C Parts Management Tail End Spend (Procurement MRO Consumables)


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Strategic Sourcing: Optimization for Tail End Spend (C-Parts)

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  • Kitting is a process that outsources your entire component supply procedure. It's a single source for all the components used in a modular design. It’ll be delivered labelled, prepared and delivered ready for manufacture on a date that suits your production schedule.
  • C Parts Management Tail End Spend (Procurement MRO Consumables)

    1. 1. C-Parts Management Introduction and methodology to tail end spendWouter StegengaRound TableAmsterdam, Oktober 2011
    2. 2. What does it make you think of? Workload to Specialitie Price VM(O)I Monitoring quote Replenishmen s Kanban Sourcing Piggy back t Customs system Lead times process Supplier development Theft Out of Ordering Leverage FiFo H2; motivate Preferred supplier replenishment Availability stockMin Stock Risk suppliers? Partner Store Stock Supply Sourcing Long Term room Incumbent Alternative s CPM Items Exotics Reduce / Abandoning Indirects /specialties Demand One offsBehavioural Stocked items TSM Scope change Non-stocked items customer Commodities Headache Internal TCO / Geography Multiple commodities local Horizontal approach Not Sexy Customer TAC Project/contractNot impressive Low spend Hard overlap Non-core Low volume Feedback savings Soft Low price Involvemen prices savings Process improvementsToo many items t > %* < € = <€ Motivation EbitMaverick spend Logistical improvements Working capital Q: where to Knowledge P2P process focus? Authorization flow Business logic Alternatives Poor data Retrospective monitoring Poor item description Less PO’s Poor visibility Less Invoices 2
    3. 3. What is typical in the field of C-parts management?How to define it anyway??• Definition: CPM (C-Parts Mgt) refers to the tail end of all spend. It’s the low volume, low value segment. This last portion of sourceable spend is also MRO consumables referred to as Tail Spend Mgt (TSM).• Scope: Scope could be limited to MRO consumables only and or numerous Volume Scope of CPM (overlapping) commodities.• Goal: to reduce the internal process costs by optimizing the supply base # of suppliers• Strategy: different strategies are possible and they all depend, of course, of the known parameters, like number of items, number of distribution locations, Scaling the Pareto principle on the volatility of products, spend, number of suppliers behind, availability of real tail itself makes us identify the green, yellow and red. commodity distributors, and in some cases… quality of data. Typical spread of Number of Items Typical spread of Spend within a CPM project within a CPM project 3
    4. 4. What does the CPM situation typically looks like in an organization? A Long Term Strategy on MRO Consumables needs to have an integrated approach, as it will include different commodities and touching other contracts... 1) Situation 2) Complication • Many different items are • Relatively low velocity consumed on the factory floor • Relatively low item price by many different • Diversity of items employees... • Need to stock some of these • As items can be urgently needed some need to be • Many different user stored locally... MHE consumption profiles • The Total Acquisition Costs can multiply the purchase PAINTS price... • Overconsumption does occur, although difficult to prove 3) Question 4) Answer PPE How to improve the supply of A strategy to select a preferred C-parts, while achieving supplier for supplying 80% of supplier reduction, process goods while implementing optimizations and (hard) logistical concepts to optimize savings for the organisation? the supply of consumables. 4
    5. 5. How could we class different strategies and how suitable would thosestrategies be if we change the parameters? 1) Reduce 4 different strategies: • It should be part of the category mgr’s task to maintain the portfolio and challenge the demand for exotics and duplicates. By questioning business (processes), behaviour, demand OUTSOURCE patterns and old machinery the (expected) demand for exotics Integrate can be reduced or replaced by higher running alternatives. INHOUSE 2) Piggy Back OUTSOURCE • By managing the portfolio the C-parts could have been included in the contracts of higher running items. In this way numerous suppliers take a bit of the headache away for your TRANSACTIONAL SPEND organisation. However, as the tail, and the insight in it, will Leverage change often the contracts need to be flexible. 3) Leverage • When there is a certain spend on the numerous items, taking an integrated approach to source best would probably make Piggy Back most sense. 4) Integrate (3rd party) • When aiming for least PO’s, suppliers and focus on core activities, outsourcing (BPO-P) of these procurement tasks Reduce shall be considered. Note • While scoping the project always aim to make a best fit with future demand, excluding the death items, reducing the exotic NUMBER OF ITEMS items and understanding what has been piggy backing already 5
    6. 6. Interesting...But besides strategies, what kind of optimizations could we aim for? • Implement supplier reporting on detailed consumption to • Develop relationships especially with update Master Data on item incumbents eager to gain business in the description. scope of C-parts • Leverage buying power and • Have real commodity players compete include C-parts in the strategy against specialist as to have an like piggy backing. instrument to drive the threshold and to make the business decision transparent. • Reduce demand for exotics, implement alternatives. • Aim to largely reduce the • Track end user consumption number of suppliers by and automatic individual leveraging the baskets. consumption limitations • Reduce approval flow, • Manage life cycle and • Reducing suppliers & transition ownership retrospective monitoring, guide internal customer (VMI, inhouse shops) towards suppliers. monitor individual consumption, into more volatile • Implement monthly consolidated invoicing reduce stock and stashes. items. per budget place with monitoring/reporting. 6
    7. 7. ...and what could an Integrated Supply Partner realise for my organisation? How to deliver? Services Services Value Products Solutions (products) (Processes) • eOrdering / eInvoicing • In-depth Material Advise • Purchase Cards • Energy Survey / Reduce • Substitute Parts • Blanket Orders Monitoring Total • Supplier Reduction • Transaction Analysis • Punch out Super Search What value component? Acquisition • Product Transformation Reporting • Training Costs • Product Adaption • Consolidated Invoicing • Insite Services • OE Parts Conversion • Self Billing • Performance • Delivery to Line Measurement • 24/7/365 Service Improve Supplier • Training • Condition monitoring • Reduced Maintenance Product Product • Consignment Stock mgt • Technical Support • Technical Consultancy Efficiency Portfolio • Insite Services • Repairs • Component Kitting • Application Advice Reduce • Training • Product & brand • Stock Profiling Working • Consignment Stock mgt rationalisation • Vendor mgt Inventory Capital • Insite Services 7
    8. 8. Okay, and how to scope and size a project? Well, first we started with anestimation of the contribution of the three pillars to the overall savings. Estimation of contribution of project targets to overall savings 1) Commercial Savings Realization of commercial savings 8% average of €1.7M => €130k 2) Inventory Reduction Reduce stock by 50% (€160K) 15% cost of capital => €24k ??? 3) Process savings Reduction of: PO&Approval €??? FTE €??? Workload & replenishment €??? PO’s for non-coded items €??? closer walkways €??? etc etc. €??? Total process savings €???k Focus on the process and commercial savings 8
    9. 9. Defining different segments creates clarity for all involved and can greatlymanage the workload behind... • Procurement should involve Material Management to define the right baskets. • Basic rule can roughly identify the segments, for example:  Materials with an annual spend above €3k are green items  Materials with an annual spend below €3k and above €1k are yellow items  Materials with an annual spend below €1k are red items Number of Items Annual Spend The Red segment = Headache for everybody 9
    10. 10. It’s key to clearly instruct the suppliers about the tender rules, targets,setup and supplier expectations. The CPM tender is about developing the relationship with one or two selected suppliers. The selection is driven by savings, capabilities, quality and the concept of service. To manage the workload and optimize selection we had set up the following tender rules:  Since the Green segment are the basket drivers at least 100 items (80%) has to120 items be quoted for an acceptable bid.€1M spend To discuss: should we reveal the total segment spend to the market?  For the headache segment the supplier has to accept to deliver the whole segment for the price given and with transition of the source.1850 items With contract implementation Goodyear will hand over the sources and last price€300k spend paid. The total spend and items for the segment are given. To discuss: reveal prices of 100 randomly selected items for price reference?  In the yellow segment the market decides whether it’s better to stay with our230 items current source, to switch to the new preferred supplier or to cherry pick with an€450k spend alternate supplier. No spend or prices are revealed to the market. The winner of the tender will get at least €1.3M 10
    11. 11. And create a strategy to get the best bid out of the suppliers… Cherry pick best supplier Negative 5% commercial savings, because of: Enablement of highest process savings Reduce the suppliers RFQ effort and improve quotes by focussing on service concept Reduce suppliers risk to accept the red segment At the short list there should be enough trust in the relation to reveal current price levels of Stimulate them to ‘give items. back’ the 5% on other This will reduce surprises and suppliers can be segments asked to calculate and commit on the segment Make the suppliers savings during the tendering process. confident with the tender Handling fee on top of current distributors margin! …and implement a strong service concept with commercial savings as well 11
    12. 12. What type of logistical improvements shall we involve the localstakeholders on? All concepts should be established with strong local business involvementDrawers for tools Vending machines Steel lockers to Shelves for fasteners be replenished and other low cost items Shop – In - Solution Vertical Lift Module 12
    13. 13. Best Practice: The tail end of MRO consumables... Project outcome • 11 commodities, supplied by 125 suppliers. • 2200 items, 95% of materials have an annual spend of less than €3k • Annual spend of € 1,7M, total POs: 11.000/yr • All 11 commodities, supplied by 1 supplier; a local commodity player • 2200 items (96%), supplied by 1 supplier… • Suppliers reduction ~110 (~90%; 15 supplier remained) • Annual spend of €1,5M with 1 supplier, total PO reduction: ~10.500/yr • Savings on: Baseline Spend (inc volume discount & CP) 6% Consignment stock 3% Invoice reduction 2% PO reduction (-/- 10.500 PO’s) 3% Supplier reduction (-/- 110 suppliers) ? FTE reduction by workload, time ? Reduced consumption of items ? Suppliers proposing better alternatives ? Benefit on Non-Stocked items ? • Supplier engineer (1FTE) for 3 months for smooth implementation 13
    14. 14. Additional sources • Webinar • By Global eProcure (GEP) http://www.globaleprocure.com/Webcast-Tail-SpendManagement-watch.aspx • Sourcing managers discussion • By LinkedIn; discussion group ‘Strategic Sourcing & Procurement’, search for ‘tailend-spend’ • http://www.linkedin.com/groups/Strategies-managing-Tailend-spend- 139021.S.56521661?view=&srchtype=discussedNews&gid=139021&item=56521661&type=member&trk= eml-anet_dig-b_pd-ttl-cn • White papers • See below the only knowledgeable white paper I found on internet, again by Global eProcure (GEP). Of an estimated € 2.000 bn in Indirect Spend in Europe each year, a 20% tail would constitute of €400 bn of addressable tail end spend 14
    15. 15. Elemica is the leading consortium in the Tire and Chemical industry Founded by the chemical and tire & The 32 share holders of Elemica: rubber industries in 2000 Greater than $70 Billion of transactions handled annually through Elemica Solutions Over 13,000 strategic sourcing projects with yearly savings in average of $150M Global presence with offices in Atlanta, Amsterdam, Frankfurt, London, Seoul, Shanghai, Singapore, and Tokyo. Global Headquarters in Exton, Pennsylvania. More than 3000 companies connected through the Elemica Connected Solution supporting a wide range of industries. 15
    16. 16. What is the value of sourcing via Elemica? The 3 C’s Delivered Via COST Reduction  Dedicated Elemica staff • Leverage aggregated spend – On site • Increased category focus – Delivery Center Based • New strategies  Best in class eSourcing platform • Opportunities within the organization or in customers eSourcing platform • Negotiation recommendations  Elemica logistics sourcing platform CAPACITY Increase • Additional resources • More projects in same time frame CAPABILITY Improvement • More effective strategies • Enhanced tools & eSourcing process • Category experience • Market & industry knowledge 16
    17. 17. Please feel free to contact for additional information on C-PartsManagement the contacts listed below...Go tohttp://sourcelink.elemica.com/Sourcelink/Home.aspx How optimized is your tail end spend? 17