Best-Practice for Direct Material Procurement Download it at: www.gazhoo.com

Findings from best-practice industry examples for direct material procurement Source: Team Best-practice industry examples show that you need to have a procurement strategy first Direct material procurement begins with the early stage of product development and is of strategic importance throughout the product lifecycle OEMs select, monitor and control suppliers beyond their first tier suppliers and focus besides contract manufacturers in particular on core component manufacturers Throughout the production phase an open exchange of information with suppliers is the key success factor to manage the supply chain Most B2B solutions support the procurement process during the production phase not during the development phase Most B2B solutions help reduce procurement costs, only few support on-time delivery and quality assurance Typical marketplace solutions do not address the key issues of direct material procurement Many B2B solutions are available Key success criteria of direct procurement are on-time delivery and high-quality, not low costs To achieve this, close relationships with the suppliers are necessary that need to be built up from the early product development phase onwards However, relationships with direct material suppliers are complex and hence not obvious to handle Supplier relationships are key What are the natural roles of the different participants in the value chain? How should the procurement process be optimized and what are the benefits from that? Which IT tools and structural set-ups would be beneficial? Download it at: www.gazhoo.com

Best-practice industry examples show that you need to have a procurement strategy first

Direct material procurement begins with the early stage of product development and is of strategic importance throughout the product lifecycle

OEMs select, monitor and control suppliers beyond their first tier suppliers and focus besides contract manufacturers in particular on core component manufacturers

Throughout the production phase an open exchange of information with suppliers is the key success factor to manage the supply chain

Most B2B solutions support the procurement process during the production phase not during the development phase

Most B2B solutions help reduce procurement costs, only few support on-time delivery and quality assurance

Typical marketplace solutions do not address the key issues of direct material procurement

Key success criteria of direct procurement are on-time delivery and high-quality, not low costs

To achieve this, close relationships with the suppliers are necessary that need to be built up from the early product development phase onwards

However, relationships with direct material suppliers are complex and hence not obvious to handle

What are the natural roles of the different participants in the value chain?

How should the procurement process be optimized and what are the benefits from that?

Which IT tools and structural set-ups would be beneficial?

Key focus areas for direct procurement Focus of this document Source: Team Procure-ment Consulting services Necessity services Education IS/IT Capex Market communication Others Systems Core components Standard components Type of goods Industry specific Highly specialized Made to specification Industry specific Specialized (sometimes commodity) Made to specification Industry specific (sometimes generic) Commodity Standardized Generic Commodity Standardized Strategic importance High High Medium Low Focus on timely delivery and high quality Focus on low costs Direct materials Indirect materials

Industry specific

Highly specialized

Made to specification

Industry specific

Specialized (sometimes commodity)

Made to specification

Industry specific (sometimes generic)

Commodity

Standardized

Generic

Commodity

Standardized

High

High

Medium

Low

Direct material procurement implies active management of suppliers Source: Team Requirements Procurement strategy Accurate, up-to-date forecasts to provide suppliers with information on current demand Visibility of inventories to provide suppliers with information on current supply Transparency of in-bound supply chain to recognize bottlenecks for mission-critical components/systems early Careful screening and selection of suppliers Detailed design specifications developed in close collaboration with suppliers Ongoing evaluation of suppliers Broad overview over supply base Clear understanding of production costs of standard components Efficient procurement processes Supplier switching Supplier development and integration Download it at: www.gazhoo.com Timely delivery High quality Low costs

Accurate, up-to-date forecasts to provide suppliers with information on current demand

Visibility of inventories to provide suppliers with information on current supply

Transparency of in-bound supply chain to recognize bottlenecks for mission-critical components/systems early

Careful screening and selection of suppliers

Detailed design specifications developed in close collaboration with suppliers

Ongoing evaluation of suppliers

Broad overview over supply base

Clear understanding of production costs of standard components

Efficient procurement processes

For successful direct material procurement both strategic and operational processes have to be mastered Source: Team Product lifecycle Strategic procurement processes Key success factors for direct material procurement Timely delivery High quality Low costs Operational procurement processes Strategy design Material specification/Change management Product development Strategic phase Design phase Prototype phase Transition phase Mass production Forecasting Procurement Fulfillment Supplier selection Supplier development

Key success factors for direct material procurement

Timely delivery

High quality

Low costs

Procurement process for direct material spans across both product development and production phase * Total cost of ownership Source: XYZ Identify new, innovative materials and technologies Quantify TCO* Survey supply markets Decide on sourcing Set awarding strategy Identify and assess suppliers Negotiate and award contract Jointly design and develop new product Specify material require-ments Manage specification changes Determine long-term forecasts annually and send to suppliers Track incoming orders Estimate short- and mid term demand and transmit to suppliers Track inventory level and production schedule Plan procurement Perform ongoing analysis of price and cost trends Place order/ call-off Track order status Manage in-bound transport-ation Test product Initiate payment Continuously measure performance of supplier Focus on suppliers requiring improvement and help them improve Update supplier on latest development within buyer company Product development Production Procurement strategy design Supplier selection Material specifi-cation Forecasting Procurement Fulfillment Supplier development

Identify new, innovative materials and technologies

Quantify TCO*

Survey supply markets

Decide on sourcing

Set awarding strategy

Identify and assess suppliers

Negotiate and award contract

Jointly design and develop new product

Specify material require-ments

Manage specification changes

Determine long-term forecasts annually and send to suppliers

Track incoming orders

Estimate short- and mid term demand and transmit to suppliers

Track inventory level and production schedule

Plan procurement

Perform ongoing analysis of price and cost trends

Place order/ call-off

Track order status

Manage in-bound transport-ation

Test product

Initiate payment

Continuously measure performance of supplier

Focus on suppliers requiring improvement and help them improve

Update supplier on latest development within buyer company