a global supply chain, multitude of countries. High-performing, changes, while simultaneously investingand they should take a varied approach tier-one suppliers manage the complex in relationships with those suppliersto sourcing different categories of parts. supply chain with information sharing – that offer the lowest price and show the both upstream and downstream. The best potential. Suppliers should activelyFor instance, they could differentiate ability of suppliers to share information manage their own suppliers, developbetween suppliers of high-tech and along the supply chain will remain a non-exploitive close collaboration withlow-tech parts and implement separate main differentiator for procurement them and build on common values. Byprocesses for procuring goods that excellence. doing so, tier-one suppliers have the bestcontain different raw materials. In opportunity to reduce supply risks to theaddition, suppliers can potentially benefit benefit of both parties and achieve anfrom sharing certain information in the Efficient Raw Material optimal cost-benefit ratio. In addition,supply chain, ensuring the supply of Management the quality and price of the end productraw materials and conducting effective are likely to improve since trusted tier-procurement risk management. Efficient raw material management two suppliers will be involved in choosing strongly contributes to the market the raw material mixture, and the supply share a supplier holds. Larger tier-two chain will be stronger, giving suppliers aDifferentiating Between suppliers are recommended to negotiate key competitive edge.Suppliers of High-Tech and long term pricing contracts and thus secure a raw material supply for the longLow-Tech Parts term, balancing the cost of doing so withHigh-performing tier-one companies availability requirements. For suppliers indifferentiate among their suppliers based best-cost countries, that process may beon the technological complexity of the easier, due to their proximity to minesparts provided: These companies source and raw material processing facilities. 3
  4. 4. Supply Challenges Faced in theManufacturing IndustryAutomotive suppliers, like most industrial equipmentsuppliers, face numerous challenges, both internallyand externally.External Challenges Internal Challenges players in the supply chain. In fact, those that do share this information are oftenRaw Material Management Supplier Collaboration regarded as “exotic,” since they appearLike any other major industry, the Depending on the size of the company, to have given away the “heart” of theirautomotive sector is affected by increasing a change in mindset may be needed business. However, this ignores the truecost pressure from raw materials. The for a tier-one supplier and beyond to benefit that sharing selected informationfluctuations in the price of raw materials engage with upstream offshore suppliers. with selected, preferred suppliers canhave caused cost-target uncertainties. Whereas large multinationals may be bring for optimizing products andAs a result, companies are using a range accustomed to cross-border collaboration, processes.of strategies such as negotiating fixed medium-sized companies may beprices with periodical adjustments, reluctant to do so. They may lack the Risk Managementimplementing advanced buy /sell right timing and expertise to evaluate Although risk management is widelyprocesses, and setting up hedging the supply base within best-cost countries embedded into the strategies thatdepartments. and expand respectively. However, some suppliers use, the value of procurement companies have gained experience in risk management is often underestimated.Global Competition expanding their supply base in eastern It is crucial for suppliers to have a backupAutomotive suppliers have also felt Europe, and this may prove a good procurement plan in place to ensureincreased pressure from growing starting point for further expansion in business continuity, since the risk to thecompetition in Asia, especially from China best-cost countries. supply chain presented by upstreamand India. At the same time, they have suppliers can be substantial.benefited from the lower prices offered Holistic Information Sharingby new players in best-cost countries. Certain industries and markets lendSuppliers could seize the potential themselves to data sharing, for exampleadvantage of this opportunity by sourcing information regarding part specificationsfrom best-cost countries, which could have and stock level trends which havethe effect of driving prices down through historically been tantamount to businesslow labor costs for complex parts. secrets, not to be disclosed to other4
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  6. 6. How High-Performance Suppliers Use Best Practicesin Direct Materials SourcingGeneral Best Practices Best practices includeAccenture works with several tier-one • Optimizing purchasing processessuppliers to the automotive industry, • Understanding and consolidatingamong other industries. By partnering the supply basewith Accenture, the suppliers are • Ensuring suppliers pursue the samegenerally able to save about 10-15% growth strategiesof their procurement budget. Recent • Actively using brand attractionprojects have shown that despite the • Communicating and collaboratingchallenging market, high-performing with supplierscompanies are investing in implementing • Sharing R&D costsbest practices that are helping them • Conducting active risk managementlead the way.Implement a Structured They map out the amount spent with Ensure Suppliers Share YourProcurement Process individual suppliers, analyze that data Growth Strategy and understand the percentage of theirLeading automotive suppliers have an procurement budget that goes to each High performing automotive tier-oneoptimized, structured procurement supplier. suppliers have identified suppliers thatprocess in place. These suppliers conduct have strategies which match their ownstandardized, periodical Requests for Based on the analysis, companies growth strategy. They understand thatQuotations (RFQs) and well-prepared, eliminate suppliers off the so-called “tail some tier-two suppliers–dependingprofessionally executed fact-based end” of the spend list– e.g. they cut off on the size of the company and thenegotiations. Supplier behavior is those suppliers with whom they spend category of goods sourced—are not asdocumented and analyzed, and the the least, considering that the parts can growth-driven as others. When scoutingdata is used to award contracts and be produced at an incumbent supplier. for optimal supply partners, theseselect suppliers in the future. Companies Accenture has worked with companies keep in mind that suppliers have saved an average of 10% to 15% with non-uniform strategies can cause on costs by rationalizing the preferred problems for supplier base consolidation,Consolidate the Supply Base supplier list and improving compliance cost extra time for management andwith “Tail-End” Cuts or toward preferred suppliers. unnecessarily tie up resources.Acquisitions In some cases, companies choose toBest-in-class companies take a rigorous consolidate the supply base with anapproach to thinning out their base of acquisition of an upstream supplier thatsuppliers by cutting off low-performing fits within its growth strategy. Overall,suppliers that do not add value or, in consolidation helps achieve procurementsome cases, by acquiring small upstream targets by reducing the number ofsuppliers. upstream contacts and increasing overall supply chain reliability.6
  7. 7. Supplier Relationship Management: Cutting off the long tail end of suppliersLong tail end supplier reduction programIdentify Classify Implement Supplier Classification Supplier to-be C B A A A B+ Supplier as-is B+ B Supplier X Supplier Z B- Supplier Y Supplier Z C Demand type Mapping Table Repetitive Demand 1 time Repetitive• Identify C suppliers by region • Classify demand pattern in • Develop supplier replacement• Validate A and B supplier 1 time and repetitive mapping tables structure by category • Assign demand types to supplier • Communicate list of obsolete• Confirm A, B, C structure with classifications suppliers to requestors key stakeholders • Communicate supplier • Block suppliers in ERP systems reclassification and communicate • Confirm savings by supplier reallocationTypically, Accenture is able to realize 10% - 15% of procurement budget savings by rationalizing the preferred supplierslist, improving compliance to preferred suppliers/contracts, increasing procurement control over long tail of spend andreducing operating costUtilize Your Brand Strategy professional relationship with their Conduct Risk Management suppliers, constantly challenging themTop tier-one suppliers also build upon to achieve better results and working to Finally, best-in-class suppliers activelythe power of their successful brands: develop those suppliers that show growth use risk management tools and strategies.They actively position their brand to potential. Both parties benefit, since They operate thorough procurement riskattract the best potential suppliers. priority business contracts may be offered management, invest in cross-functionalHowever, using a brand strategy functions to select suppliers in return for continuous risk management capabilities, usebest in supply-driven environments. In price reductions and reduced supply risk. predictive analytics and strive to eliminatea demand-driven market, a tier-one risk by using a collaborative approachsupplier’s lack of an attractive brand with their suppliers and customers.improves the bargaining power of its Share R&D Costs withtier-two suppliers, which may shift to a Selected Industry Peersmore attractive tier-one supplier. Another way to benefit from collaboration is to work with other organizations inCommunicate and joint R&D projects. Top companies formCollaborate With Suppliers alliances with strategic and non- competitive industry peers to help shareAs a key enabler for a successful sourcing the costs (and ownership) of joint researchprogram, top automotive suppliers and to speed up product development.actively engage and interact with their The ultimate level of collaboration issuppliers. They have a single contact partnering with a supplier or a group ofperson in place (usually a lead buyer or a suppliers to design and develop a newsupply base manager) who understands product with a unique selling proposition.the needs of the business and sees the Companies do this by putting to usevalue of collaborating with the supply innovations in supply materials, servicesbase. These employees build a trusting, or processes. 7
  8. 8. From Generic to Category andCommodity-Based Sourcing StrategiesIn addition to the seven The next section of this report looks at During the course of a project, Accenture two different approaches to sourcing works closely with the clients to developgeneral best practices distinctly different categories of goods. dozens of re-usable, commodity-specificdiscussed above, top- First, we examine sourcing strategies for documents to improve the client’s electronics, which in this case means sourcing process, also aiming for long-performing automotive simple products with a large number term improvements beyond the projectsuppliers have defined of suppliers, but products with a high timeframe. raw-material cost. Second, we look atspecific approaches for strategies best suited for molding, whichsourcing particular types is a complex product with a fragmented supply base and high raw-material costs.of goods, depending ontheir category and the These categories – electronics and molding – differ in the size of thecommodity materials potential supply base, supplier behavior,used to create those and in category complexity, to name just a few areas. Therefore, they are well-goods. suited for illustrating in-depth a variety of best-practice sourcing solutions. Ultimately, the characteristics of each good could help form a baseline for determining the right sourcing approach.8
  9. 9. Electronics – At a GlanceThroughout the report, Category Snapshot: Electronicsthe term “electronics” Characteristics “Electronics” Categoryrefers to electrical Sourcing scope Globally (mainly Asia)components such as Supply base Fragmented supply base with many sub-categoriesPrinted Circuit Boards Ease of transportation Easy (small parts)(PCBs), interconnector Part complexity Low-mediumcables and LEDs. Level of standardization High Raw material influence Very high (e.g. Copper) Buyer power HighThe electronics category is characterized Supplier power Lowby an abundance of suppliers that arecapable of manufacturing according to Threat of substitute products Lowa customer’s specifications. Parts are Threat of substitute suppliers Highgenerally of low to medium complexityand have a high degree of standardization(e.g. catalogue items). Tier-one suppliers with SMEs and bypassing distributors • Request RFQs regularly to gain anare able to exploit their bargaining power may be more cost effective, even if it can overview of the current marketover their upstream suppliers due to be difficult to identify which SME to situation and identify further savingssupplier interchangeability. work with. High performers quickly opportunities. They also require that identify the suppliers managed through their suppliers propose a minimumUpstream suppliers increasingly respond distributors and request a direct quote number of cost-saving initiativesto this threat by consolidating their own for comparison. This process step may per year.upstream supply base or by building lead to direct sourcing or provide tougher • Actively manage and challengealliances with their peers. Relationships bargaining power with distributors. upstream suppliers to reduce the rawbetween tier-two suppliers and their material content in each componentupstream suppliers are primarily focused through small design changes andon price and only secondarily on securing Manage Raw Material Price by reconfiguring their productionsupply for the electronics category. Fluctuations processes. They use best-cost countryCurrently, top tier-two suppliers focus suppliers since the parts can beon sourcing these materials from best- Electronics components are subject to switched easily and suppliers therecost country suppliers, since they have volatile raw material prices. For instance, have lower processing costs for rawthe necessary technology and can the price of the copper that goes into materials and end products.provide capacity as needed. cables can make up 50% of the total part price. Best-in-class suppliers use advanced procurement strategies toLeverage or Go Around reduce the risks associated with raw- material price volatility. These companies:Capacities in the electronics market are • Negotiate fixed prices with suppliersincreasingly driven by small and medium- for a certain period, therebysized enterprises (SME) and to a lesser minimizing the impact of changes inextent by large-scale multinational the price of raw materialssuppliers. Due to their size and lack of • Renegotiate the fixed prices and adjustinternational sales capabilities, the SMEs them on a periodic basis (e.g. everyrely on distributors to market their month or year), depending on theproducts. Distributors may charge a length of the lifecycle of the partsservice premium of up to 8%, claimingthat they received a better price for thedownstream supplier due to contractbundling. However, negotiating directly 9
  10. 10. Molding – At a GlanceThe term “molding” in Category Snapshot: Moldingthe automotive industry Characteristics Thermoplatic Injection Moldingtypically refers to Category Sourcing scope Globallyproducts that include Supply base Fragmented, specialized supply basethermoplastic raw with some sub-categoriesmaterials, such as plastic Ease of transportation Easy (small parts) Part complexity Highresin. Examples are Level of standardization Medium-lowgasoline tanks, pistons, Raw material influence High (e.g. resin)switches and pins. Buyer power Low-medium Supplier power Medium-high Threat of substitute products LowMolding products fall into various sub-categories, such as blow molding, Threat of substitute suppliers Mediumrotational molding, extrusion moldingand injection molding. Here, we will supplier cost structures and analyze cost the tools and switch to a competitor.examine injection molding. Injection drivers. Yet their cost-driver analyses On the other hand, downstream suppliersmolding can require sophisticated, look at more than molding parts; they go cannot switch upstream suppliershighly customized and maintenance- a step further to include molding tools, (granted client approval) if they don’tintensive tools for each part, depending since effective management of such own the tools as the product lifetimeon the size of the part. Compared to equipment can be used to reduce part may not justify building a duplicate orthe “electronics” category, which is prices (e.g. through replacement or replacement tool.somewhat easy to manage due to its high better maintenance, or by collaboratinglevel of standardization of parts and the on the design of a tool).abundance of suppliers, managing Understand Suppliers’suppliers in the molding category is more Restraintscomplex. The market is supplier driven, Consider Tool Ownershipgiven the shortage of specialized suppliers Due to the required upfront investmentsand a lack of global capacity for high High-performing suppliers understand in tooling for molding products, high-precision molding machines. Given this that the ownership (or lack of ownership) performing tier-two suppliers understandmarket situation, tier-one and tier-two of production tools should be considered the limits faced by their upstreamsuppliers need to take differing supplier in a detailed analysis of an upstream suppliers, particularly SMEs. Whencapabilities into account when defining supplier’s cost base for molding products. pushing for price reductions, they keepcost-cutting measures or considering an Once these costs are broken down, they in mind that the offer of additionalacquisition. Currently, suppliers are engage with their suppliers to help those business to compensate for a supplier’sfocused on acquiring molding capabilities suppliers lower costs, in exchange for loss of profit may not help those SMEs(e.g. machines) and developing new guaranteeing a certain volume of orders that must invest in new lines to increasesuppliers to overcome the capacity and keeping tools at the upstream capacity. (The investment would comebottleneck. supplier. This strategy is necessary since without a guarantee for business, since molding components require special, suppliers can easily move production to customized tools for every type of part. a competitor.) Therefore, they look toCalculate Cost of Tools for These tools can become a lever in price larger upstream suppliers with theProducing Complex Parts negotiations before production starts, financial resources necessary to invest in particularly since it is not uncommon excess capacity despite reduced prices,Best-in-class automotive suppliers that both parties vie for possession of thereby offering more stability to theconsider the complexity and functionality the tools. The upstream supplier is at overall sourcing and manufacturingof molding parts when they are looking the mercy of the downstream supplier process. If no large-scale suppliers existfor ways to reduce costs. They conduct if it does not own the tools, since the or have free capacity, the growth of theperiodic supplier RFQs, benchmark downstream supplier could withdraw tier-two supplier is limited.10
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  12. 12. Risk Management as a Basis forProcurement Best PracticesCompanies typically The most common and volatile areas of In addition, they keep upstream suppliers procurement risk are upstream supplier of complex products from gaining toounderestimate the impact reliability and price fluctuation. Therefore, much bargaining power by buildingof risk on procurement top companies anticipate upstream loyalty with bundled business contracts supplier risks, both financial and and awarding related business (such asperformance. logistical, and protect themselves with a stamping contract for pins along with contingency plans. They build strong an award for parts molded around that supplier relationships that may even metal pin).Nevertheless, the focus include an offer of replacement businesshas returned to proactive if contracts are moved unexpectedly.risk management as aresult of the recenteconomic downturn.12
  13. 13. The “Master’s” Approach to Procurement RiskManagement: A Study by Accenture and MITResearch into procurement risk management conducted by Accenture andthe Massachusetts Institute of Technology identified several leading practicesfor successful procurement. The two partners surveyed 127 chief procurementofficers at global, industrial companies around the world.The research showed that procurement “masters” avoid price volatility anduse external data to support their risk analyses. And they do so without over-investing in IT for procurement risk management. Finally, “masters” excel atanticipating, monitoring and mitigating risks in a variety of ways.Risk Anticipation Capabilities Risk Monitoring Capabilities Mitigation CapabilitiesMasters typically: Masters typically: Masters typically:• Differentiate their procurement risk •Identify and assess the level of risk at • Integrate the organization in case of strategies based on the category of key stages of the strategic sourcing incident of mitigation plans goods they are purchasing process • Develop a process to measure the• Maintain regular contact with • Use external data sources to monitor impact of incidents and alerts, to suppliers and use multi-vendor the supply market, the financial continuously improve risk management sourcing, in order to react quickly in viability of suppliers, and other trends • Emphasize development of mitigation case of supply chain disruptions in the market plans for critical key suppliers• Apply engineering expertise to consider • Adapt monitoring approaches to alternative production materials different categories of suppliers,• Use risk sharing clauses in contractual according to geographic and cultural agreements influences• Employ predictive analytics to build • Monitor key risks with critical suppliers cost structure forecasts and create at each step of the supply process scenario plans about raw-material • Collaborate and integrate with key price fluctuations suppliers and agree on “early warning systems” for supply chain disruptionsPlease refer to the Accenture Study “High Performance in Procurement Risk Management” (2010)for further details. 13
  14. 14. ConclusionAccenture’s experience Technological complexity is increasingly With trustful relationships, upstream seen as the main differentiator for suppliers may even help their downstreamwith Direct Material supplier selection: Best-in-class suppliers partners choose raw material mixturesSourcing suggests source low-tech parts with a focus on that will improve quality and reduce cost from upstream best-cost country prices.that suppliers should suppliers, assembling parts locally. Theycollaborate more to manage a supply base for complex parts Finally, leading suppliers actively manage in western countries, allowing some risk in the procurement process. Theysuccessfully navigate upstream suppliers to be involved in anticipate and react quickly to changesfuture markets and component design. Leaders also strive to in the market and develop non-exploitive closely involve all parties in the supply relationships with suppliers to improvereap the benefits of chain through information sharing. This their cost-benefit ratios.globalization while creates transparency and opportunities for process improvement. By implementing these proven bestoperating a sustainable practices, companies can operate asupply chain. In addition, efficient raw material sustainable supply chain – and gain a management strongly contributes to a competitive edge. supplier’s market share, and some suppliers benefit from their global For more information about how proximity to raw material mines. Accenture can help your purchasing Companies are advised to secure a department become a driver of high supply of raw materials for the long performance, please contact the authors. term, balancing that cost with the resources needed.14
  15. 15. About the authorsFlorian Kache Lars Bettermann Ralf MägerleFlorian Kache is a Consultant within Lars Bettermann is a Senior Manager Ralf Mägerle is a Partner at Accenturethe Operations Practice of Accenture in Accenture Management Consulting. and is leading Accenture’s Sourcing &Management Consulting. Specializing He is based in Cologne, Germany, and Procurement Management Consultingin Sourcing & Procurement he has has vast experience in the Auto- and Practice in Austria, Switzerland andprofound experience from international Industrial Equipment industry. His Germany. His last 19 years he spend inprojects within the Automotive, main focus is on challenges within Sourcing & Procurement helping clientsChemicals, Communications & High Sourcing and Procurement such as in several industries becoming highTech industry. During the last 5 years Global Strategic Sourcing, Procurement performing in Procurement. Based inhe worked successfully on various Transformations and Process Excellence. Zurich, Switzerland, he can be reached atprojects focusing on Global Strategic During the last 12 years he has gained, Procurement Transformation, experience both in consulting as welland Carve Out Transformation in as industry and has lived abroadM&A divestitures. Based in Frankfurt, several years. He can be reached atGermany, he can be reached at This document is produced by Accenture as general information on the subject. It is not intended to provide advice on your specific circumstances. If you require advice or further details on any matters referred to, please contact your Accenture representative. 15
  16. 16. About AccentureAccenture is a global managementconsulting, technology services andoutsourcing company, with approximately236,000 people serving clients in morethan 120 countries. Combiningunparalleled experience, comprehensivecapabilities across all industries andbusiness functions, and extensive researchon the world’s most successful companies,Accenture collaborates with clients tohelp them become high-performancebusinesses and governments. The companygenerated net revenues of US$25.5 billionfor the fiscal year ended Aug. 31, 2011.Its home page is © 2011 AccentureAll rights reserved.Accenture, its logo, andHigh Performance Deliveredare trademarks of Accenture.