Creating Value with an Outsourced International Purchasing Office for a large FMCG company in China

Case Study
Creating Value with an Outsourced
International Purchasing Office for a large FMCG company
in China
Dragon Sourcing - 龙源
Your Tailored Sourcing Approach to China

© 2007 Dragon Sourcing. All rights reserved.
2
Agenda
1. Context
2. Sourcing Process
3. Governance Model
4. Results and conclusions

3
Context
• A global consumer-goods company headquartered in USA.
 It has operations in more than 40 countries and sells its products in over 180 nations
worldwide.
 50,000 employees
 sells food, beverage and household products
• Launched a “Direct to manufacture LCC sourcing” initiative
• Selected Dragon Sourcing to manage the programme

4
Agenda
1. Context
2. Sourcing Process
3. Governance Model

5
Dragon Sourcing service offering covers the end-to-end sourcing process
Feasibility Analysis
Supplier Selection
and Contracting
Procurement Operations
• Analyse spend category in detail
– Specifications and quality requirements
– Volumes
– Deadlines
• Analyse supply market and identify potential suppliers
• Pre-qualify potential suppliers through an RFI process
• Manage RFP process with pre-qualified suppliers
• Analyse supplier responses and calculate fully delivered
price (logistics, import duties, ADT,..)
• Develop Business case and implementation plan
• Shortlist suppliers based on
RFI/RFP process
• Audit shortlisted suppliers
• Select 2-3 suppliers for sample
development process
• Manage sample development
process
• Conduct final negotiations and
select suppliers
• Finalise Contract
• Manage P/O and agree payment
terms and details (L/Cs,..)
• Check in process production quality
• Conduct pre-shipment QC
• Arrange logistics
• Manage supplier performance
• Monitor new sourcing opportunities
Keyactivities

6
Supplier Selection
and Contracting
– Volumes
– Deadlines
RFI/RFP process
development process
process
select suppliers
Keyactivities

7
The first step is to develop a comprehensive understanding of the need and of
the functional requirements, e.g.: laminated packaging
Product Name Laminated film Product Picture
Quantity M-OPA15/PE45(270mm):12,200,000M2/year
M-OPA15/PE45(338mm):6,500,000M2/year
M-OPA15/PE70(270mm):1,000,000M2/year
Current spending
(DDU price)
M-OPA15/PE45(Width 270mm): EUR XX/1000 M
Total spend of Laminated
film
Total spend: Over € 5M
Food Approval Standard BGA,FDA,EC
Thickness M-OPA15/PE45: Layer1:15µm
Layer2:45µm
M-OPA15/PE70: Layer1:15µm
Layer2:70µm
HS Code 39232900
Customs Duty 6.5%

8
Then, an RFI/RFP process is administered to filter out most capable suppliers
Company Name
Address
Town
Province
Company Website
Contact Person
Title
Email
Tel
Fax
Mobile phone
Alternative Contact Person
Title
Email
Tel
CONTACT INFORMATION
联系信息
COMPANY INFORMATION
Contact detail
information
I. Company Background
What date was your company founded?
What is the nationality/region of your company?
How much capital do you have (in RMB)?
What is the workfloor size (m²)?
How many employees do you have?
2006 2005 2004 2003
Revenue/Turnover (in RMB)
US (%) EU (%) Japan (%) Total (%)
% Sales exports to the main markets (US, Europe, Japan)
Customers Industry Country
Percentage of sales
Who are your top 5 Customers?
Business
overview
Type
Product Reference Material
Material cost
Manufacturing
cost
Packaging cost Logistics cost Total Price
13%VAT
refund
FOB total
price
FOB sea
Port
Example
PA9+EVOH3+PA9+PE54 xxx M2 50.000 40.000 3.000 7.000 100.000 -13.000 87.000 Qingdao
M-OPA15/PE45 Felxblend M-OPA 15+ PE 15 M2 0.000 0.000 0.000 Shanghai
M-OPA15/PE45 Felxblend M-OPA 15+ PE 15 M2 0.000 0.000 0.000 Shanghai
M-OPA 15/PE70Peel M-OPA 15+ PE 70 M2 0.000 0.000 0.000 Shanghai
laminated
film
All in USD/ 1000M2
Annual Quantity
Product and price
information
Type
Reference Material
Proposed Packaging
Proposed
pallet size
(mm)
Nb of pallet
per 20'
container
Nb of pallet
per 40'
container
Film
length/reel
(m)
Number of
reels/pallet
Total Film
length (1000m)
per 20'
container
Total Film
length
(1000m) per
40' container
每
Example
PA9+EVOH3+PA9+PE54 Reels on filmed pallets 800 x 1200 10 21 1000 160 1,600 3,360
M-OPA 15/PE 45
Felxblend
M-OPA 15+ PE 15 0 0
M-OPA 15/PE 45
Felxblend
M-OPA 15+ PE 15 0 0
M-OPA 15/PE 70
Peel
M-OPA 15+ PE 70 0 0
Laminated
film
Logistic
information

9
Suppliers’ competitiveness is first measured on an FOB basis
Laminated film Project RFQ Control General Sheet
Supplier Contact Information
Supplier Name Y/N Date Y/N Date Y/N Date
M-OPA 15/PE 45
(Width 270 mm)
M-OPA 15/PE 45
(Width 338 mm)
M-OPA 15/PE 70 Peel
(Width 270 mm)
Supplier 1 Y 29-Sep Y 8-Oct Y 29-Sep US$75.00 US$86.00 US$88.00
FOB Price in US$ per 1000M
Intend to Respond
Received
RFQ Sent Out
Phone Call Follow
Up
0
2
1

10
Then all relevant information is collected to calculate DDP prices
FOB Price (supplier) Freight forwarding, customs & duties
DDP Price
Supplier Name Product type per supplier
FOB
Purchasing
price
Container
type
Units of measure
Length/r
eel
Number
of reels
per Pallet
Number
of pallet
per
containe
r
Number of
films in a
20'
container
Freight cost per
unit
CFR Rotterdam
value
Customs duties CFR
Freight cost for
inland
transportation
per roll
DDP US$ price
M-OPA 15/PE45(270mm) US$74.25 20' 1000 M film 1,500 54 10 810,000 US$3.13 US$77.38 US$5.03 US$77.38 US$1.49 US$83.90
M-OPA 15/PE70(270mm) US$93.00 20' 1000 M film 800 27 20 432,000 US$5.88 US$98.88 US$6.43 US$98.88 US$2.79 US$108.09
Supplier 1
20'
Supplier 2
Supplier 3

11
Finally a Go/no Go decision to proceed is given based on the savings potential
vs the risk associated with changing suppliers
DDP Price analysis for M-OPA15/PE45(338mm) with pallet
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
Supplier 1 Supplier 2 Supplier 3
With pallet Current purchasing price
DDP Price analysis for M-OPA15/PE45(270mm) with pallet
0.00
20.00
40.00
60.00
80.00
100.00
DDP Price analysis for M-OPA 15/PE70(270mm) with pallet
€ 73.39 € 70.67 € 107.26
0.00
20.00
40.00
60.00
80.00
100.00
120.00

12
Supplier Selection
and Contracting
– Volumes
– Deadlines
RFI/RFP process
development process
process
select suppliers
Keyactivities

13
Short-listed suppliers are audited to assess long-term partnership opportunities
Audit
questionnaire
Audit report
Audit
summary
Objectives
• Meet top management and sales management teams
• Present order details
• Refine supplier offer understanding
• Understand organisation
• Validate manufacturing capabilities
• Visit factory and check work conditions
Topics
• General Management
• Order management
• Shipping / packaging
• Planning process
• Goods flow
• Procurement
• Purchasing
• Production
• Quality…

14
Collected information is shared with customer through detailed audit reports
GENERAL INFORMATION
SUPPLIER NAME Jia Pu
City Kunshan
Province Jiangsu
Contact person Mr. Wu Yun
Job title Sales Manager
Email wuyun@caihua.com
Phone number 13311779692
Fax number 86-21-64806899
Website www.caihua.com
BUSINESS INFORMATION
Found Year 1990
Ownership Private Owned
Capital 10000 million USD
Number of employees 308
Revenue/Turnover (in million RMB) 2006 722 million RMB
% Sales of the film in total revenues 70%
% Sales exports to western markets 20%
Main export markets Europe, US,
Customer Reference Kraft, Pepsi, Danone
Production capacity per year laminated film 7000 tons
QUALITY & ENVIRONMENT CERTIFICATION
ISO 9001:2000 Yes
ISO 40001 Yes
GMP Yes
Factory picture
　
COMPLIANCE WITH LOCAL LAW
Children labor Yes 　
Working hours Yes
Health & Safety Yes
Environmental issues Yes

15
Audit outcome is summarized in a rated profile of each supplier

16
The final supplier selection relies on the short-listed suppliers’ offers, audits and
sample quality
Suppliers’ quotation
Samples
Audit summary
Supplier
summary
Supplier
capabilities
Supplier
assessment
Supplier
Name
Final
Ranking
Supplier 1 1
Supplier 2 4
Supplier 3 2
Supplier 4 5
Supplier 5 3

17
Supplier Selection
and Contracting
– Volumes
– Deadlines
RFI/RFP process
development process
process
select suppliers
Keyactivities

18
Overall methodology & 7-step process
Quality is regularly monitored during production and at pre-shipment
• Dragon Sourcing teams are trained to follow a
7-step process to execute Quality inspections
• Sampling and criteria requirements are detailed
in a specific document for customer approval
• On-site data are recorded in a specifically
designed Excel table
• Inspections are documented in a report
submitted to customer
• Action plans are defined in order to improve
product quality
Sampling & Criterias
Excel recording tool
Checkitem #
Box #
Marking Inner carton Mug Quantity Mug heigth
Mug upper
diameter
Mug lower
diameter
Wall
thickness
Mug weigth Material type Quality
1 OK OK 48 104.3 64.9 3.6 326 OK OK
2 OK OK 48 103.4 64.5 4.2 346 OK OK
3 OK OK 48 104 64.6 3.9 344 OK OK
4 OK OK 48 104.6 64.8 3.8 317 OK OK
5 OK OK 48 104.3 57 3.6 308 OK OK
6 OK OK 48 104.8 61 3.8 317 OK OK
7 OK OK 48 103.7 64.5 3.9 328 OK OK
8 OK NO 48 103.8 62 3.9 345 OK OK
9 OK OK 48 103.3 64.1 3.1 322 OK OK
10 OK OK 48 103.2 63.4 3.7 325 OK OK
11 OK OK 48 104.4 64.8 3.9 317 OK OK
12 OK OK 48 102.3 64.2 3.2 316 OK OK
13 OK OK 48 105.4 63 4 316 MO OK
14 OK OK 45 105.6 65 4 322 OK OK
15 OK OK 48 106.3 65.6 4.1 357 OK OK
16 OK OK 48 103.4 65.5 3.9 311 NO OK
17 OK NO 48 104.7 64.1 3.8 300 OK OK
18 OK OK 48 104 60 3.8 342 OK OK

19
QC Reports provide detailed information concerning production quality
Type Cartons and wipes
# of boxes
checked
# defects
Crit Crushed boxes 40 -
Maj
　
Carton holes, cuttings not causing damage of wipes inside 40 4
Maj
　
Case containing lower number of packs than requested, i.e.
12 packs per box
40 -
Maj
　
Case label missing and/or illegible 40 -
Maj Footprints on cases 40 -
Maj Incorrect box dimension (41x23x18.5 cm) 40 -
Maj Misprint of shipping mark 40 -
Type Wipes and laminates
# of
cartons
checked
# of
samples
checked
# defects
Crit Conditions of the laminate: holes, sealing 40 70 -
Crit Printing quality 40 70 -
Crit Printing content same as confirmed graphic 40 70 -
Maj Number of wipes per packs (70 pcs) tolerance: +/- 2 wipes 40 70 -
Maj Dimension of the wipes 19x19cm, tolerance: +/- 0,5cm 40 70 -
Maj Edges OF THE LID don’t cut 40 70 -
Maj LID opens/closes properly 40 70 -
Maj Laminate packaging shrinkage 40 70 -
Min Less weight per pack 40 70 3

20
Supplier performance is closely monitored and new potential suppliers regularly
audited in order to manage the supplier for continuous improvement
Supplier performance management Alternative sourcing opportunities monitoring
Overall performance
Q1 Q2 Q3 Q4
　　
Potential
Supplier
1
Potential
Supplier
2
Potential
Supplier
3
Current
Supplier
Price
Prod. 1 26.4 23.8 24.9 24.6
Prod. 2 36.1 33.8 34.9 33.7
Prod. 3 13.4 15.1 12.2 12.8
Prod. 4 40.2 38.1 41.3 38.4
Region Jiangsu Zhejiang Shanghai Shanghai
Turnover (M€) 6 14 8 19
Staff 350 700 430 880
Capabilities 100/day 120/day 75/day 140/day
Sample quality N/A Good N/A Good
Cooperation Good Good Average Good
Potential supplier assessment
Potential Supplier 1 Potential Supplier 2 Potential Supplier 3 Current Supplier
Competitivity Capabilities Motivation

21
Agenda
1. Context
2. Sourcing Process
3. Governance Model

22
The China sourcing programme is managed via a series of frequent
conference call meetings
Dragon SourcingClient procurement unit
Business Model
• Dragon Sourcing is a service provider
assisting customer in sourcing and
procurement activities
• Customer places Purchase Orders directly
with selected suppliers and suppliers
invoice directly Customer
• Customer pays DS a fixed monthly mgmt
fee + evaluates every quarter Dragon
Sourcing performance
Communication
• Steering Committees weekly (conference
call) to review overall progress on all
categories
• Categories follow-up meetings on an ad-
hoc basis to review category issues
• Meeting minutes record main decisions,
planned actions and project status
DS CEO
DS Account Manager
President
Sourcing Director
Buyer
Buyer
Buyer
Buyer
Buyer
Buyer
Logistics
Buying Analyst
Buying Analyst
Buying Analyst China

23
During these meetings, projects’ status and issues are discussed
Project Overview & Follow up
2008-4-14
Project
No.
Project
request date Project Name Organisation Product category
Current
estimated
annual spend Status Followed by
1
Paper cup
N/A Paper cup 5 sizes
75 million for
7.5oz
30 million for 8oz
4 million for 12oz Sampling Leon GU
3
Calcium
propionate
N/A
Calcium
propionate in
25kg bag 46 ton Sampling Leon GU
4
Laminated film
N/A
PA/PE laminated
film for coffee
packing 20 million m2 Sampling Leon GU
5 Wipes N/A Baby wipes 4 million units Sampling Leon GU
6
Filter paper
N/A Filter paper 3000 ton
Supply
market
survey Leon GU

24
Agenda
1. Context
2. Sourcing Process
3. Governance Model

25
The sourcing programme has covered a high variety of items
Paper
cup
Calcium
propionate
Laminated
film
Baby wipes Filter paper

26
Savings range from 15 to 32% depending on the product and the “as-is”
sourcing situation
Generated savings per product
0%
5%
10%
15%
20%
25%
30%
35%
paper cup Laminated
film
Calcium
propionate
Baby wipes Filter paper
On-going

27
In addition to savings, the Client benefits from a range of other benefits from our
“Sourcing on Demand” service
• Reduced sourcing risks in terms of:
– CSR
– Capacity/availability/delivery reliability
– Quality
• Total Supply Chain transparency
– Sourcing process (RFI, RFP, Audits, QCs,…)
– Knowledge about the suppliers (regular visits by client)
– Assurance that product is really made to the spec
• Pro-active market intelligence about category opportunities and innovative products in China
• Flexibility to increase/reduce sourcing capacity on Demand
• Window to other asian countries (e.g.: Vietnam, Malaysia,…)

Creating Value with an Outsourced International Purchasing Office for a large FMCG company in China

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