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Napm Az Presenation   25 Aug 2011
Napm Az Presenation   25 Aug 2011
Napm Az Presenation   25 Aug 2011
Napm Az Presenation   25 Aug 2011
Napm Az Presenation   25 Aug 2011
Napm Az Presenation   25 Aug 2011
Napm Az Presenation   25 Aug 2011
Napm Az Presenation   25 Aug 2011
Napm Az Presenation   25 Aug 2011
Napm Az Presenation   25 Aug 2011
Napm Az Presenation   25 Aug 2011
Napm Az Presenation   25 Aug 2011
Napm Az Presenation   25 Aug 2011
Napm Az Presenation   25 Aug 2011
Napm Az Presenation   25 Aug 2011
Napm Az Presenation   25 Aug 2011
Napm Az Presenation   25 Aug 2011
Napm Az Presenation   25 Aug 2011
Napm Az Presenation   25 Aug 2011
Napm Az Presenation   25 Aug 2011
Napm Az Presenation   25 Aug 2011
Napm Az Presenation   25 Aug 2011
Napm Az Presenation   25 Aug 2011
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Napm Az Presenation 25 Aug 2011

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"Supply Management: The Missing Voice in the Integrated Business Plan: How Cost Management, Negotiation and Contract Management Inform the Process and are Essential to Its Execution ” …

"Supply Management: The Missing Voice in the Integrated Business Plan: How Cost Management, Negotiation and Contract Management Inform the Process and are Essential to Its Execution ”

In manufacturing, traditional sales and operations planning is expanding beyond simple supply-demand balancing toward integrated business decision-making. Service firms are also realizing the benefits of holistic business planning. Integrated business planning is neither integrated nor complete without supply management which must come to the process with an understanding of the supply risks and a strategy for capitalizing on opportunities. An integrated plan for the business must be informed by the relative bargaining position of the firm, supplier viability under multiple economic scenarios, trends and potential ranges for commodity and other prices, supplier and global capacities, technological advances, and other relevant context. Supply management must also be prepared to contribute to integrated business planning with a comprehensive analysis of total cost of ownership and its sensitivity to each of its components, strategies for structuring supply agreements to mitigate risk and minimize the cash-to-cash cycle, approaches for substituting information for time and inventory, sourcing alternatives to support sales and marketing initiatives as well as manufacturing and quality requirements, and scenarios for reducing lead time and lot size.

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  • Each function has its own goals and targets to hit. Many times, these are not aligned to deliver an overall greater value to shareholders. This may be a bit more obvious in the direct procurement space, but it is also true in indirect procurement for critical supplies. How can these many interdependent decisions within separate business functions be aligned?
  • Certainly a risk can present an opportunity and an opportunity implies a risk (at least the risk of an opportunity cost).
  • Other possible factors:Relative QualitySwitching Cost
  • This is one visual way to present a potential area of risk for the business plan.Other possible factors:Contribution to innovationRelative QualityCollaboration and Automation
  • Again, these could be indirect commodities, materials or services as well as direct. This can apply to both manufacturing and to service environments. In the indirect and non-manufacturing spaces, physical space and media space, paper, money (in banking for ATM’s), critical spare parts for manufacturing equipment and other similar purchased goods and services come to mind. Hopefully, you can quickly think of the relevant critical purchased goods or services in your industry and in your company.
  • In recent months commodity prices have risen and fluctuated. This creates a risk to the costs for both direct and indirect procurement.
  • Companies like SAP, Oracle and Ariba have created businesses or lines of business that are focused on facilitating transactional collaboration and execution, driving down procurement costs. If this is not in place for your largest and most critical suppliers, is there a good reason? Has the total cost of the opportunity been analyzed and is that part of the integrated decision dialog? Can the collaboration be extended to planning in a way that inventory and lead times can be reduced?
  • Transcript

    • 1. Supply Management: The MissingVoice in the Integrated Business PlanHow Cost Management, Negotiation and Contract ManagementInform the Process and are Essential to Its Execution Arnold Mark Wells, CPIM 25 August 2011
    • 2. How can we align and integrate decisions toward a common goal? ?Business decisions from various functions are often not aligned. Yet unless we can align them, moving the business forward is difficult.© 2011 End-to-End Analytics, LLC 2
    • 3. Myopic, incomplete perspectives will not yield integrated business planning When decision-makers are looking at different decision variables, butnot the whole equation,they are forced to make assumptions.© 2011 End-to-End Analytics, LLC 3
    • 4. The Dangers of Dis-integrated Decisions “When I was a physicist, someone would come to me from time to time with problems in mathematics he could not solve. He wanted me to check his numbers for him. But after a while I learned not to waste my time checking the numbers, because the numbers were almost always right. However, if I checked the assumptions, they were almost always wrong.” The Goal by Eli Goldratt So, while a single business function makes a “good” decision based on a subset of inputs, their “numbers” may be right, but the explicit or implicit assumptions about other business functions may render the functional decision a poor one for the company overall.© 2011 End-to-End Analytics, LLC 4
    • 5. “Little” Sales and Operations Planning S&OP started as a tactical effort to line up production, sales and inventory. Other business functions Inventory need to be included for decisions that are integrated and strategic. Sales Production ? ? ? • e.g. PSI Report • The focus was tactical so the terms were common • But it was only part of the picture from a strategic point of view© 2011 End-to-End Analytics, LLC 5
    • 6. “Big” S&OP Process S&OP has evolved into an holistic strategic process 1. Strategic Planning  Rationalize Products, Channels, Customers  New Product Planning  Align Pricing 2. Demand Planning  Alignment to Corporate Goals  Quantitative Forecasting  Supply Network Design  Sales, Marketing Input  What-if Analysis5. Executive Management  Orders/Demand Balancing  KPI Measurement  Consensus  Plan vs. Actual The Integrated Business  Waterfall Analysis Decision-making or  Root Cause Analysis Planning Process (IBP) is  Continuous Improvement both multi-functional and multi-dimensional 4. Financial Planning  Product Line Profitability 3. Supply Planning  Constraint Management  Capacity Planning  What-if Analysis  Inventory Planning  Allocation of Demand to Supply  Logistics  Analyze Revenue, Margin and Working Capital Impact  Risk and Opportunity Planning  Identify Gaps between S&OP and Strategic Goals© 2011 End-to-End Analytics, LLC 6
    • 7. Including Supply Management in the Process Participation and Preparation Participation - getting a “seat at the table”  Establish transparency to supply risks and opportunities  Engage proactively with other functions – understand their goals and challenges within the integrated business planning context  Create supply management scenarios that will enable other functions to meet their goals  Strive for mutual accountability Preparation for Participation  Assess the risks  Build the analytical foundation for creating opportunities  Create scenarios to leverage opportunities© 2011 End-to-End Analytics, LLC 7
    • 8. Preparation for Participation The Supply Management Funnel to IBP Assess Build Leverage Risks Foundation Opportunities Integrated Business  Supplier Viability Planning  Bargaining Position  Develop Sourcing  Collaborate Strategy  Capacity & Dependency Risk  Structure and Manage Contracts $  Analyze Total Cost of Ownership  Purchase Strategically  Price Trends and Exchange Rates Following the process in the funnel enables the steps for participation by supply management in the integrated business planning process.© 2011 End-to-End Analytics, LLC 8
    • 9. Preparation for Participation Assess Supply Risks Assess Build Leverage Risks Foundation Opportunities Integrated Business  Supplier Viability Planning   Collaborate  Bargaining Position Develop Sourcing Strategy  Capacity &  Structure and Manage Contracts $ Dependency Risk  Analyze Total Cost of Ownership  Purchase Strategically  Price Trends and Exchange Rates© 2011 End-to-End Analytics, LLC 9
    • 10. Preparation for Participation Assess Risk - Analyze Supplier Viability Drivers of Viability  Balance sheet (working capital, debt)  Income statement (profitability)  Cash flow (sufficient, positive)  Breadth of customer base  Competitive threats  Technology  Will the supplier‟s technology become obsolete?  Will the supplier be able to support the next generation of your product?  Relative size – takeover target?© 2011 End-to-End Analytics, LLC 10
    • 11. Preparation for Participation Assess Risk - Analyze Bargaining Position Key Commodity, Component, Material or Service Percent of Buyer‟s Annual Purchase Least Leverage Some Parity; Key Opportunity for Innovative Supply; (High) Detailed Knowledge of TCO is Important; Integrated decisions for an organization should be informed by bargaining position, which is a multi-faceted concept. This is one example of a way to visualize bargaining position.Percent of Buyer‟sAnnual Purchase Least Important Quadrant Greatest Leverage Quadrant (Low) Size = Price (low, average, high) Percent of Supplier‟s Business Percent of Supplier„s Business Color = Overall Relative Bargaining Position (strong, moderate, weak) (Smallest) (Largest) © 2011 End-to-End Analytics, LLC 11
    • 12. Preparation for Participation Assess Risk – Supplier Capacity and Dependency Commodity A Commodity B Commodity A 10% Committed from Current, Approved 20% Suppliers 35% 50% Additional Potential Commitment from 20% Current Suppiers 50% 10% Opportunity for Other Supply 5% 35% 50% Potential Risk to Supply Commodity C Commodity D 0% 20% Systematically identify and 10% graphically depict where the 5% capacity of your suppliers 20% 60% and broader capacity puts 100% supply at risk.© 2011 End-to-End Analytics, LLC 12
    • 13. Preparation for Participation Assess Risk - Pricing Trends and Exchange Rates Quantitatively know the risk from purchase prices and exchange rates where applicable.© 2011 End-to-End Analytics, LLC 13
    • 14. Preparation for Participation Build the Foundation for Potential Supply Opportunities Assess Build Leverage Risks Foundation Opportunities Integrated Business  Supplier Viability Planning   Collaborate  Bargaining Position Develop Sourcing Strategy  Capacity Risk  Structure and Manage Contracts $  Analyze Total Cost of Ownership  Purchase Strategically  Price Trends and Exchange Rates© 2011 End-to-End Analytics, LLC 14
    • 15. Preparation for Participation Build the Foundation for Opportunities – Sourcing Strategy R&D, marketing, operations and sourcing decisions are interdependent and need to be integrated  New product development must coordinate carefully with sourcing  New markets may require new sources  New manufacturing techniques may require sourcing changes  Demographics, service models and legal requirements must be considered in sourcing strategies  Need to be able to consider internal vs. external sourcing and to what degree and propose a plan that will support the business strategy for maximum revenue growth, return on net assets, margins and market share – objectives of S&OP/Integrated Business Planning© 2011 End-to-End Analytics, LLC 15
    • 16. Preparation for Participation Build the Foundation for Opportunities – Analyze TCO You need to understand both sides of the equation  Buyer  Supplier  Price  Price  Planning  Time value of money (Payment terms)  Execution  Commitment  Quality  Expediting  Value added services  Design changes  Taxes  Time value of money (financing/payment terms)  Cost of holding inventory Understanding TCO and your sensitivity to it can lead to innovative arrangements and profitable outsourcing  Price x for payment in 45 days  Price y - x for payment in 30 days  Outsourcing analysis© 2011 End-to-End Analytics, LLC 16
    • 17. Preparation for Participation The Supply Management Funnel to IBP Assess Build Leverage Risks Foundation Opportunities Integrated Business  Supplier Viability Planning   Collaborate  Bargaining Position Develop Sourcing Strategy  Capacity and  Structure and Manage Contracts $ Dependency Risk  Analyze Total Cost of Ownership  Purchase Strategically  Price Trends and Exchange Rates© 2011 End-to-End Analytics, LLC 17
    • 18. Preparation for Participation Leverage Opportunities – Collaboration Scenarios Transactional Collaboration  Easily supported by technology  Automatic, systematic communication for larger, more important suppliers  Regular, manual communication and transactions for smaller suppliers Beyond transactions, what can be done?  Co-investment on reducing changeovers  Offering long term commitment for frequent replenishments  Pickup vs. delivery  Parcel or less-than-truckload deliveries in exchange for ?? Other Areas of Potential Collaboration  Requirements (time-phased view into what you anticipate your needs will be)  Design (can be design of indirect materials as well – think marketing materials, etc.)  Technology© 2011 End-to-End Analytics, LLC 18
    • 19. Preparation for Participation Leverage Opportunities - Contract Structure & Management Scenarios In order to create a win-win scenario, you have to know the following:  TCO  Your sensitivity to its components  How much money can be saved in total  How much you want to capture (or can afford to share as leverage with your supplier)  How to structure the contract for maximum flexibility and minimum risk (e.g. Vested Outsourcing)© 2011 End-to-End Analytics, LLC 19
    • 20. Supply Management Contributions – Opp. Leverage Opportunities – Contract Structure & Management Scenarios Considerations for Flexibility and Risk  Potential range of future requirements by period  Minimum and maximum quantity in units for each period  Unit price by period, fixed or market dependent  Lead time commitment  Understanding regarding cancellation or changes to orders  Minimum and maximum quantities over a range of periods  Minimum order quantities  Sequential capacity expansion options, each of which might have its own lead time and associated payment for expansion cost  Other© 2011 End-to-End Analytics, LLC 20
    • 21. Preparation for Participation Leverage Opportunities – Strategic Purchase Scenarios Strategic Purchases Requirements + Quantity Discount + Forecasted Price + Inventory Holding Cost + Risk of Obsolescence Normal Material Price Purchases Dollars Predictive and prescriptive analysis Time© 2011 End-to-End Analytics, LLC 21
    • 22. Summary Getting Started Participation - getting a “seat at the table”  Establish transparency to supply risks and opportunities  Engage proactively with other functions – understand their goals and challenges within the integrated business planning context  Create supply management scenarios that will enable other functions to meet their goals  Strive for mutual accountability Preparation for Participation  Assess the risks  Build the analytical foundation for creating opportunities  Create scenarios to leverage opportunities© 2011 End-to-End Analytics, LLC 22
    • 23. Supply Chain and Pricing Expertise Analytical Know-how Arnold Mark Wells, CPIM Principal End-to-End Analytics, LLC 955 Alma St., Suite B Palo Alto, CA 94310 330 546 2404 mark@e2eanalytics.com Superior Supply Chain Performance Through Data-Driven Analysis Powerful, Visual, Interactive Excel-based Tools Also: • mark@arnoldmarkwells.com • http://arnoldmarkwells.wordpress.com© 2011 End-to-End Analytics, LLC 23

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