1. Gaining Competitive Advantage through More Effective Direct Material Sourcing
How Industrial Equipment Suppliers Can Implement Procurement Best Practices to Reduce Risk and
Improve Cost Structures
By Florian Kache, Lars Bettermann and Ralf Mägerle

2. 2

3. Introduction
This report examines current challenges in Direct Material Sourcing, including increasing technological complexity, a strain on raw materials, and the need for better procurement risk management.
It outlines procurement best practices in general and for specific categories of goods, and the paper covers procurement risk management strategies. Primarily focused on the automotive sector, these findings and insights are applicable in other industries that involve industrial equipment.
Accenture’s experience with Direct Material Sourcing shows that suppliers at all levels should collaborate more to reap the benefits of a global supply chain, and they should take a varied approach to sourcing different categories of parts.
For instance, they could differentiate between suppliers of high-tech and
low-tech parts and implement separate processes for procuring goods that contain different raw materials. In addition, suppliers can potentially benefit from sharing certain information in the supply chain, ensuring the supply of
raw materials and conducting effective procurement risk management.
Differentiating Between Suppliers of High-Tech and Low-Tech Parts
High-performing tier-one companies differentiate among their suppliers based on the technological complexity of the parts provided: These companies source low-tech parts from best-cost countries, having them assembled in the region they are purchased. And they manage a base of suppliers of complex parts from developed countries. Suppliers of complex parts should meet requirements regarding flexibility, and they are usually asked to contribute ideas for design and functionality.
Information Sharing in the Supply Chain
As the number of players in the supply chain increases, so does its complexity. Often suppliers are scattered across a multitude of countries. High-performing, tier-one suppliers manage the complex supply chain with information sharing – both upstream and downstream. The ability of suppliers to share information along the supply chain will remain a main differentiator for procurement excellence.
Efficient Raw Material Management
Efficient raw material management strongly contributes to the market
share a supplier holds. Larger tier-two suppliers are recommended to negotiate long term pricing contracts and thus secure a raw material supply for the long term, balancing the cost of doing so with availability requirements. For suppliers in best-cost countries, that process may be easier, due to their proximity to mines and raw material processing facilities.
In some cases, a supplier should consider acquiring a raw materials company in order to secure the supply. By doing so, the supplier has the opportunity to gain a vital advantage for some commodities, particularly the rare earth compounds that are vital for the electronics industry.
Procurement Risk Management
Procurement risk management processes are a must-have for suppliers to achieve higher procurement performance. To be successful in the market it is critical for buyers to anticipate and rapidly react to changes, while simultaneously investing in relationships with those suppliers
that offer the lowest price and show the best potential. Suppliers should actively manage their own suppliers, develop non-exploitive close collaboration with them and build on common values. By doing so, tier-one suppliers have the best opportunity to reduce supply risks to the benefit of both parties and achieve an optimal cost-benefit ratio. In addition, the quality and price of the end product are likely to improve since trusted tier- two suppliers will be involved in choosing the raw material mixture, and the supply chain will be stronger, giving suppliers a key competitive edge.
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, tier-one suppliers have adopted new procurement strategies such as supplier collaboration, in an effort to cut costs. Tier-two suppliers are following suit and discovering that optimized and transformed procurement organizations can help them beat the competition.
3

4. External Challenges
Raw Material Management
Like any other major industry, the automotive sector is affected by increasing cost pressure from raw materials. The fluctuations in the price of raw materials have caused cost-target uncertainties.
As a result, companies are using a range of strategies such as negotiating fixed prices with periodical adjustments, implementing advanced buy /sell processes, and setting up hedging departments.
Global Competition
Automotive suppliers have also felt increased pressure from growing competition in Asia, especially from China and India. At the same time, they have benefited from the lower prices offered by new players in best-cost countries. Suppliers could seize the potential advantage of this opportunity by sourcing from best-cost countries, which could have the effect of driving prices down through low labor costs for complex parts.
Internal Challenges
Supplier Collaboration
Depending on the size of the company,
a change in mindset may be needed
for a tier-one supplier and beyond to engage with upstream offshore suppliers. Whereas large multinationals may be accustomed to cross-border collaboration, medium-sized companies may be reluctant to do so. They may lack the right timing and expertise to evaluate the supply base within best-cost countries and expand respectively. However, some companies have gained experience in expanding their supply base in eastern Europe, and this may prove a good starting point for further expansion in best-cost countries.
Holistic Information Sharing
Certain industries and markets lend themselves to data sharing, for example information regarding part specifications and stock level trends which have historically been tantamount to business secrets, not to be disclosed to other players in the supply chain. In fact, those that do share this information are often regarded as “exotic,” since they appear to have given away the “heart” of their business. However, this ignores the true benefit that sharing selected information with selected, preferred suppliers can bring for optimizing products and processes.
Risk Management
Although risk management is widely embedded into the strategies that suppliers use, the value of procurement risk management is often underestimated. It is crucial for suppliers to have a backup procurement plan in place to ensure business continuity, since the risk to the supply chain presented by upstream suppliers can be substantial.
Supply Challenges Faced in the Manufacturing Industry
Automotive suppliers, like most industrial equipment suppliers, face numerous challenges, both internally
and externally.
4

5. 5

6. Implement a Structured Procurement Process
Leading automotive suppliers have an optimized, structured procurement process in place. These suppliers conduct standardized, periodical Requests for Quotations (RFQs) and well-prepared, professionally executed fact-based negotiations. Supplier behavior is documented and analyzed, and the
data is used to award contracts and select suppliers in the future.
Consolidate the Supply Base with “Tail-End” Cuts or Acquisitions
Best-in-class companies take a rigorous approach to thinning out their base of suppliers by cutting off low-performing suppliers that do not add value or, in some cases, by acquiring small upstream suppliers.
They map out the amount spent with individual suppliers, analyze that data and understand the percentage of their procurement budget that goes to each supplier.
Based on the analysis, companies eliminate suppliers off the so-called “tail end” of the spend list– e.g. they cut off those suppliers with whom they spend the least, considering that the parts can be produced at an incumbent supplier. Companies Accenture has worked with have saved an average of 10% to 15% on costs by rationalizing the preferred supplier list and improving compliance toward preferred suppliers.
In some cases, companies choose to consolidate the supply base with an acquisition of an upstream supplier that fits within its growth strategy. Overall, consolidation helps achieve procurement targets by reducing the number of upstream contacts and increasing overall supply chain reliability.
Ensure Suppliers Share Your Growth Strategy
High performing automotive tier-one suppliers have identified suppliers that have strategies which match their own growth strategy. They understand that some tier-two suppliers–depending
on the size of the company and the category of goods sourced—are not as growth-driven as others. When scouting for optimal supply partners, these companies keep in mind that suppliers with non-uniform strategies can cause problems for supplier base consolidation, cost extra time for management and unnecessarily tie up resources.
How High-Performance Suppliers Use Best Practices in Direct Materials Sourcing
General Best Practices
Accenture works with several tier-one suppliers to the automotive industry, among other industries. By partnering with Accenture, the suppliers are generally able to save about 10-15%
of their procurement budget. Recent projects have shown that despite the challenging market, high-performing companies are investing in implementing best practices that are helping them
lead the way.
Best practices include
• Optimizing purchasing processes
• Understanding and consolidating
the supply base
• Ensuring suppliers pursue the same growth strategies
• Actively using brand attraction
• Communicating and collaborating with suppliers
• Sharing R&D costs
• Conducting active risk management
6

7. Utilize Your Brand Strategy
Top tier-one suppliers also build upon the power of their successful brands: They actively position their brand to attract the best potential suppliers. However, using a brand strategy functions best in supply-driven environments. In
a demand-driven market, a tier-one supplier’s lack of an attractive brand improves the bargaining power of its tier-two suppliers, which may shift to a more attractive tier-one supplier.
Communicate and Collaborate With Suppliers
As a key enabler for a successful sourcing program, top automotive suppliers actively engage and interact with their suppliers. They have a single contact person in place (usually a lead buyer or a supply base manager) who understands the needs of the business and sees the value of collaborating with the supply base. These employees build a trusting, professional relationship with their suppliers, constantly challenging them
to achieve better results and working to develop those suppliers that show growth potential. Both parties benefit, since priority business contracts may be offered to select suppliers in return for continuous price reductions and reduced supply risk.
Share R&D Costs with Selected Industry Peers
Another way to benefit from collaboration is to work with other organizations in joint R&D projects. Top companies form alliances with strategic and non- competitive industry peers to help share the costs (and ownership) of joint research and to speed up product development. The ultimate level of collaboration is partnering with a supplier or a group of suppliers to design and develop a new product with a unique selling proposition. Companies do this by putting to use innovations in supply materials, services or processes.
Conduct Risk Management
Finally, best-in-class suppliers actively use risk management tools and strategies. They operate thorough procurement risk management, invest in cross-functional risk management capabilities, use predictive analytics and strive to eliminate risk by using a collaborative approach with their suppliers and customers.
Identify• Identify C suppliers by region• Validate A and B supplier structure by category • Confirm A, B, C structure with key stakeholdersABCABCSupplier ClassificationDemand typeB+ B- • Classify demand pattern in 1 time and repetitive• Assign demand types to supplier classifications• Communicate supplier reclassificationClassify1 timeRepetitiveImplement• Develop supplier replacement mapping tables• Communicate list of obsolete suppliers to requestors• Block suppliers in ERP systems and communicate• Confirm savings by supplier reallocationSupplier X Supplier YSupplier to-beSupplier as-isAB+ Repetitive DemandMapping TableSupplier ZSupplier Z
Supplier Relationship Management: Cutting off the long tail end of suppliers
Long tail end supplier reduction program
Typically, Accenture is able to realize 10% - 15% of procurement budget savings by rationalizing the preferred suppliers list, improving compliance to preferred suppliers/contracts, increasing procurement control over long tail of spend and reducing operating cost
7

8. From Generic to Category and Commodity-Based Sourcing Strategies
In addition to the seven general best practices discussed above, top- performing automotive suppliers have defined specific approaches for sourcing particular types of goods, depending on their category and the commodity materials used to create those goods.
The next section of this report looks at two different approaches to sourcing distinctly different categories of goods. First, we examine sourcing strategies for electronics, which in this case means simple products with a large number
of suppliers, but products with a high raw-material cost. Second, we look at strategies best suited for molding, which is a complex product with a fragmented supply base and high raw-material costs.
These categories – electronics and molding – differ in the size of the potential supply base, supplier behavior, and in category complexity, to name just a few areas. Therefore, they are well- 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.
During the course of a project, Accenture works closely with the clients to develop dozens of re-usable, commodity-specific documents to improve the client’s sourcing process, also aiming for long- term improvements beyond the project timeframe.
8

9. Throughout the report, the term “electronics” refers to electrical components such as Printed Circuit Boards (PCBs), interconnector cables and LEDs.
The electronics category is characterized by an abundance of suppliers that are capable of manufacturing according to
a customer’s specifications. Parts are generally of low to medium complexity and have a high degree of standardization (e.g. catalogue items). Tier-one suppliers are able to exploit their bargaining power over their upstream suppliers due to supplier interchangeability.
Upstream suppliers increasingly respond to this threat by consolidating their own upstream supply base or by building alliances with their peers. Relationships between tier-two suppliers and their upstream suppliers are primarily focused on price and only secondarily on securing supply for the electronics category. Currently, top tier-two suppliers focus
on sourcing these materials from best- cost country suppliers, since they have the necessary technology and can provide capacity as needed.
Leverage or Go Around
Capacities in the electronics market are increasingly driven by small and medium- sized enterprises (SME) and to a lesser extent by large-scale multinational suppliers. Due to their size and lack of international sales capabilities, the SMEs rely on distributors to market their products. Distributors may charge a service premium of up to 8%, claiming that they received a better price for the downstream supplier due to contract bundling. However, negotiating directly with SMEs and bypassing distributors may be more cost effective, even if it can be difficult to identify which SME to work with. High performers quickly identify the suppliers managed through distributors and request a direct quote for comparison. This process step may lead to direct sourcing or provide tougher bargaining power with distributors.
Manage Raw Material Price Fluctuations
Electronics components are subject to volatile raw material prices. For instance, the price of the copper that goes into cables can make up 50% of the total part price. Best-in-class suppliers use advanced procurement strategies to reduce the risks associated with raw- material price volatility. These companies:
• Negotiate fixed prices with suppliers for a certain period, thereby minimizing the impact of changes in the price of raw materials
• Renegotiate the fixed prices and adjust them on a periodic basis (e.g. every month or year), depending on the length of the lifecycle of the parts
• Request RFQs regularly to gain an overview of the current market situation and identify further savings opportunities. They also require that their suppliers propose a minimum number of cost-saving initiatives
per year.
• Actively manage and challenge upstream suppliers to reduce the raw material content in each component through small design changes and
by reconfiguring their production processes. They use best-cost country suppliers since the parts can be switched easily and suppliers there have lower processing costs for raw materials and end products.
Category Snapshot: Electronics
Characteristics
“Electronics” Category
Sourcing scope
Globally (mainly Asia)
Supply base
Fragmented supply base with many
sub-categories
Ease of transportation
Easy (small parts)
Part complexity
Low-medium
Level of standardization
High
Raw material influence
Very high (e.g. Copper)
Buyer power
High
Supplier power
Low
Threat of substitute products
Low
Threat of substitute suppliers
High
Electronics – At a Glance
9

10. The term “molding” in the automotive industry typically refers to products that include thermoplastic raw materials, such as plastic resin. Examples are gasoline tanks, pistons, switches and pins.
Molding products fall into various sub- categories, such as blow molding, rotational molding, extrusion molding and injection molding. Here, we will examine injection molding. Injection molding can require sophisticated,
highly customized and maintenance- intensive tools for each part, depending on the size of the part. Compared to
the “electronics” category, which is somewhat easy to manage due to its high level of standardization of parts and the abundance of suppliers, managing suppliers in the molding category is more complex. The market is supplier driven, given the shortage of specialized suppliers and a lack of global capacity for high precision molding machines. Given this market situation, tier-one and tier-two suppliers need to take differing supplier capabilities into account when defining cost-cutting measures or considering an acquisition. Currently, suppliers are focused on acquiring molding capabilities (e.g. machines) and developing new suppliers to overcome the capacity bottleneck.
Calculate Cost of Tools for Producing Complex Parts
Best-in-class automotive suppliers consider the complexity and functionality of molding parts when they are looking for ways to reduce costs. They conduct periodic supplier RFQs, benchmark supplier cost structures and analyze cost drivers. Yet their cost-driver analyses look at more than molding parts; they go a step further to include molding tools, since effective management of such equipment can be used to reduce part prices (e.g. through replacement or better maintenance, or by collaborating on the design of a tool).
Consider Tool Ownership
High-performing suppliers understand that the ownership (or lack of ownership) of production tools should be considered in a detailed analysis of an upstream supplier’s cost base for molding products. Once these costs are broken down, they engage with their suppliers to help those suppliers lower costs, in exchange for guaranteeing a certain volume of orders and keeping tools at the upstream supplier. This strategy is necessary since molding components require special, customized tools for every type of part. These tools can become a lever in price negotiations before production starts, particularly since it is not uncommon that both parties vie for possession of the tools. The upstream supplier is at
the mercy of the downstream supplier
if it does not own the tools, since the downstream supplier could withdraw
the tools and switch to a competitor.
On the other hand, downstream suppliers cannot switch upstream suppliers (granted client approval) if they don’t own the tools as the product lifetime may not justify building a duplicate or replacement tool.
Understand Suppliers’ Restraints
Due to the required upfront investments in tooling for molding products, high- performing tier-two suppliers understand the limits faced by their upstream suppliers, particularly SMEs. When pushing for price reductions, they keep in mind that the offer of additional business to compensate for a supplier’s loss of profit may not help those SMEs that must invest in new lines to increase capacity. (The investment would come without a guarantee for business, since suppliers can easily move production to a competitor.) Therefore, they look to larger upstream suppliers with the financial resources necessary to invest in excess capacity despite reduced prices, thereby offering more stability to the overall sourcing and manufacturing process. If no large-scale suppliers exist or have free capacity, the growth of the tier-two supplier is limited.
Category Snapshot: Molding
Characteristics
Thermoplatic Injection Molding
Category
Sourcing scope
Globally
Supply base
Fragmented, specialized supply base with some sub-categories
Ease of transportation
Easy (small parts)
Part complexity
High
Level of standardization
Medium-low
Raw material influence
High (e.g. resin)
Buyer power
Low-medium
Supplier power
Medium-high
Threat of substitute products
Low
Threat of substitute suppliers
Medium
Molding – At a Glance
10

11. 11

12. Risk Management as a Basis for Procurement Best Practices
The most common and volatile areas of procurement risk are upstream supplier reliability and price fluctuation. Therefore, top companies anticipate upstream supplier risks, both financial and logistical, and protect themselves with contingency plans. They build strong supplier relationships that may even include an offer of replacement business if contracts are moved unexpectedly.
In addition, they keep upstream suppliers of complex products from gaining too much bargaining power by building loyalty with bundled business contracts and awarding related business (such as
a stamping contract for pins along with an award for parts molded around that metal pin).
Companies typically underestimate the impact of risk on procurement performance.
Nevertheless, the focus has returned to proactive risk management as a result of the recent economic downturn. 12

13. Research into procurement risk management conducted by Accenture and
the Massachusetts Institute of Technology identified several leading practices for successful procurement. The two partners surveyed 127 chief procurement officers at global, industrial companies around the world.
The research showed that procurement “masters” avoid price volatility and
use external data to support their risk analyses. And they do so without over- investing in IT for procurement risk management. Finally, “masters” excel at anticipating, monitoring and mitigating risks in a variety of ways.
Risk Anticipation Capabilities
Masters typically:
• Differentiate their procurement risk strategies based on the category of goods they are purchasing
• Maintain regular contact with suppliers and use multi-vendor sourcing, in order to react quickly in case of supply chain disruptions
• Apply engineering expertise to consider alternative production materials
• Use risk sharing clauses in contractual agreements
• Employ predictive analytics to build cost structure forecasts and create scenario plans about raw-material price fluctuations
Risk Monitoring Capabilities
Masters typically:
•Identify and assess the level of risk at key stages of the strategic sourcing process
• Use external data sources to monitor the supply market, the financial viability of suppliers, and other trends in the market
• Adapt monitoring approaches to different categories of suppliers, according to geographic and cultural influences
• Monitor key risks with critical suppliers at each step of the supply process
• Collaborate and integrate with key suppliers and agree on “early warning systems” for supply chain disruptions
Mitigation Capabilities
Masters typically:
• Integrate the organization in case of incident of mitigation plans
• Develop a process to measure the impact of incidents and alerts, to continuously improve risk management
• Emphasize development of mitigation plans for critical key suppliers
The “Master’s” Approach to Procurement Risk Management: A Study by Accenture and MIT
Please refer to the Accenture Study “High Performance in Procurement Risk Management” (2010) for further details.
13

14. Accenture’s experience with Direct Material Sourcing suggests
that suppliers should collaborate more to successfully navigate future markets and
reap the benefits of globalization while operating a sustainable supply chain.
Technological complexity is increasingly seen as the main differentiator for supplier selection: Best-in-class suppliers source low-tech parts with a focus on cost from upstream best-cost country suppliers, assembling parts locally. They manage a supply base for complex parts in western countries, allowing some upstream suppliers to be involved in component design. Leaders also strive to closely involve all parties in the supply chain through information sharing. This creates transparency and opportunities for process improvement.
In addition, efficient raw material management strongly contributes to a supplier’s market share, and some suppliers benefit from their global proximity to raw material mines. Companies are advised to secure a supply of raw materials for the long term, balancing that cost with the resources needed.
With trustful relationships, upstream suppliers may even help their downstream partners choose raw material mixtures that will improve quality and reduce prices.
Finally, leading suppliers actively manage risk in the procurement process. They anticipate and react quickly to changes in the market and develop non-exploitive relationships with suppliers to improve their cost-benefit ratios.
By implementing these proven best practices, companies can operate a sustainable supply chain – and gain a competitive edge.
For more information about how Accenture can help your purchasing department become a driver of high performance, please contact the authors.
Conclusion
14

15. Florian Kache
Florian Kache is a Consultant within
the Operations Practice of Accenture Management Consulting. Specializing
in Sourcing & Procurement he has profound experience from international projects within the Automotive, Chemicals, Communications & High
Tech industry. During the last 5 years
he worked successfully on various projects focusing on Global Strategic Sourcing, Procurement Transformation, and Carve Out Transformation in
M&A divestitures. Based in Frankfurt, Germany, he can be reached at
florian.kache@accenture.com.
Lars Bettermann
Lars Bettermann is a Senior Manager
in Accenture Management Consulting. He is based in Cologne, Germany, and has vast experience in the Auto- and Industrial Equipment industry. His
main focus is on challenges within Sourcing and Procurement such as Global Strategic Sourcing, Procurement Transformations and Process Excellence. During the last 12 years he has gained experience both in consulting as well
as industry and has lived abroad
several years. He can be reached at
lars.bettermann@accenture.com.
Ralf Mägerle
Ralf Mägerle is a Partner at Accenture and is leading Accenture’s Sourcing & Procurement Management Consulting Practice in Austria, Switzerland and Germany. His last 19 years he spend in Sourcing & Procurement helping clients in several industries becoming high performing in Procurement. Based in Zurich, Switzerland, he can be reached at ralf.magerle@accenture.com.
About the authors
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. Copyright © 2011 Accenture
All rights reserved.
Accenture, its logo, and
High Performance Delivered
are trademarks of Accenture.
About Accenture
Accenture is a global management consulting, technology services and outsourcing company, with approximately 236,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$25.5 billion for the fiscal year ended Aug. 31, 2011.
Its home page is www.accenture.com.