The Purchasing Highway: Under Construction

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The Purchasing Highway: Under Construction

  1. 1. The Purchasing Highway: Under Construction Achieving supply chain efficiency through robust commodity strategies Mary Alice Kuhn, C.P.M. Manager-Strategic Sourcing & Design
  2. 2. Timken at a glance <ul><li>$4.5 billion sales </li></ul><ul><li>26,000 associates in 27 countries </li></ul><ul><li>Manufacturing plants: </li></ul><ul><ul><li>54 bearing </li></ul></ul><ul><ul><li>12 joint-venture bearing </li></ul></ul><ul><ul><li>12 steel </li></ul></ul>Technical centers Manufacturing facilities Sales offices
  3. 3. Timken at a glance <ul><li>Fortune 500 </li></ul><ul><li>Forbes Platinum 400 – America’s Best Big Companies in 2005 </li></ul><ul><li>Forbes Global 2000 </li></ul><ul><li>Named one of the “100 Best Corporate Citizens for 2004” by Business Ethics magazine </li></ul>Automotive 35% Steel 27% Industrial 38%
  4. 4. Timken at a glance (a) Company estimates, Freedonia Group and external financial reports. <ul><li>Timken: </li></ul><ul><ul><li>#3 Global Bearing </li></ul></ul><ul><ul><li>#1 North American Bearing </li></ul></ul><ul><ul><li>#1 Global Tapered Bearing </li></ul></ul><ul><ul><li>#2 Global Needle Bearing </li></ul></ul><ul><ul><li>#2 Global Industrial Bearing Aftermarket </li></ul></ul>Global bearing market - $25 Billion (a)
  5. 5. Supply Chain Complexity <ul><li>Two-lane highways… </li></ul>Customer Customer Customer Customer Customer Distribution Center Assembly Plant Steel Plant Supplier Component Plant
  6. 6. Supply Chain Complexity <ul><li>…become four and six-lane interstates </li></ul>Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Comp Plant Assy, Comp Plant Assy, Comp Plant Tier 1 Tier 1 Tier 1 Tier 1 Customer Customer Customer Customer Customer Customer Customer
  7. 7. Supply Chain Complexity <ul><li>“ Competition is no longer company to company. It’s supply chain to supply chain.” </li></ul><ul><li>Sr. Vice President- </li></ul><ul><li>Supply Chain Management </li></ul><ul><li>Cessna Aircraft Company </li></ul>
  8. 8. The Purchasing Highway: Under Construction Achieving supply chain efficiency through robust commodity strategies
  9. 9. <ul><li>Move away from buying parts (go fetch) </li></ul><ul><li>Embrace long-term thinking </li></ul><ul><li>Institute KPI other than price reduction </li></ul><ul><li>Integrate Purchasing in Supply Chain; Break down Supply Chain silos </li></ul><ul><li>Elevate professional development </li></ul><ul><li>Shorten time to productivity; improve cultural assimilation </li></ul>Objectives
  10. 10. <ul><li>Learn about and understand available practices related to creating and implementing strategies </li></ul><ul><li>Understand how to link business strategies to Purchasing strategies </li></ul><ul><li>How to connect strategies to reality (over time) </li></ul><ul><li>How to change mentalities from tactical to strategic </li></ul><ul><li>KPIs for current and future measurement </li></ul>Benchmarking
  11. 11. <ul><ul><li>Industrial Customers </li></ul></ul><ul><ul><li>Automotive Customers </li></ul></ul><ul><ul><li>Industry-specific organizations: ISM (Institute for Supply Management), Corporate Strategy Board, Procurement Strategy Board </li></ul></ul><ul><ul><li>Academia: Eli Broad School of Management – U of Michigan, PSU, etc. </li></ul></ul><ul><ul><li>Consultants </li></ul></ul><ul><ul><li>Trade publications, internet </li></ul></ul><ul><ul><li>Key/strategic suppliers </li></ul></ul><ul><ul><li>Research firms: CAPS (Center for Advanced Purchasing Studies) </li></ul></ul>Candidate List
  12. 12. <ul><li>Tremendous amount of information: Many articles, websites, etc. – no documented process of “how to” develop a strategic process resulting in a commodity strategy; company spec’d </li></ul><ul><li>There is no rule book/play book </li></ul><ul><li>“ How to” needs to be adaptable to “what” </li></ul><ul><ul><ul><li>“ How to” becomes SOP (standard operating procedure) </li></ul></ul></ul><ul><li>SOP example: </li></ul><ul><ul><ul><li>“ What” > Who are the leaders? Target companies, equipment manufacturers, suppliers, customers, academia/best in class > Line of questioning based on specific process that creates “what” > Contact & dialogue > Apply learnings to commodity strategy in conjunction with business & market analysis </li></ul></ul></ul><ul><li>To get cost out of “what” CM needs to be teacher & facilitator to share practices with supplier </li></ul>Findings ~ general
  13. 13. <ul><li>Every commodity: </li></ul><ul><ul><li>TCO analysis </li></ul></ul><ul><ul><li>High emphasis on cross functional team ownership </li></ul></ul><ul><ul><li>Strategic plans – at least 5 years out with specific data on spend, supply base, key processes, resource process maps, KPIs, objectives </li></ul></ul><ul><ul><li>Rationalized supply base; more time spent on key suppliers and less time on poor performers </li></ul></ul><ul><ul><li>Long term agreements covering 80%+ of spend </li></ul></ul><ul><ul><li>Supplier relationship management, emphasis on L6S, VAVE </li></ul></ul><ul><ul><li>Aligned staffs to support transactional to strategic work </li></ul></ul><ul><ul><li>Supplier integration – advisory boards, conferences, trust, focus on future (not past) </li></ul></ul>Findings ~ general
  14. 14. Current Steps in Sourcing Identify Select Certify Evaluate Manage Business Need ? What is it? Who can make it? How consistent can they make it? Pick 1 (or 2) PPAP, approval
  15. 15. What does this mean? Value to the business Time Create a Competitive Advantage Supply base value opportunities
  16. 16. <ul><ul><ul><li>Supply Base Rationalization & Relationship Management: Develop supplier strategies, categorize and establish appropriate relationships </li></ul></ul></ul><ul><ul><ul><li>Process Adherence: Develop and document standard operating procedures to integrate sourcing processes into an end-to-end supply chain </li></ul></ul></ul><ul><ul><ul><li>Data assessibility: Robust information systems to enable immediate access to data for analysis and decision making (ONE) as well as provide data visibility between customer~Timken~supply base </li></ul></ul></ul><ul><ul><ul><li>Professional Development: Create an associate community reflective of current talent pool and future needs via skills assessments, clearly defined roles & responsibilities; provide training to close gaps; offer to supply base </li></ul></ul></ul>Strategies
  17. 17. The Strategic Sourcing Council Process is the Framework for Development and Implementation of Robust Commodity Strategies Analysis & Decision Making Manage & Measure Relationship Structure & Contract Business Need Transition & Implementation Strategy Planning (Profile) Council Objectives: 1) Resource allocation and accountability; Alignment 2) Process management (adherence to SOPs) 3) Timely implementation 5) Risk mitigation 6) Profitable success Council Composition: - Each commodity has at least 2 executive sponsors of which 1 is the GM-Purchasing-Indirect, Direct/Auto or Direct/Ind + business unit front end and/or manufacturing director/VP - Each commodity has a cross functional team of which the owner(s) of the resource(s) are decision makers (“gatekeepers”) Decision making process: - Executive sponsors and gatekeepers have voting priviledges. When there is not consensus or a “tie”, the executive sponsors have final decision. 1 2 3 4 5
  18. 18. “ Best-in-Class” Steps in Sourcing Analysis & Decision Making Manage & Measure Relationship Structure & Contract Business Need Transition & Implementation Strategy Planning (Profile) Commodity Understanding Supply Market Analysis Business Understanding OBJECTIVE OF PROFILE PLANNING STEP: -Systematic process -Executive consensus -Clear direction; rationale -Less “firefighting” (because of better planning and understanding of the supply base’s capabilities & capacities) Commodity Strategy
  19. 19. “ Best-in-Class” Steps in Sourcing <ul><li>Commodity Understanding </li></ul><ul><li>What is it we want to buy? </li></ul><ul><li>Specs - relevant, market appropriate, competition’s spec </li></ul><ul><li>Raw material - availability, source, Timken/customer directed </li></ul><ul><li>Manufacture - process, machines, technology </li></ul><ul><li>Product – order frequency, inventory levels, supply chain map/path </li></ul><ul><li>Current – source, history, OTD, etc </li></ul><ul><li>Application – how is part used, where, who </li></ul>Analysis & Decision Making Manage & Measure Relationship Structure & Contract Business Need Transition & Implementation Strategy Planning (Profile) Commodity Understanding Supply Market Analysis Business Understanding Commodity Strategy
  20. 20. “ Best-in-Class” Steps in Sourcing <ul><li>Supply Market Analysis </li></ul><ul><li>Who makes up the supply base and what are the trends? </li></ul><ul><li>Location-Ease of doing business, location of sub contractors & material source, length of supply chain </li></ul><ul><li>Capability, Capacity-development & investment requirements </li></ul><ul><li>Quality processes-minimum requirements </li></ul><ul><li>Technology-state of art? </li></ul><ul><li>Market share, customer base, competitors </li></ul><ul><li>Cost drivers, cost structure </li></ul>Analysis & Decision Making Manage & Measure Relationship Structure & Contract Business Need Transition & Implementation Strategy Planning (Profile) Commodity Understanding Supply Market Analysis Business Understanding Commodity Strategy
  21. 21. “ Best-in-Class” Steps in Sourcing <ul><li>Business Understanding </li></ul><ul><li>What is Timken’s supply chain stream and vision to get to the marketplace? </li></ul><ul><li>Status – growth or receding, life expectancy, market price </li></ul><ul><li>Technical – substitutions, replacements, </li></ul><ul><li>Competition – what are they doing? Make or buy? Where is source? </li></ul><ul><li>Goals – history of use, main drivers, current/future scenarios </li></ul><ul><li>Supply base – internal, external, who, capability, capacity, core competency, contract obligations </li></ul>Analysis & Decision Making Manage & Measure Relationship Structure & Contract Business Need Transition & Implementation Strategy Planning (Profile) Commodity Understanding Supply Market Analysis Business Understanding Commodity Strategy
  22. 22. Purchasing measures <ul><li>Current </li></ul><ul><ul><li>Price downs to plant level verification </li></ul></ul><ul><li>Future </li></ul><ul><ul><li>Total Cost of Ownership (TCO) </li></ul></ul>
  23. 23. Purchase cost Internal company costs Joint supplier/ customer costs TCO + + = Source: McKinsey Supply Management Practice Purchase price Transportation Warehousing Inventory carrying costs Factory yield/ process efficiency Purchasing administration Damaged field product Production capacity Expediting Specifications R&D Operating costs Maintenance costs Inventory management costs Set-up costs Total Cost of Ownership (TCO)
  24. 24. “ Best-in-Class” Steps in Sourcing <ul><ul><li>Cost drivers and related factors, sensitivity to change </li></ul></ul><ul><ul><li>Spend management over time </li></ul></ul><ul><ul><ul><li>Buying strategy (hand-to-mouth, buy to requirements, forward buying, life-of-product, JIT, etc.) </li></ul></ul></ul><ul><ul><ul><li>Implementation strategy (hedging, spot buy, contract/PO basis, multi-year, capacity, life of product, etc.) </li></ul></ul></ul><ul><ul><li>Estimated TCO vs Actual </li></ul></ul>Total Cost of Ownership (TCO) Analysis & Decision Making Manage & Measure Relationship Structure & Contract Business Need Transition & Implementation Strategy Planning (Profile) Commodity Understanding Supply Market Analysis Business Understanding Commodity Strategy
  25. 25. Purchasing measures <ul><li>Current </li></ul><ul><ul><li>Price downs to plant level verification </li></ul></ul><ul><li>Future ~ TCO ~ identify cost drivers </li></ul><ul><ul><li>Price downs </li></ul></ul><ul><ul><li>Cost of quality </li></ul></ul><ul><ul><li>Cost avoidance </li></ul></ul><ul><ul><li>Customer satisfaction </li></ul></ul><ul><ul><li>Inventory levels </li></ul></ul><ul><ul><li>OTD </li></ul></ul><ul><ul><li>Supply chain cycle time reduction </li></ul></ul><ul><ul><li>Etc. </li></ul></ul>
  26. 26. Cost Drivers <ul><li>Cost drivers were identified based on: </li></ul><ul><li>> survey analysis on buyers and suppliers </li></ul><ul><li>> industry best practices </li></ul><ul><li>Apart from “piece price”, the most important cost drivers were found to be: </li></ul><ul><li>> Quality </li></ul><ul><li>> Supplier reliability and capacity </li></ul><ul><li>> Logistics, Warehousing, Transportation </li></ul><ul><li>> Transaction costs </li></ul>
  27. 27. <ul><li>> Subjective (Choose from 1-5; 1=poor, 5=excellent) </li></ul><ul><li>> Access to TSN: Complete/restricted/No access; </li></ul><ul><li>Accordingly a 5/3/1, respectively! </li></ul><ul><li>> EDI/ERS capability: a yes/no answer; hence excellent/poor ; i.e. 5/1 respectively </li></ul><ul><ul><ul><li>> Back office enterprise system availability: level of ERP applications, access to “knowledge”; value-added </li></ul></ul></ul><ul><li>> Ease of payment terms: Do you want payment in USD? Is payment in USD? Yes (4,5); No (1/2/3, based on strength of dollar! Refer purchasing training), payment terms in days (30- 90), technical expertise of suppliers aligned to Timken technologies </li></ul><ul><ul><ul><li>> How much is the quality control being applied real time (measured from Rapid plant assessment tool) </li></ul></ul></ul>Transaction Costs
  28. 28. <ul><li>Copyright The Timken Company 2005 </li></ul>
  29. 29. <ul><li>Benchmark – internally and externally </li></ul><ul><li>Identify gaps; Prioritize needs </li></ul><ul><li>Establish framework: SOPs, guidelines, common terminology, etc. </li></ul><ul><li>Cross-functionality and executive sponsorship – purchasing doesn’t own the supply chain or the supplier or the problems associated with the supplier </li></ul><ul><li>Set milestones and achieve the dates </li></ul><ul><li>Balance - short and long term activities (put out fires while establishing a fire prevention plan) </li></ul>Preparation for the Trip
  30. 30. Review YOUR construction plans: <ul><li>Something you heard you will apply immediately in your work, and </li></ul><ul><li>2) An “a-ha!” </li></ul>

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